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S. HRG. 112–409 

CONTINUED OVERSIGHT OF THE IMPLEMENTATION OF THE WALL STREET REFORM ACT 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE DODD-FRANK WALL STREET REFORM AND CONSUMER 

PROTECTION ACT ON THE FINANCIAL REGULATORY FRAMEWORK, 

AND THE IMPACT OF THE FINANCIAL CRISIS ON AMERICAN CONSUMERS, INVESTORS AND THE OVERALL ECONOMY 

DECEMBER 6, 2011 

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 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

CHARLES YI, Chief Counsel 

LAURA SWANSON, Policy Director 

GLEN SEARS, Senior Policy Advisor 

WILLIAM FIELDS, Legislative Assistant 

ANDREW OLMEM, Republican Chief Counsel 

HESTER PEIRCE, Republican Senior Counsel 

MICHELLE ADAMS, Republican Counsel 

DAWN RATLIFF, Chief Clerk 

RIKER VERMILYE, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)
(III) 

C O N T E N T S 

TUESDAY, DECEMBER 6, 2011 

Page 

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

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 2 

Senator Menendez ............................................................................................ 4 

Senator Brown .................................................................................................. 4 

Prepared statement ................................................................................... 40 

Senator Moran 

Prepared statement ................................................................................... 40 

WITNESSES 

Neal S. Wolin, Deputy Secretary, Department of the Treasury .......................... 5 

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

Response to written questions of: 

Chairman Johnson .................................................................................... 99 

Senator Shelby ........................................................................................... 100 

Senator Schumer ....................................................................................... 104 

Senator Crapo ............................................................................................ 104 

Senator Toomey ......................................................................................... 105 

Daniel K. Tarullo, Member, Board of Governors of the Federal Reserve System ......................................................................................................................... 7 

Prepared statement .......................................................................................... 49 

Response to written questions of: 

Senator Shelby ........................................................................................... 108 

Senator Schumer ....................................................................................... 110 

Senator Crapo ............................................................................................ 111 

Senator Toomey ......................................................................................... 113 

Mary L. Schapiro, Chairman, Securities and Exchange Commission ................. 8 

Prepared statement .......................................................................................... 62 

Response to written questions of: 

Chairman Johnson .................................................................................... 114 

Senator Shelby ........................................................................................... 123 

Senator Schumer ....................................................................................... 124 

Senator Crapo ............................................................................................ 124 

Senator Toomey ......................................................................................... 126 

Gary Gensler, Chairman, Commodity Futures Trading Commission ................. 10 

Prepared statement .......................................................................................... 78 

Response to written questions of: 

Chairman Johnson .................................................................................... 127 

Senator Shelby ........................................................................................... 129 

Senator Crapo ............................................................................................ 129 

Senator Toomey ......................................................................................... 130 

Accompanied by Jill E. Sommers, Commissioner, Commodity Futures 

Trading Commission ..................................................................................... 16 

Martin J. Gruenberg, Acting Chairman, Federal Deposit Insurance Corporation ........................................................................................................................ 11

Prepared statement .......................................................................................... 82 

Response to written questions of: 

Senator Shelby ........................................................................................... 132 

Senator Crapo ............................................................................................ 133 

Senator Toomey ......................................................................................... 134 
Page

IV 

John Walsh, Acting Comptroller of the Currency, Office of the Comptroller 

of the Currency ..................................................................................................... 13 

Prepared statement .......................................................................................... 88 

Response to written questions of: 

Senator Shelby ........................................................................................... 134 

Senator Crapo ............................................................................................ 137 

Senator Toomey ......................................................................................... 138 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Committee letter to Federal financial regulators regarding the rulemaking 

process ................................................................................................................... 149 

Securities and Exchange Commission response to Committee regarding the 

rulemaking process .............................................................................................. 152 

Federal Deposit Insurance Corporation response to Committee regarding the 

rulemaking process .............................................................................................. 164 

Comptroller of the Currency response to Committee regarding the rulemaking 

process ................................................................................................................... 186 

Board of Governors of the Federal Reserve System response to Committee 

regarding the rulemaking process ...................................................................... 250 

Federal Housing Finance Agency response to Committee regarding the rulemaking process ..................................................................................................... 258 

Consumer Financial Protection Bureau response to Committee regarding the 

rulemaking process .............................................................................................. 263 

National Credit Union Administration response to Committee regarding the 

rulemaking process .............................................................................................. 268 
(1) 

CONTINUED OVERSIGHT OF THE IMPLEMENTATION OF THE WALL STREET REFORM 

ACT 

TUESDAY, DECEMBER 6, 2011 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:04 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. Good morning. I call this hearing to order. 

Today this Committee continues its oversight of the implementation of the Wall Street Reform Act. Since the last implementation 

hearing in July, there have been significant developments regarding rule proposals, rule finalizations, and more broadly, additional 

concerns about the impact of the crisis in Europe. 

We do not have to imagine a far-off crisis to be reminded of why 

we passed Wall Street reform. The current situation in Europe underscores the importance of implementing new rules that enhance 

supervision of large, complex financial firms and the financial system as a whole, reduce risk in the marketplace, and support financial stability. 

Over the past 18 months, since the passage of the Wall Street 

reform bill, much progress has been made. Agencies and offices 

have been merged or created, and some very important rules, including the rules for orderly liquidation and living wills, have been 

finalized. The Consumer Financial Protection Bureau has opened 

its doors and is doing excellent work on projects like simplifying 

mortgage and student loan forms through its ‘‘Know Before You 

Owe’’ initiative. But work remains to be done. 

Some of the most complex rulemakings of the Wall Street Reform 

Act are the ones still under consideration: the Qualified Residential 

Mortgage determination otherwise known as QRM, the Volcker 

Rule, provisions to enhance supervision of nonbank financial and 

bank-holding companies, and the rules under which nonbank financial firms will be designated ‘‘systemically important.’’ I want timely resolution of these critical, outstanding rulemakings, and I am 

looking forward to hearing about the next steps for these rules 

from our panelists today. 

I recognize that these rulemakings are difficult, but this is the 

time when tough decisions have to be made by our regulators. 
2 

While our economy is starting to show signs of recovery from the 

financial crisis, the ongoing turmoil in Europe is a stark reminder 

that we must continue to monitor threats to financial stability. The 

Wall Street Reform law gave our regulators new tools to better address potential threats, to create well-functioning markets while 

also reducing systemic risks, and to improve supervision. But until 

the new rules are implemented, our financial system and our economy remain vulnerable to these threats. 

I want to thank the regulators before us today for their tireless 

work over the last 18 months continuing implementation of this 

important law. In addition, you are all dealing with many challenges, including funding constraints, the bankruptcy of MF Global, 

and other supervisory issues that the institutions you regulate face 

as the economy continues to recover from the financial crisis. I 

have no doubt that you and all your staffs will keep up the important work. 

Senator Shelby, your opening statement. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. Welcome to the 

Committee, all of you. 

Today our financial regulators will give us a progress report on 

their implementation of the Dodd-Frank Act. When Dodd-Frank 

was passed, the American people were promised that financial regulators would have all the tools and powers that they need to properly regulate financial institutions and to protect investors and consumers. 

Unfortunately for the American people, more powers and more 

tools cannot help when regulators fail to do their jobs. This lesson 

is vividly demonstrated by the Commodity Futures Trading Commission’s failed regulation of MF Global. The CFTC’s most basic responsibility is to ensure that customers are protected when a firm 

fails, yet 37 days have passed since MF Global filed for bankruptcy 

and more than $1 billion in customer funds are still missing and 

unaccounted for. 

It is unclear how much longer customers must wait while a bewildered CFTC searches for their money. Holding the CFTC accountable for its regulatory failures will not be an easy task. Already Chairman Gensler has been evading questions about his role 

in the regulation of MF Global. Prior to the firm’s bankruptcy, it 

appears that Chairman Gensler had contacts with MF Global and 

its CEO, Jon Corzine, concerning the CFTC’s regulation of the 

firm. But when he was called to account for the firm’s bankruptcy 

and the missing customer funds, Chairman Gensler decided that he 

needed to recuse himself from matters dealing with MF Global. 

The victims of MF Global I believe deserve better. 

Accordingly, I have asked the CFTC’s Inspector General to examine the Commission’s oversight and regulation of MF Global. I have 

also asked him to determine whether Chairman Gensler’s recusal 

was appropriate and whether Mr. Gensler should have recused 

himself much earlier in the process. In the absence of a Committee 

investigation, the IG’s examination will help determine whether 

MF Global received special consideration by the CFTC. 
3 

Although the CFTC’s failures have received the most attention, 

our other financial regulators have had their own difficulties. Over 

the last year, it appears that the Securities and Exchange Commission has been operating as a no-doc regulator in its rulemakings 

and enforcement actions. 

First, the SEC’s proxy access rule was struck down as arbitrary 

and capricious by the D.C. Circuit because the SEC failed to properly conduct economic analysis before issuing the rule. Just last 

week, a Federal court refused to endorse a major SEC settlement 

because the SEC failed to provide sufficient evidence that the settlement was in the public interest. Meanwhile, banking regulators 

have struggled to effectively implement several key rules. Most importantly, the proposal to implement the Volcker Rule has been 

marred by misconduct, ambiguity, and interagency discord. Drafts 

of the proposed rule were leaked to the press, prompting Inspector 

General inquiries into whether agency personnel violated confidentiality rules. 

When regulators finally issued a proposed rule, it came in the 

form of a 298-page concept proposal with over 1,300 questions. We 

all agree that banks should not be allowed to gamble with taxpayer-guaranteed deposits, yet the ambiguity in the proposed rule 

threatens to make compliance costly and difficult, especially for 

smaller banks. 

Further, the CFTC has not signed on to the Volcker proposal and 

may opt to draft its own rule. The Financial Stability Oversight 

Council was established to ensure that regulators properly coordinate their rulemakings. I hope to hear today why the Council was 

unable to secure agreement on the Volcker Rule. More than a year 

has passed now since the enactment of Dodd-Frank, and it is now 

evident that it has not lived up to its promises. In fact, it has exacerbated many problems by granting large bureaucracies greater 

powers while further insulating them from congressional oversight. 

For much too long, we have sacrificed the voice of the people on 

the altar of regulatory independence. What we are left with are 

massive bureaucracies insulated from the people they are supposed 

to be protecting and unaccountable for their actions. This week, the 

President is calling for the confirmation of the Director of the Bureau of Consumer Financial Protection. This massive new bureaucracy was designed by the drafters of Dodd-Frank to be virtually unaccountable to the American people. Before we spend hundreds of 

millions of dollars on a new Federal Government agency, I believe 

we should ensure that it can be held accountable for its actions. 

Therefore, I and 44 of my Republican colleagues have informed the 

President that we will not consider the nomination of anyone to be 

the first Director until the Bureau is made accountable to the 

American people and we have had some legislative structural 

changes. 

The authors of Dodd-Frank believed that more Government was 

better, more regulators, more rules, more regulations, and more bureaucrats with more independence empowered to make choices for 

others. We were told that we could expect great things. The first 

year has shown that little has changed. Dodd-Frank contains many 

flaws, but the failure to improve the accountability of our financial 

regulators may be its greatest shortcoming. 
4 

Thank you. 

Chairman JOHNSON. Thank you, Senator Shelby. 

Are there any other Members who wish to make a brief opening 

statement? 

Senator MENENDEZ. Mr. Chairman? 

Chairman JOHNSON. Yes, Senator Menendez. 

STATEMENT OF SENATOR ROBERT MENENDEZ 

Senator MENENDEZ. Thank you, Mr. Chairman, for holding the 

hearing. Thank you to all of our witnesses. 

I was proud to support the Wall Street Reform and Consumer 

Protection Act. If implemented correctly, I believe it will result in 

better loan underwriting, better protections for consumers, better 

oversight of risks that affect the stability of the financial system, 

greater transparency in derivatives, and progress toward ending 

too big to fail so that the decisions of those who at large institutions ultimately became the collective risks of the entire country. 

I do not want to relive 2008 again. 

So it is important to take the time to get the rules right, but it 

is also important to know that progress is being made, so I look 

forward to hearing from the witnesses. 

And, finally, with respect to the Consumer Financial Protection 

Bureau that I also advocated for, regardless of what you think of 

the new consumer watchdog, it is time for the Senate to understand something about majority rule. A majority, a bipartisan majority, of the U.S. Senate voted for the Dodd-Frank Wall Street reform law. Part of that law is the Consumer Financial Protection 

Bureau. It needs a Director. It needs a Director to ultimately level 

the playing field. This nominee has been highly commended by 

both the private sector and the consumer sector. But without having a Director, there are a whole host of rules that cannot be written, which only perpetuates an uneven playing field where community banks and credit unions have to abide by regulations and 

nonbank lenders do not, which is not fair to consumers or the industry members who play by the rules. 

So it is time to allow for an up-or-down vote on Richard Cordray 

and to get us moving forward on the proposition that a bipartisan 

majority of the U.S. Senate representing the country should be able 

to have its day and move forward. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. I want to echo the 

words from my colleague Senator Menendez about the importance 

of the Consumer Financial Protection Bureau. I am, I think, the 

only one on the panel who knows Attorney General Cordray personally fairly well, and as Senator Menendez said, he has support 

in the public sector and private sector from Republicans and Democrats, including his successor as Attorney General. Former Senator 

DeWine is supporting him, and it is the only time—I have mentioned this to the Committee before and talked to Chairman Johnson about it, too, and to Ranking Member Shelby. This is the only 

time, the Senate historian said, in American history where one po-
5 

litical party has blocked a nominee because they do not like the 

makeup of the agency, they do not agree with the existence of the 

agency, so they block the administrator for the agency. And that 

just does not make sense, and it is unprecedented, as I said, and 

it does not serve this country. And we know that banks are treated 

differently from nonbanks as a result. That does not serve anybody’s interest well. It does not protect the public, and it is just the 

kind of overreach that we have seen far too often around here. And 

I am sorry to say that, but I think that, again, speaks volumes 

about why we need to do what we need to do. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you all. I want to remind my colleagues that the record will be open for the next 7 days for opening 

statements and any other material you would like to submit. 

I would like to welcome our witnesses back to the Banking Committee, and we will keep the introductions brief. 

The Honorable Neal S. Wolin is Deputy Secretary of the U.S. Department of the Treasury. 

The Honorable Dan Tarullo is currently serving as a member of 

the Board of Governors of the Federal Reserve System. 

The Honorable Mary Schapiro is Chairman of the U.S. Securities 

and Exchange Commission. 

The Honorable Gary Gensler is the Chairman of the Commodity 

Futures Trading Commission. 

The Honorable Marty Gruenberg is the Acting Chair of the Federal Deposit Insurance Corporation. 

Mr. John Walsh is the Acting Comptroller of the Currency of the 

Office of the Comptroller of the Currency. 

I thank all of you 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. 

Secretary Wolin, you may begin your testimony. 

STATEMENT OF NEAL S. WOLIN, DEPUTY SECRETARY, 

DEPARTMENT OF THE TREASURY 

Mr. WOLIN. Thank you, Chairman Johnson, Ranking Member 

Shelby, and Members of the Committee, for the opportunity to appear today. 

Congress passed financial reform 18 months ago in the aftermath 

of the financial that cost this country 9 million jobs, trillions of dollars, and countless opportunities. Today our country’s foremost 

challenge is helping the millions of Americans who lost their jobs 

in the recession find new employment. Nearly 3 million private sector jobs have been created within the last 2 years, but our economy 

is not creating new jobs fast enough. 

The President has laid out a set of ideas that together would create nearly 2 million jobs, and we hope Congress will move forward 

with them. But at the same time, our current economic challenges 

only increase our commitment to implementing financial system 

fully, quickly, and carefully. 

Those reforms address the flaws and failures in the financial system that led to the crisis from which our economy and our country 

is still recovering. While we believe providing certainty as soon as 

possible is important, Treasury and the independent regulators are 
6 

committed to balancing speed with time for broad public engagement and debate, time for coordination amongst U.S. regulators 

and our international counterparts to help achieve a level playing 

field, and time for analyses of costs and benefits to help ensure 

rules that build a stronger, more resilient financial system within 

placing unnecessary burdens on industry. 

Since reform was passed last July, we have made substantial 

progress while abiding by these principles. Financial regulators 

have now publicly proposed or finalized nearly all the major rules 

relating to the core elements of reform. The ultimate shape of both 

individual rules and reform as a whole is becoming clearer by the 

week. 

Treasury has also made substantial progress standing up new institutions to help ensure our financial system is stronger and more 

resilient going forward. The members of the Financial Stability 

Oversight Council have been meeting regularly for over a year. The 

Office of Financial Research is providing it with critical data and 

analytical support. And the Federal Insurance Office has begun 

carrying out its mission to monitor the insurance industry. 

Treasury has also been responsible for standing up the Consumer Financial Protection Bureau. President Obama has nominated Richard Cordray, an outstanding advocate for American consumers, to serve as its first Director, but his confirmation has not 

moved forward. Without a Director, the CFPB is unable to exercise 

its full authority, and as a result, our economy remains vulnerable 

to some of the same regulatory gaps that contributed to the financial crisis, and consumers continue to lack common-sense protections. 

The CFPB’s limited authority affects the financial security of 

tens of millions of American families who rely on nonbank institutions for financial products and services. Until the Director is in 

place, the CFPB cannot supervise nonbanks that do business with 

Americans every day in the mortgage, payday, and private student 

lending markets, among others. 

We have a responsibility to make sure the CFPB can exercise its 

full authority to protect servicemembers, students, seniors, and the 

American people as a whole from the types of unfair and predatory 

practices that proliferate in the run-up to the financial crisis. 

Full implementation of the Dodd-Frank Act is critical for protecting Americans not only from poor consumer protections, but 

also from the excess risk and fragmented oversight that played 

such important roles in bringing about the crisis. 

In implementing reform, our goal is to build a financial system 

that is not prone to panic and collapse, that helps Americans save 

for retirement and borrow to finance an education or a home without experiencing deception or abuse, and that helps businesses finance growth and investment and strengthens our economy. 

We appreciate the leadership and support of this Committee 

throughout the reform process, and we look forward to working 

with Congress as we move forward toward this common goal. 

Thank you. 

Chairman JOHNSON. Thank you. 

Mr. Tarullo, please proceed. 
7 

STATEMENT OF DANIEL K. TARULLO, MEMBER, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

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

Members of the Committee. There are a lot of witnesses and a lot 

of Senators, so let me just make two introductory points. 

First, I think you all recognize that there is a bit of tension between the various goals that we all have in trying to implement a 

very complicated piece of legislation. We want to get it right. We 

want to have a process that is very considered. We want to have 

a very open and transparent process. And then we want to get it 

all done quickly. And it is not going to be possible to get everything 

done quickly if the fairness, the openness, the transparency, and 

the considered quality of the deliberations are not going to be adhered to. I think, though, we are making considerable progress, 

and although a few of the statutory deadlines have not been met, 

I think we are well on our way to getting the major pieces of DoddFrank into place. 

The second point I would like to make will come as no surprise 

to many Members of the Committee since I try not to miss any opportunity to re-emphasize the importance of capital in our prudential regulatory system. Dodd-Frank, of course, addressed capital in 

several particulars. It did not provide a comprehensive approach to 

capital. But what we have tried to do is to incorporate the elements 

of capital regulation set forth in Dodd-Frank into an overall integrated approach to capital regulation that tries to take account of 

the shortcomings of that system prior to the crisis. I think the 

shortcomings were basically three: 

One, both the quality and quantity of capital in individual institutions was lower than it needed to be before the crisis. 

Two, there was only a micro-prudential, that is, a firm-by-firm 

approach to looking at capital rather than looking at how firms and 

the stability of firms affected the system as a whole in a 

macroprudential fashion. 

And, third, capital assessment was too static. We tended to take 

snapshots of how capital looked at a particular moment rather 

than the dynamic perspective that suggests or shows what capital 

ratios could be like if bad things occur. 

What we have done is, in coordination with our banking colleagues here and abroad, to negotiate and now get ready to implement a set of enhancements to both the quality and quantity of 

capital for individual firms. That is, I think, helped from my perspective a lot by the Collins amendment to Dodd-Frank because 

since Collins puts a floor under the amount of capital that is required for a firm, it allays a lot of the concerns that I had and I 

think some Members of the Committee had that Basel II might 

allow capital to drift too low. 

Second, with respect to macroprudential capital regulation, we 

are moving forward with a set of enhanced prudential standards 

for the largest, most systemically important institutions, including 

enhanced capital standards. 

And, third, with respect to that snapshot dynamism issue, DoddFrank, as you know, calls for stress tests for larger U.S. institutions. The full Dodd-Frank provisions and the full Dodd-Frank 

stress test approach will be implemented next year. But in the be-
8 

ginning of this year and now starting again for the beginning of 

2012, we have been running and will be running stress tests on our 

largest institutions as part of our annual capital review. 

I would just close by saying that I think there is a lot going on 

in Dodd-Frank. We are making progress. But, again, I just want 

to remind everybody of the centrality of capital regulation to the 

safety and soundness of our financial system. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you. 

Chairman Schapiro, please proceed. 

STATEMENT OF MARY L. SCHAPIRO, CHAIRMAN, SECURITIES 

AND EXCHANGE COMMISSION 

Ms. SCHAPIRO. Chairman Johnson, Ranking Member Shelby, and 

Members of the Committee, thank you for inviting me to testify on 

the Securities and Exchange Commission’s ongoing implementation 

of the Dodd-Frank Act. 

The Dodd-Frank Act significantly changes the SEC’s regulatory 

landscape. It brings hedge fund and other private fund advisers 

under the regulatory umbrella, creates a new whistleblower program, establishes an entirely new regime for the over-the-counter 

derivatives market, enhances the SEC’s authority over credit rating agencies and clearing agencies, and heightens regulation of 

asset-backed securities. 

In the months since the Act’s passage, we have made significant 

progress in our efforts to meet these broad new responsibilities. Of 

the more than 90 provisions in the Act that require SEC rulemaking, we have proposed or adopted rules for over three-fourths 

of them. In addition, we have finalized 12 studies and reports required by the Act. 

As I have noted in my prior testimony before this Committee, our 

rulemaking efforts are informed by a substantial outreach effort. 

SEC Commissioners and staff have participated in scores of interagency and working group meetings; conducted seven public 

roundtables; met with hundreds of interested groups and individuals, including investors, academics, and industry participants; and 

received, reviewed, and considered thousands of public comments. 

All of these efforts, in addition to congressional input and robust 

Commission debate, are helping us write rules that effectively protect investors and the financial system without imposing undue 

burdens on market participants. My written statement underscores 

in detail the breadth and complexity of our Dodd-Frank rulemaking 

activities. However, I would like to emphasize a few of our recent 

actions. 

Just over a month ago, the Commission adopted a new rule that 

requires hedge fund and other private fund advisers registered 

with the Commission to report systemic risk information. This rule, 

adopted jointly with the CFTC and in heavy consultation with 

FSOC, will dovetail with the enhanced private fund reporting 

adopted earlier this year and is scaled to the size of the funds. 

In August, our final rules became effective establishing the whistleblower program mandated by the Act. Since then, the Commission has received hundreds of tips through the program from individuals all over the country and in many parts of the world. We 
9 

already are reaping the early benefits of the whistleblower program 

through active and promising investigations utilizing crucial whistleblower information, some of which we expect will lead to rewards in the near future. 

With regard to credit rating agencies, the Commission proposed 

rules intended to strengthen the integrity of credit ratings by, 

among other things, improving their transparency. In addition, the 

Commission received public comment to inform its upcoming study 

on the feasibility of establishing a system in which a public or private utility or self-regulatory organization would assign NRSROs to 

determine the credit ratings for structured finance products. 

To implement the new oversight regime for the over-the-counter 

derivatives market, the Commission proposed rules in 13 areas required by Title VII. In the coming months, we expect to propose 

our last Title VII rules regarding capital margins, segregation, and 

recordkeeping requirements for security-based swap dealers and 

swap participants. 

Along with our fellow regulators, the Commission also proposed 

rules to implement the Volcker Rule and to provide for increased 

regulation of financial market utilities and financial institutions 

that engage in payment, clearing, and settlement activities that are 

designated as systemically important. 

In addition to these areas, the Commission proposed rules affecting the registration of municipal advisers, asset-based securities, 

and corporate governance. 

In the new few months, we expect to adopt additional rules regarding 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 addition, we 

intend to address the relevant international issues of Title VII holistically in a single proposal, and we expect to seek public comment on an implementation plan for all of the key rules under Title 

VII with the goal of ensuring the rules take effect in a logical, progressive, and efficient manner that minimizes unnecessary disruption and costs to the markets. 

The SEC has made tremendous progress, but the provisions of 

the Dodd-Frank Act vastly expand our responsibilities and will require additional resources to fully implement the law. While we 

seek to use existing resources as efficiently as possible, the new responsibilities assigned to us are so significant they cannot be 

achieved solely by wringing efficiencies out of our existing budget. 

Attempting to do so will severely hamper our ability to meet both 

new and existing responsibilities. 

I would note that, regardless of the amount appropriated to the 

SEC, our budget will be fully offset by the fees we collect and will 

have no impact on the Nation’s budget deficit. 

Thank you for inviting me to share with you our progress to date 

and our plans going forward. I look forward to answering your 

questions. 

Chairman JOHNSON. Thank you. 

Chairman Gensler, please proceed. 
10 

STATEMENT OF GARY GENSLER, CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION; ACCOMPANIED BY JILL E. 

SOMMERS, COMMISSIONER, COMMODITY FUTURES TRADING 

COMMISSION 

Mr. GENSLER. Good morning, Chairman Johnson, Ranking Member Shelby, and Members of the Committee. I am glad to be here 

with fellow regulators and also with CFTC Commissioner Jill 

Sommers. 

Three years ago, both the financial system and the financial regulatory system failed. More than eight million jobs were lost, and 

today, millions of Americans continue to struggle. Swaps played a 

central role in the crisis. Swaps, so important for managing and 

lowering risk for end users, also concentrated risk in the financial 

system, and in response, Congress and the President came together 

and enacted the historic Dodd-Frank Act. 

The CFTC is working to complete the Dodd-Frank rules thoughtfully, not against a clock, and though Congress gave us 1 year to 

complete the task, we will take more time, as is appropriate, I believe. The agency has benefited from significant public input, including more than 25,000 comment letters, 1,100 meetings, and we 

have conducted 14 public roundtables, and yesterday we announced 

two more public roundtables, and no doubt we will get benefit from 

even more beyond that. 

The Commission has substantially completed the proposal phase 

of the rule writing and this summer turned the corner and began 

finalizing rules, after asking people to comment on the whole mosaic at one time. And we have finished 20 rules and have a full 

schedule of meetings well into next year. 

Each of our final rules have benefited from careful considerations 

of cost and benefits and we ask the public to continue to give us 

advice in this area. 

Mentioning just a few areas that we finalized: large trader reporting, so for the first time we know what the large traders are 

doing in physical commodities, registration of the data repositories 

themselves; aggregate position limits; risk management for the 

clearinghouses, these bodies that are going to have significant more 

transactions in them. We also finished rules giving the Commission 

more authority to prosecute wrongdoers who recklessly manipulate 

markets, giving us authorities that the SEC has had for years. 

And yesterday, we completed a rule first proposed in October 

2010 to enhance customer protection regarding investment of their 

funds. This rule brings customers back to the protections they had 

prior to exemptions granted by the Commission between 2000 and 

2005 and it will prevent investment of customer funds in foreign 

debt as well as lending customer money within the firm, which is 

called intercompany or in-house repurchase agreements. I have 

consistently felt that the CFTC needed to strengthen customer 

fund protection and I am pleased that the Commission acted yesterday in this regard. 

The Commission is also looking to soon finish rules on segregation for cleared swaps. These are cleared swaps. But segregation of 

funds, both in the futures market and in the swaps market, is the 

core foundation of customer protection and our agency is looking 

across the board, the audit regimes, the examination regimes, the 
11 

custodial regimes, the working relationships with the self-regulatory organizations, to see what can we do more to enhance these 

protections and protect customers. 

Moving forward, we are working to finish key transparency rules, 

including the specific data to be reported to regulators, so all of us 

at this table can have more information and the public can have 

more information in what is called real time reporting. 

As mandated by Dodd-Frank, the CFTC is working closely with 

the SEC on further definitions of swap dealer and swap and I hope 

that we can get these done shortly. 

An important matter to all of us is nonfinancial end users have 

a choice on whether or not to use central clearing. This was 

Congress’s mandate. But I think consistent with that intent, as 

well, the CFTC’s margin proposal states that nonfinancial end 

users will not be required to post margin on uncleared swaps, and 

the CFTC is dedicated to maintaining the ability of end users to 

hedge risk without being pulled into those margin and clearing regimes. 

Now, as the CFTC finalizes rules, I will say we do need more resources. We are just over 700 staff members. That is about 10 percent more than we were in the 1990s at our peak, and since then, 

the futures market has grown dramatically, about fivefold. And in 

addition, we are asked to oversee this complex and very large $300 

trillion notional amount swaps market. We rely a lot on self-regulatory organizations, but I dare say we probably need some more 

funding so that the Nation can be assured we can actually oversee 

the futures and swaps markets and enforce the rules to promote 

the transparency and protect the public. 

Furthermore, as many Members have mentioned, the current 

debt crisis in Europe has put a stark reminder of the need for us 

to move forward, complete reform, and adequately resource the 

agency. 

I thank you. 

Chairman JOHNSON. Thank you. 

Chairman Gruenberg, please proceed. 

STATEMENT OF MARTIN J. GRUENBERG, ACTING CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. GRUENBERG. Thank you, Chairman Johnson, Ranking Member Shelby, and Members of the Committee. Thank you for the opportunity to testify on the FDIC’s implementation of the DoddFrank Act. 

The FDIC has made substantial progress on implementing the 

requirements of the Act, especially in the two primary areas where 

we have principal rulemaking responsibility, deposit insurance reforms and orderly liquidation authority. 

Regarding deposit insurance, the FDIC has issued final rules 

that permanently increase the standard coverage limit to $250,000 

and temporarily provide unlimited deposit insurance for non-interest bearing transaction accounts. 

In addition, the FDIC adopted a final rule that redefines the deposit insurance assessment base from domestic deposits to assets. 

The new definition reduces the share of assessments paid by community banks as a group compared to the largest institutions, bet-
12 

ter reflecting each group’s share of industry assets. As a result of 

this new rule, second quarter 2011 assessments for banks with less 

than $10 billion in assets were about a third lower in aggregate 

than first quarter assessments, even though the overall amount of 

assessment revenue collected remained about the same. 

The FDIC also has substantial flexibility under the Act to manage the Deposit Insurance Fund. The FDIC’s Fund Management 

Plan is designed to maintain a positive fund balance, even during 

a banking crisis, while preserving steady and predictable assessment rates through economic and credit cycles. 

Regarding orderly liquidation authority, a fundamental goal of 

the Act is to promote financial stability by improving regulators’ 

ability to deal with systemic risk and the challenges posed by systemically important financial institutions. In July, the FDIC issued 

a final rule implementing the FDIC’s orderly liquidation authority. 

The rule defines the way creditors will be treated and how claims 

will be resolved in an FDIC receivership. Many aspects of the rule 

are similar to the rules in bankruptcy. Shareholders and creditors 

in receivership will be exposed to losses under the statutory priority of claims. The rule, however, will allow continuity of critical 

operations, both to prevent the financial system from freezing up 

and to maximize the value recovered from the assets of a failed 

SIFI, or systemically important financial institution. 

The FDIC also has adopted two rules regarding resolution plans. 

The first resolution plan rule, jointly issued with the Federal Reserve Board, requires bank-holding companies with total consolidated assets of $50 billion or more and certain designated nonbank 

systemically important financial institutions to develop, maintain, 

and periodically submit resolution plans to regulators. The plans 

will detail the manner in which each covered company would be resolved under the Bankruptcy Code and will include information on 

credit exposures, cross guarantees, and organizational structure. 

The second rule would require complementary resolution plans 

from insured depository institutions with assets of $50 billion or 

more. 

In the event of a cross-border resolution of a covered financial 

company, the Dodd-Frank Act requires the FDIC to coordinate to 

the maximum extent possible with appropriate foreign regulatory 

authorities. Through the Financial Stability Board of the G20 countries and the Basel Committee, the FDIC and U.S. regulators are 

working to promote greater harmonization of national laws governing resolutions and improved coordination. We have also been 

engaging on a bilateral basis with foreign supervisors on resolution 

planning. 

In regard to bank capital, interagency agreement has been 

reached on an alternative to the use of credit ratings as required 

by the Dodd-Frank Act that will be included as part of a Notice of 

Proposed Rulemaking to implement new capital requirements on 

assets held in a bank’s trading book. This Notice of Proposed Rulemaking will be acted on by the FDIC Board at a Board meeting tomorrow, and this rulemaking is pursuant to a Basel Committee 

capital agreement. 

Finally, given the effects of the recent financial crisis on community banks and concerns raised about the potential impact of the 
13 

Dodd-Frank Act on these institutions, the FDIC is undertaking a 

series of initiatives relating to community banks. The FDIC will 

hold a national conference early next year that will focus on the future of community banks. We will also organize a series of regional 

roundtable discussions with local community bankers around the 

country and undertake a major research initiative to study a variety of issues relating to community banks. 

The FDIC will also undertake a review of our examination, rulemaking, and guidance processes to identify ways to make supervision more efficient, consistent, and transparent without compromising supervisory standards. 

Mr. Chairman, that concludes my oral statement. I would be glad 

to respond to your questions. Thank you. 

Chairman JOHNSON. Thank you. 

Comptroller Walsh, please proceed. 

STATEMENT OF JOHN WALSH, ACTING COMPTROLLER OF THE 

CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. WALSH. Chairman Johnson, Ranking Member Shelby, and 

Members of the Committee, I appreciate the opportunity to report 

on the OCC’s progress in implementing the Dodd-Frank Act. 

Since I last testified before the Committee on July 21, the integration of OTS staff has been successfully completed and the supervision of Federal savings associations has been integrated into our 

bank supervision operation. We also have continued our work to 

support the CFPB and the FSOC as well as our efforts to strengthen risk-based capital, leverage, and liquidity requirements. Finally, 

we have made significant progress on key regulations to implement 

the Dodd-Frank Act. So this morning, I would like to highlight a 

few of the items that are detailed in my written statement. 

In operational terms, the integration of the OTS into the OCC 

has been successfully completed, but we are continuing to participate in a variety of outreach activities to maintain an active dialogue with Federal savings associations, including expansion of the 

former OTS advisory committees on mutual savings associations 

and minority institutions. Our integration efforts are now focused 

on coordinating and consolidating the various rules and policies 

that apply to Federal savings associations and national banks, and 

as part of this effort, we aim to eliminate duplication and reduce 

unnecessary regulatory burden. 

Our dealings with the CFPB over the last several months have 

focused on consumer complaints and policy and exam coordination. 

The OCC has continued to provide significant OCC staff and infrastructure support to process consumer complaints on the CFPB’s 

behalf. 

With respect to rulemaking, the CFPB is required to consult with 

the prudential regulators prior to proposing a rule and during the 

rulemaking process. The CFPB currently has in process several 

rulemakings where interagency consultation will be critical, and we 

are working on a consultation agreement that will provide the prudential regulators reasonable time to review, discuss, and comment 

on CFPB rulemakings. 
14 

Another area of focus is the coordination of supervisory activities 

among the CFPB and prudential regulators. The Dodd-Frank Act 

requires the CFPB to consult with the prudential regulators regarding respective schedules for examination, to conduct their respect exams simultaneously, and to share and comment on resulting draft reports of examination. Some of these requirements do 

not mesh well with how bank examination activities are actually 

conducted, so the OCC and other prudential regulators are working 

with CFPB to develop an MOU to implement a practical approach 

to coordination that avoids unnecessary regulatory burden on insured depository institutions, which we believe to have been the 

Congressional intent. 

The OCC continues to be an active participant in the activities 

of the FSOC. Since July, the Council issued its 2011 Annual Report 

to Congress and has held additional meetings and conference calls 

to discuss current market and regulatory developments that could 

have potential systemic risk implications for the U.S. financial sector and broader economy. Facilitating candid, confidential exchanges of information regarding risk to the financial system is one 

of the principal benefits of the FSOC. 

A clear lesson of the financial crisis was the need to bolster the 

quality and quantity of capital held by financial institutions, as 

others have mentioned. Harmonizing Dodd-Frank capital requirements with the revised Basel standards is one of the principal challenges the OCC and the other Federal banking agencies face, and 

we are working with the other agencies to ensure the reforms are 

carried out in a coordinated, mutually reinforcing manner. 

Finally, since the July hearing, the OCC has issued a number of 

proposed rules required under the Dodd-Frank Act on credit risk 

retention, margin and capital requirements for covered swap entities, and incentive compensation. OCC and agency staff are carefully evaluating the thousands of comments received on these three 

proposed rulemakings and are now actively engaged in considering 

the many issues raised. 

More recently, and after months of intensive study and analysis, 

the banking agencies and the SEC jointly published the Volcker 

Rule, which is open for public comment through January 13, 2012. 

In summary, since July, much has been accomplished. We will 

continue to move forward to complete the many projects underway. 

I look forward to keeping the Committee advised of our progress 

and I am happy to answer your questions. 

Chairman JOHNSON. Thank you. I would like to thank all of our 

witnesses for their testimony. 

As we begin questions, I will ask the Clerk to put 5 minutes on 

the clock for each Member. 

Secretary Wolin and Governor Tarullo, how would delaying the 

implementation of Wall Street Reform leave the U.S. economy more 

susceptible to fallout from the European debt crisis? And Chairman 

Gruenberg, as the situation in Europe leads to the failure of large 

interconnected financial firms, is the FDIC prepared to resolve it? 

Secretary Wolin. 

Mr. WOLIN. Mr. Chairman, the core elements of Dodd-Frank 

were designed to build a stronger, more resilient financial system, 

one that is less prone to crisis, less vulnerable to stress. And Eu-
15 

rope certainly underscores the importance of moving forward with 

implementation of the statute to make sure that appropriate capital cushions and other enhanced prudential standards are put in 

place to make sure that derivatives are brought within the regulatory fold, to make sure that we continue to make progress on orderly liquidation authority and its modalities and living wills and 

so forth, so that we both can be best protected from whatever Europe provides us, but also whatever other stresses our financial 

system happens to encounter. So I think it is critically important 

that we move forward. 

Chairman JOHNSON. Governor Tarullo. 

Mr. TARULLO. Thank you, Mr. Chairman. Dodd-Frank was structured, I think, to respond to two kinds of stresses or problems in 

U.S. firms: One, some of the specific, if I can put it this way, internally generated problems that characterized the pre-crisis period 

with mortgage-backed securities and the like; and second, as Secretary Wolin just indicated, a generalized capacity to absorb loss. 

I think what we are facing in Europe right now is the prospect 

of or the possibility of an externally generated set of problems for 

the U.S. firms rather than the internally generated problems. Here, 

I think that the capital is the most important consideration, and 

here, we began moving back in 2009 to push our institutions to enhance their capital buffers. Since the beginning of 2009, our 19 

largest institutions have accreted or raised approximately $300 billion in capital, more than a 40 percent increase in what was held 

beforehand. 

I do not think any of us would discount the possibility for difficulties in the United States if there were severe problems in Europe, but I do think that at the core, which is to say the capital 

and liquidity positions of our large institutions, we have made a lot 

of progress since the beginning of 2009, progress which is, I think, 

enhanced and rounded out by the Dodd-Frank provisions. 

Chairman JOHNSON. Chairman Gruenberg. 

Mr. GRUENBERG. Mr. Chairman, if we were confronted with the 

failure of a systemically important financial institution, it would 

only be in the event that the systemic resolution authorities of the 

Dodd-Frank Act had been triggered. If that were to occur, we believe we today have the authorities and the capability to carry out 

the FDIC’s responsibilities under the law. 

We have been working for the past year since the enactment of 

the legislation on internal resolution plans for our most systemically important financial institutions. We have been consulting 

closely with our fellow agencies and we have also been engaging 

with the foreign supervisors of the foreign operations of our major 

companies. So, if necessary, we think we are prepared today to 

carry out our responsibilities under the law. 

Chairman JOHNSON. My office has been contacted by people from 

all across South Dakota deeply concerned about frozen accounts 

and missing funds connected with the collapse of MF Global. Chairman Gensler, Chairman Schapiro, what is being done to track 

down the estimated $1.2 billion in missing funds and what steps 

are being taken at your agencies and at the SROs you oversee to 

ensure the integrity of segregated accounts at other broker-dealers 
16 

and at FCMs to make sure that nothing like this ever happens 

again? Chairman Gensler. 

Mr. GENSLER. Senator, as I am not participating in the matters 

of this specific company, it may be appropriate for someone else at 

the agency, or Commissioner Sommers, who is here, to follow up 

and take the specifics on the company. 

But more generally, with regard to the importance of protecting 

customer funds and segregated funds, we are taking a number of 

steps. Yesterday, we finalized a rule on investment of customer 

funds. I have consistently felt we needed to do that since we proposed that in October of 2010. We are also working along with selfregulatory organizations, doing a limited review of the largest, even 

the smallest Futures Commission Merchants to ensure where they 

are as of November and December of this year. 

But I did not know on the specifics whether you wanted—— 

Chairman JOHNSON. Commissioner Sommers, do you have anything you would like to add about the ongoing CFTC investigation? 

Ms. SOMMERS. Thank you, Senator. The CFTC currently has dozens of staff members working on MF Global issues. We have auditors, investigators, and attorneys looking into the matter. We are 

working closely with the trustees, staff, and with the forensic accountants to make sure that we are tracing all of the transactions 

that went in and out of the customer segregated funds at MF Global. The number of different accounts and the number of different 

transactions that did occur has made this a very complex process 

for both our staff and the forensic accountants that the trustee is 

using, but we all are working through these issues and hope to resolve them very shortly. 

Chairman JOHNSON. Chairman Schapiro, do you have anything 

to add? 

Ms. SCHAPIRO. What I would add, Mr. Chairman, is that the securities side of MF Global was very much smaller, only about 400 

active securities accounts, compared with many thousands of futures accounts. And while the company did not report a shortfall 

in the reserve account, the equivalent of the segregated account on 

the securities side, we are, of course, not relying on any representations whatsoever from the company. We are working closely with 

a SIPC trustee to ensure that money can be traced and recovered 

for the estate. 

And we are also looking at our rules to see if there are other 

things we could be doing differently to bolster the integrity of the 

custody practices of broker-dealers. We have a very strong customer protection rule that already only allows customer funds to be 

invested in U.S. Government securities that are backed by the full 

faith and credit of the United States. But we have also proposed 

some rules with respect to requiring separate audits of broker-dealer custody practices that would also enhance SRO and SEC examination authority of broker-dealers and would require broker-dealers to file regular reports with the agency with respect to their custody practices. And there is a pending FINRA rule proposal out for 

comment right now that would greatly enhance financial reporting 

by broker-dealers. So we are also looking carefully to see if there 

are additional things that we can be doing. 
17 

The trustee has filed a motion with the court to transfer the bulk 

of those 400 securities accounts to another firm and that motion 

will be heard on Friday by the court. 

Chairman JOHNSON. Chairman Gensler, CFTC staff participated 

in the interagency effort in questioning the Volcker Rule proposal, 

but the CFTC did not sign on to the joint text adopted by the other 

regulators almost 2 months ago. When can we expect the CFTC to 

issue its Volcker Rule proposal, and will there be any differences 

in the CFTC proposal from the text issued by the other regulators 

in October? 

Mr. GENSLER. Mr. Chairman, we did at a staff level participate 

and I would envision that we would move forward with the proposal consistent with what other regulators have done. It has really 

just been a capacity issue of bringing things forward to a Commission. We had our last meeting in October 18 and then the next on 

December 5. We also had a changeover of one Commissioner retiring and another one coming on board. So I would envision to get 

feedback from staff and Commissioners and move forward with 

something consistent with what other regulators have done. 

Chairman JOHNSON. My time is up, but I do have additional 

questions for all of you regarding QRM, Wall Street Reform implementation road map, the FSOC, and oversight of the SEC. 

Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman Gensler, according to the MF Global bankruptcy trustee, as much as $1.2 billion or more of customer funds are missing 

from the CFTC—are missing there. The CFTC is the regulator. 

Where have you been there? And second, do you know where the 

money is? 

Mr. GENSLER. Senator, as I am not participating in the matters, 

it may be appropriate—I do not know if—— 

Senator SHELBY. Why are you not participating, for the record? 

Mr. GENSLER. No, absolutely, sir. I think it is a good question. 

Though the attorneys at the CFTC, the Chief Ethics Officer, and 

the General Counsel had indicated to me that they did not see a 

reason, legal or ethical reason for me to not participate, I reached 

out to them that as it turned to an enforcement matter and before 

we had our first closed door surveillance meetings—we have closed 

door surveillance meetings every Friday and have for 30-plus 

years—and said I did not really want my participation to be a distraction—there had already been some questions—from this important matter. 

Senator SHELBY. Are you not participating because of a prior relationship with the Chairman of MF Global, Jon Corzine? 

Mr. GENSLER. I had left Wall Street 14 years earlier, but I had 

participated with this Committee, actually, with Paul Sarbanes—— 

Senator SHELBY. I understand. 

Mr. GENSLER.——on the Dodd—oh, no, that was called SarbanesOxley. 

Senator SHELBY. But did you recuse yourself because of your relationship, past or present, with the Chairman of MF Global, Mr. 

Corzine? 
18 

Mr. GENSLER. I—I indicated to our General Counsel that Thursday, November 3, that I thought—that I did not want my participation to be a distraction—— 

Senator SHELBY. So the answer is—— 

Mr. GENSLER.——from the very important matters—— 

Senator SHELBY.——yes or no? 

Mr. GENSLER.——going forward—— 

Senator SHELBY. Wait a minute. Wait a minute. I asked you a 

question. Did you recuse yourself from proceedings dealing with 

MF Global because of your prior relationship with Mr. Corzine way 

back 14 years ago or currently, or a combination? 

Mr. GENSLER. Well, it was—it might even have been broader. I 

just did not want to be a distraction because I had been at the 

same firm and he had been my boss, but also—— 

Senator SHELBY. Well, you thought you might have a conflict or 

the perception of one, is that right? 

Mr. GENSLER. No. What the lawyers told me pretty straightforward was there was no reason that I needed to not participate. 

But as it turned to an enforcement matter and an investigation 

about these very important matters, because it is critical to find 

out where the money was, I did not want my participation to be 

a distraction from the very—there are excellent career staff at the 

CFTC—— 

Senator SHELBY. Let me ask you another question here. 

Mr. GENSLER. Sure. 

Senator SHELBY. Since you have been Chairman of the CFTC, 

has the Chairman of MF Global contacted you or the CFTC regarding the regulation of MF Global in any way? 

Mr. GENSLER. I do not know about his contacts with the rest of 

the agency. There was one courtesy meeting—— 

Senator SHELBY. Wait a minute—— 

Mr. GENSLER.——at the very beginning of—— 

Senator SHELBY. So you had a meeting. There was a meeting 

there. You called it a courtesy meeting. But you had a meeting 

with the Chairman of MF Global, Mr. Corzine, right? 

Mr. GENSLER. There was a courtesy meeting when he took the 

job, and then there was one staff phone call—— 

Senator SHELBY. Now, was the meeting—excuse me. I do not 

mean to be rude—— 

Mr. GENSLER. No, I am sorry—— 

Senator SHELBY.——but I want to get the point. 

Mr. GENSLER. Right. 

Senator SHELBY. Was the meeting at CFTC? 

Mr. GENSLER. Yes. Yes. 

Senator SHELBY. And was it after Mr. Corzine became Chairman 

of MF Global? 

Mr. GENSLER. Yes, it was, sir. 

Senator SHELBY. And what did that have to do with him taking 

the job, meeting with you, or meeting with your staff or members? 

Mr. GENSLER. He was head of an agency—head of a company, 

and he came by and there were staff at the CFTC—— 

Senator SHELBY. OK. 

Mr. GENSLER.——and myself there, yes, in the spring of 2010. 
19 

Senator SHELBY. Did you or any of the staff ever have any conversations, dialogue, or interaction with Mr. Corzine regarding the 

regulation of what he could do and not do at MF Global? 

Mr. GENSLER. Well, as reported on our Web site, there was one 

general call—— 

Senator SHELBY. Well, I am not interested in reporting on the 

Web site. Just tell us what happened. 

Mr. GENSLER. Well, it was a broader thing. In July of this year, 

there was reaching out—as part of the 1,100 meetings that we 

have had on the Dodd-Frank rulemaking, one of them included 

CFTC staff, myself. It was a telephone call about this rule about 

investment of customer funds. 

Senator SHELBY. So you had a meeting there regarding the 

Chairman of MF Global, right? 

Mr. GENSLER. That is correct, conducted by telephone. That is 

correct. 

Senator SHELBY. Now, my last follow-up is part of my first question to you, because my time is limited. Do you or the CFTC, do 

you know where the $1.2 billion is today—— 

Mr. GENSLER. I am not participating—— 

Senator SHELBY.——and if you do not know, why do you not 

know? 

Ms. SOMMERS. Senator, we are working closely with the forensics 

accountants that have been hired by the trustee to try to locate any 

missing customer funds. We continue to work through those issues, 

but we have not located all the funds that are missing, but we continue to—— 

Senator SHELBY. So the answer is you do not know where the 

money is. 

Ms. SOMMERS. That is right. 

Senator SHELBY. Thank you. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Reed. 

Senator REED. Well, thank you very much, Mr. Chairman. 

Governor Tarullo, let me begin with you. You and your colleagues have a complicated challenge implementing the Volcker 

Rule, and that is to me a broader issue with respect to how derivatives and complicated instruments are going to be treated on the 

books of these major companies. It is complicated. That is why Congress directed the agencies do it because the process of reaching 

out, getting opinions from the affected industry, getting comments, 

et cetera, is something that in our legislative process we do not do 

as systematically. 

But the other complicating factor here, too, is there has, I think, 

clearly been an attack on the budgets of the agencies so that their 

resources are in question whether they can carry out some of these 

sophisticated issues. And we are also seeing at least the potential 

for challenges at the circuit court on the Administrative Procedures 

Act with respect to the economic analysis, and I find that interesting because that was not even part of Dodd-Frank. That is a 

predecessor statute that called for consideration of the economic 

consequences, not a cost/benefit analysis. I think the courts are 

writing a lot into that statute. 
20 

But all of that having been said, in this period of time where it 

is very difficult to deploy effective rules with respect to Volcker, 

with respect to clearing platforms, with respect to the treatment of 

derivatives, the only fallback I think you have is capital—capital 

that will assure the Congress and the American public that they 

will not have to go in and once again, as they did in 2008, provide 

huge direct financial support, and as we have discovered recently, 

indirect financial support through the borrowing facilities of the 

Fed. 

Is that your perspective? Are you prepared to explicitly consider 

the additional capital that these institutions must bear if we cannot effectively deploy these rules? 

Mr. TARULLO. Senator, as I indicated earlier, we have been proceeding with the improvement of capital regulation across the 

board. With respect to the trading side of major institutions where 

obviously the Volcker Rule has particular salience, we are on the 

verge of putting out a proposed regulation along with our fellow 

banking agencies which would implement the so-called Basel 2.5 

rules. Those are the ones applicable to the trading books. 

Second, when we did the capital review exercise earlier this year 

and as we undertake it again, which we have just begun to do, for 

early 2012, we have including for our largest institutions a socalled trading book shock, something which would essentially build 

on the 2008 shock to traded assets to stress test them under the 

current environment. This year we have also added a specifically 

European component to that, taking into account the potential impact on sovereigns in the European Union. 

The reason I mention the stress test part of this is back to the 

point I made in my introductory remarks, that we need a dynamic 

as well as a static picture of capital, and so what we tried to do 

in these stress tests is to say assume an adverse scenario, assume 

bad things happening, both in the banking book and the trading 

book, and make sure that the firms could sustain the kinds of 

losses associated with that adverse scenario and still emerge sufficiently well capitalized to be a viable financial intermediary. 

So I absolutely think that capital is central here. I realize I have 

become a bit of a broken record on this, but I do think that capital 

is the foundation for a well-structured financial regulatory system 

which definitely needs to be complemented with other forms of regulation. 

Senator REED. But without these other forms of regulation, 

then—and I do not want to put words in your mouth—it would 

seem to me that the capital level would be some percentage point 

higher because you do not have these other complementary transparent platforms or rules and—— 

Mr. TARULLO. When we set capital requirements, we do try to 

look at how those requirements relate to other regulatory arrangements. So I think it is the case that in the absence of, for example, 

restrictions on proprietary trading, we would need to look at the 

potential losses associated with an unregulated proprietary trading 

undertaking. 

Senator REED. So there is a point, at least analytically, at which 

if the Volcker Rule was adopted and these other measures—more 

effective use of clearing platforms, more products being traded, 
21 

cleared, rather than over-the-counter bilateral transactions—that 

potentially at least capital would not be as high for banks. And I 

find one of the ironies is that, you know, the industry and others 

are fighting so hard against these, and they may end up with higher capital levels that impede their ability to lend, to participate in 

the economy. And I guess the moral of the story is, at least I hope 

it is, you cannot have it both ways. You cannot undermine all of 

these regulatory structures and then expect to have very low capital levels because there is no protection for the taxpayer. 

Mr. TARULLO. Certainly, the riskiness of a particular asset is affected by the regulatory environment in which that asset can be 

purchased, and I think that is a core point. Obviously, if a firm is 

able to take on a substantial portfolio of risky assets, capital requirements will have to be higher. 

Senator REED. Thank you very much, Mr. Chairman. 

Chairman JOHNSON. Senator Johanns. 

Senator JOHANNS. Thank you, Mr. Chairman. 

Chairman Gensler, this is the second time that you have appeared, before me at least, since MF Global hit the front pages, and 

I must admit your nonparticipation explanation makes less sense 

to me today than before you appeared the first time. Let me try 

to understand this. 

You worked for former Senator Corzine 14 years ago. Is that correct? 

Mr. GENSLER. Well, I worked with Goldman Sachs, the firm, for 

18 years, finishing in 1997. That is correct. 

Senator JOHANNS. Right. And up until the time you decided on 

November 3rd that you were not going to participate anymore, you 

had regulated MF Global. Correct? 

Mr. GENSLER. Yes, as Chairman of the Commission overseeing 

125 futures commission merchants and thousands of other registrants. 

Senator JOHANNS. Never occurred to you prior to November 3rd 

that you should not be participating with MF Global? 

Mr. GENSLER. I raised the question with the staff when I came 

on board at the CFTC which companies to be involved in or not involved in, and they had said there was no specific reasons not to 

participate. But then as this turned to an enforcement matter—October 31st, Halloween—as it turned to an enforcement matter, they 

repeated that, but as we were getting closer to that Friday surveillance meeting, I had indicated to them that I thought that it would 

be best not to be a distraction, the hard-working and very excellent 

staff of the agency with regard to something that could be a specific 

investigation about specific individuals as well, and—— 

Senator JOHANNS. Why would you be a distraction? You see, 

what it feels like up here, having been in something like your seat 

myself, is that when this got uncomfortable because money is not 

there that should be there, and for whatever reason you folks did 

not discover that until it looks like it is too late, you do not want 

to come up here and answer questions. Every hard question you 

are asked, you said, ‘‘Well, I am not participating,’’ and you asked 

Commissioner Sommers to step up and offer something. And to me 

it looks like you are ducking the responsibilities of your job. 

I do not understand why you would be a distraction. 
22 

Mr. GENSLER. Senator, I take the responsibilities of the job very 

seriously, and I think that the protection of customer funds and positions is just paramount and it is core to our regime and the farmers and ranchers and many energy merchants because those are 

the people that really need to work on and use these instruments 

to hedge are critical to this. So—— 

Senator JOHANNS. So when—— 

Mr. GENSLER. I would far prefer, actually, as you suggest, to be 

able to address it. But when I turned to the general counsel—and 

this was—in my 2 1⁄2 years, this is not the first time that I might 

not be involved in a specific investigation of individuals where 

there is excellent career staff, 170-plus attorneys and so forth in 

the enforcement areas—there are auditors and so forth—to get the 

direction of four other excellent Commissioners and not be a distraction by my personal involvement and participation, and it—— 

Senator JOHANNS. But as—— 

Mr. GENSLER.——turning to an enforcement matter. 

Senator JOHANNS. But as President Truman so famously observed, the buck stops with you. So after this hearing, when farmers from Nebraska call me and say, ‘‘What did Chairman Gensler 

say about getting my money back?’’ My response to them is, ‘‘Well, 

he did not want to become a spectacle, and so he is not participating, and I have nothing to offer in terms of where Chairman 

Gensler might be on that. He has got good staff, and they are handling it.’’ 

But, you see, from our standpoint we want a person to come before us and answer the hard questions. That is what your job is 

about, and it just feels to me like you are not discharging the responsibilities of that job. 

Mr. GENSLER. Well, I feel, sir, that I am. I am doing it to the 

best of my abilities, and I had a judgment, and it was not the first 

time over these 2 1⁄2 years when it turns to an enforcement matter 

that may involve particular individuals—and in this case, though 

it was 14 years earlier, and 9 years earlier when the SarbanesOxley work was done—that that Thursday I said to the general 

counsel, you know, ‘‘What do you recommend here? And how do you 

have me not participate so I am not a distraction to the American 

public and to the important matters?’’ The critical matters that we 

do share on this is ensuring that customer funds are protected, 

that money is accounted for, that segregation happens every day, 

and that people can have confidence in these markets. 

Senator JOHANNS. Well, let me just wrap up with this. It seems 

to me very, very fundamental. If you have money from customers 

in this account and you have your own account over here or the 

company’s account, you do not mix the two, and you do not appropriate money from customers to do your own risky trading. That 

seems to be basic. I bet that has been the law since the beginning 

of time, and this is not tough. And I do not understand, and you 

are not clarifying for me why you would not be participating in 

this. 

Mr. GENSLER. In terms of the law, the law is absolutely clear. 

The Commodities and Exchange Act is clear. There were some exemptions granted in 2005 that yesterday the Commission voted to 

narrow and take back, but there were exemptions granted in 2005 
23 

about lending customer money to other parts of a firm through 

something called ‘‘repurchase agreements.’’ And in October of 2010, 

we proposed to narrow that, to dial that back. I have been consistent about that for these 14 months and believed that we needed 

to do that. But we went through, you know, the healthy process of 

notice and comment and hearing from the public as well. 

Senator JOHANNS. And that is not what happened here. 

Mr. GENSLER. Well, I cannot comment on the specifics of that. 

Senator JOHANNS. Yes, because you are not participating. 

Chairman JOHNSON. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Secretary Wolin, let me ask you, 60 Members of the Senate voted 

to pass the Wall Street Reform Act. That is well beyond a simple 

majority. That included the Consumer Financial Protection Bureau. 

Now, it seems to some of us that it is both unprecedented and 

rather extreme for Republicans to refuse to confirm anyone, regardless of how qualified they are, as Mr. Cordray is, to lead an agency 

because they oppose the existence of an agency that is accountable 

in a dozen different ways under the law, and that is meant to help 

consumers versus large financial institutions. If Republicans in the 

Congress continue to oppose even an up-or-down vote—you know, 

they do not have to vote for this person, but allowing us to have 

an up-or-down vote to confirm a Director—can you explain what 

the practical consequences of not having a Director means for consumers, for middle-class families, for this agency? 

Mr. WOLIN. Thank you, Senator, for that question. Absolutely, as 

you have said and as my opening statement says, without a confirmed Director in this position, the Consumer Financial Protection 

Bureau will not have authority to supervise and enforce very common-sense consumer protections with respect to payday lenders, 

mortgage brokers, mortgage lenders, mortgage servicers, and student loan providers. And I think if you look at what the Consumer 

Bureau has done to date, you see the kind of overwhelming importance of their effort. They are trying to make clearer mortgage disclosure, clearer credit card disclosure, clearer disclosure for students who take out loans. They are trying to help servicemembers 

and seniors make sure that they get the information they need in 

a clear form so that they can make essential choices about what 

consumer products they want to purchase or not and what kinds 

of variations of those products. And we know that the absence of 

all that disclosure was an important element of what caused the 

financial crisis in 2008 and 2009. 

And so from our perspective, we are talking about very commonsense, very tangible protections for everyday Americans of all sorts 

with respect to some of the most important financial judgments 

they will have to make. 

Senator MENENDEZ. And isn’t it true that, for example, community banks and credit unions will be at a disadvantage because 

they will have to live under the regulations but nonbank institutions or certain others—there is a whole universe of institutions 

that cannot be regulated, unlike community banks and credit 

unions, unless there is a Director to help promulgate the regulations? 
24 

Mr. WOLIN. That is true, Senator. The Consumer Bureau has authority now to do these things with respect to banks. It is only the 

nonbanks that they do not have that authority. So we have the unhappy circumstance of banks being regulated in these ways, which 

they should be, but all the nonbanks, with whom millions and millions of Americans engage every day, are not being looked after in 

this way. 

Senator MENENDEZ. And in pursuing this line of questioning in 

a different respect, I have heard a lot of rhetoric about regulations 

of Wall Street causing a loss of jobs or slowing economic growth. 

But can you name a single action in all of American history that 

caused a greater loss of American jobs or slowing the growth that 

we have had in this economy than when we allowed Wall Street 

financial institutions to largely do whatever they wanted running 

up to the financial crisis that culminated in 2008? Isn’t it a fact 

that it was the failure to regulate big Wall Street banks and the 

derivatives market that caused the losses of millions of American 

jobs over the last several years? 

Mr. WOLIN. Well, we know, Senator, that the financial crisis led 

to the destruction of enormous amounts of job and wealth and people to lose their homes. We know that an important reason for that 

was our not having a financial regulatory system that was adequate to the task. That is why the enactment by this Congress of 

Dodd-Frank was so critical and that the implementation work that 

my colleagues to the left are currently engaged in is so critically 

important so that we make sure that we have a system that is 

stronger and more resilient and that better protects not just the financial system but the well-being and the resources of Americans 

across our country. 

Senator MENENDEZ. And, finally, on a different matter, as the 

Subcommittee Chair on Housing, I am very concerned that if the 

qualified residential mortgage definition being worked out—there 

are several of you, I understand, who are engaged in this, so I 

would like you to respond to that—by regulators is not broad 

enough, it could hurt the housing market, especially if you proceed 

with high downpayments of 20 percent or more, which is where the 

marketplace has already taken itself to in expectation that this is 

what you are going to do. Now, that is a whole universe of very 

responsible borrowers that will be largely eliminated at the end of 

the day. 

For example, that was a universe in which I bought my first 

home, and I have been a very responsible borrower over a long period of time. Why would you seek to eliminate that whole universe 

of very potentially responsible borrowers by, you know, systematically just saying 20 percent or above is the mark? 

Mr. WALSH. I am happy to start on that one. The QRM is a narrow definition in a risk retention rule, and the basic point of the 

rule, we believe, and the requirement in law is to encourage risk 

retention in securitizations. The question is: Should there be exemptions or exceptions to the securitization requirement? And the 

QRM definition is drawn pretty narrowly in order to identify mortgages that are so well underwritten that no risk retention is needed, but then leaving substantial space for other products that do 
25 

not meet the QRM definition to be provided to the market, but to 

do so within the risk retention framework that the law requires. 

It is one of the issues we have to confront. There have been 

many, many, many comments on that issue. But it is not intended 

to define what an acceptable mortgage is. It is intended to define 

an exception from the broader rule. So it is one of the things we 

will be grappling with. 

Senator MENENDEZ. Are you going to be—you know, there is a 

lot of uncertainty surrounding whether your next step is to issue 

final regulations or another proposed version. Can you assuage the 

concerns of borrowers and lenders alike by saying you plan to issue 

a reproposal? 

Mr. WALSH. Well, that is a collective decision of people down the 

table here based on the comments. I think for myself it will depend 

on how different a proposal we are looking at once we have made 

the series of decisions in response to comments. If it is very fundamentally different, then I would like to see more comment. But 

we will have to decide that collectively. 

Senator MENENDEZ. Mr. Chairman, thank you. I just want to say 

there are many different ways in which we look at how to make 

sure that risk is reviewed. I just find this movement toward this 

20 percent to me to be arbitrary. It is one of a series of factors that 

should be considered, but it should not be the driving factor. And 

this housing market does not need any more body blows to it if we 

are going to lead to a recovery. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Moran. 

Senator MORAN. Mr. Chairman, thank you very much. 

Chairman Gensler, based upon your voluntary recusal, I do not 

think you can answer this question at this moment, and it is not 

necessary for your colleague to join us at the table, but maybe the 

CFTC could answer this. 

I thought the CFTC, at least at first blush, made sensible reform 

yesterday in regard to the use of the segregated accounts, altered 

the investment opportunities for customers in those segregated accounts. And while that does appear to me to be sensible, everything 

that I have read about MF Global, I do not see that that rule would 

have changed any of the outcome of what has transpired at MF 

Global. And while they may have been doing things with that 

money that this rule would affect, we really have—I mean, what 

I read is we have fraud. We have the taking of customers’ funds 

and they are gone. 

So I would like to have the CFTC explain to me why this change 

in this rule may have been a tool that would have prevented what 

occurred at MF Global from occurring, and no need, again, for you 

to answer that today, but if the CFTC could respond to the Committee with that question, I would appreciate it. 

Senator MORAN. Then let me ask Chairman Schapiro a question. 

Senator Warner and I soon this week are going to introduce legislation that we hope will generate additional startups and revive entrepreneurship in this country’s economy. President Obama has 

talked about Section 404 of Sarbanes-Oxley. We heard testimony 

last week in this Committee about how it remains one of the most 

egregious deterrents toward entrepreneurs, small business men 
26 

and women accessing capital, but I do not know that you or the— 

SEC has said anything about the cost/benefit analysis of Section 

404 and its compliance as it relates to small firms. 

Ms. SCHAPIRO. Senator, I am happy to talk about that. As you 

know, we share the concern about access to capital for small businesses. We have created a new advisory committee that is helping 

us confront small business capital formation issues. We are looking 

at all kinds of initiatives, including raising the limit on Regulation 

A offerings, whether 500 shareholders is still the right number for 

a company to have to begin publicly reporting to the SEC, whether 

we should relax the general solicitation ban, and a number of other 

things, crowdfunding and others. So we have a lot on our plate and 

a lot of initiatives ongoing. 

I will say that I have personally weighed in with a concern about 

raising the 404(b) exemption as high as, I believe, some bills are 

considering doing. It is currently $75 million, which, in fact, covers 

60 percent of all public companies. Those companies do not have 

to do 404(b) reporting. To go to $1 billion, which I think some bills 

are contemplating, would concern me because we have understood 

from investors consistently that the independent auditors’ reporting on internal controls is, from their view, a very important investor protection and gives them a lot of confidence when investing in 

companies. And the worst result I think we could have would be 

for investors to lose confidence generally again, as they did after 

Enron, in the quality and the integrity of financial statements. And 

the bigger the company gets, the more the concern I would have 

about that. 

In addition, it is not at all clear to us—and we look at these considerations very carefully—that exempting from 404(b) for these 

larger companies would, in fact, save audit costs, because internal 

controls have to be tested in the audit of the financial statements, 

anyway. 

So we would be happy to work with you and talk with you in detail about it, but I do have some concerns because 404(b), investors 

consistently tell us, has been very important to their willingness to 

commit capital. 

Senator MORAN. Well, I do think it is important that we have 

your expertise, the SEC’s expertise on this topic. I think it is timely. I think entrepreneurship, startup companies are a great opportunity for our country’s economy, and I do know—I mean, I sincerely believe there is an impediment, but we need to find the right 

threshold, the right balance for protection, but also to increase the 

opportunity to access capital. And so I would welcome your more 

timely answers to those questions. 

My final question, and it is a broad one, and this comes from 

Chairman Johnson’s question. My take on what I heard across the 

table was that Dodd-Frank—and I was not on this Committee at 

the time that Dodd-Frank was passed and signed into law. It may 

have reduced the risk of failure of financial institutions that create 

a systemic risk, and regulators have additional authorities to wind 

down businesses that are failing. But I did not hear anybody indicate that Dodd-Frank reduces the number of institutions that are 

too big to fail, that would meet that definition, that the public, I 

think, and me as a Member of the House of Representatives 
27 

thought Dodd-Frank was addressing, reducing the number of firms 

that, if they failed, there would be a systemic risk. And what I 

heard today in your response to the Chairman’s question was nothing suggests that the concentration of economic power is any less 

today or that there are fewer firms whose failure would cause a 

dramatic consequence to the U.S. economy, but two things—nothing wrong with either one of those two things, is we have greater 

authorities to wind down one of those firms in that circumstance, 

and we have a greater opportunity to prevent any of those institutions from risky behavior that causes them to fail. 

What have I missed in that discussion that you had in response 

to the Chairman’s question? 

Mr. WOLIN. Senator, I think all those things are true; that is to 

say, the statute decreases the probability that firms will fail by 

making sure that they are better protected, better buffered, have 

stronger standards, are engaging in less risky activity; and also, of 

course, as Chairman Gruenberg noted, we have new tools, the Government does, to deal with failure if and when it does occur in 

ways that are orderly and that do not require the taxpayers’ resources to deal with the situation. 

But I think it also does this, which you are getting at: It makes 

sure that firms are better protected from each other so that the 

buffers, the kinds of things that make it less likely for any one firm 

to fail help make sure that when a particular firm fails, other firms 

are better insulated, better protected from those circumstances. 

One key element of that whole dynamic is what Governor Tarullo 

has pointed to as being, of course, a central aspect of this, which 

is capital. And there are lots of other ways, and I am sure other 

colleagues on the panel can speak to them. But I think it is all of 

those things. It is reducing the likelihood of failure, better making 

sure that other firms are protected from failure of a particular 

firm, and dealing with a firm that fails in a way that is orderly and 

is protected from the taxpayer. 

Mr. TARULLO. Senator, let me just add two things to what Secretary Wolin said. 

First, I do think it is important that market discipline play a 

much greater role than it did in the pre-crisis period. So a number 

of the things that we are talking about here, whether it is the 

FDIC’s orderly liquidation authority or the enhanced prudential 

standards, the disclosure that we are doing in accordance with the 

stress tests, all of those are means to enhance market discipline as 

a complement to basic regulation. 

The second thing I would say is that there are two forms of systemic risk that we need to be concerned with. One is the one you 

highlighted, which is the number of firms which in and of themselves would cause a systemic problem if they were to fail. But second is a set of activities, correlated activities within the financial 

system that may be conducted by a broader number of not huge organizations, which themselves could create some systemic risk if, 

for example, there were a shock to the value of the assets that were 

underlying those transactions. And that is really what MBS was. 

MBS involved big institutions, to be sure, but it involved a lot of 

others. 
28 

So when you talk about derivatives reform, central clearing and 

the like, you are talking as much about systemic problems that can 

arise in nongigantic firms as well as gigantic ones. But I will say 

to you quite honestly, I think we are going to need some more work 

and thinking there to make sure that we are identifying those 

forms of risk and not just allowing an arbitrage out of one set of 

institutions into another. 

Senator MORAN. When you say market discipline, is that my 

phrase ‘‘moral hazard’’? Is that what you are—— 

Mr. TARULLO. It is the other side, it is the flip side of moral hazard, sir, yes. 

Senator MORAN. OK. Thank you. 

Chairman JOHNSON. Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair. 

I want to start with a brief discussion on the difference between 

qualified residential mortgage, which was an exception to the risk 

retention rule, as Mr. Walsh pointed out, and qualified mortgage, 

which was a term used to define a mortgage that meets ability-topay standards—in other words, getting rid of the liar loans. 

Mr. Wolin, under the section for the qualified mortgage, again, 

the ability-to-pay standards, a series of requirements are laid out, 

and those requirements include not being a balloon mortgage, 

being fully amortized, not being negatively amortizing, being 

verified income, and so forth, and meeting the ratios in regulation 

or statute for debt to income, all of those basically, yes, it has been 

underwritten and ability to pay. 

Two terms are used in this section, one of which refers to a presumption and the other to safe harbor. Now, technically those are 

two different things in the law, and I think you have produced two 

different rules based on which direction the rules will go, two different draft rules. 

Do you have a sense right now which way you are going to go 

on this? 

Mr. WOLIN. I do not, Senator. I think it has yet to be determined, 

and I think how the QRM and the QM, which, as you note, have 

different purposes but also have some interplay, relate to one another is, I think, also something that needs to be worked through 

in the end, of course, by regulators. We will, you know, offer our 

views, and in the case of the QRM rules, we have a coordinating 

function that the statute provides to us, but the regulators will, of 

course, in the end make their judgments. 

Senator MERKLEY. The qualified mortgage is completely under 

this section presumption of ability to repay and is distinct and different from the risk retention version. 

Mr. WOLIN. Right. 

Senator MERKLEY. I will note that later in that section there is 

a reference directly to the safe harbor. Certainly that was the discussion that was taking place among those of us who were immersed in trying to get rid of the liar loans, was that you would 

have a safe harbor. Thank you. 

Governor Tarullo, I wanted to turn to the G–SIFI surcharge, and 

I believe that earlier in the year you called for a surcharge, which 

we might call an anti-bailout equity buffer, of as much as 7 percent 

which could bring the total amount up to 15 percent for tier one 
29 

capital ratio. But I think the Fed ultimately adopted 3 percent, 

that is, essentially instead of getting to 15 percent, they get to 11 

percent. And for most organizations, under the scaled bucket structure, it would only be 1 percent or 2 percent. 

So is it fair to say that you lost and that you are still concerned 

about that? 

Mr. TARULLO. No, so, Senator, what I said in that speech, in 

June, I believe, was that the methodology that we—which is to say 

Fed economists—had pursued in trying to calibrate what an appropriate surcharge would be had produced a range of possible surcharges that would have been somewhere between 1.5 and 7 percent. As you indicate, the Basel agreement was for 3 percent as 

being at the top. That is obviously within. And the 2 to 2.5 that 

would apply to a lot of SIFIs is obviously within that range. 

I did not at the time propose it, but I did want people to see that 

a methodology which asked the question how can we equalize the 

risk of failure of one of these systemic institutions and the impact 

that it would have on the financial system to that of a medium-size 

institution could under some not implausible assumptions produce 

an amount of a surcharge greater than we had intended to propose. 

There are other—this is relevant to my response to Senator 

Reed’s question earlier. When one thinks about which number to 

choose once you have gotten a range, I think you want to take several things into consideration: one, how are you feeling about the 

underlying capital system, the quality of capital and the like; two, 

to what degree are there other regulatory structures which suggest 

that you need to go higher or lower in that range that you have 

got; and, three—and I think we do take this into consideration— 

the degree to which we can get agreement from our international 

counterparts to move their SIFIs in a similar direction. 

So, you know, as with Basel III, personally I would have been a 

little happier with a little higher number, but I do think that the 

numbers that we got in the international negotiations and in coordination with the OCC and the FDIC are well within that range 

which analytically we think will provide the kind of additional buffer support that is needed. 

Senator MERKLEY. Thank you. Because my time is out, I will just 

close by noting that the total amount of buffer becomes much less 

than many such as those at the Stanford Business School have proposed, and this is in the context of certainly significant exposure 

to European banks and some exposure that is not fully understood 

in terms of the credit default swaps and how the dominoes line up 

in that manner. So I applaud your ongoing effort to have this first 

line of defense be one that is robust and substantial. 

Thank you. 

Chairman JOHNSON. Senator Corker. 

Senator CORKER. Again, Mr. Chairman, thank you for calling the 

hearing, and I thank each of you for being here. 

Mr. Wolin, the CFPB, the Consumer Financial Protection Bureau, we have had numbers of conversations about it, and I have 

talked to the White House several times over the course of the last 

several months. But, you know, in fairness, even the Treasury’s 

proposal that came forth regarding the Bureau had a board, and 
30 

even the Treasury Secretary has said, yes, you know, we felt there 

should be a board. 

I do not know whether you are enjoying being part of a political 

game that is taking place regarding this, but I would just say, look, 

some basic checks and balances with this organization I think 

would cause the logjam that is taking place on this to really be broken up, and I am sort of surprised that you all continue to be a 

part of this political game that is taking place. But I do hope at 

some point in time we will be able to have a meeting of minds and 

have just a simple kind of thing that most people in Tennessee and 

across our country would like to see, and that is some accountability. But I hope that will happen, and you do not need to answer 

that. I know it is not going to happen this week because everybody 

is having so much fun with it. 

But on GSEs, in February you all came forth with sort of a multiple choice of what could happen with GSEs. I am surprised that 

you have not come forth with any solution toward the GSEs, and 

you do not have to go on forever, but explain to me why you have 

not. I mean, it is a pretty basic issue that all of us know needs to 

be dealt with. We had looked forward to working with you, and 

when we realized you really just did not have the appetite for taking it on, we have offered a bill ourselves. I hope you will look at 

that, but could you tell us why you are not really pursuing any 

type of GSE reform at this time? 

Mr. WOLIN. Well, Senator, let me—and I want to come back to 

the CFPB thing, if I might for a second as well. We are keenly interested in pursuing proposals for housing finance reform. We laid 

out some options, as you note. We continue to work on refining sort 

of what we think the right approach is and have tried to be clear, 

working with folks across the Congress, that we are keen to engage 

in that conversation. 

So we have been continuing to work on plans. We have engaged—— 

Senator CORKER. Are you going to come forth with a plan? 

Mr. WOLIN. Well, I do not know whether we are going to have 

a specific thing or when, but certainly we hope to. This is obviously 

critical, and at some point we will be bringing something forward. 

Senator CORKER. I would just say in general the observation is 

that you all are really succumbing to politics and are unwilling to 

take on the tough issues that need to be dealt with that really 

cause people in our country to be divided taking on tough issues 

like this and really promoting other political stances like you are 

right now, the CFPB, and not trying to solve it. So I just want to 

tell you it is disappointing, and I do hope that very soon somehow 

that might change. 

To you, Mr. Gensler, I was not really—— 

Mr. WOLIN. Could I respond to that, Senator? 

Senator CORKER. Sure, if you can do it briefly. 

Mr. WOLIN. I think we have tried to take on lots of very complicated—— 

Senator CORKER. You have not taken on GSEs as you said you 

would. You have not done that. You have not taken it on. You came 

out with a multiple choice that makes everybody happy, and you 

did not do what you said you would do. You all said you all would 
31 

come forth at the beginning of this year with a real proposal. The 

year is almost over, and you have not done that. 

Mr. WOLIN. I would say this, Senator, that we have put out some 

very serious ideas. We continue to work on proposals, and we will 

work with whoever on the Hill wants to continue to work with us. 

Senator CORKER. Good. Thank you. 

Mr. Gensler, I was not going to weigh in on this. I figured others 

would do it. I do have some other questions I want to ask other 

folks. But I just was not going to do it. I have to tell you that it 

appears to me—I do not know if you would make the same decision 

again, but the people that care about MF Global really care about 

what happened running up to the point in time that you recused 

yourself. I mean, the enforcement piece, it will take its own course, 

and I am sure it will be tough. But it feels to me like you panicked, 

and it was more about a career-enhancing situation to avoid accountability. And I just have to tell you as a person, I know I fall 

short of this, but I do try to take on the tough issues and not dodge 

tough issues. You know, I may not be coming back because of that. 

But, you know, it appears to me, candidly, that you really took a 

career-enhancing—I think it has actually not turned out to be the 

case, but a career-enhancing position by trying to take yourself out 

of this at a moment in time when really the rest of—I mean, 

Corzine is not the chairman anymore of the company, so it seems 

like now is a great time for you to be involved. But I was disappointed with your testimony, and I would love to talk to you 

about it some other time. But it does not seem to me that it makes 

any sense at all and was done solely to enhance your career here. 

Mr. GENSLER. Senator, I would look forward to that, and I feel 

that you have given me good advice throughout my 2 1⁄2 years here. 

But really what happened is, as it turned to a specific enforcement 

matter that could involve specific individuals, not just the company 

but specific individuals, about compliance with laws, not just one 

law but various laws, and there were some questions coming that 

Thursday I was up in the Senate testifying on position limits, actually, but I reached out to the general counsel, and I said I know 

that you are saying that it was 14 years ago and 9 years ago and 

so forth, but that my very participation could be such a distraction 

on the enforcement matter. And then I said, ‘‘So what do we do 

elsewise?’’ And to your very good question, the general counsel 

said, ‘‘Well, enforcement involves, the bankruptcy involves the very 

heart of the questions of where is the money,’’ and so forth. 

So I do not think, sir—and I appreciate what you are saying because it is a balancing. All of us that are in this town, there is a 

balancing of these very hard decisions. So I made a judgment on 

that Thursday. It was certainly not for the reasons you are saying 

because you have observed this is still a very challenging topic. 

Even not participating it is a challenging topic. 

Senator CORKER. Well, thank you. 

Mr. GENSLER. It was a balanced judgment. 

Senator CORKER. And let us talk about that. 

Mr. Wolin and Mr. Tarullo, I know Treasury, when Volcker came 

out, my guess is that there were people at Treasury that thought, 

‘‘What in the world?’’ especially when it came out. And I know 

Treasury first opposed Volcker internally, and now it is part of our 
32 

law. And over time I guess you have figured out the best way to 

deal with Volcker was to make sure that treasurys were exempt 

from Volcker. All other trading in debt is going to become far less 

liquid—in other words, you buy a GE bond or somebody else, there 

is going to be no liquidity. But you artfully exempted treasurys so 

it would not have any effect on Treasury’s ability to have liquidity 

in trading debt instruments that are very important to you. 

I am just wondering if you think that was an appropriate response to Volcker, to basically say, OK, we will let it apply to everybody else but us? I wonder if you and Tarullo might respond to 

what that is going to do in debt markets by crowding people out 

of the private side and, candidly, causing people to more focus on 

something that they know is highly liquid? 

Mr. WOLIN. Let me start, Senator, by saying we were in favor of 

the Volcker Rule. I came before this Committee and testified with 

Paul Volcker and was clear about—— 

Senator CORKER. Not in the beginning. 

Mr. WOLIN. The statute was the creation of this Congress. I 

think from our perspective we wanted to make sure and I think industry was keen for us to make sure that we excluded certain 

things from the provisions. How that gets worked through in the 

rulemaking obviously is not for the Treasury to participate in, so 

I will defer to Governor Tarullo. But I have a hard time imagining 

that this is going to have a particularly important effect when all 

is said and done on the overall debt markets and their liquidity. 

Mr. TARULLO. Senator, with respect to liquidity for other instruments more generally, I think a lot of this will depend on the efficacy of one of the concepts that lies behind the proposal, which is 

to try to adjust the metrics and the oversight to the relative liquidity of the markets for the particular assets. So, for example, in the 

exceptions for underwriting and market making, it will be appropriate to evaluate what a firm does differently if it is making a 

market in a relatively less liquid asset, which, for example, could 

be a bond in a smaller firm, as opposed to making a market in Fortune 500 equities that are traded on the New York Stock Exchange. 

So we will try to minimize the effect upon liquidity in markets 

by implementing the market-making and underwriting sections as 

sensibly as we can, taking account of the differences in markets. 

I do not know what 3 or 4 or 5—well, it will surely be more than 

that because the rule will not take effect for another 2 1⁄2 years, but 

what 5 or 6 or 7 years from now, how the nature of trading in 

these instruments will have changed. It may well be that a bunch 

of it just migrates to some different firms. 

Chairman JOHNSON. Senator Hagan. 

Senator HAGAN. Thank you, Mr. Chairman, and thank you for 

holding this Committee hearing. 

Governor Tarullo, in your written testimony, you devoted much 

of your discussion to capital regulation after Dodd-Frank. I agree 

that this is an issue of utmost importance. European banks currently hold large portfolios of sovereign debt that would satisfy liquidity coverage ratios under Basel III. Yet we have seen declines 

in the liquidity and value of these assets. It has been reported that 
33 

the Basel Committee may add equities and corporate debt to the 

list of assets that can be used to satisfy the liquidity requirements. 

Could you discuss this possibility? Would you agree that banks 

are best served by holding a diverse pool of ‘‘high-quality liquid assets’’ such as cash, U.S. Treasurys, covered bonds, and central bank 

reserves? 

Mr. TARULLO. Certainly, Senator. I should say at the outset that 

the interest in taking another look at the liquidity coverage ratio 

began well before the current period of stress on European 

sovereigns. We, which is to say, the Federal Reserve, was one of 

the entities which asked internationally to take another look at the 

liquidity coverage ratio, and I would say, to be fair to those who 

came up with the original proposal, it was in large part because we 

had never had quantitative liquidity requirements before, either 

nationally or internationally, and so we, that is to say, the Board, 

thought that it was particularly important that, before putting any 

such requirement in place, there be a pretty close look and a look 

that involved principles at central banks and regulators. 

One of the precepts, I think, for the renewed look was just the 

point that you were making, that if you are worried about the liquidity of a firm, what you are really asking is how well are the 

liabilities and the assets of that firm matched so that in a period 

of stress it can cover its needs over some period of time so that it 

has a plan, it can develop a plan for longer-run survival. And what 

I had thought was that the 2008 period gave us a very good reallife experiment to test what kinds of instruments actually do remain liquid even during a period of stress like that, for example, 

highly traded equities of large companies. 

So that is, in fact, one of the motivations for the rethink, and I 

believe that once the international group at the Basel Committee 

that is looking at the LCR has finished its evaluation next year, 

you will see some changes in things like what qualifies and assumed run rates and the like to try to conform the requirements 

somewhat more closely to the experience we actually had in 

late—— 

Senator HAGAN. Let me follow up on that. The Volcker Rule provides an exclusion for accounts used to establish or acquire a position for the purposes of the bona fide liquidity management. 

Mr. TARULLO. Right. 

Senator HAGAN. And I would expect that the Basel Committee’s 

definition of the bank’s stock of liquid assets for liquidity coverage 

ratio purposes and the trading account exclusion for bona fide liquidity management would be closely linked. Is that an appropriate expectation? 

Mr. TARULLO. Well, I think for certain we would want to take the 

revised liquidity coverage ratio into account in thinking about what 

is a legitimate liquidity management program. But, remember, the 

LCR is only a 30-day window, and if you are looking at sound liquidity management for a firm, 30 days is important because of 

that breathing period that I mentioned a moment ago, but you actually want to make sure that the book is better matched going 

well out beyond 30 days. 

So while we would take LCR into account, good sound liquidity 

management will include things other than just the LCR. 
34 

Senator HAGAN. Thank you. 

Chairman Schapiro, the proposed Volcker Rule prohibits a banking entity from acquiring an ownership interest in, or sponsoring 

a ‘‘covered fund’’ unless otherwise permitted under the rule. I was 

hoping to clarify certain aspects of what constitutes a covered fund. 

Would the ‘‘covered fund’’ definition apply to foreign funds such 

as mutual funds or other regulated collective investment vehicles 

offered to U.S. investors? 

Ms. SCHAPIRO. Senator, it is a little hard to answer that 

straightforwardly, but I will try to. We started, when we—first of 

all, working very closely with our colleagues in the bank regulatory 

world because at the end of the day this rule is really about protecting the safety and soundness of the banks as a result of their 

investment or sponsorship. So we started with a statutory provision given to us by Congress, which was really quite broad, and 

then we worked to try to determine where that breadth was overinclusive and actually in some instances under-inclusive, and came 

up with what we thought was a pretty tailored definition. 

I think comments are going to be critically important to us in refining this so that we come up with a meaningful definition that 

does not create gaps and loopholes but is also, as I said, not overinclusive. 

We did propose to include—and the CFTC may want to speak to 

this—commodity pools and foreign funds because we thought that 

was an area where there ought to be coverage. We have gotten a 

lot of pushback on those issues, and so we will be reviewing those 

comments very, very carefully. 

Senator HAGAN. I was relieved to see that a joint venture between a banking entity and an ‘‘operating company’’ would still be 

permitted under the rule. However, to my knowledge, the term ‘‘operating company’’ remains undefined. Given that joint ventures are 

not the type of corporate structures that the Volcker Rule was intended to cover, I would expect that definition to be broad. Can you 

comment on what is meant by the term ‘‘operating company’’? 

Ms. SCHAPIRO. Just to say that that is actually an example 

where we thought the statute was over-inclusive, and so we sought 

to create exemptions there for joint ventures that are operating 

companies or vehicles that are used to merge an entity with or into 

a banking entity or its affiliates. I understand that there are those 

who feel that we did not make those exclusions broad enough, and 

so we are looking at that. 

Senator HAGAN. And then one final thing under that question. I 

noted that credit funds that originate and invest in loans and other 

extensions of credit on a long-term basis were not exempted from 

the covered fund definition. Would you agree that credit funds 

allow the banking system to share credit risk with investors? 

Ms. SCHAPIRO. Well, I think, again, that is something—I do not 

have a good answer for you on that, but, again, we will be sure we 

look at that carefully. All of these issues around covered funds are 

obviously complex and technical, but that is why the comments will 

be very valuable to us, as well as the input from our colleagues 

who regulate the banks. 

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

Chairman JOHNSON. Senator Vitter. 
35 

Senator VITTER. Thank you, Mr. Chairman. Thanks to all the 

witnesses. 

Like a lot of folks, I have a broad concern with the notion of 

SIFIs and regulation of that, and the general concern is that in trying to deal with too big to fail in this way, we are going to end up 

encouraging or incenting too big to fail. Specifically, just as an example, the Wall Street Journal has reported that the biggest toobig-to-fail banks pay about 78 basis points less for their funds than 

their rivals. 

Has that sort of factor in the market been examined in terms of 

the SIFI issue? What will be the impact of designating these 

nonbanks as systemically important in the market? And is there 

going to be the consequence that some of them actually gain advantage? Has that been examined in a rigorous way? 

Mr. TARULLO. I think you are addressing me, Senator? 

Senator VITTER. I guess I would love your reaction, Governor, as 

well as Secretary Wolin’s. 

Mr. TARULLO. OK, so let me start. I think with respect to too big 

to fail, it is not a binary exercise; that is, one does not go from 

being perceived as clearly too big to fail one day to being perceived 

clearly not too big to fail the next day. And I think what you have 

heard today and probably have heard on past panels is a process 

that is in place to try to change in a real way the perception of too 

big to fail among systemically important institutions in the United 

States. And that happens, first, through the kinds of capital standard that I was describing earlier. I think, second, it happens 

through making market discipline real for these institutions. 

When the FDIC is able to develop, as it is in the process of doing, 

a credible liquidation authority, what you begin to see, as I think 

you have probably observed, outsiders, including ratings agencies, 

saying there is not the level of implicit support that they had imputed to U.S. firms in the past any longer, and that has actually 

laid behind some of the downgrades that the ratings agencies have 

done. They have said explicitly this is not about the condition of 

the bank; it is just what we think—how much we think the Government would stand behind them. 

So we absolutely look at market indicators to show us to what 

degree market discipline is becoming a reality for these firms in 

the same way that it is a reality for a middle-sized regional bank 

in the Midwest. 

Senator VITTER. Secretary? 

Mr. WOLIN. Senator, I would just add this thought to what Governor Tarullo said, which is that no one is lining up to be designated as a SIFI—those who might be designated lining up, quite 

displeased with the prospect, and that is because it comes with a 

set of enhanced prudential standards that they will have to meet. 

And, you know, it ties in to what the Governor was saying, I think, 

with respect to how we think about what the ultimate implication 

of this is, more buffers, more standards, and so forth. 

So I do not think being designated as a SIFI is something that 

people see as an advantage either with respect to cost of funding 

or otherwise. It will come with sort of a more onerous set of requirements. 
36 

Senator VITTER. OK. Thank you. And just one other comment 

about a completely separate topic to the Chair of the SEC, Chairman Schapiro. First of all, the Stanford case, as you know, has 

been very important to me because of the number of Louisiana victims. Senator Shelby is in a similar situation. A lot of folks are affected. The SEC did take action in June, and I thank you for that. 

It was very long in coming, going back to well before your tenure, 

but the SEC finally took positive concrete action. I thank you for 

that. 

You have been personally very engaged since then to try to get 

SIPC to do the right thing and act, and we have had many conversations about it. And I also thank you for that, and I am sincere 

about both of those things. 

Having said that, this again is dragging on 6 months after your 

positive concrete action, and so I would just encourage you publicly, 

the same way I have encouraged you privately, that I think the 

SEC needs to take definite action again before the end of the year 

in a positive way. And I am afraid that is going to mean suing 

SIPC. It seems to me that is what is going to be required based 

on my information and my conversations. I hope there could be another more positive and immediate outcome, but bottom line, I really encourage you in the strongest possible terms to make sure to 

take the next step, definite action before the end of the year. 

Ms. SCHAPIRO. Senator, I appreciate that, and I think you know 

I share deeply your concern about this and that we not take longer 

than is absolutely necessary, and that we try to get to the best possible result for the victims. That is what we are working very hard 

on, and the Commission is equally engaged in getting to resolutions 

as quickly as we possibly can. 

Senator VITTER. Thank you. 

Chairman JOHNSON. For the past few minutes, there has been a 

vote pending in the Senate. Senator Shelby has some quick questions. 

Senator SHELBY. Thank you, Mr. Chairman. 

To the SEC, Chairman Schapiro, your tenure as the Chairman 

of the SEC has been marked by a number of major failures. These 

failures include investor protection failings that was just brought 

up, Stanford; failures in court like the recent Citicorp settlement 

decision; rulemaking failures like the proxy access rule that was rejected by the D.C. Circuit. There have also been operational failures like the Commission’s lease of the Constitution Center; management failures like your general counsel’s involvement in the 

Madoff case; and the continuing internal control failures identified 

by the GAO, the Government Accountability Office. 

As head of the SEC, do you take responsibility for any of these 

failures? Does the buck stop with you? Or what do you say? 

Ms. SCHAPIRO. Well, Senator, let me start by saying that the 

GAO found that the SEC had no material weaknesses in its internal controls over financial reporting this year for the first time in 

years. The agency’s issues with respect to internal controls have 

gone on through many Administrations, but we cleared both material weaknesses this year. I am extremely proud of that and extremely proud of the staff’s work. 
37 

The agency has had some stumbles. I have always taken responsibility for being transparent about them and for fixing them going 

forward. But I think your recitation ignores the unbelievable 

amount of great work that has gone on at the SEC in the last 3 

years, including the fact that we had a record year in enforcement 

last year, more enforcement cases filed than ever before in the history of the agency, more rulemakings successfully completed, more 

rulemakings successfully completed through unanimous votes by 

the Commission than in a very long time. And we have worked 

hard to remedy many issues that have been of longstanding concern at the agency. I do take responsibility. I testify often about 

them. But I am enormously proud of this agency’s record. 

Senator SHELBY. Secretary Wolin, your opening statement gave 

the impression to some of us that nonbank lenders are completely 

unregulated. Of course, you know that is not totally true. Explain 

to the American people how these lenders are currently regulated 

at the State level and also by the Federal Trade Commission. 

Mr. WOLIN. Senator Shelby, I would say they are substantially 

unregulated for consumer protection. They are, depending on the 

State and depending on what kind of nonbank financial firm it is, 

regulated in States. But I would say that what we have now is no 

Federal regulator who is focused on the nonbank financial sector 

with respect to consumer protection in a serious way, and that, of 

course, leaves an unevenness as between banks and nonbanks. 

Senator SHELBY. Are you at Treasury and on behalf of the Administration, are you guys—Senator Corker brought it up—are you 

seriously interested in talking to the Republican leadership about 

how we can move forward on the consumer protection head and all 

of this? In other words, we have submitted three recommendations 

to you, one of which he brought up, Senator Corker, dealing with 

the Treasury’s initial recommendation that this consumer agency 

be accountable, that it have a board and so forth. Are you guys seriously interested in trying to negotiate with us on this and let us 

move forward where we can regulate a lot of these nonbank banks? 

Mr. WOLIN. Well, I think, Senator, what we are very interested 

in is the Senate considering Richard Cordray. As you know, the 

statute provided a very intricate set of protections, checks and balances with respect to the CFPB. It has gotten oversight by this 

Congress, by the GAO, independent audits, reporting requirements. 

Its rules are subject to coordination with the regulators to my left. 

It can be overturned by a vote of the FSOC. There are a whole set 

of things there that, in the end, Congress determined were the 

right governance structures for this entity, and we think that, having done that, it is important for the Senate to consider the President’s nominee. 

Senator SHELBY. Sure. One last question, Mr. Chairman. Just to 

go back to Chairman Gensler. You were involved in crafting the 

Dodd-Frank legislation. You testified at many hearings, crafted 

statutory language, and attended countless meetings. You even sat 

at the table during the Agriculture Committee markup and staffed 

members into the early morning hours during the conference. 

Since the passage of Dodd-Frank, you have testified numerous 

times against changes to Dodd-Frank and have been to Europe 

many times to lobby their regulators. In fact, according to your 
38 

written testimony, you will be meeting with foreign regulators on 

Thursday. 

Chairman Gensler, in all candor, do you not think that if you had 

spent less time protecting your political turf, your regulatory turf, 

and more time protecting customers and overseeing firms like MF 

Global, it is less likely that MF Global would be where they are 

today and the customers’ money would not be missing? 

Mr. GENSLER. Senator, I think it is about protecting the American public. It is what the CFTC does every day prior to DoddFrank and after Dodd-Frank. It is about ensuring that end users 

and their customers get the benefit of these markets to hedge a 

risk, lock in a price and do what they do well. We are an agency 

that relies heavily on self-regulatory organizations. We are only 10 

percent larger than we were in the 1990s, and that is—— 

Senator SHELBY. But making you larger does not make you better, does it? 

Mr. GENSLER. Not necessarily. Absolutely. We agree on that. 

Senator SHELBY. Mm-hmm. 

Mr. GENSLER. We have to be more efficient—— 

Senator SHELBY. Mm-hmm. 

Mr. GENSLER.——use technology better—— 

Senator SHELBY. Sure. 

Mr. GENSLER.——use the collaborative process with other regulators here and around the globe, enter into memorandums of understanding, having mutual recognition with those international 

regulators. We are a small regulator that has to leverage, really, 

off of the self-regulatory organizations and other regulators, but I 

think that the hard working staff at the CFTC is there, and as 

Chairman, I do take responsibility for those things that do well and 

those things that do poorly. I do take responsibility and this job seriously, sir. 

Senator SHELBY. Do you believe that the CFTC has failed the 

American people as far as MF Global is concerned? 

Mr. GENSLER. Again, I am not participating in the matter, but 

let me answer it more generally. 

Senator SHELBY. Well, you can—— 

Mr. GENSLER. If people—— 

Senator SHELBY.——answer it specifically—— 

Mr. GENSLER. No, no, I think—— 

Senator SHELBY. Have they either failed it or they have not? Obviously, they have failed. 

Mr. GENSLER. I think that—I think that when our legal system 

says to segregate funds, it means to segregate funds, and customers need to be able to rely on that every day from every firm. 

Senator SHELBY. And if people have not done it, they should pay 

the consequences? 

Mr. GENSLER. Well, that is what our law says, sir. 

Senator SHELBY. When they break rules and laws. 

Mr. GENSLER. That is what our laws say. 

Senator SHELBY. Thank you. Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you all for your testimony and for 

being here with us today. 

Shortly, the Senate will take another significant vote to ensure 

that American consumers, including servicemembers and older 
39 

Americans, have the strong consumer protections that they want, 

need, and deserve. I urge my colleagues to not let politics trump 

the needs of American consumers and stop any filibuster on Richard Cordray’s nomination to be the first Director of the Consumer 

Financial Protection Bureau. Mr. Cordray is an extremely well 

qualified candidate who deserves a vote on his nomination. 

Thank you all for your hard work, continuing to implement the 

Wall Street Reform and Consumer Protection Act. 

This hearing is adjourned. 

[Whereupon, at 12:13 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 
40 

PREPARED STATEMENT OF SENATOR SHERROD BROWN 

Thank you, Mr. Chairman, and thank you for holding this hearing and for your 

commitment to the Committee’s oversight role. 

At a June Subcommittee hearing, representatives from the three banking regulators shared the lessons that they learned from the financial crisis. They also described the steps that they are taking to reform the financial system. 

But I find several recent regulatory actions troubling. 

In particular: 

• The major bank-holding companies have transferred significant portions of 

their derivatives exposure into their bank subsidiaries that are backed by the 

Federal Government; and 

• The Federal Reserve provided $7.7 trillion in secret, low-cost loans—unknown to both Treasury and Congress—to financial companies, particularly the 

six biggest megabanks. 

These examples clearly demonstrate three things: 

First, we need more transparency. 

Certainly some trade secrets need to be protected, but the lack of transparency 

that exists in the financial sector is paralleled perhaps only by our national security 

establishment. 

Dodd-Frank took some steps in this direction, but we need to do more. 

Second, regulators, the Treasury Department, and Congress are far too lenient 

with a Wall Street that they view as more essential than it actually is. 

Preventing excessive risk-taking and moral hazard requires significant costs and 

reforms for any institution seeking support from the U.S. Government, and by extension the taxpayers. 

As both Governor Tarullo and Senator Shelby have argued this includes more equity at the biggest megabanks—a sentiment that I know some other panelists might 

disagree with. 

Third, not enough has been done to help those outside of the financial sector—most especially the middle class on Main Street. 

Many in Ohio and around the Nation are hurting—families and businesses, students and seniors. 

Daily, we are reminded of the inadequacy of the response to the financial crisis. 

This failure to fight for middle class Americans is all that much starker when we 

view it against the gifts that have been bestowed upon Wall Street. 

The result is a system that is good for the regulated institutions, but bad for 

policymakers, investors and other market participants, and taxpayers. 

One of the central lessons of the financial crisis is that terrible things can happen 

when institutions are allowed to run wild—free from oversight or accountability. 

So far, I’m sorry to say that the regulators’ deeds have not necessarily matched 

their words. 

Thank you, Mr. Chairman. 

PREPARED STATEMENT OF SENATOR JERRY MORAN 

While today’s hearing is intended to review the financial stability of the United 

States, I believe it is critically important that we also take this opportunity for a 

basic review of the facts in the collapse of MF Global. Kansans are rightfully frustrated. Many have lost their confidence in the markets and in Government as funds 

that were legally required to be segregated have seemingly been stolen from the 

firm. I strongly urge this Committee to consider a series of hearings to specifically 

investigate the failure of MF Global and to identify solutions which can restore confidence. 

Additionally, I would hope today’s hearing could provide an opportunity to debunk 

the myth that Senate Republicans are standing in the way of improved consumer 

protection. The commitment and request made by 45 Senators remains the same 

today as it did 7 months ago: no confirmed Director, regardless of party affiliation, 

until basic changes are made to the structure of the CFPB. I have had a legislative 

proposal pending in the Senate since April which would accomplish our goals for reform. Nothing I have proposed is radical; in fact it is based on returning the CFPB 

to the President’s original design and funding mechanism. Our collective time and 

energy would be better spent working on a solution which can bring accountability 

to the Bureau rather than a doomed vote which does nothing to advance our reform 

efforts or protect consumers. 
41 

This rhetoric we will witness this week may grab headlines, but it ignores a basic 

fact: accountability and transparency at the CFPB is a goal that should be shared 

by every policymaker interested in protecting consumers from the abuses of the 

past. 

Even if the President decides to change course and constructively engage with the 

Senate in quickly passing some basic reforms to the structure of the agency, the 

CFPB will remain an incredibly powerful Government bureaucracy. Nothing I have 

proposed would undue those authorities or responsibilities. My concern, however, is 

that without additional transparency and accountability, the result of a poorly drafted rule could lead to less credit and less opportunity for consumers and small businesses alike. 

PREPARED STATEMENT OF NEAL S. WOLIN 

DEPUTY SECRETARY, DEPARTMENT OF THE TREASURY

DECEMBER 6, 2011 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, 

thank you for the opportunity to discuss Treasury’s progress implementing the 

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the DoddFrank Act). 

The Dodd-Frank Act is the strongest set of financial reforms enacted since the 

Great Depression, and was passed in the wake of the worst financial crisis this 

country has experienced since that time. 

That crisis cost nearly nine million jobs, wiped out more than a quarter of household wealth, and deeply compromised Americans’ trust in our financial system. 

Today, our country’s foremost challenge is helping the millions of Americans who 

lost their jobs as a result of the recession find new employment. Nearly three million private sector jobs have been created within the last 2 years, but our economy 

is not creating new jobs fast enough. 

Congress took an important first step by passing important provisions of the 

President’s American Jobs Act that provide tax cuts for hiring unemployed or service-disabled veterans and repeal a tax on Federal contractors. It should pass the remainder without delay. Independent economists estimate that the provisions in the 

American Jobs Act, taken together, would create up to two million new jobs and add 

nearly 2 percentage points to economic growth next year. 

At the same time as we work to create jobs, Treasury is focused on implementing 

the Dodd-Frank Act to build a more efficient, transparent, and stable financial system—one that supports this country’s long-term economic strength and leadership, 

rather than jeopardizes it. 

Congress designed the Dodd-Frank Act’s reforms to address the key failures in 

our financial system that precipitated and prolonged the financial crisis. Its core elements include: 

• Tougher constraints on excessive risk-taking and leverage. To lower the risk of 

failure of large financial institutions and reduce the damage to the broader 

economy if a failure occurs, the Dodd-Frank Act provides authority for regulators to impose more conservative limits on risks that could threaten the stability of the financial system. 

• An orderly liquidation authority to protect taxpayers. The Dodd-Frank Act creates a new orderly liquidation authority to break up and wind down a failing 

financial firm so that taxpayers and the economy are protected. 

• Comprehensive oversight of derivatives. The Dodd-Frank Act creates a new regulatory framework for the over-the-counter (OTC) derivatives market to increase 

oversight, transparency, and stability in this previously unregulated area. 

• Stronger consumer protections. The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) to concentrate authority and accountability 

in a single Federal agency for consumer financial products and services. 

• Increased transparency and market integrity. The Dodd-Frank Act includes a 

number of measures that increase disclosure and transparency in financial markets, including new reporting rules for hedge funds, trade repositories to collect 

information on derivatives markets, and improved disclosures on asset-backed 

securities. 

• Accountability for stability and oversight across the financial system. The DoddFrank Act created the Financial Stability Oversight Council (the Council) to 

identify risks to the financial stability of the United States, promote market discipline, and respond to emerging threats to the stability of the U.S. financial 
42 

system. To support the Council, the Office of Financial Research (OFR) collects 

and improves the quality of financial data and develops tools to evaluate risks 

to the financial system. 

Our current economic challenges only increase our commitment to meeting our responsibility to the American public to implement these reforms fully, quickly, and 

carefully. As the President has said, ‘‘We have a responsibility to write and enforce 

these rules to protect consumers of financial products, taxpayers, and our economy 

as a whole . . . History cannot be allowed to repeat itself.’’ 

Going forward, the Dodd-Frank Act aims to mitigate the effect of future stresses 

in the financial system on our economy and provides the Government with new tools 

in times of crisis. It aligns the boundaries of our regulatory structure with the risks 

presented by our modern-day financial system. It restores the balance between innovative financial markets and financial stability. And it meets our responsibility to 

the American people to learn the lessons of this crisis, and to act upon them. 

* * * 

Implementation Principles 

Several key principles continue to guide our implementation of the Dodd-Frank 

Act. 

1. Balancing Speed with Quality and Consistency 

Treasury and the independent regulatory agencies responsible for writing most of 

the Dodd-Frank Act’s rules are working to provide clarity to the public and the markets as quickly as possible. 

However, a regulatory system that addresses the substantial flaws that led to the 

financial crisis should not be built in haste. The Dodd-Frank Act is designed to help 

protect our economy for generations. Many of its reforms involve some of the most 

complex areas of finance. 

As a result, Treasury and the independent agencies are committed to balancing 

speed and certainty with adequate time for broad public engagement and dialogue, 

coordination among U.S. regulators and our international counterparts to help 

achieve a level playing field, and analyses of costs and benefits to help ensure rules 

build a stronger, more resilient financial system without placing unnecessary burdens on industry. 

Substantial progress has been made since the Dodd-Frank Act was passed less 

than 18 months ago. Since July 2010, financial regulators have publicly proposed 

or finalized nearly all the major rules related to the core elements of reform. The 

ultimate shape of both individual requirements and overall reform is becoming 

clearer by the week. Increasingly, financial firms are in a position to adjust their 

business models in anticipation of final rules. 

Rules proposed or finalized include: 

• the Volcker Rule; 

• rules for designating nonbanks and financial market utilities for enhanced supervision and prudential standards; 

• rules governing the orderly resolution of large failing financial firms; 

• the majority of OTC derivative market regulations; 

• risk retention requirements; 

• reporting requirements for large hedge fund and private equity funds; 

• and rules enhancing protections for investors. 

Treasury will continue to work with the independent regulators in pursuit of final 

rules that are both timely and fully considered. 

2. Transparency and Public Engagement 

An open and ongoing public dialogue is critical to the rule-writing process. Regulators have gone above and beyond statutory requirements to engage broadly with 

interested parties prior to issuing proposed rules, review and consider comments on 

proposed rules carefully, and pursue public rulemakings in cases where the DoddFrank Act does not require them, such as with respect to the process for the designation of nonbank financial companies. 

Over a year ago, the Financial Stability Oversight Council released an integrated 

Dodd-Frank Act implementation roadmap to provide the public with a general guide 

to the rule-writing agencies’ anticipated timelines and sequencing for the implementation of Dodd-Frank Act rules. Many of the Council’s member agencies have pro-
43 

vided the public with notice of anticipated rulemaking timelines significantly in advance of the rulemaking activity itself. 

To bolster their efforts, the Council has also made available on its Web site links 

to each member agency’s Dodd-Frank Act implementation Web page, providing the 

public with a single portal to updated agency timelines, proposed rules, key studies, 

final rules, public comments, and other implementation materials. 

Through the comment process and public forums, member agencies have also 

sought the public’s input on how rules interrelate and how, and in what sequence, 

they can best be implemented. Agency efforts have included sponsoring multi-agency 

public forums, including SEC and CFTC joint roundtables regarding implementation 

of derivatives reform, to hear the public’s views on the substance and implementation of rules involving parallel or overlapping issues. 

Transparency and public input informs and strengthens the reform process, helping to ensure new rules foster healthy and dynamic markets. Treasury will continue 

to encourage and prioritize maximum transparency and public engagement as reform moves forward. 

3. Strengthening Coordination 

Strong coordination is essential for implementing the Dodd-Frank Act in a way 

that creates a coherent, efficient, and effective financial regulatory system. Coordination is important for closing gaps and minimizing opportunities for regulatory arbitrage, which could leave the U.S. and global financial system more vulnerable to 

future crises. Coordination is also important to avoid overlapping or conflicting regulations that may create inefficiencies or unnecessary compliance burdens within the 

financial industry. 

The Dodd-Frank Act provides for coordination of various kinds and with various 

degrees of specificity. One of the duties of the Financial Stability Oversight Council 

is to facilitate information sharing and coordination among its independent member 

agencies, both during the implementation of the Dodd-Frank Act and as it carries 

out its broader responsibilities. 

Congress granted specific authority to the Secretary of the Treasury, as the Chairperson of the Council, to coordinate the work of the agencies on two important 

Dodd-Frank rulemakings: the Volcker Rule, which limits banks’ ability to take excessive risks, and the risk retention rule, which improves the alignment of incentives among financial institutions involved in securitization. 

Congress did not provide Treasury or the Secretary of the Treasury, as Chairperson of the Council, the authority to force coordination among its independent 

member agencies. Yet even without this authority, Treasury is encouraged by the 

efforts the Council’s member agencies have made over the past 18 months, and their 

unanimous recognition of the importance of coordination, even when not statutorily 

required, in the Council’s first annual report. 

Treasury, along with the Council’s other member agencies, is committed to going 

beyond the coordination requirements in the Dodd-Frank Act, and will continue to 

seek opportunities to improve and increase coordination going forward. 

4. Working Toward Simple, Streamlined, and Balanced Reform 

As Dodd-Frank implementation moves forward, Treasury believes that it is important for agencies to streamline, simplify, and consider the economic effects of significant rulemakings. Implementation must strike the right balance between shaping 

a financial system that is safer and more resilient and one that is innovative and 

dynamic. Analyzing new regulations’ costs and benefits, both in terms of individual 

rules and rules in the aggregate, is an important part of getting the balance right. 

The Dodd-Frank Act made several important institutional changes to help streamline regulations and the regulatory process more broadly. It consolidated prudential 

supervision of federally chartered depository institutions by folding the Office of 

Thrift Supervision’s prudential responsibilities into the Office of the Comptroller of 

the Currency’s mandate. It created the Consumer Financial Protection Bureau, 

which is now responsible for rulemakings under Federal consumer financial protection laws that were previously spread among seven Federal agencies. It also created 

the Financial Stability Oversight Council in part to facilitate information sharing 

and strengthen coordination among its member agencies. 

In addition to these institutional reforms, agencies have also made efforts to 

streamline supervisory requirements and new regulations as the rule-writing process moves forward. Last week, the CFPB requested public input on ways to streamline regulations under the consumer financial protection laws that it has inherited 

from seven Federal agencies. The CFPB is asking the public to identify provisions 

that it should put the highest priority on updating, modifying, or eliminating, and 
44 

is also seeking suggestions for making compliance easier for firms, especially smaller ones. Another example is last month’s joint statement from the CFPB, along with the 

Federal Deposit Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the Currency, National Credit Union Administration (together, the prudential regulators). The statement provided greater clarity regarding how the agencies 

expect to carry out supervisory and enforcement responsibilities with respect to consumer protection. Since the prudential regulators oversee compliance with Federal 

consumer financial laws for depository institutions and credit unions with assets 

below $10 billion, while the CFPB oversees all institutions above that limit, the 

agencies jointly agreed on common standards and intervals for measuring financial 

institutions’ asset sizes and determining supervisory authority. 

The CFPB has also begun carrying out its mission to streamline and simplify 

rules and requirements with regard to consumer financial products and services. 

One of its first initiatives was to combine two federally required mortgage disclosure 

forms into one clear, simple document. The CFPB is currently soliciting public feedback on two potential designs, while also working with the Department of Education 

to develop a straightforward new form for colleges and universities to use to communicate student aid offers. 

As new rules are designed to strengthen our financial system, the Administration 

is leading a Governmentwide effort to streamline, simplify, and review the costs and 

benefits of new and existing regulations. In January, the President issued an Executive Order directing executive agencies to develop a plan to streamline regulations, 

including carrying out a review of existing regulations and assessing the costs and 

benefits—both qualitative and quantitative—of any new rules or requirements. In 

June, Secretary Geithner requested independent member agencies of the Financial 

Stability Oversight Council to adopt the principles and guidelines of the President’s 

Executive Order. In July, the President issued a second Executive Order encouraging all independent regulatory agencies, to the extent permitted by law, to follow 

the key provisions of the January order, including eliminating or fixing rules that 

are outdated or unjustifiably costly, and making sure that new regulations undergo 

vigorous review. The President asked that they publish written plans describing 

their efforts within 120 days. 

All independent agencies, including those responsible for Dodd-Frank Act 

rulemakings, are expected to submit plans, and many have already done so. The 

Federal Reserve, for example, is increasing efforts to review all regulatory matters 

from the perspective of community depository organizations, alongside regular zerobase reviews of its regulations roughly every 5 years. In addition to its ongoing review of rules affected by the Dodd-Frank Act, the FDIC is also undertaking a community bank initiative that includes a review of its examination process and rulemaking process to further our understanding of the challenges and opportunities for 

community banks. The CFTC has also submitted a plan describing its efforts, and 

is examining and revising a number of existing regulations as part of its implementation of the Dodd-Frank Act. It plans to begin periodic, retrospective reviews of regulations not reviewed as part of the Dodd-Frank Act work as soon as that work is 

complete. 

In their plans, independent agencies have stressed the importance of understanding the costs and benefits of new rulemakings, their methods for doing so, and 

their compliance with statutes designed to ensure that regulatory agencies consider 

and minimize regulatory burdens. 

However, it is important to ensure that analyzing the costs and benefits of reforms is balanced with their full and timely implementation. As reform moves forward, we should not lose sight of the continuing costs of the financial crisis this 

country experienced—millions of jobs, trillions of dollars, and countless lost opportunities—or the potential costs of stalled or incomplete reform on our economy in the 

future. 

5. Building a Level Playing Field for Strong Global Reform 

Through the G–20, the Financial Stability Board, and regular bilateral engagement, the United States continues to lead and foster consensus on key areas of financial reform to help strengthen global financial stability, build more resilient financial markets, and promote greater consistency and convergence in regulatory 

outcomes. 

In 2009, the G–20 leaders agreed to a set of objectives in pursuit of a stronger 

and more internationally consistent supervisory and regulatory framework. Among 

other issues, the G–20 leaders pledged to reshape their regulatory systems to identify and take account of macroprudential risks; to extend regulation and oversight 

to all systemically important financial institutions, instruments and markets; to 
45 

work to improve the quality, quantity, and international consistency of capital in the 

banking system; and to create greater transparency and alignment in frameworks 

for OTC derivatives. 

Between the G–20 meetings in London and Pittsburgh in 2009 and last month’s 

meeting in Cannes, notable progress has been made with our counterparts around 

the world on these and other issues critical to global financial stability. 

Following the G–20 leaders call at the Pittsburgh Summit, in 2011 regulators 

reached agreement on the new Basel III framework for bank capital and liquidity 

that is designed to allow institutions to absorb a level of losses comparable to what 

we faced at the peak of the financial crisis without turning to taxpayer support. 

These heightened standards phase in gradually, so that banks can adjust while continuing to provide credit to households and businesses. Basel III will also help to 

ensure that the level and definition of capital will be uniform across borders, and 

for the first time, outlines mandatory leverage and liquidity ratios. 

At the Cannes Summit, the G–20 leaders endorsed measures to address challenges posed by global systemically important financial institutions. These measures 

include requirements for higher loss absorbency capacity, new tools to facilitate orderly resolution, and more intensive and effective supervision. The largest firms will 

be required to hold additional capital buffers to reduce the risks of potential disruptions caused by the failure of one of these firms. 

In addition to international work on systemically important firms, G–20 leaders 

have also adopted principles aligned with the Dodd-Frank Act to promote international consistency across derivatives markets. These principles are fully consistent with those included in the Dodd-Frank Act. 

Two years ago in Pittsburgh, the G–20 leaders reached agreement on requiring 

increased clearing, trading on exchanges, and reporting for over-the-counter trade. 

In Cannes, the G–20 leaders also agreed to pursue a U.S. proposal for a new global 

margin standard on uncleared derivatives trades to create uniform incentives for 

central clearing, while also pushing forward on efforts supported by policymakers 

and industry alike to develop an international legal entity identifier system, which 

will help precisely identify parties to financial transactions. That is important, for 

example, for trading in derivatives, where it will help shine a spotlight on 

counterparty exposures and thus interconnectedness, a key factor in assessing 

threats to financial stability. These efforts are critical to ensure international coherence and greater oversight of capital markets. Treasury is working with our G–20 

counterparts to synchronize implementation. 

As the world’s leading economy, financial reform in the United States should set 

a strong, clear example for the international community. Treasury will remain committed to fully implementing the Dodd-Frank Act at home, while working with our 

counterparts around the world to strengthen global reform. 

* * * 

The Dodd-Frank Act made Treasury responsible for standing up several important 

new institutions to help ensure our financial system is stronger and more resilient 

going forward. In addition to the Consumer Financial Protection Bureau and the Financial Stability Oversight Council, the Dodd-Frank Act created an Office of Financial Research (OFR) to provide the Council with critical data and analytical support. 

The Dodd-Frank Act also created the Federal Insurance Office (FIO) to identify gaps 

in regulation that could contribute to a systemic crisis in the insurance industry or 

the financial system more broadly. 

Treasury has worked hard to stand up these important new institutions, and is 

pleased with the progress they have made. 

The Consumer Financial Protection Bureau 

The CFPB’s mission is to help ensure consumers have the information they need 

to make financial decisions appropriate for them, carry out Federal consumer financial laws, and restrict unfair, deceptive, or abusive acts and practices. The DoddFrank Act created the CFPB to consolidate consumer protection responsibilities for 

consumer financial products and services that had been fragmented across several 

Federal regulators into a single institution dedicated solely to that purpose. 

In July, President Obama nominated Richard Cordray to be the CFPB’s first director. He is exceptionally qualified to lead the CFPB. Throughout his career, Mr. 

Cordray has demonstrated a strong commitment to consumer advocacy and public 

service, and possesses a deep understanding of both finance and consumer protection law. 

Despite Mr. Cordray’s outstanding qualifications, some in the Senate have said 

they will not confirm any individual to head the CFPB without fundamental 

changes to its structure, which Congress laid out in the Dodd-Frank Act. 
46 

Secretary Geithner has urged Senators to reconsider their view. During his last 

appearance before this Committee, the Secretary asked that Senators who have not 

done so meet with Mr. Cordray and learn more about the work of the CFPB. As 

Senators get to know Mr. Cordray, we believe they will find that he is an ideal candidate to lead the CFPB, and that his measured, sensible approach to the CFPB’s 

work will allay concerns some Senators have expressed regarding the CFPB’s operation in the future. Furthermore, the CFPB is subject to strong oversight through 

statutorily required hearings, reports, and audits, constraints that do not apply to 

any other Federal banking regulator, and is the only banking regulator with a statutory cap on its primary source of independent funding. 

Without a Director, the CFPB’s ability to address unfair, deceptive, and abusive 

practices by payday lenders, private student loan providers, debt collectors, and 

other nonbank lenders, including certain mortgage originators and servicers, is constrained. It also limits the CFPB’s ability to level the playing field so that banks 

and nonbanks play by the same rules, and to prevent the sort of imbalances in consumer finance markets—in particular, mortgage loans—that helped cause the financial crisis. 

If the CFPB is unable to exercise its full authority, not only will consumers lack 

common-sense protections, but our economy will remain vulnerable to some of the 

same critical gaps in regulation that helped cause the financial crisis. 

Under its current authority, in July the CFPB assumed responsibility for super- vising depository institutions with over $10 billion in assets and their affiliates. In 

October, the CFPB released its supervision and examination manual, which is the 

field guide that examiners will use in supervising both depository institutions and 

other consumer financial services providers. The CFPB and prudential regulators 

also agreed on common standards for measuring an institution’s asset size for purposes of determining supervisory authority. 

In its supervision and examination manual, the CFPB highlighted its Mortgage 

Servicing Examination Procedures and recognized the pervasive problems reported 

in the mortgage servicing industry. As reported by prudential regulators, servicers 

lost important documentation, experienced problems with foreclosure processing, 

and failed to communicate with consumers—and, in some cases, borrowers who 

qualify for loan modifications did not received them in time to avoid foreclosure. Initially, the CFPB’s examinations of mortgage servicers will focus on the servicing of 

loans in default. 

In November, the CFPB also outlined plans to provide advance notice of potential 

enforcement actions to individuals and firms under investigation for violating Federal consumer financial laws. The EarlyWarning Notice process allows the subject 

of an investigation to respond to any potential legal violations before the CFPB decides whether to begin legal action. 

The CFPB also created the Know Before You Owe project to simplify the disclosures that consumers receive. Know Before You Owe has already launched initiatives simplifying mortgage disclosure requirements and student aid offers, and will 

include additional initiatives in other areas of consumer finance in the future. 

The Know Before You Owe mortgage disclosure initiative combines two lengthy, 

complicated federally required mortgage disclosures into a single, simpler form that 

clearly presents costs and risks to borrowers. The CFPB is currently evaluating two 

potential forms, which they have posted on their Web site to gather public input, 

as well as conducting one-on-one interviews with consumers, lenders, and brokers. 

The Know Before You Owe’s student aid project aims to help young people more 

easily understand and compare the costs and benefits of student loans. The CFPB 

partnered with the Department of Education to create a model format that schools 

can use to communicate financial aid offers. Currently, these offers are often difficult to understand and compare, and may not clearly differentiate loans from other 

types of student aid. The CFPB has also launched an online guide to help borrowers 

understand their options when repaying student loans, and recently requested that 

they share their experiences using private student loans to improve our understanding of this particular credit market. 

Credit card applications also include confusing language and fine print, which 

makes it difficult for consumers to fully understand the terms of these agreements. 

Last week, the CFPB released a report that highlighted the Bureau’s success assisting consumers with credit card complaints. Very soon, the CFPB plans to launch 

a new initiative under the Know Before You Owe Project to help consumers better 

understand these agreements and make more informed decisions. 

The CFPB is also committed to helping ensure that members of the armed services and their families are fully informed and empowered when choosing consumer 

financial products and services. Servicemembers and their families face special circumstances—deployments, relocations, overseas assignments—that present unique 
47 

challenges. To better understand the nature of these challenges, the CFPB’s Office 

of Servicemember Affairs is collecting information from servicemembers, their advocates and counselors, and industry participants, as well as hosting town hall meetings with military families and roundtable discussions with financial readiness program managers and counselors, legal assistance lawyers, chaplains, and other professionals serving the military community. 

Similarly, the CFPB’s Office of Older Americans will help seniors navigate their 

own unique financial challenges by helping to educate and clarify financial choices 

about long-term savings, retirement planning, and long-term care. The CFPB will 

also coordinate with senior groups, law enforcement, financial institutions, and 

other Federal and state agencies to identify and prevent scams targeting seniors. 

Another accomplishment is the launch of the CFPB’s Consumer Response Center, 

which began taking credit card complaints in July. On December 1, the CFPB started to take mortgage related complaints. In the coming months, the CFPB will take 

consumer complaints about other types of consumer financial products and services. 

The CFPB’s August information sharing agreement with the Federal Trade Commission (FTC) allows it to access consumer complaints within the FTC’s Consumer 

Sentinel system on a range of additional consumer financial products and services. 

The Financial Stability Oversight Council 

The Dodd-Frank Act created the Financial Stability Oversight Council to identify 

risks to the financial stability of the United States, promote market discipline, and 

respond to emerging threats to the stability of the U.S. financial system. 

Prior to the Dodd-Frank Act’s enactment, there was no effective forum for the senior leadership of Treasury, the Federal financial regulatory agencies and other experts to share information and engage as a group on a regular basis. In recent 

months, the Council’s principals have come together to share information in response to possible risks to our financial system posed by credit ratings of U.S. debt, 

the failure of MF Global, and the ongoing sovereign debt crisis in Europe. Since I 

last testified in July, the Council has held six principals meetings, and in between 

these meetings the Council has had numerous conference calls to discuss market developments. Deputies meet at least every 2 weeks and staff of member agencies is 

in regular communication. 

In July, the Council published its first annual report, which provided a comprehensive view of financial market developments and potential threats to our financial system. The report also includes recommendations to enhance the integrity, 

efficiency, competitiveness, and stability of the U.S. financial markets, promote market discipline, and maintain investor confidence. 

Although independent agencies, not the Council itself, have the authority to address the annual report’s recommendations regarding structural vulnerabilities, the 

Council continues to share information and review progress on each recommendation. 

The Council has also made progress on two of its direct responsibilities under the 

Dodd-Frank Act: designating financial market utilities (FMUs) and nonbank financial companies for enhanced prudential standards and supervision. 

In July, the Council finalized rules regarding the procedure for designating 

FMUs—firms that facilitate clearing and settlement in bond, currency, derivatives, 

and other financial markets—for enhanced risk management standards and supervision. The final rule benefited from public comments the Council solicited after it 

released an Advanced Notice of Proposed Rulemaking (ANPR) in November 2010 

and a Notice of Proposed Rulemaking (NPR) in March 2011. The Council currently 

is analyzing firms for potential designation. 

The Council is also making progress toward issuing a final rule that establishes 

quantitative and qualitative criteria and procedures for designations of nonbank financial companies. Prior to the financial crisis, these types of institutions operated 

largely beyond the boundaries of financial regulators’ scope. This allowed them to 

take on excessive risks that threatened the stability of the financial system more 

broadly. 

The Council received significant public input after publishing an ANPR in October 

2010 and an NPR in January 2010. In October 2011, the Council published additional guidance, including specific metrics for potential designation and an analytical framework, for further public comment. 

The Office of Financial Research 

The Dodd-Frank Act established the Office of Financial Research to improve the 

quality of financial data available to policymakers and the public, and to facilitate 

more robust and sophisticated analysis of the financial system. 
48 

Richard Berner, as Counselor to the Treasury Secretary, has been leading our efforts to stand up the OFR while the Administration continues to evaluate candidates to serve as its Director. 

The OFR has made progress hiring experts with deep experience in data management, technology, and risk management to support its work. Leading academics and 

quantitative finance experts are also lending their experience and knowledge to help 

establish the OFR’s research operation, including its structure, agenda, and fellowship programs. 

Treasury is committed to providing this implementation team with needed support and guidance, and I, along with other senior Treasury officials, meet with the 

team weekly to make sure the OFR’s stand up is well-executed, priorities are identified, and progress is measured. 

As the OFR continues to build its data infrastructure, it has also begun working 

on specific research projects to support the Council’s monitoring of risks to the financial system. Just last week, the OFR and the Council hosted a conference that 

brought together thought leaders from the financial regulatory community, academia, public interest groups, and the financial services industry to discuss new 

technologies and analytical approaches for assessing, monitoring, and mitigating 

threats to financial stability. The OFR’s research on financial stability and its 

projects to improve the quality of financial data were discussed at that conference. 

Over the past year, the OFR’s leadership has helped gain strong private sector 

support and international regulatory backing for the Legal Entity Identifier (LEI) 

initiative. This public-private initiative, which the OFR launched in November 2010, 

will create a global standard for the identification of parties to financial transactions. Such a standard will improve data quality and thus the abilities of regulators and firms to manage counterparty risk, assure the integrity of business practices, and lower processing costs for financial transactions. 

Over the past few months, the LEI initiative has won a number of key endorsements, including from the G–20 and the Financial Stability Board (FSB), which both 

released public statements affirming their support for industry and financial regulators’ efforts to establish an LEI. 

To further progress on establishing an LEI globally, the OFR worked closely with 

the FSB and other international authorities to hold a workshop this past September 

to discuss how to coordinate on steps going forward. Representatives from international market participants and regulators voiced support for greater cooperation 

on the LEI initiative. Earlier this year, a global coalition of market participants and 

their members published recommendations for how to best adopt the LEI, and the 

International Organization for Standardization (ISO) developed a draft technical 

specification for the identifier. 

The OFR has also begun working to facilitate interagency coordination on data 

collection efforts. The process leading to the adoption of Form PF shows the benefits 

that come from collaboration between the OFR and other members of the Financial 

Stability Oversight Council. The SEC and CFTC worked collaboratively with the 

Council and the OFR to harmonize Form PF and a related CFTC form to increase 

transparency for certain participants in the commodities market. Because of this 

alignment, the Council will be in a better position to aggregate the information 

gathered from private fund advisers and these commodity market participants for 

use in assessing systemic risk. 

The OFR is working with regulators to catalogue the data they already collect to 

ensure the OFR relies on existing data whenever possible and to identify opportunities for efficiencies in contracting, collecting, processing, and distributing data. With 

this catalogue, the OFR will work with regulators to identify redundant data collection and reduce the reporting burden on financial institutions, while also strengthening and improving protections throughout the financial system. 

Federal Insurance Office 

The Dodd-Frank Act created the Federal Insurance Office to monitor all aspects 

of the insurance industry, identify issues or gaps in regulation that could contribute 

to a systemic crisis in the insurance industry or financial system, assess the accessibility and affordability of insurance products, coordinate and develop Federal policy 

on prudential aspects of international insurance matters, and contribute expertise 

to the Financial Stability Oversight Council. 

In March, Treasury named Michael McRaith, former head of the Illinois Department of Insurance, as the FIO’s Director and, in September, FIO announced 15 individuals drawn from industry, academia and consumer advocacy organizations to 

serve on the Federal Advisory Committee on Insurance, which advises FIO. 

FIO is playing an increasingly important role both domestically and internationally as regulatory reform moves forward. In addition to advising the Council, FIO 
49 

is currently drafting a report on modernizing U.S. insurance regulation, on which 

it is currently seeking public comments. On December 9, FIO is hosting a conference 

to solicit additional public input. Among other subjects, panelists will focus on international regulatory developments, consumer protection, and solvency oversight. 

In October, FIO became a full member of the International Association of Insurance Supervisors, which is currently working to designate globally significant insurers and develop a common framework for the supervision of internationally active 

insurance groups. FIO’s membership in this group helps to ensure the U.S. position 

on insurance matters are represented with a single voice as regulators work on 

international insurance issues. 

* * * 

As the economy continues to recover from the worst financial crisis in generations, 

the Dodd-Frank Act will help protect Americans from the excess risk, fragmented 

oversight, and poor consumer protections that played such leading roles in bringing 

about the crisis. Our goal is a financial system that is not prone to panic and collapse; that helps Americans save for retirement and borrow to finance an education 

or a home without experiencing deception or abuse; and that helps businesses finance growth and investment and strengthen our economy. 

We appreciate the leadership and support of this Committee throughout the reform process, and we look forward to working with Congress as we move forward 

toward this common goal. 

Thank you. 

PREPARED STATEMENT OF DANIEL K. TARULLO 

MEMBER, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

DECEMBER 6, 2011 

Chairman Johnson, Ranking Member Shelby, and other Members of the Committee, thank you for the opportunity to testify on the Federal Reserve’s implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 

(Dodd-Frank Act). 

The Federal Reserve’s Approach to Dodd-Frank Implementation 

Needless to say, implementation of the Dodd-Frank Act has been, and continues 

to be, a formidable task. At the Federal Reserve, hundreds of staff members are contributing to Dodd-Frank projects. We have issued 29 final rules, public notices, and 

reports already and we have another 13 rules underway. All told, we expect the 

Board will issue approximately 60 sets of rules and formal guidelines as part of its 

implementation efforts. We are working diligently to complete the remaining rules. 

The challenge arises from the sheer number of studies, rules, and other implementation tasks the Act requires the Federal Reserve to produce in a relatively short period of time. Moreover, much of the work involves the more time-consuming process 

of joint rulemakings or coordination with other agencies, all of which are facing 

similar demands. 

For all the variation and complexity in our Dodd-Frank implementation responsibilities, we have several unifying goals. 

First and foremost, we want to get it right. This means implementing the statute 

faithfully, in a manner that maximizes financial stability and other social benefits 

at the least cost to credit availability and economic growth. To achieve this balance, 

we have assembled interdisciplinary teams for our significant rulemakings, bringing 

together economists, supervisors, legal staff, and other specialists to help develop 

sensible policy alternatives and to help avoid unintended consequences. 

Second, in addition to a thorough internal analytic process, we also are committed 

to soliciting and considering the comments of others. We are, of course, consulting 

extensively with other financial regulatory agencies, both bilaterally and through 

the Financial Stability Oversight Council. The interagency consultation process has 

included staff discussions during the initial policy development stage, sharing of 

draft studies and regulatory text in the interim phases, and dialogue among agency 

principals in the advanced stages of several rulemakings. 

Along with the other agencies testifying today, we have gone well beyond the formal consultation requirements of Dodd-Frank. Members of the Board, as well as 

staff at senior levels, have regular meetings with their counterparts at other agencies to discuss implementation issues of common interest. Consultations at multiple 

levels and across agencies help to improve the consistency of regulation across the 

banking industry and reduce the potential for overlapping regulatory requirements. 

In addition, these consultations help highlight the interaction among different rules 
50 

under development by these agencies, as well as the interplay between proposed policy alternatives and existing regulations. 

We are also trying to make our rulemaking process as fair and transparent as 

possible, with ample opportunity for the public to comment. During the proposal 

stage, we specifically seek comment from the public on the costs and benefits of our 

proposed approach, as well as on alternative approaches to our proposal. We believe 

strongly that public participation in the rulemaking process improves our ability to 

identify and resolve issues raised by our regulatory proposals. We generally provide 

the public a minimum of 60 days to comment on all significant rulemaking proposals, with longer periods permitted for especially complex or significant proposals. 

Federal Reserve staff have participated in more than 300 meetings with outside 

parties and their representatives, including community and consumer groups. To 

promote transparency in the rulemaking process, we include in the public record a 

memorandum describing the attendees and subjects covered in any meetings involving nongovernmental participants at which Dodd-Frank rulemakings are discussed. 

These summaries are posted on the Federal Reserve Board’s Web site on a weekly 

basis, as are updates on Board rulemakings and other Dodd-Frank initiatives. 

Third, in drafting regulations, we have made special efforts to identify and, to the 

degree possible consistent with statutory requirements, minimize the regulatory 

burden on smaller entities. We conduct an assessment that takes appropriate account of the potential impact a rule may have on small businesses, small governmental jurisdictions, and small organizations affected by the rule, in accordance 

with the Regulatory Flexibility Act. We have paid particular attention to reducing 

the regulatory burden on community banking organizations. For example, the Federal Reserve has established community depository institution advisory councils at 

each of the 12 Federal Reserve banks. These councils gather input from community 

depository organizations on ways to reduce regulatory burden and improve the efficiency of our supervision, and also collect information about the economy from the 

perspective of community organizations throughout the Nation. A representative 

from each of these 12 advisory councils serves on a national Community Depository 

Institution Advisory Council that meets semiannually with the Board of Governors 

to bring together the ideas of all the advisory groups. 

The Board of Governors has also established a subcommittee of our regulatory 

and supervisory oversight committee for the express purpose of reviewing all regulatory matters from the perspective of community depository organizations. These 

reviews are intended to find ways to reduce the burden on community depository 

organizations arising from our regulatory policies without reducing the effectiveness 

of those policies in improving the safety and soundness of depository organizations 

of all sizes. 

Fourth, we are working to complete our Dodd-Frank projects as quickly as possible while meeting the three objectives already stated. There is obviously considerable value in providing as much clarity as possible as soon as possible to financial 

markets and the public about the post-crisis financial regulatory landscape. 

Capital Regulation after Dodd-Frank 

The breadth of Dodd-Frank’s provisions reflects in part that the pre-crisis regulatory regime had been insufficiently attentive to a variety of risks from a variety 

of sources. But we should not forget that strong capital requirements remain the 

most supple form of prudential regulation, because they can provide a buffer against 

bank losses from any source. To put it simply, the best way to avoid another TARP 

is for our large regulated institutions to have adequate capital buffers, reflecting the 

damage that would be done to the financial system were such institutions to fail. 

Implicitly, passage of Dodd-Frank was a criticism of the specific features of capital 

regulation that prevailed during the pre-crisis period. Basel I capital requirements 

relied almost exclusively on capital ratios that were snapshots of balance sheets and 

thus frequently a lagging indicator of a bank’s condition. The kind of capital that 

qualified for regulatory purposes was not uniformly reliable as a buffer against 

losses. Moreover, capital requirements were set solely with reference to the balance 

sheet of each firm individually, with little attention to the economy-wide impact of 

financial stress at large institutions. And, most fundamentally, capital requirements 

had simply been too low, in general and with respect to the risk-weightings of certain assets. 

Strong capital requirements must be at the center of the post-crisis period regulatory regime. The Federal Reserve is integrating the specific capital-related provisions of Dodd-Frank into its overall capital program. That program has three basic 

components: improving capital regulation at the level of individual firms; introducing a macroprudential or system-wide element to capital regulation; and con-
51 

ducting regular stress testing and capital planning. I will discuss each of the three 

areas briefly. 

The first component is to improve the traditional, firm-based approach to capital 

regulation. This work is mostly related to standards developed in cooperation with 

other supervisors in the Basel Committee on Banking Supervision, but there is also 

a Dodd-Frank element. The ‘‘Collins amendment’’ in Dodd-Frank provided a safeguard against declines in minimum capital requirements in a capital regime based 

on bank internal modeling. The so-called Basel 2.5 agreement strengthened the 

market risk capital requirements of Basel II. Basel III upgraded the quality of regulatory capital, increased the quantity of minimum capital requirements, created a 

capital conservation buffer, and introduced an international leverage ratio requirement. In the coming months the banking agencies will be jointly proposing regulations consistent with Basel 2.5 and Basel III. 

The second component of our capital program is to introduce a macroprudential 

element to capital regulation. Section 165 of the Dodd-Frank Act mandated that the 

Board establish enhanced risk-based capital standards for large bank-holding companies. This mandate complements the Basel Committee’s effort to develop a framework for assessing a capital surcharge on the largest, most interconnected banking 

organizations based on their global systemic importance. Both the Dodd-Frank provision and the Basel systemic surcharge framework are motivated by the fact that 

the failure of a systemically important firm would have dramatically greater negative consequences on the financial system and the economy than the failure of other 

firms. In addition, stricter capital requirements on systemically important firms 

should help offset any funding advantage these firms derive from their perceived 

status as too-big-to-fail and provide an incentive for such firms to reduce their systemic footprint. 

Of course, Dodd-Frank requires the Federal Reserve to impose more stringent 

capital requirements on all bank-holding companies with assets of $50 billion or 

more, not just the U.S. firms that will appear on the Basel Committee’s list of global 

systemic banks. No decision has yet been made as to whether the more stringent 

capital requirement to be applied to large U.S. banking firms that are not on the 

eventual list of global systemic banks will be in the form of a quantitative surcharge. However, analysis of the systemic footprints of these other U.S. bank-holding companies suggests that even if surcharges were to apply, their amounts would 

be quite modest, at least based on the current characteristics of these bank-holding 

companies. 

The third component of the Federal Reserve’s capital program is to establish regular, firm-specific stress testing and capital planning. Dodd-Frank creates two kinds 

of stress-testing requirements. First, it mandates that the Federal Reserve Board 

conduct annual stress tests on all bank-holding companies with $50 billion or more 

in assets to determine whether they have the capital needed to absorb losses in 

baseline, adverse, and severely adverse economic conditions. Second, it requires both 

these companies and certain other regulated financial firms with between $10 billion and $50 billion in assets to conduct internal stress tests. 

We will be implementing the specific stress-testing requirements of Dodd-Frank 

beginning later in 2012. However, in the interim we are using a modified form of 

stress testing as part of the annual capital planning process we have established 

for large bank-holding companies. Last month we announced the parameters and 

process for this year’s capital review, which will be completed in March, at which 

time the results of the stress test will be publicly reported for the 19 largest firms. 

Conclusion 

For all the work that has already gone into implementing Dodd-Frank, both at 

the Federal Reserve and at the other regulatory agencies, there is still considerable 

work to do. Final regulations implementing some of the Act’s most important provisions, such as the ‘‘living will’’ requirement and the Collins amendment, are now 

in place. Measures to implement other prominent provisions, such as the Volcker 

rule, have been proposed, but are not yet in final form. Still others, such as the section 165 requirements, have not yet been proposed. Whether completing work on 

proposed regulations, or moving forward with those yet to be proposed, the Federal 

Reserve will continue to pursue the four goals I noted earlier. 

Thank you very much for your attention. I would be pleased to answer any questions you might have for me. 
52 

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reg"latory reports with Ihe Board and an 

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M) IR- 14231. On 

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adjustmen!s arc rC<l"i",d by statute. (Section lIOO(E» 

Z) I R·I"HI. 0" " Ian:h 25. 2011. the l30ard issued a fi..u.lIl..wk to increase 

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Ikf",.. the Comm,n.., "'" BonI:ir\;. lIous" .. orod Url>o.n Mf.; .. U.S. 

w"-",, on..l,X.; IJo:<:emt>er(> WI ) 

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l'ropOS<'d on E"erow AceotJ nt Under ..... Trulh In L ... ,dlne A ct 

(Reeulwllon Z) I R-I.r06J. On Febn""y 23. 20 11. lhe Iloord iss""d a pI9I'osed Olle 10 expand Ihe 

minimum period fOl' mandatory eseIOW aecollnts fOI firsl-licn. higheI'pIiced mongage loans from 

on" to Ii,'" years. :llld longer "nder circ u",stances; pro,ide an from the escrow 

requirement fOTeertain creditors Ihar opcr-dle in rural OT undCT'ScIn-d cou utie s; and implement 

n"W disclosure requiremenl •• "Ontain"" in Ihc Act. (Scction. 1411. 1412 "nd 1414) 

" l'ropOS<'d Rul" Abllily t u Rep"y Und"" the Trulh In '-e"dlnl: Z) IR- 141 71. On April 19.2011. the Board issued a [lTO!!O!!ed rule under Regulation Z Ihal would 

require eredilors 10 octennine a consumer's abilily 10 repay a mortgage ""fore making the loan 

and would eSlablish minimu", mortgage underwriling standards. TIle proposal would also 

implement the Act's limits on prcpa)TIlent penalties. The Boatd is soli citing comment OIllhe 

proposed n,le until July 22. 2011. (S""tions 1411. 1412 and 1414) 

32. H"al Rn le fI" E""r(m' Under Ihe T m lh In I .... ndln g (Re glli3U" n Z) 

13921. On Fchruary 23, 20 1 !. th" Board a fi..!J.ll!...a! to inc",ase the percentage 

thresl>old used to whcth"r a mortgage lender i, "''l,u",d to eslablish an ,""cmuII 

for pfOP"" y and in.ura""" f<)r' first·licn ' 'ju'''ho'' ",sidential "'0"8 ab'" loans. dYc"ti"" 

April!. 2011. (Sect;on 1461) 

n. Inl .. ri", }';nul Rule on A ppn'is"II"'kp .. nd .. Z) IR 139.11. On October 18. 

2010. the Board iss ued an interim final oole that is intended to that real estate appraisers 

are free to use their independ",,1 professional judgmenl in assigning homc values wilhout 

influence or prcswrc fro", thos .. with in Ihe transactions. 1472) 

Page 7 of 10 

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Before Ihc Commitlee on Banka-os- H"""u-v. ond U""'n AffalB U,S, SC .... I< W.shington. IX;. December<\. 2011 

Tubk 2. ReptJri$ .wd UmJer 11, 1.1 Dmld·Fr(llrk ACI 

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SI"dy or Ihe I"'pncl u r Cn'tfil Risk In S...,n riliznllun I\ l a rk.I ... On October 19. 2010. the 

!3oard issued a o n tM potent;al ;mpact of c...:d;t risk ""'Unt;on oil 

suurilizalion n,,,rL:cl.ol. (Seclion 941) 

Report on O T S T,.,.nsll;o n Pia " . On Jannary 25. 2011.11", Board. OTS. acC. and FDIC 

issued a joinl rePort 10 Con gress and Ihe l"sI"-'<1or< G"neral oflhe participaling agencies on the 

agene;",,· plans to implement Ihe trunsfer ofOTS aUlhorities. (Section 327) 

Report on lHbil Cud T"","ncllons. On June 29. 2011. Ihe !3oard issned a r£l!!!l1 disclosing 

crnain aggregate or infonnation concerning intcrch""ge transaction and payment card 

network fees charged or received in eonneclion wilh c lCClronio debillransactions. (Seelion 1075) 

Sindy orlhe n """I"lIo n ur Finnnc1nl C ompnnies "nder Ihe C ode. The !3oard 

has approved" ",hich [hc Board haJ; co nduCI.:d. in consultalio" wilh Ihe Adminislraliw 

Office o rtM U.S. Courls. related 10 the resolution companies nnd.". th e Uan kmptcy Code, (Section216) 

Sindy or Inlen,alion a l Coonl;nulior. R .. 10 the R."",I"lIo n o r Sysl<'",ic 

Comp,,,,I,,,,. '11", Board has "pproved a!ill!!!L which Ihe Boa,d has conducled. in consultation 

wilh the Adminislr:>t,vc Officc ofthc U.S. Courts. regarding i"len,alional coordi",uion relating 10 

the "':Solulion of sySlcm;c financial con'panies und.,. Ihe Bankruplcy Code and applicahk fo...:i gn 

law. (Seclion 217) 

Repo.1 on Remlt"",c .. Tnonsreno: ,\ulomal .... C1<'u rlng 1.1 0 . ... (ACII). 0" 

July 19. 20 11. the Board apl'rowd a t£llil!l10 Congress on Ihestatus of AC U for 

reminance Iransf.".. 10 foreign countries. (Seclion 1073) 

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62 

1The views expressed in this testimony are those of the Chairman of the Securities and Exchange Commission and do not necessarily represent the views of the full Commission. 2See Release No. IA–3308, Reporting by Investment Advisers to Private Funds and Certain 

Commodity Pool Operators and Commodity Trading Advisors on Form PF (October 31, 2011), 

http://www.sec.gov/rules/final/2011/ia-3308.pdf. 

PREPARED STATEMENT OF MARY L. SCHAPIRO 

CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION

DECEMBER 6, 2011 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee: 

Thank you for inviting me to testify regarding the Securities and Exchange Commission’s ongoing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’ or ‘‘Act’’).1

The Dodd-Frank Act makes significant changes in the regulatory landscape for 

the SEC. Among other things, the Act brings hedge fund and other private fund advisers under the regulatory umbrella of the Investment Advisers Act of 1940 (‘‘Advisers Act’’), creates a new whistleblower program, establishes an entirely new regime for the over-the-counter (‘‘OTC’’) derivatives market, enhances the SEC’s authority over nationally recognized statistical rating organizations (‘‘NRSROs’’) and 

clearing agencies, and heightens regulation of asset-backed securities (‘‘ABS’’). 

To implement the Act, the SEC was tasked with writing a large number of new 

rules and conducting over 20 studies and reports. Over the past 16 months, we have 

made great progress toward completing those tasks. Of the more than 90 provisions 

in the Act that require SEC rulemaking, the SEC already has proposed or adopted 

rules for over three-fourths of those that are required. Additionally, the SEC has 

finalized 12 of the more than 20 studies and reports that the Act directs us to complete. While we have had much success, we continue our work to implement all provisions of the Act for which we have responsibility—even as we also perform our 

longstanding core responsibilities of pursuing securities violations, reviewing public 

company disclosures and financial statements, inspecting the activities of investment advisers, investment companies, broker-dealers and other registered entities, 

and maintaining fair and efficient markets. 

In my prior opportunities to testify before this Committee about Dodd-Frank Act 

implementation, I outlined our efforts to modernize our internal processes to enable 

us to better accomplish both our preexisting responsibilities and those added by the 

Act. Among others, these efforts include the creation of new cross-disciplinary working groups; our focus on increasing transparency, consultation and public input; and 

the forging and strengthening collaborative relationships with other Federal regulators and our international counterparts. To date, we have participated in scores 

of interagency and working group meetings, conducted seven public roundtables, 

met with hundreds of interested groups and individuals including investors, academics and industry participants, and received, reviewed and considered thousands 

of public comments. 

The considerable progress we have made so far is the result of the exceptional 

work of my fellow Commissioners and our staff, whose extraordinary efforts have 

enabled us to accomplish so much in a relatively short time. While the Dodd-Frank 

Act added significantly to their workload, they have been implementing the Act in 

a thoughtful, thorough, and professional manner. 

My testimony today will provide an overview of these activities, emphasizing the 

Commission’s efforts since I last testified before this Committee on Dodd-Frank Act 

implementation in July. 

Hedge Fund and Other Private Fund Adviser Registration and Reporting 

The Dodd-Frank Act mandated that the Commission require private fund advisers 

(including hedge and private equity fund advisers) to confidentially report information about the private funds they manage for the purpose of the assessment of systemic risk by the Financial Stability Oversight Council (‘‘FSOC’’). On October 31, 

2011, in a joint release with the CFTC, based on staff consultation with staff representing members of FSOC, the Commission adopted a new rule that requires 

hedge fund advisers and other private fund advisers registered with the Commission 

to report systemic risk information on a new form (‘‘Form PF’’).2 Under the new 

rule, Commission registered investment advisers managing at least $150 million in 

private fund assets will periodically file Form PF. The data collection will dovetail 

with the enhanced private fund reporting discussed below. 

The Form PF reporting requirements are scaled to the adviser. Advisers with less 

than a certain amount of hedge fund, liquidity fund or private equity fund assets 
63 

3See Release No. IA–3221, Rules Implementing Amendments to the Investment Advisers Act 

(June 22, 2011), http://www.sec.gov/rules/final/2011/IA-3221.pdf. 4See Release No. IA–3222 Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers (June 22, 2011), http://www.sec.gov/rules/final/2011/IA-3222.pdf. 5See Release No. IA–3220, Family Offices (June 22, 2011), http://www.sec.gov/rules/final/ 

ia-3220.pdf. 6See Release No. IA–3198, Investment Adviser Performance Compensation (May 10, 2011), 

http://www.sec.gov/rules/proposed/2011/ia-3198.pdf. 7See Study on Enhancing Investor Adviser Examinations (January 2011), http:// 

www.sec.gov/news/studies/2011/914studyfinal.pdf; see also Commissioner Elisse B. Walter, 

Statement on Study Enhancing Investment Adviser Examinations (Required by Section 914 of 

Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act) (Jan. 2010), 

http://www.sec.gov/news/speech/2011/spch011911ebw.pdf. 

under management will report only very basic information on an annual basis. Advisers with assets under management over specified thresholds will report more information, and large hedge fund and liquidity fund advisers also will report on a 

quarterly basis. This approach is intended to provide FSOC with a broad picture 

of the industry while relieving smaller advisers from much of the reporting requirements. In addition, the reporting requirements are tailored to the types of funds 

that an adviser manages and the potential risks those funds may present, meaning 

that an adviser will respond only to questions that are relevant to its business 

model. The Dodd-Frank Act provides special confidentiality protections for this data. 

The initial stages of this reporting will begin next year. 

In addition to this important reporting rule, the Commission already has completed many of the rulemakings required by the Dodd-Frank Act amendments to the 

Advisers Act. • In June, the Commission adopted rules that: require the registration of, and reporting by, advisers to hedge funds and other private funds and other advisers 

previously exempt from SEC registration; require reporting by investment advisers relying on certain new exemptions from SEC registration; and reallocate 

regulatory responsibility to the state securities authorities for advisers that 

have between $25M and $100M in assets under management.3

• Concurrently, the Commission adopted rules to implement new adviser registration exemptions created by the Dodd-Frank Act. The new rules implement new 

exemptions for: (i) advisers solely to venture capital funds; (ii) advisers solely 

to private funds with less than $150 million in assets under management in the 

United States; and (iii) certain foreign advisers without a place of business in 

the United States and with only a de minimis amount of U.S. business.4

• The Commission also adopted a new rule defining ‘‘family offices’’—a group that 

historically has not been required to register as advisers—that will be excluded 

from the definition of an investment adviser under the Advisers Act.5

• In May, the Commission proposed changes to the rule that permits investment 

advisers to charge certain clients performance fees.6 The rule’s conditions already include minimum standards, such as net worth, that clients must satisfy 

for the adviser to charge these fees. The proposed amendments would incorporate the revised dollar amount levels that the Commission adjusted by order 

this past July to account for the effects of inflation, as required by the DoddFrank Act. The amendments also would remove the value of a client’s primary 

residence from the calculation of net worth. 

Staff Studies Regarding Investment Advisers and Broker-Dealers 

In January 2011, the Commission submitted to Congress two staff studies in the 

investment management area as required under the Dodd-Frank Act. 

The first study, mandated by Section 914, analyzed the need for enhanced examination and enforcement resources for investment advisers that are registered with 

the Commission.7 It found that the Commission likely will not have sufficient capacity in the near or long term to conduct effective examinations of registered investment advisers with adequate frequency. Therefore, the study stated that the Commission’s examination program requires a source of funding that is adequate to permit the Commission to meet new examination challenges and sufficiently stable to 

prevent adviser examination resources from continuously being outstripped by 

growth in the number of registered investment advisers. 

The study highlighted the following three options to strengthen the Commission’s 

investment adviser examination program: (1) imposing user fees on Commission-registered investment advisers to fund their examinations; (2) authorizing one or more 

self-regulatory organizations that assess fees on their members to examine, subject 
64 

8See 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 Broker-Dealers (January 21, 2011), http://www.sec.gov/news/speech/2011/spch012211klctap.htm. 

to Commission oversight, all Commission-registered investment advisers; or (3) authorizing FINRA to examine a subset of advisers—i.e., dually registered investment 

advisers and broker-dealers—for compliance with the Advisers Act. 

The second staff study, required by Section 913 of the Dodd-Frank Act (the ‘‘IA/ 

BD Study’’), addressed the obligations of investment advisers and broker-dealers.8

This study reviewed the broker-dealer and investment adviser industries, the regulatory landscape surrounding each, issues raised by stakeholders who commented 

during the preparation of the report, and other considerations. 

The IA/BD Study made two primary recommendations: that the Commission (1) 

exercise its discretionary rulemaking authority to implement a uniform fiduciary 

standard of conduct for broker-dealers and investment advisers when they are providing personalized investment advice about securities to retail investors; and (2) 

consider harmonization of broker-dealer and investment adviser regulation when 

broker-dealers and investment advisers provide the same or substantially similar 

services to retail investors and when such harmonization adds meaningfully to investor protection. 

Under Section 913, the uniform fiduciary standard to which broker-dealers and 

investment advisers would be subject would be ‘‘no less stringent’’ than the standard 

that applies to investment advisers today. 

As the IA/BD Study notes, the distinction between an investment adviser and a 

broker-dealer is often lost on investors, and it remains difficult to justify why there 

should be different rules and standards of conduct for the two roles—especially 

when the same or substantially similar services are being provided. Investment professionals’ first duty must be to their clients, and we are giving serious consideration to the study’s recommendations. 

The staff is currently considering the contours of rulemaking following on the 

study, including the costs and benefits of options for rulemaking. The staff also is 

continuing to meet with academics, and industry and investor representatives who 

have an interest in or insights into the results and recommendations of the study. 

In addition, the Commission’s economists are considering available data that would 

help inform any potential rule recommendation. 

Whistleblower Program 

Section 922 of the Dodd-Frank Act established a whistleblower program that requires the SEC to pay an award 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. The Act also required the Commission to promulgate rules to implement the program. 

Our final rules, adopted in May, became effective on August 12, 2011. Since then, 

the Commission has received hundreds of tips through the whistleblower program 

from individuals all over the country and in many parts of the world. That, of 

course, is in addition to the tens of thousands of tips, complaints, and referrals the 

agency receives every year. Our new Office of the Whistleblower is reviewing these 

submissions and working with whistleblowers. The office recently filed its Annual 

Report to Congress detailing its many activities since its creation. These include, 

among other things, the establishment of an outreach program, internal training 

programs, development of policies and procedures, meeting with whistleblowers and 

their counsel, and coordination on investigations with Commission staff. 

We already are reaping the early benefits of the whistleblower program through 

active and promising investigations utilizing crucial whistleblower information, 

some of which we hope may lead to rewards in the near future. In addition, the 

quality of the information we are receiving has, in many instances, enabled our investigative staff to work more efficiently, thereby allowing us to better utilize our 

resources. 

Additional Investor Protection Provisions 

The Commission continues to exercise its expanded enforcement authority by utilizing many of the other investor protection provisions contained in the Dodd-Frank 

Act. For example, we use our new ‘‘collateral bar’’ authority to bar or suspend persons who have engaged in serious misconduct in one segment of the financial services industry that the Commission regulates from other segments that the Commission also regulates. 
65 

9See In the Matter of Diageo Plc, Release No. 34–64978 (July 27, 2011) http://www.sec.gov/ 

litigation/admin/2011/34-64978.pdf 10See 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. 11See 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. 

In addition, the Commission has used its authority granted in Section 929P(a) to 

impose penalties in administrative cease and desist actions against nonregulated individuals and entities. Although the Commission could impose penalties against regulated persons administratively prior to Dodd-Frank, it could obtain penalties 

against nonregulated persons only in enforcement actions filed in district court. The 

Act now permits the Commission to obtain penalties against nonregulated violators 

of the Federal securities laws in either forum. In one recent example of our exercise 

of this authority, the Commission imposed a $3 million administrative penalty 

against an alcoholic beverage producer for violations of the Foreign Corrupt Practices Act involving more than $2.7 million in illicit payments to government officials 

in India, Thailand and South Korea.9 Prior to the Dodd-Frank Act, the Commission 

would not have been able to impose a penalty against the company in a cease-anddesist proceeding; that sanction would only have been available in a district court 

action. Accordingly, to obtain full relief, the Commission would have had to either 

file the entire action in district court or, alternatively, file two separate actions— 

one administrative and one civil. With the new authority granted in Section 

929P(a), the Commission no longer has to file multiple actions or abandon what may 

be the more appropriate forum in order to obtain an appropriate penalty. 

Section 929E of the Dodd-Frank Act allowed for nationwide service of process so 

that the SEC could compel a witness to appear at trial anywhere in the United 

States. This new tool has enhanced our enforcement efforts by providing our trial 

attorneys with greater access to key witnesses and documents at trial. 

These are just a few examples of the many ways in which we are utilizing our 

expanded authority to more effectively protect investors. And, these new tools are 

augmenting our Enforcement Division’s own, proactive initiatives to enhance its effectiveness by bringing more cases—and more significant cases—more swiftly and 

more efficiently. Indeed, in recently ended fiscal year 2011, the SEC filed 735 enforcement actions—more enforcement actions than ever filed in a single year in SEC 

history. As a result of our aggressive enforcement activity, we obtained more than 

$2.8 billion in penalties and disgorgement ordered in fiscal year 2011. 

OTC Derivatives 

Among the key provisions of the Dodd-Frank Act are those that will establish a 

new oversight regime for the OTC derivatives marketplace. Title VII of the DoddFrank Act requires the Commission to work with other regulators—the CFTC in 

particular—to write rules that: 

• Address, among other things, mandatory clearing, the operation of trade execution facilities and data repositories, business conduct standards for certain market intermediaries, capital and margin requirements, and public transparency 

for transactional information; 

• Improve transparency and facilitate the centralized clearing of swaps, helping, 

among other things, to reduce counterparty risk and systemic risk that results 

from exposures by market participants to uncleared swaps; 

• Enhance investor protection by increasing security-based swap transaction disclosure and helping to mitigate security-based swap conflicts of interest; and 

• Allow the OTC derivatives market to continue to develop in a more transparent, 

efficient, and competitive manner. 

Title VII Implementation to Date 

To date, the Commission has proposed rules in 13 areas required by Title VII: 

• Rules prohibiting fraud and manipulation in connection with security-based 

swaps;10

• Rules regarding trade reporting, data elements, and real-time public dissemination of trade information for security-based swaps that would lay out who must 

report security-based swaps, what information must be reported, and where and 

when it must be reported;11
66 

12See 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. 13See Release No. 34–63452, Further Definition of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major Security-Based Swap participant’’ and ‘‘Eligible Contract 

Participant’’ (December 7, 2010), http://www.sec.gov/rules/proposed/2010/34-63452.pdf. 14See Release No. 63557, 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 (December 

15, 2010), http://www.sec.gov/rules/proposed/2010/34-63557.pdf. 15See 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. 16See Release No. 34–63727, Trade Acknowledgment and Verification on Security-Based Swap 

Transactions (January 14, 2011), http://www.sec.gov/rules/proposed/2011/34-63727.pdf. 17See Release No. 34–63825, Registration and Regulation of Security-Based Swap Execution 

Facilities (February 2, 2011), http://www.sec.gov/rules/proposed/2011/34-63825.pdf. 18See Release No. 34–64017, Clearing Agency Standards for Operation and Governance 

(March 2, 2011), http://www.sec.gov/rules/proposed/2011/34-64017.pdf. 19See Release No. 33–9204, Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping 

(April 27, 2011), http://www.sec.gov/rules/proposed/2011/33-9204.pdf. 20See Release No. 34–64766, Business Conduct Standards for Security-Based Swaps Dealer 

and Major Security-Based Swap Participants (June 29, 2011), http://www.sec.gov/rules/proposed/2011/34-64766.pdf. 21See Release No. 34–65543, Registration of Security-Based Swap Dealers and Major SecurityBased Swap Participants (October 12, 2011), http://www.sec.gov/rules/proposed/2011/34- 

65543.pdf. 22See 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. 

• Rules regarding the obligations of security-based swap data repositories that 

would require them to register with the Commission and specify the extensive 

confidentiality and other requirements with which they must comply;12

• Joint rules with the CFTC regarding the definitions of swap and security-based 

swap dealers, and major swap and security-based swap participants;13

• Rules relating to mandatory clearing of security-based swaps that would establish a process for clearing agencies to provide information to the Commission 

about security-based swaps that the clearing agencies plan to accept for clearing;14

• Rules regarding the exception to the mandatory clearing requirement for hedging by end users that would specify the steps that end users must follow, as 

required under the Dodd-Frank Act, to notify the Commission of how they generally meet their financial obligations when engaging in security-based swap 

transactions exempt from the mandatory clearing requirement;15

• Rules regarding the confirmation of security-based swap transactions that 

would govern the way in which certain of these transactions are acknowledged 

and verified by the parties who enter into them;16

• Rules defining and regulating security-based swap execution facilities, which 

specify their registration requirements, and establish the duties and implement 

the core principles for security-based swap execution facilities specified in the 

Dodd-Frank Act;17

• Rules regarding certain standards that clearing agencies would be required to 

maintain with respect to, among other things, their risk management and operations;18

• Joint rules with the CFTC regarding further definitions of the terms ‘‘swap,’’ 

‘‘security-based swap,’’ and ‘‘security-based swap agreement;’’ the regulation of 

mixed swaps; and security-based swap agreement recordkeeping;19

• Rules regarding business conduct that would establish certain minimum standards of conduct for security-based swap dealers and major security-based swap 

participants, including in connection with their dealings with ‘‘special entities,’’ 

which include municipalities, pension plans, endowments and similar entities;20

• Rules regarding the registration process for security-based swap dealers and 

major security-based swap participants;21 and 

• Rules intended to address conflicts of interest at security-based swap clearing 

agencies, security-based swap execution facilities, and exchanges that trade security-based swaps.22
67 

23See Release No. 34–63094, Reporting of Security-Based Swap Transaction Data (October 13, 

2010), http://www.sec.gov/rules/interim/2011/34-63094.pdf. 24See Release No. 33–9222, Exemptions for Security-Based Swaps Issued by Certain Clearing 

Agencies (June 9, 2011), http://www.sec.gov/rules/proposed/2011/33-9222.pdf. 25See Release No. 34–64628, Beneficial Ownership Reporting Requirements and SecurityBased Swaps (June 8, 2011), http://www.sec.gov/rules/final/2011/34-64628.pdf. 26See Release No. 34–64678, Temporary Exemptions and Other Temporary Relief, Together 

with Information on Compliance Dates for New Provisions of the Securities Exchange Act of 1934 

Applicable to Security-Based Swaps (June 15, 2011), http://www.sec.gov/rules/exorders/2011/ 

34-64678.pdf. 27See Release No. 34–64795, Order Granting Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with the Pending Revision of the Definition of ‘‘Security’’ to 

Encompass Security-Based Swaps, and Request for Comment (July 1, 2011), http://sec.gov/ 

rules/exorders/2011/34-64795.pdf; and Release No. 33–9231, Exemptions for Security-Based 

Swaps (July 1, 2011), http://www.sec.gov/rules/interim/2011/33-9231.pdf. 28See Release No. 34–64796, Order Pursuant to Section 36 of the Securities Exchange Act of 

1934 Granting Temporary Exemptions from Clearing Agency Registration Requirements under 

Section 17A(b) of the Exchange Act for Entities Providing Certain Clearing Services for SecurityBased Swaps (July 1, 2011), http://sec.gov/rules/exorders/2011/34-64796.pdf; and Release No. 

33–9232 Extension of Temporary Exemptions for Eligible Credit Default Swaps to Facilitate Operation of Central Counterparties to Clear and Settle Credit Default Swaps (July 1, 2011), 

http://www.sec.gov/rules/interim/2011/33-9232.pdf. 

The Commission adopted an interim final rule regarding the reporting of outstanding security-based swaps entered into prior to the date of enactment of the 

Dodd-Frank Act.23 This interim final rule notifies certain security-based swap dealers and other parties of the need to preserve and report to the Commission or a 

registered security-based swap data repository certain information pertaining to any 

security-based swap that was entered into prior to the July 21, 2010 passage of the 

Dodd-Frank Act and whose terms had not expired as of that date. 

In addition, to facilitate clearing of security-based swaps, the Commission has proposed 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.24 We 

also readopted certain of our beneficial ownership rules to preserve their application 

to persons who purchase or sell security-based swaps.25

Moreover, the Commission has taken a number of steps to provide legal certainty 

and avoid unnecessary market disruption that might otherwise have arisen as a result of final rules not having been enacted by the July 16 effective date of Title VII. 

Specifically, we have: 

• Provided guidance regarding which provisions in Title VII governing securitybased swaps became operable as of the effective date and provided temporary 

relief from several of these provisions;26

• Provided guidance regarding—and where appropriate, interim exemptions 

from—the various pre-Dodd-Frank provisions that would otherwise have applied to security-based swaps on July 16;27 and 

• Taken other actions to address the effective date, including extending certain 

existing temporary rules and relief to continue to facilitate the clearing of certain credit default swaps by clearing agencies functioning as central counterparties.28

Next Steps for Implementation of Title VII 

While the Commission has made significant progress to date, much remains to be 

done to fully implement Title VII. First, we need to complete the core elements of 

our proposal phase, in particular, rules related to the financial responsibility of security-based swap dealers and major security-based swap participants. 

In addition, because the OTC derivatives market has grown to become a truly 

global market in the last three decades, we must continue to evaluate carefully the 

international implications of Title VII. Rather than deal with these implications 

piecemeal, we intend to address the relevant international issues holistically in a 

single proposal. The publication of such a proposal would give investors, market participants, foreign regulators, and other interested parties an opportunity to consider 

as an integrated whole our proposed approach to the registration and regulation of 

foreign entities engaged in cross-border transactions involving U.S. parties. 

After proposing all of the key rules under Title VII, we intend to seek public comment on an implementation plan that will facilitate a roll-out of the new securitiesbased swap requirements in a logical, progressive, and efficient manner that minimizes unnecessary disruption and costs to the markets. Many market participants 

have advocated that the Commission adopt a phased-in approach, whereby compli-
68 

29See Release No. 34–64017, Clearing Agency Standards for Operation and Governance 

(March 3, 2011), http://www.sec.gov/rules/proposed/2011/34-64017.pdf. 30The CFTC adopted final rules regarding standards for derivatives clearing organizations 

based on the applicable core principles on October 18, 2011. See Derivatives Clearing Organization General Provisions and Core Principles, 76 FR 69334 (November 8, 2011), http:// 

www.cftc.gov/ucm/groups/public/@lrFederalregister/documents/file/2011-27536a.pdf. 31See 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. 32See Release No. 34–64514, Proposed Rules for Nationally Recognized Statistical Rating Organizations (May 18, 2011), http://www.sec.gov/rules/proposed/2011/34-64514.pdf. 

ance with Title VII’s requirements would be sequenced. Commission staff is actively 

engaged in developing an implementation proposal that takes into consideration 

market participants’ recommendations with regard to such sequencing. 

Clearing Agencies 

Title VIII of the Dodd-Frank Act provides for increased regulation of financial 

market utilities and financial institutions that engage in payment, clearing and settlement activities that are designated as systemically important. Clearing agencies 

play a critical role in the financial markets by ensuring that transactions settle on 

time and on agreed-upon terms. The purpose of Title VIII is to mitigate systemic 

risk in the financial system and promote financial stability. 

To promote the integrity of clearing agency operations and governance, the Commission proposed certain enhanced requirements for clearing agencies.29 Specifically, the proposed rules would require clearing agencies to maintain certain standards with respect to risk management and operations, have adequate safeguards 

and procedures to protect the confidentiality of trading information, have procedures 

that identify and address conflicts of interest, require minimum governance standards for boards of directors, designate a chief compliance officer, and disseminate 

pricing and valuation information if the clearing agency performs central 

counterparty services for security-based swaps. Many of the proposed requirements 

would apply to all clearing agencies, while others would focus more specifically on 

clearing agencies that clear security-based swaps. 

The proposal was the result of close work between the Commission staff and staffs 

of the CFTC and the Federal Reserve Board (‘‘Board’’). The proposed requirements 

are consistent with—and build on—current international standards, and they are 

designed to further strengthen the Commission’s oversight of securities clearing 

agencies, promote consistency in the regulation of clearing organizations generally, 

and thereby help to ensure that clearing agency regulation reduces systemic risk in 

the financial markets. The comment period for the proposal ended on April 29, 2011 

and we received approximately 25 comments. We expect to consider final rules and 

revisions in light of comments received in the near future.30

In addition, as directed by Title VIII, the SEC staff worked jointly with the staffs 

of the CFTC and the Board over the past year to develop a report to Congress reflecting recommendations regarding risk management supervision of clearing entities designated as systemically important by the FSOC—each called a ‘‘designated 

clearing entity’’ or ‘‘DCE’’. The staffs of the agencies met regularly and engaged in 

constructive dialogue to develop a framework for improving consistency in the DCE 

oversight programs of the SEC and CFTC, promoting robust risk management by 

DCEs, promoting robust risk management oversight by DCE regulators, and improving regulators’ ability to monitor the potential effects of DCE risk management 

on the stability of the financial system of the United States. The joint report was 

submitted to Congress in July and recommended finalizing rulemakings to establish 

enhanced risk management for DCEs, formalizing the process for consultations and 

information sharing regarding DCEs, enhancing DCE examinations, and developing 

ongoing consultative mechanisms to promote understanding of systemic risk. The report should establish a strong framework for ongoing consultation and cooperation 

in clearing agency oversight among the Commission, the CFTC, and the Board, 

which in turn should help to mitigate systemic risk and promote financial stability. 

Credit Rating Agencies 

Under the Dodd-Frank Act, the Commission is required to undertake approximately a dozen rulemakings related to nationally recognized statistical rating organizations (‘‘NRSROs’’). The Commission adopted the first of these required 

rulemakings in January 2011,31 and in May, the Commission published for public 

comment a series of proposed rules that would further implement this requirement.32 The proposed rules are intended to strengthen the integrity of credit ratings 
69 

33See Release No. 34–63573, Credit Rating Standardization Study (December 17, 2010), 

http://sec.gov/rules/other/2010/34-63573.pdf. 34See Release No. 34–64456, Solicitation of Comment to Assist in Study on Assigned Credit 

Ratings (May 10, 2011), http://www.sec.gov/rules/other/2011/34-64456.pdf. 35See Release No. 33–9245, Security Ratings (July 27, 2011), http://www.sec.gov/rules/final/ 

2011/33-9245.pdf. 36See Release No. 33–9117, Asset-Backed Securities (April 7, 2010), http://www.sec.gov/ 

rules/proposed/2010/33-9117.pdf. 37See Release No. 34–64352, Removal of Certain References to Credit Ratings under the Securities Exchange Act of 1934 (April 27, 2011), http://www.sec.gov/rules/proposed/2011/34- 

64352.pdf. 

by, among other things, improving their transparency. Under the Commission’s proposals, NRSROs would, among other things, be required to: 

• Report on their internal controls; 

• Better protect against conflicts of interest; 

• Establish professional standards for their credit analysts; 

• Publicly provide—along with the publication of any credit rating—disclosure 

about the credit rating and the methodology used to determine it; and 

• Provide enhanced public disclosures about the performance of their credit ratings. 

In addition, the proposals would require disclosure concerning third-party due diligence reports for asset-backed securities. 

The Dodd-Frank Act requires the SEC to conduct three studies relating to credit 

rating agencies. In December 2010, the Commission requested public comment on 

the feasibility and desirability of standardizing credit rating terminology.33 The 

Commission received 16 comment letters in response to this request, and Commission staff has reviewed the comments received and is working toward producing a 

final product. The Dodd-Frank Act also requires (1) a study, due in July 2012, about 

alternative compensation models for rating structured finance products and (2) a 

study, due in 2013, about NRSRO independence. 

With respect to alternative compensation models, the Dodd-Frank Act directs the 

Commission to study the credit rating process for structured finance products and 

the conflicts associated with the ‘‘issuer-pay’’ and the ‘‘subscriber-pay’’ models. The 

Commission also must study the feasibility of establishing a system in which a public or private utility or a self-regulatory organization would assign NRSROs to determine the credit ratings for structured finance products. Accordingly, in May 2011 

the Commission published a request for public comment on the feasibility of such 

a system, asking interested parties to provide comments, proposals, data and analysis.34 The comment period ended on September 13, 2011. The Commission received 

29 comment letters in response to its request for comments, which Commission staff 

is currently reviewing. 

The Dodd-Frank Act also requires every Federal agency to review its regulations 

that require use of credit ratings as an assessment of the credit-worthiness of a security and undertake rulemakings to remove these references and replace them with 

other standards of credit worthiness that the agency determines are appropriate. 

The Commission has taken the following steps to fulfill this requirement: 

• In July 2011, the Commission adopted rule amendments removing credit ratings as conditions for companies seeking to use short-form registration when 

registering nonconvertible securities for public sale. Under the new rules, the 

test for eligibility to use Form S–3 or Form F–3 short-form registration is tied 

to the amount of debt and other nonconvertible securities (other than equity) 

a particular company has sold in registered primary offerings within the previous 3 years, or that the company has outstanding that were issued in registered primary offerings.35 In addition, prior to adoption of the Act, in April 

2010 the Commission proposed new requirements to replace the current credit 

rating references in shelf eligibility criteria for asset-backed security issuers 

with new shelf eligibility criteria.36

• In April 2011, the Commission proposed to remove references to credit ratings 

in rules concerning broker-dealer financial responsibility, distributions of securities, and confirmations of transactions.37
70 

38See Release Nos. 33–9193; IC–29592, References to Credit Ratings in Certain Investment 

Company Act Rules and Forms (March 3, 2011), http://www.sec.gov/rules/proposed/2011/33- 

9193.pdf. 39See 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. 40See 2011 Summary Report of Commission Staff’s Examinations of Each Nationally Recognized Statistical Rating Organization (September 2011), http://www.sec.gov/news/studies/ 

2011/2011lnrsrolsection15elexaminationslsummarylreport.pdf. 41See Release No. 34–65545, Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds (October 12, 

2011), http://www.sec.gov/rules/proposed/2011/34-965545.pdf. 42The FSOC Volcker Rule study and recommendations can be found at http:// 

www.treasury.gov/initiatives/Documents/Volcker%20sec%20%20619%20study%20final%2018% 

2011%20rg.pdf. 

• In March 2011, the Commission proposed to remove credit ratings from rules 

relating to the types of securities in which a money market fund can invest.38

This proposal includes amendments to Rule 2a–7, which governs the operation 

of money market funds and requires these funds to invest only in highly liquid, 

short-term investments of the highest quality. These proposed amendments 

would replace the current requirement that rated portfolio securities have received a first or second tier rating. They are designed to offer protections comparable to those provided by NRSRO ratings and to retain a degree of risk limitation similar to the current rule. 

In September 2010, the Commission also adopted a rule amendment to remove 

communications with credit rating agencies from the list of excepted communications in Regulation FD, as required by Section 939B of the Dodd-Frank Act.39

Finally, the Dodd-Frank Act requires the SEC to conduct staff examinations of 

each NRSRO at least annually and to issue an annual report summarizing the exam 

findings. Our staff recently successfully completed the first cycle of these exams, 

and the Commission approved the publication of the staff’s summary report of the 

examinations.40 The staff will continue to focus on completing the statutorily mandated annual examinations of each NRSRO, including follow-up from prior examinations, and making public the summary report of those examinations. 

Volcker Rule 

In October 2011, the Commission proposed a rule jointly with the Federal banking 

agencies to implement Section 619 of the Dodd-Frank Act, commonly referred to as 

the ‘‘Volcker Rule.’’41 This proposal reflects an extensive, collaborative effort by the 

Federal banking agencies, the SEC, the CFTC, and their respective staffs to design 

a rule to implement the Volcker Rule’s prohibitions and restrictions in a manner 

that is consistent with the language and purpose of this complex statute. In developing this proposal, interagency staffs gave close and thoughtful consideration to the 

FSOC’s January 2011 study and its recommendations for implementing Section 

619.42 As a result, the joint proposal builds upon many of the recommendations set 

forth in the FSOC study, including the use of quantitative measurements to distinguish prohibited proprietary trading from permitted market-making-related activity 

and the requirement that banking entities develop robust programmatic compliance 

regimes. 

As required by the statute, the joint proposal generally prohibits banking entities 

from engaging in proprietary trading and having certain interests in, and relationships with, hedge funds and private equity funds. The proposed rule also provides 

certain exceptions to these general prohibitions, consistent with the statute. For example, the proposal permits a banking entity to engage in underwriting, marketmaking-related activity, risk-mitigating hedging, and organizing and offering a private equity fund or hedge fund, among other permitted activities, provided that specific requirements set forth in the proposed rule are met. Further, as established 

by Section 619, an otherwise-permitted activity would be prohibited under the proposed rule if it involved a material conflict of interest, high-risk assets or trading 

strategies, or a threat to the safety and soundness of the banking entity or to the 

financial stability of the United States. The proposal defines ‘‘material conflict of interest,’’ ‘‘high-risk asset,’’ and ‘‘high-risk trading strategy’’ for these purposes. As set 

forth in the Dodd-Frank Act, the Commission’s rule would apply to banking entities 

for which the Commission is the primary financial regulatory agency. These banking 

entities include, among others, certain registered broker-dealers, investment advisers, and security-based swap dealers. 

The joint proposal requests comment on a wide range of issues due, in part, to 

the complexity of the issues presented by the statute and the proposal. The comment period for this proposal ends on January 13, 2012. We look forward to receiv-
71 

43See Release No. 34–62824, Temporary Registration of Municipal Advisors (September 1, 

2010), http://www.sec.gov/rules/interim/2010/34-62824.pdf. 44See Release No. 34–63576, Registration of Municipal Advisors (December 20, 2010), http:// 

sec.gov/rules/proposed/2010/34-63576.pdf. 45See 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. 46See Release No. 34–64148, Credit Risk Retention (March 30, 2011), http://www.sec.gov/ 

rules/proposed/2011/34-64148.pdf. 47See § 78o–11(c)(1)(A). 

ing and considering public comment on this proposal and continuing to work with 

the other regulators to further refine the rule prior to adoption. 

Municipal Advisors 

Section 975 of the Dodd-Frank Act creates a new class of regulated persons, ‘‘municipal advisors,’’ and requires these advisors to register with the Commission. This 

new registration requirement, which became effective on October 1, 2010, makes it 

unlawful for any municipal advisor, among other things, to provide advice to a municipal entity unless the advisor is registered with the Commission. In September 

2010, the Commission adopted an interim final rule establishing a temporary means 

for municipal advisors to satisfy the registration requirement.43 In December 2010, 

the Commission proposed a permanent rule that would create a new process by 

which municipal advisors must register with the SEC.44 We have received over 

1,000 comment letters on the proposal, including many that express concerns regarding the treatment of appointed officials and traditional banking products and 

services. We are giving these comments careful consideration before adopting a final 

rule. In addition, we are continuing to discuss many interpretive issues with other 

regulators and interested market participants so that the final rule will strike an 

appropriate balance by ensuring that parties engaging in municipal advisory activities are appropriately registered, without unnecessarily imposing additional regulation. 

Asset-Backed Securities 

The Commission has been active in implementing Subtitle D of Title IX of the 

Dodd-Frank Act, entitled ‘‘Improvements to the Asset-Backed Securitization Process.’’ In August 2011, the Commission adopted rules in connection with Section 

942(a) of the Dodd-Frank Act, which eliminated the automatic suspension of the 

duty to file reports under Section 15(d) of the 1934 Act for ABS issuers and granted 

the Commission authority to issue rules providing for the suspension or termination 

of this duty to file reports. The new rules permit suspension of the reporting obligations for ABS issuers when there are no longer asset-backed securities of the class 

sold in a registered transaction held by non-affiliates of the depositor.45

On March 30, 2011, the Commission joined its fellow regulators in issuing for 

public comment proposed risk retention rules to implement Section 941 of the Act. 

46 Section 941, which is codified as new Section 15G of the Securities Exchange Act 

of 1934, generally requires the Commission, the Board, Federal Deposit Insurance 

Corporation, 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 asset-backed security—transfers, sells, or conveys to a third party. Section 15G 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.47

Under the proposed rules, a sponsor generally would be permitted to choose from 

a menu of four risk retention options to satisfy its minimum 5 percent risk retention 

requirement. These options were designed to provide sponsors with flexibility while 

also ensuring that they actually retain credit risk to align incentives. The proposed 

rules also include three transaction-specific options related to securitizations involving revolving asset master trusts, asset-backed commercial paper conduits, and commercial mortgage-backed securities. Also, as required by Section 941, the proposal 

provides a complete exemption from the risk retention requirements for ABS 

collateralized solely by ‘‘qualified residential mortgages’’ (or QRMs) and establishes 

the terms and conditions under which a residential mortgage would qualify as a 

QRM. We have received a number of comments regarding the QRM exemption, 

which we will carefully consider as we move forward with the interagency rulemaking process. Although the original comment period was scheduled to close on 
72 

48See 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. 49See 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. 50See Section 942(b) of the Dodd-Frank Act. In April 2010, the Commission proposed, among 

other things, to require that, with some exceptions, prospectuses for public offerings of ABS and 

ongoing Exchange Act reports contain specified asset-level information about each of the assets 

in the pool. See Release No. 33–9117, Asset-Backed Securities (April 7, 2010), http:// 

www.sec.gov/rules/proposed/2010/33-9117.pdf. In July 2011, the Commission requested additional comment on the 2010 proposals relating to asset-level data in light of Section 942(b) and 

comments received on the 2010 proposals. See Release No. 33–9244, Re-proposal of Shelf Eligibility Conditions for Asset-Backed Securities and Other Additional Requests for Comment (July 

26, 2011), http://www.sec.gov/rules/proposed/2011/33-9244.pdf. The proposals, if adopted, 

would implement the requirements for registered offerings of Section 942(b). 51See 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. 

June 10, 2011, in light of requests from various sources for an extension to allow 

sufficient time for data gathering and impact analyses related to the provisions of 

the proposed rule, we extended the comment period to August 1, 2011. 

The Commission also adopted rules in January 2011 implementing Section 943, 

on the use of representations and warranties in the market for ABS,48 and Section 

945, which requires an asset-backed issuer in a Securities Act registered transaction 

to perform a review of the assets underlying the ABS and disclose the nature of 

such review.49

We also are working on rules requiring the disclosure of asset-level information 

regarding the assets backing each tranche or class of security.50

Prohibition against Conflicts of Interest in Certain Securitizations 

In September 2011, the Commission proposed a rule to implement the prohibition 

under Section 621 of the Dodd-Frank Act, which prohibits entities that create and 

distribute asset-backed securities from engaging in transactions that involve or result in material conflicts of interest with respect to the investors in such assetbacked securities.51 The proposed rule would implement this provision by prohibiting underwriters, placement agents, initial purchasers, sponsors of an asset-backed 

security, or any affiliate or subsidiary of such entity from engaging in any transaction that would involve or result in any material conflicts of interest with respect 

to any investor in the relevant asset-backed security. These entities, referred to as 

‘‘securitization participants,’’ assemble, package and distribute asset-backed securities, and so may benefit from the activity that Section 621 is designed to prohibit. 

The prohibition would apply to both nonsynthetic and synthetic asset-backed securities and would apply to both registered and unregistered offerings of asset-backed 

securities. 

Under the proposal, a conflict of interest would arise if a securitization participant 

would benefit directly or indirectly from either the actual, anticipated, or potential 

(a) adverse performance of the asset pool supporting or referenced by the relevant 

asset-backed security, (b) loss of principal, monetary default or early amortization 

event on the asset-backed security, or (c) decline in the market value of the assetbacked security; or as a result of allowing a third party, directly or indirectly, to 

structure the relevant asset-backed security or select assets underlying the assetbacked security in a way that facilitates or creates an opportunity for that third 

party to benefit from a short transaction. The conflict would be material if there is 

a substantial likelihood that a reasonable investor would consider the conflict important to his or her investment decision. 

The proposed rule contains three exceptions mandated by the statute for bona fide 

market-making, liquidity commitments and risk-mitigating hedging activities. In developing the proposal, we considered comments received in response to the Commission’s general solicitation of comments on the implementation of the Dodd-Frank 

Act. Commenters suggested that applying the statutory prohibition in a broad manner might impair the asset-backed securities market. The proposal is not intended 

to prohibit legitimate securitization activities, but rather, to prohibit the type of conduct at which Section 621 is aimed. We asked many questions in the release to ensure that we strike the right balance of prohibiting the type of conduct at which 

the statute is targeted without restricting other securitization activities. 

The Commission looks forward to public comment regarding this proposal, including comment on the potential interplay between this proposal and Section 619 of 

the Dodd-Frank Act. The 90-day comment period for this rule ends on December 19, 

2011. 
73 

52See 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. 53See 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. 54See Release No. 33–9199, Listing Standards for Compensation Committees (March 30, 2011), 

http://www.sec.gov/rules/proposed/2011/33-9199.pdf. 55See Release No. 34–62874 (September 9, 2010), http://www.sec.gov/rules/sro/nyse/2010/ 

34-62874.pdf (New York Stock Exchange); Release No. 34–62992 (September 24, 2010), http:// 

www.sec.gov/rules/sro/nasdaq/2010/34-62992.pdf (NASDAQ Stock Market LLC); Release No. 

34–63139 (October 20, 2010), http://www.sec.gov/rules/sro/ise/2010/34-63139.pdf (International Securities Exchange); Release No. 34–63917 (February 16, 2011), http://www.sec.gov/ 

rules/sro/cboe/2011/34-63917.pdf (Chicago Board Options Exchange); Release No. 34–63918 

(February 16, 2011), http://www.sec.gov/rules/sro/c2/2011/34-63918.pdf (C2 Options Exchange, Incorporated); Release No. 34–64023 (March 3, 2011), http://www.sec.gov/rules/sro/ 

bx/2011/34-64023.pdf (NASDAQ OMX BX, Inc.); Release No. 34–64121 (March 24, 2011), 

http://www.sec.gov/rules/sro/chx/2011/34-64121.pdf (Chicago Stock Exchange); Release No. 

34–64122 (March 24, 2011), http://www.sec.gov/rules/sro/phlx/2011/34-64122.pdf (NASDAQ 

Continued 

Corporate Governance and Executive Compensation 

The Dodd-Frank Act includes an array of corporate governance and executive 

compensation provisions that require Commission rulemaking. Among others, such 

rulemakings include: 

• Say on Pay. The Commission adopted rules in January 2011 that require, in 

accordance with Section 951 of the Act, public companies subject to the Federal 

proxy rules to provide a shareholder advisory ‘‘say-on-pay’’ vote on executive 

compensation, a separate shareholder advisory vote on the frequency of the sayon-pay vote, and disclosure about, and a shareholder advisory vote to approve, 

compensation related to merger or similar transactions, known as ‘‘golden parachute’’ arrangements.52 The Commission also proposed rules to implement the 

Section 951 requirement that institutional investment managers report their 

votes on these matters at least annually.53

• Compensation Committee and Adviser Requirements. Section 952 requires the Commission to, by rule, 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. In March 2011, the Commission issued a proposal to implement Section 952 that would require the exchanges to establish 

listing standards that require each member of a listed issuer’s compensation 

committee to be a member of the board of directors and to be ‘‘independent.’’54

The proposed rules also would direct the exchanges to prohibit the listing of any 

equity security of any issuer that is not in compliance with certain requirements relating to compensation committees and compensation advisers. The 

proposal also would amend the Commission’s existing compensation consultant 

disclosure rules to require disclosure about whether the issuer’s compensation 

committee retained or obtained the advice of a compensation consultant; whether the work of the compensation consultant has raised any conflicts of interest; 

and, if so, the nature of any such conflict and how it is being addressed. The 

comment period for the proposal ended on May 19, 2011, and the staff is currently developing recommendations for final rules. 

• Incentive-Based Compensation Arrangements. Section 956 of the DoddFrank Act requires the Commission along with six 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 the Commission published for public comment a proposed 

rule that would address such arrangements. The Commission has received voluminous comment letters on the proposed rule, and the Commission staff, together with staff from the other regulators, is carefully considering the issues 

and concerns raised in those comments before adopting final rules. 

• 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 on the election of directors 

(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. To date, the Commission has approved 

changes to the rules with regard to director elections and executive compensation matters for most of the national securities exchanges,55 and we anticipate 
74 

OMX PHLX LLC); Release No. 34–64186 (April 5, 2011), http://www.sec.gov/rules/sro/edgx/ 

2011/34-64186.pdf (EDGX Exchange); Release No. 34–64187 (April 5, 2011), http:// 

www.sec.gov/rules/sro/edga/2011/34-64187.pdf (EDGA Exchange); Release No. 34–65804 (November 22, 2011), http://www.sec.gov/rules/sro/nsx/2011/34-65804.pdf (National Stock Exchange, Inc.). 56See Section 954 of the Dodd-Frank Act. 57See Section 953(a) of the Dodd-Frank Act. 58See Section 953(b) of the Dodd-Frank Act. 59See Section 955 of the Dodd-Frank Act. 60See Release No. 34–63547, Conflict Minerals (December 15, 2010), http://www.sec.gov/ 

rules/proposed/2010/34-63547.pdf; Release No. 33–9164, Mine Safety Disclosure (December 15, 

2010), http://www.sec.gov/rules/proposed/2010/33-9164.pdf, Release No. 34–63549, Disclosure 

of Payments by Resource Extraction Issuers (December 15, 2010), http://www.sec.gov/rules/ 

proposed/2010/34-63549.pdf. 61See Release No. 33–9211, Disqualification of Felons and Other ‘‘Bad Actors’’ from Rule 506 

Offerings (May 25, 2011), http://www.sec.gov/rules/proposed/2011/33-9211.pdf. 62See Release No. 33–9177, Net Worth Standard for Accredited Investors (January 25, 2011), 

http://www.sec.gov/rules/proposed/2011/33-9177.pdf. 

that corresponding changes to the rules of the remaining national securities exchanges will be considered by the Commission in the near future. 

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,56 and new disclosure requirements about executive compensation and company performance,57 executive pay ratios,58 and employee and director hedging.59 These provisions of the 

Act do not contain rulemaking deadlines, but the staff is working on developing recommendations for the Commission concerning the implementation of these provisions of the Act. 

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. The Commission published rule proposals for 

the three specialized disclosure requirements in December 2010, and the comment 

period ended on March 2, 2011.60 In October, the Commission hosted a public 

roundtable to discuss key issues related to the conflict mineral rulemaking, including what is covered by the rule, what steps will be required to comply with the rule, 

and reporting under the rule. In connection with the roundtable, the Commission 

reopened the comment period until November 1, 2011 to allow comments to be submitted on the matters discussed at the roundtable. On all three of these 

rulemakings, the staff is developing recommendations for the Commission’s consideration. 

Exempt Offerings 

Under Section 926 of the Act, the Commission is required to adopt 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. The Commission proposed rules to implement the requirements of 

Section 926 on May 25, 2011.61 Under the proposal, the disqualifying events include 

certain criminal convictions, court injunctions and restraining orders; certain final 

orders of state securities, insurance, banking, savings association or credit union 

regulators, Federal banking agencies or the National Credit Union Administration; 

certain types of Commission disciplinary orders; suspension or expulsion from membership in, or from association with a member of, a securities self-regulatory organization; and certain other securities-law related sanctions. The comment period for 

this rule proposal ended on July 14, 2011 and the staff is currently developing recommendations for final rules. 

In addition, the Commission proposed rule amendments in January that would 

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 exceeds the $1 million threshold required for ‘‘accredited investor’’ status.62

The comment period on this proposal ended on March 11, 2011 and the staff is preparing final rule recommendations for the Commission. This section was effective 

on the date of enactment of the Dodd-Frank Act; the implementing rules are designed to clarify the requirements and codify them in the Commission’s rules. 

Financial Stability Oversight Council 

In addition to the rulemaking activity described above, Title I of the Dodd-Frank 

Act created the FSOC, and with it, a formal structure for coordination among the 
75 

63See Dodd-Frank Act § 112(a)(1). 64Section 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.’’ 65See Dodd-Frank Act § 802. 66See Dodd-Frank Act § 805. 

various financial regulators to monitor systemic risk and to promote financial stability across our Nation’s financial system. FSOC has the following primary responsibilities: 

• Identifying risks to the financial stability of the United States that could arise 

from the material financial distress or failure—or ongoing activities—of large, 

interconnected bank-holding companies or nonbank financial holding companies, 

or that could arise outside the financial services marketplace; 

• Promoting market discipline by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government 

will shield them from losses in the event of failure (i.e., addressing the moral 

hazard problem of ‘‘too big to fail’’); and 

• Identifying and responding to emerging threats to the stability of the United 

States financial system.63

As Chairman of the SEC, I am a voting member of FSOC. Senior SEC staff and 

I have actively participated in the FSOC and found its focus on identifying and addressing risks to the financial system to be important and helpful to the SEC as 

a capital markets regulator. The FSOC also has fostered a healthy and positive 

sense of collaboration among the financial regulators, facilitating cooperation and 

coordination for the benefit of investors and our overall financial system. Since passage of the Dodd-Frank Act, the FSOC has taken steps to create an organizational 

structure, coordinate interagency efforts, and build the foundation for meeting its 

statutory responsibilities. 

For example, SEC staff worked with staff at other FSOC agencies on the October 

release of FSOC’s second notice of proposed rulemaking regarding systemically important nonbank financial institutions (‘‘nonbank SIFIs’’). This release proposes the 

processes and considerations by which FSOC will designate nonbank SIFIs for 

heightened supervision by the Board. As proposed, nonbank financial companies will 

generally be assessed in a three-stage process: 

• Stage 1: FSOC will apply uniform quantitative thresholds using publicly available data to identify those nonbank financial companies that will be subject to 

further evaluation. 

• Stage 2: FSOC will further analyze the nonbank financial companies identified 

in Stage 1 using a broader range of information available primarily through existing public and regulatory sources. 

• Stage 3: FSOC will contact each nonbank financial company that FSOC believes 

merits further review to collect information directly from the company that was 

not available in the earlier stages. At the end of Stage 3, based on the results 

of the analyses conducted during each stage of review, FSOC may vote to make 

a determination regarding the company. 

Financial Market Utilities (‘‘FMUs’’) are essential to the proper functioning of the 

Nation’s financial markets.64 These utilities form critical links among marketplaces 

and intermediaries that can strengthen the financial system by reducing 

counterparty credit risk among market participants, creating significant efficiencies 

in trading activities, and promoting transparency in financial markets. However, 

FMUs by their nature create and concentrate new risks that could affect the stability of the broader financial system. To address these risks, Title VIII of the DoddFrank Act provides important new enhancements to the regulation and supervision 

of FMUs designated as systemically important by FSOC (‘‘DFMUs’’) and of payment, 

clearance and settlement activities. This enhanced authority in Title VIII should 

provide consistency, promote robust risk management and safety and soundness, reduce systemic risks, and support the stability of the broader financial system.65 Importantly, the enhanced authority in Title VIII is designed to be in addition to the 

authority and requirements of the Securities Exchange Act and Commodity Exchange Act that may apply to FMUs and financial institutions that conduct designated activities.66

FSOC established an interagency DFMU committee to develop a framework for 

the designation of systemically important FMUs, in which staff from the SEC has 

actively participated. The FSOC finalized the rule establishing a designation process 
76 

67See Release Authority to Designate Financial Market Utilities as Systemically Important 

(July 18, 2011), http://www.treasury.gov/initiatives/Documents/Finalruledisclaimer7-18- 

2011.pdf. 

for FMUs in July,67 after first publishing an advanced notice of proposed rulemaking seeking public comment on the designation process generally, and a notice 

of proposed rulemaking seeking public comment on the specific process it proposed 

to follow when reviewing the systemic importance of FMUs. 

New Commission Offices 

In addition to the Whistleblower Office mentioned above, the Dodd-Frank Act requires the Commission to create four new offices within the Commission, specifically, the Office of Credit Ratings, Office of the Investor Advocate, Office of Minority 

and Women Inclusion, and Office of Municipal Securities. As each of these offices 

is statutorily required to report directly to the Chairman, the creation of these offices has been subject to approval by the Commission’s Appropriations subcommittees. 

As discussed below, both Congressional Appropriations committees approved creation of the Office of Minority and Women Inclusion in FY 2011 in July and we created that office soon thereafter. 

As for the remaining three offices, the SEC’s pending FY 2012 request, if approved, would allow the agency to establish the offices at levels adequate to enable 

those offices to execute their new responsibilities. In the meantime, the initial functions of these offices are being performed on a limited basis by other divisions and 

offices. 

Office of Minority and Women Inclusion 

Section 342 of the Act requires that we establish an Office of Minority and 

Women Inclusion. In mid-July 2011, the House and Senate Appropriations Committees approved the SEC’s reprogramming request to create such an office. Shortly 

after, the SEC established its Office of Minority and Women Inclusion (OMWI). 

OMWI is currently staffed by two full-time employees and an Acting Director. A nationwide search for a permanent Director of the Office is underway and our hope 

is to be able to announce a selection by the end of the year. Although OMWI is a 

separate unit from the agency’s EEO Office, due to budgetary restrictions, resource 

challenges, and the fact that the EEO Director has been designated as OMWI Acting Director, OMWI is presently housed in our EEO Office space. A benefit from 

this arrangement is that OMWI is able to leverage EEO Office resources to implement its requirements under Section 342. 

OMWI has been collaborating with a number of SEC divisions and offices to meet 

the requirements of Section 342, including, but not limited to, the Office of the 

Chairman, Division of Enforcement, Division of Corporation Finance, Office of Investor Education and Advocacy, Office of Human Resources, Office of Acquisitions, Office of Financial Management, Office of General Counsel, and Office of Information 

Technology. This collaboration ranges from providing guidance and input on the 

standards to be developed under Section 342, to supporting OMWI’s infrastructural 

needs (data systems and data feeds), to actual participation in a number of diversity 

and pipeline development initiatives. 

OMWI continues to make strides to enhance the inclusion of minorities and 

women in the workforce and business activities of the agency. Since OMWI’s establishment, the SEC has sponsored or participated in approximately 20 events to recruit diverse talent or diverse suppliers, including, but not limited to: 

• Hispanic National Bar Association Annual Convention 

• National Black MBA Association, DC Chapter Pre-Conference Career Expo 

• National Association of Asian MBAs Annual Leadership Conference 

• National LGBT Bar Association Lavender Law Conference 

• National Association of Minority and Women Owned Law Firms Annual Meeting 

• Minority Corporate Counsel Association Annual Diversity Conference 

• Corporate Counsel Women of Color Annual Career Strategies Conference 

Cost-Benefit Analyses 

We are keenly aware that our rules have both costs and benefits, and that the 

steps we take to protect the investing public also impact financial markets and industry participants who must comply with our rules. This is truer than ever given 

the scope, significance and complexity of the Dodd-Frank Act requirements. Our Di-
77 

68 After reviewing cost benefit analyses included in six of our Dodd-Frank Act rulemaking releases, the SEC’s Inspector General issued a report in June 2011. While the Office of Inspector 

General (‘‘OIG’’) is continuing to review the Commission’s cost benefit analyses, this report concluded that ‘‘a systematic cost-benefit analysis was conducted for each of the six rules reviewed. 

Overall, [the OIG] found that the SEC formed teams with sufficient expertise to conduct a comprehensive and thoughtful review of the economic analysis of the six proposed released that [the 

OIG] scrutinized in [its] review.’’ See U.S. SEC Office of the Inspector General, Report of Review 

of Economic Analyses Performed by the Securities and Exchange Commission in Connection with 

Dodd-Frank Rulemakings (June 13, 2011) http://www.sec-oig.gov/Reports/AuditsInspections/ 

2011/Reportl6l13l11.pdf at 43. We look forward to continuing to work with the OIG as it 

conducts a further review. 69 As discussed below, this resource gap was highlighted in the report prepared by the Boston 

Consulting Group pursuant to Section 967 of the Act. 70For instance, the Dodd-Frank Act also established a $50 million SEC Reserve Fund to allow 

the SEC to invest in multi-year IT projects and respond to unexpected market events (such as 

the May 6th market plunge). If this fund is eliminated or the SEC is not permitted to access 

the fund, it would have significant consequences for important IT projects, such as modernizing 

the SEC’s EDGAR system and www.sec.gov to strengthen business processes, enhance their usefulness for the public and for SEC staff, and reduce long-term operations and maintenance costs. 

Without these investments, our ability to resolve longstanding inadequacies in these systems 

and bring important benefits to the investing public would be significantly hindered. 

vision of Risk, Strategy, and Financial Innovation (‘‘RSFI’’) directly assists in the 

rulemaking process by helping to develop the conceptual framing for, and assisting 

in the subsequent writing of, the economic analysis sections. 

Economic analysis of agency rules considers the direct and indirect costs and benefits of the Commission’s proposed regulations against alternative approaches, including, the effects on competition, efficiency and capital formation. Analysis of the 

likely economic effects of proposed rules, while critical to the rulemaking process, 

can be challenging. Certain costs or benefits may be difficult to quantify or value 

with precision, particularly those that are indirect or intangible. In light of recent 

court decisions, RSFI and the rule writing divisions are examining potential improvements in the economic analysis the SEC employs in rulemaking. Although the 

existing procedures and policies are designed to provide a rigorous and transparent 

economic analysis, we are taking steps to improve this process so that future rules 

are consistent with best practices in economic analysis. 

When engaging in rulemaking, the Commission invites the public to comment on 

our analysis and provide any information and data that may better inform our decisionmaking. In adopting releases, the Commission responds to the information provided and revises its analysis as appropriate. This approach promotes a regulatory 

framework that strikes the right balance between the costs and the benefits of regulation.68

Funding for Implementation of the Dodd-Frank Act 

The provisions of the Dodd-Frank Act expand the SEC’s responsibilities and will 

require significant additional resources to fully implement the law. To date, the SEC 

has proceeded with the first stages of implementation without the necessary additional funding. As described above, implementation up to this point has largely involved performing studies, analysis, and the writing of rules. These tasks have 

taken staff time away from other responsibilities, and have been done almost entirely with existing staff and without sufficient investments in areas such as information technology. 

It is, of course, incumbent upon us to use our existing resources efficiently and 

effectively as we strive to fulfill statutory mandates, protect investors and achieve 

our mission. That said, the new responsibilities assigned to the agency under the 

Dodd-Frank Act are so significant that they cannot be achieved solely by wringing 

efficiencies out of the existing budget without also severely hampering our ability 

to meet our existing responsibilities.69

If the SEC does not receive additional resources, many of the issues highlighted 

by the financial crisis and which the Dodd-Frank Act seeks to fix will not be adequately addressed, as the SEC will not be able to build out the technology and hire 

the industry experts and other staff desperately needed to oversee and police these 

new areas of responsibility.70

The Dodd-Frank Act requires that the SEC collect transaction fees to offset the 

annual appropriation to the SEC. Accordingly, regardless of the amount appropriated to the SEC, the appropriation will be fully offset by the fees that we collect 

and therefore will have no impact on the Nation’s budget deficits. 

Section 967 Organizational Assessment 

Section 967 of the Act directed the agency to engage the services of an independent consultant to study a number of specific SEC internal operations. Boston 
78 

Consulting Group, Inc. (‘‘BCG’’) performed the assessment and provided recommendations earlier this spring. Since that time, we have undertaken a comprehensive approach to assessing the recommendations, with the work organized 

around four principal goals: optimizing the agency’s mission and structure; strengthening capabilities; improving controls and efficiency; and enhancing the workforce. 

Between May and November of this year we have focused on the program infrastructure, and we have created 17 distinct working groups that have analyzed various components of the BCG recommendations. The work streams are led by senior 

SEC staff members, each tasked with developing the proposed agency approach to 

a specific BCG recommendation. Additionally, we have created an Executive Steering Committee (ESC) comprised of cross-agency senior leadership to guide the efforts of the work streams, expand the approaches to the broader Commission, and 

ultimately recommend approval of each approach to me. Many of the working 

groups currently are preparing recommendations for consideration by the ESC, and 

we anticipate implementing many of these approaches in early 2012. 

We have already made progress on implementing several of the BCG report recommendations, including: 

• redesigning the Office of Information Technology to emphasize increased alignment with internal clients, improved coordination with IT groups located within 

the program offices, and increased efficiencies through centralization of application development and project management; 

• establishing a Continuous Improvement Program to systemically reduce unnecessary costs throughout the organization; 

• conducting comprehensive assessments of the Office of Administrative Services, 

Office of Financial Management, and Office of Human Resources operations; 

• implementing a new performance management system and conducted extensive 

staff training to assist with the transition to the new system; 

• empowering the Chief Operating Officer (OCOO) by consolidating the former 

Office of the Executive Director under the OCOO organization; and 

• focusing our limited external hiring opportunities on filling strategic, high priority skill vacancies, to include obtaining specialized industry expertise in areas 

such as over the counter derivatives. 

It is important to remember that the BCG study estimated that between $42 and 

$55 million would be required over an approximately 2-year period to fully implement their recommendations. This cost estimate, however, also does not include the 

significant amount of SEC staff time that would be needed to accomplish this. We 

recognize that implementation of many of the ideas in the BCG study will require 

a long-term commitment and sustained effort over several years to successfully implement. We are committed to an open and transparent process, and consistent with 

the statute we intend to report to Congress on a regular basis on the actions we 

take in response to the study. 

Conclusion 

Though the SEC’s efforts to implement the Dodd-Frank Act have been extensive, 

we know that there is still work left to be done and we are committed to finishing 

the job. Thank you for inviting me to share with you our progress to date and our 

plans going forward. I look forward to answering your questions. 

PREPARED STATEMENT OF GARY GENSLER 

CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION

DECEMBER 6, 2011 

Good morning Chairman Johnson, Ranking Member Shelby and Members of the 

Committee. I thank you for inviting me to today’s hearing on implementation of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act. I also thank my fellow Commissioners and CFTC staff for their hard work and commitment on implementing the legislation. 

Lessons of 2008 

Three years ago, the financial system failed, and the financial regulatory system 

failed as well. We are still feeling the aftershocks of these twin failures. 

There are many lessons to be learned from the crisis. Foremost, when financial 

institutions fail, real people’s lives are affected. More than eight million jobs were 

lost, and the unemployment rate remains stubbornly high. Millions of Americans 
79 

lost their homes. Millions more live in homes that are worth less than their mortgages. And millions of Americans continue struggling to make ends meet. 

Second, it is only with the backing of the Government and taxpayers that many 

financial institutions survived the 2008 crisis. A perverse outcome of this crisis may 

be that people in the markets believe that a handful of large financial firms will— 

if in trouble—have the backing of taxpayers. We can never ensure that all financial 

institutions will be safe from failure. Surely, some will fail in the future because 

that is the nature of markets and risk. When these challenges arise though, it is 

critical that taxpayers are not forced to pick up the bill—financial institutions must 

have the freedom to fail. 

Third, high levels of debt—and particularly short-term funding at financial institutions—was at the core of the 2008 crisis. When market uncertainty grows, firms 

quickly find that their challenges in securing financing, so called problems of ‘‘liquidity,’’ threaten their solvency. 

Fourth, the financial system is very interconnected—both here at home and 

abroad. Sober evidence from 2008 was AIG’s swaps affiliate, AIG Financial Products, which had its major operations in London. When it failed, U.S. taxpayers paid 

the price. We must ensure that Europe’s ongoing debt crisis does not pose a similar 

risk to the U.S. economy. 

Lastly, while the 2008 crisis had many causes, it is evident that swaps played a 

central role. 

Swaps added leverage to the financial system with more risk being backed by less 

capital. They contributed, particularly through credit default swaps, to the bubble 

in the housing market. They contributed to a system where large financial institutions were considered not only too big to fail, but too interconnected to fail. Swaps— 

developed to help manage and lower risk for end users—also concentrated and 

heightened risk in the financial system and to the public. 

Dodd-Frank Reform 

Congress and the President responded to the lessons of the 2008 crisis—they 

came together to pass the historic Dodd-Frank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act). 

The law gave the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) oversight of the more than $300 trillion 

swaps market. That’s over $20 of swaps for every dollar of goods and services produced in the U.S. economy. At such size and complexity, it is essential that these 

markets work for the benefit of the American public; that they are transparent, 

open and competitive; and that they do not allow excessive risk to spread through 

the economy. 

The CFTC has benefited from significant public input throughout the rule-writing 

process. We have received more than 25,000 comment letters. CFTC staff and Commissioners have met more than 1,100 times with market participants and members 

of the public to discuss the rules, and have held more than 600 meetings with domestic and foreign regulators. We also have conducted 14 public roundtables on 

Dodd-Frank, many of them with the SEC. 

The CFTC has substantially completed the proposal phase of Dodd-Frank rules. 

We have held 21 public meetings and issued more than 50 proposed rules on the 

many important areas of reform called for by the new law, including transparency, 

lowering risk through clearing, market integrity and regulating swap dealers. 

The agency turned the corner this summer and began finalizing rules to make the 

swaps marketplace more open and transparent for participants and safer for taxpayers. To date, we have finished 20 rules, and we have a full schedule of public 

meetings into next year. 

FSOC 

To help protect the public, the Dodd-Frank Act included the establishment of the 

Financial Stability Oversight Council (FSOC). This Council is an opportunity for 

regulators—now and in the future—to ensure that the financial system works better 

for all Americans. There has been a tremendous amount of coordination and consultation amongst the eight FSOC agencies on the Dodd-Frank rule-writing process, 

and the CFTC will continue to work closely with other FSOC members as we finalize additional important rules. 

In July, the FSOC approved a rule enabling the Council to identify and designate 

systemically important financial market utilities, including clearinghouses. Comprehensive and robust regulatory oversight of clearinghouses, in particular their 

risk management activities, is essential to our country’s financial stability. This rule 

complements the CFTC’s final rule establishing risk management and other regulatory requirements for derivatives clearing organizations. 
80 

Promoting Transparency 

The more transparent a marketplace is, the more liquid it is and the more competitive it is. When markets are open and transparent, prices are more competitive, 

markets are more efficient, and costs are lowered for companies and their customers. Transparency benefits the entire economy. 

To increase market transparency, we have completed rules that, for the first time, 

provide a detailed and up-to-date view of the physical commodity swaps markets so 

regulators can police for fraud, manipulation and other abuses. The large trader reporting rule we finalized establishes that clearinghouses and swap dealers must report to the CFTC information about large trader activity in the physical commodity 

swaps markets. The rule went into effect November 21. For decades, the American 

public has benefited from the Commission’s gathering of large trader data in the futures market, and now will benefit from the CFTC’s new ability to monitor swaps 

markets for agricultural, energy and metal products. 

We also finished a rule, which became effective October 31, establishing registration and regulatory requirements for Swap Data Repositories, which will gather 

data on all swaps transactions. By contrast, in the fall of 2008, there was no required reporting about swaps trading. 

Moving forward, we are working to finish rules relating to the specific data that 

will have to be reported to the CFTC. These reforms will provide the Commission 

with a comprehensive view of the entire swaps market, furthering our ability to 

monitor market participants and to protect against systemic risk. 

We also are looking to soon finalize real-time reporting rules, which will give the 

public critical information on transactions—similar to what has been working for 

decades in the securities and futures markets. 

In addition, we are working on final regulations for trading platforms, such as 

Designated Contract Markets, Swap Execution Facilities and Foreign Boards of 

Trade—all of which will help make the swaps market more open and transparent. 

Yesterday, the Commission approved a final rule implementing the Dodd-Frank provision for registration of Foreign Boards of Trade. 

Lowering Risk Through Clearing 

Another significant Dodd-Frank reform is lowering risk to the economy by mandating central clearing of standardized swaps. Centralized clearing will protect 

banks and their customers from the risk of a default by one of the parties to a swap. 

Clearinghouses reduce the interconnectedness between financial entities. They have 

lowered risk for the public in the futures markets since the late 19th century. In 

October, we finalized a significant rule establishing risk management and other regulatory requirements for derivatives clearing organizations. 

Yesterday, the CFTC approved a final rule enhancing customer protections regarding where clearinghouses and futures commission merchants can invest customer funds. We also are looking to soon finalize a rule on segregation for cleared 

swaps. Segregation of funds is the core foundation of customer protection. Both of 

these rules are critical for the safeguarding of customer funds. 

In addition, after the first of the year, we hope to consider finalizing rules that 

will broaden access to the markets, including straight-through processing, or sending transactions immediately to the clearinghouse upon execution; and the exemption for nonfinancial end users. The Dodd-Frank Act does not require nonfinancial 

end users that are using swaps to hedge or mitigate commercial risk to bring their 

swaps into central clearing. The law leaves that decision to individual end users. 

In addition, the CFTC’s proposal on margin states that nonfinancial end users will 

not be required to post margin for their uncleared swaps. Last, the Dodd-Frank Act 

maintains a company’s ability to hedge particularized risk through customized 

transactions. 

Market Integrity 

To enhance market integrity, we finished an important rule Congress included in 

the Dodd-Frank Act giving the Commission more authority to effectively prosecute 

wrongdoers who recklessly manipulate the markets. The rule, which went into effect 

August 15, broadens the types of enforcement cases the Commission can pursue and 

improves the agency’s chances of prevailing over wrongdoers. The new authority expands the CFTC’s arsenal of enforcement tools so the Commission can be a more 

effective cop on the beat. 

We also finalized a rule to reward whistleblowers for their help in catching fraud, 

manipulation and other misconduct in the financial markets, which will enhance our 

ability to protect the public. It went into effect October 24. 

In addition, we recently completed speculative position limit rules that, for the 

first time, limit aggregate positions in the futures and swaps market. 
81 

To further enhance market integrity, we are looking to finalize guidance on disruptive trading practices, as well as regulations for trading platforms. 

Regulating Dealers 

It is also crucial that swap dealers are comprehensively regulated to protect their 

customers and lower risk to taxpayers. 

The CFTC is working closely with the SEC and other regulators to finalize a rule 

further defining the term swap dealer. We also are planning to finalize a rule on 

the registration process for swap dealers and major swap participants. The agency 

is looking to soon consider final external business conduct rules to establish and enforce robust sales practices in the swaps markets. We also will consider final internal business conduct rules, which will lower the risk that dealers pose to the economy. In addition, we have been working closely with other regulators, both domestic 

and international, on capital and margin rules. 

Implementation Phasing 

The CFTC has reached out broadly on what we call ‘‘phasing of implementation,’’ 

which is the timeline that our rules will take effect for various market participants. 

We held a roundtable with the SEC in May to hear directly from the public about 

the timing of implementation. Prior to the roundtable, CFTC staff released a document that set forth concepts the Commission may consider on effective dates of final 

rules, and we offered a 60-day public comment file to hear specifically on this issue. 

The roundtable and public comment letters helped inform the Commission as to 

what requirements can be met sooner and which ones will take a bit more time. 

In September, the Commission issued for public comment a proposal for phasing 

in compliance with the swap clearing and trading mandates. We also proposed an 

implementation schedule for previously proposed rules on swap trading documentation requirements and margin requirements for uncleared swaps. These proposals 

are designed to smooth the transition from an unregulated market structure to a 

safer market structure. As we progress in finishing major rules, we will continue 

looking at appropriate timing for compliance, which balances the Commission’s desire to protect the public while providing adequate time for industry to comply with 

these new rules. 

In addition, much like we did on July 14, we will soon consider further exemptive 

relief regarding the effective dates of certain Dodd-Frank Act provisions. Commission staff is working very closely with the SEC on rules relating to entity and product definitions. Staff is making great progress, and we anticipate taking up the further definition of entities in the near term and product definitions shortly thereafter. As these definitional rulemakings have yet to be finalized, the order would 

provide relief beyond December 31, 2011. 

International Coordination 

The global nature of the swaps markets makes it imperative that the United 

States consults and coordinates with foreign authorities. The Commission is actively 

communicating internationally to promote robust and consistent standards and 

avoid conflicting requirements, wherever possible. CFTC staff is sharing many of 

our comment summaries and drafts of final rules with international regulators. We 

are engaged in bilateral discussions with foreign authorities, and have ongoing dialogues with regulators in the European Union (EU), Japan, Hong Kong, Singapore 

and Canada. On Thursday, Chairman Schapiro and I will meet with the CFTC’s 

counterparts from these four countries and the EU to discuss how to regulate the 

global swaps market in a consistent, comprehensive and coordinated manner. 

The Commission also participates in numerous international working groups regarding swaps, including the International Organization of Securities Commissions 

Task Force on OTC Derivatives, which the CFTC co-chairs. In August, the CFTC 

and SEC staff held a daylong, joint roundtable to discuss international issues related to implementation of Title VII of the Dodd-Frank Act. I anticipate that the 

Commission will explicitly seek public input on the extraterritorial application of 

Title VII of the Dodd-Frank Act. 

Resources 

As the CFTC finalizes these Dodd-Frank rules, the agency will need additional 

resources consistent with the CFTC’s significantly expanded mission and scope. The 

swaps market is seven times the size of the futures market that we currently oversee. 

The agency has the necessary funding to complete rules called for in the DoddFrank Act. Moving forward though, the CFTC will need greater resources to protect 

the public. With just over 700 staff members, we are but 10 percent larger than our 

peak in the 1990s. Since then, though, the futures market has grown more than 
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1Two remaining rules have been postponed for practical reasons. First, the rule defining the 

criteria for consolidated revenues for financial companies predominantly engaged in financial activities has been postponed to ensure consistency with a similar rule being issued by the Board 

of Governors of the Federal Reserve. Second, the FDIC has postponed the rule offsetting the 

effect on institutions with less than $10 billion in assets of requiring that the DIF reserve ratio 

reach 1.35 percent by September 30, 2020 (rather than 1.15 percent by 2016, as previously required) to better enable the FDIC to take into account prevailing industry conditions at the time 

of the offset. 

fivefold, and Congress added oversight of the swaps market, which is far more complex and seven times the size of the futures market we currently oversee. 

Without sufficient funding for the Commission, the Nation cannot be assured that 

this agency can oversee the swaps market and enforce rules that promote transparency, lower risk and protect against another crisis. 

Conclusion 

The CFTC is working to complete our rule-writing under the Dodd-Frank Act 

thoughtfully—not against a clock. 

But until the agency implements and enforces these new rules, the public remains 

unprotected. 

This is why the CFTC is working so hard to ensure that swaps-market reforms 

promote more open and transparent markets, lower costs for companies and their 

customers, and protect taxpayers. 

Thank you, and I would be happy to take questions. 

PREPARED STATEMENT OF MARTIN J. GRUENBERG 

ACTING CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION

DECEMBER 6, 2011 

Chairman Johnson, Ranking Member Shelby and Members of the Committee, 

thank you for the opportunity to testify on the Federal Deposit Insurance Corporation’s continued implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). 

It has now been nearly 17 months since enactment of the Dodd-Frank Act. The 

Act gives financial regulators important authorities to enhance financial stability 

and to manage the regulatory challenges posed by large, complex systemically important financial institutions (SIFIs). The Act also provides for a new SIFI resolution framework that includes an orderly liquidation authority and a requirement for 

SIFIs to submit resolution plans that demonstrate how they can be resolved through 

the bankruptcy process. These changes give regulators better tools to manage the 

potential risks and failure of complex financial institutions. A credible capacity to 

place a SIFI into an orderly resolution process is essential to subjecting these companies to meaningful market discipline. 

The Act specifically provides the FDIC new enhanced authority to manage the deposit insurance fund (DIF) as well as to oversee the orderly resolution of systemically important financial institutions. My testimony today will focus on the progress 

the FDIC has made in implementing these important provisions of the Dodd-Frank 

Act, including international efforts on systemic resolution planning. The testimony 

will also provide an update on implementation of bank capital provisions of the 

Dodd-Frank Act, as well as an overview of progress on important interagency rulemaking efforts. 

Core FDIC Rulemakings 

The Dodd-Frank Act granted the FDIC sole rulemaking authority in two primary 

areas: orderly liquidation authority and deposit insurance reforms. Within a year 

after passage of the Dodd-Frank Act, the FDIC had completed five major final rules 

for which the Act granted it sole rulemaking authority.1 I will discuss these completed rules in more detail below. 

Deposit Insurance Reforms and Strengthening the Deposit Insurance Fund 

The FDIC moved expeditiously to implement changes to the FDIC’s deposit insurance program required by the Dodd-Frank Act. In August 2010, the FDIC issued 

a final rule to make permanent the increase in the standard coverage limit to 

$250,000. In December 2010, the FDIC adopted a final rule amending its deposit 

insurance regulations to provide for unlimited deposit insurance for ‘‘noninterestbearing transaction accounts’’ through December 31, 2012. 

Changing the Assessment Base. In February 2011, the FDIC adopted a final 

rule redefining the deposit insurance assessment base as average consolidated total 
83 

assets minus average tangible equity. The deposit insurance assessment base was 

previously defined as domestic deposits. 

As Congress intended, the change in the assessment base reduced the share of 

assessments paid by community banks compared to the largest institutions, which 

rely less on domestic deposits for their funding than do smaller institutions. Second 

quarter 2011 assessments for banks with less than $10 billion in assets were about 

a third (about $340 million) lower in aggregate than first quarter assessments. This 

shift in the share of assessments better reflects each group’s share of industry assets. The change in the assessment base did not materially affect the overall 

amount of assessment revenue collected. In fact, assessments for the second quarter 

of 2011 (the quarter when the new rule took effect) were nearly the same as assessments for the prior quarter. 

Deposit Insurance Fund Management. Since year-end 2007, 412 FDIC-in- sured institutions failed resulting in total estimated losses of $86 billion to the DIF. 

The DIF balance hit a low of negative $20.9 billion in the fourth quarter of 2009. 

The FDIC took a number of actions to stabilize the DIF and deal with the losses 

associated with the high volume of failures, including increasing assessment rates, 

imposing a special assessment and requiring that the industry prepay assessments. 

The DIF balance increased throughout 2010 and turned positive again as of June 30 of this year. As of September 30, 2011, the fund balance was $7.8 billion (0.12 

percent of estimated insured deposits). The Dodd-Frank Act requires that the DIF 

reserve ratio reach 1.35 percent by September 30, 2020. 

The actions undertaken to stabilize the DIF were taken before passage of the 

Dodd-Frank Act. The Dodd-Frank Act, however, gave the FDIC enhanced authority 

to manage the DIF. In particular, the Act gave the FDIC substantial flexibility to 

set reserve ratio targets and pay dividends. Using this flexibility, the FDIC has 

adopted a long-term fund management plan designed to maintain a positive fund 

balance even during a banking crisis while preserving steady and predictable assessment rates through economic and credit cycles. In December 2010, the FDIC set 

a long-term reserve ratio target of 2 percent. In February 2011, also pursuant to 

the plan, the FDIC adopted lower assessment rates that will take effect when the 

DIF reserve ratio reaches 1.15 percent, with progressively lower assessment rates 

if the reserve ratio exceeds 2 percent or 2.5 percent. 

Orderly Resolution of Failed Systemically Important Financial Institutions 

In addition to issuing rules to implement deposit insurance and DIF management 

reforms, the FDIC has made significant progress in adopting regulations and in conducting ongoing planning to facilitate implementation of its new orderly liquidation 

authority for systemically important financial institutions (SIFIs). These responsibilities include a requirement for firms to maintain resolution plans that will give regulators additional tools to manage the failure of large, complex enterprises, and an 

orderly liquidation authority to resolve bank-holding companies and, if necessary, 

nonbank financial institutions. 

Orderly Liquidation Authority. Title II of the Dodd-Frank Act vests the FDIC 

with orderly liquidation authority (OLA) that is similar in many respects to the authorities it already has for insured depository institutions. On July 6, 2011, the 

FDIC issued a final rule on OLA that provides the regulatory framework defining 

how creditors will be treated and how claims will be resolved in an FDIC receivership under the Dodd-Frank Act. Many aspects of the process are similar to that in 

bankruptcy—and creditors will be exposed to losses under the statutory priority of 

claims. However, unlike bankruptcy, an orderly resolution under the Dodd-Frank 

Act allows continuity of critical operations both to prevent a freezing-up of the financial system and to maximize the value recoverable from the assets of the failed 

company. These rules provide the key elements of the framework for implementing 

OLA, if it is ever necessary. 

While the adoption of the final rule completes a large portion of the rulemaking 

required with respect to the exercise of OLA under the Dodd-Frank Act, there is 

still work to be done. The FDIC is currently working on other rules and guidance: 

• The FDIC is completing a proposed rule to be issued in consultation with the 

Department of the Treasury regarding certain key definitions for determining 

which organizations are financial companies within the meaning of the DoddFrank Act. 

• The FDIC is working with the Securities and Exchange Commission (SEC) on 

a joint regulation implementing the Title II authority to resolve covered brokerdealers. 

• The FDIC is working toward a joint rule ensuring that appropriate records are 

available with respect to all of a financial institution’s derivative transactions. 
84 

The FDIC’s similar existing regulation requiring troubled insured institutions 

to maintain records on derivative contracts is being used as a template for this 

new joint rule. 

• The FDIC is working on other rulemakings required by Title II of the Act, including a rule governing eligibility of prospective purchasers of assets of failed 

financial institutions. 

• The FDIC is working on additional guidance to the industry in response to 

questions and comments received on areas such as the creation, operation, and 

termination of bridge financial companies, and the implementation of certain 

minimum recovery requirements established under the Act. 

Financial Stability for Systemically Important Financial Institutions 

In addition to the FDIC’s OLA, the Dodd-Frank Act provided regulators with tools 

to assist in ensuring financial stability, including the requirement for companies to 

provide resolution plans, and the authority for certain firms to be designated for 

oversight by the Board of Governors of the Federal Reserve (FRB). 

The Act’s provisions are designed so that the OLA would be used only as a last 

resort. SIFIs and large bank-holding companies are required to prepare a resolution 

plan that would detail how the firm could be resolved under the Bankruptcy Code. 

If the firms are successful in their resolution planning, then the OLA would only 

be used in the rare instance where resolution under the Bankruptcy Code would 

have serious adverse effects on U.S. financial stability. 

Resolution Plans. The FDIC has adopted two rules regarding resolution plans. 

The first resolution plan rule, jointly issued with the FRB, with an effective date 

of November 30, 2011, implements the requirements of Section 165(d) of the DoddFrank Act. This section requires bank-holding companies with total consolidated assets of $50 billion or more and certain nonbank financial companies that the Financial Stability Oversight Council (FSOC) designates as systemic, to develop, maintain 

and periodically submit resolution plans to regulators. The plans will detail how 

each covered company would be resolved under the U.S. Bankruptcy Code, including 

information on their credit exposure, cross-guarantees, organizational structures, 

and a strategic analysis describing the company’s plan for rapid and orderly resolution. 

The resolution planning undertaken in connection with the two rules will complement the internal planning process that the FDIC began upon enactment of the 

Dodd-Frank Act to prepare for the orderly resolution of a systemically significant 

institution under the OLA. While the OLA planning process is well underway, and 

those plans are in an advanced stage of development, they continue to be refined. 

The information obtained as a result of the resolution plan submissions under the 

two rules will serve as a significant source of information for the further development of the FDIC’s OLA plans. 

Submission of resolution plans will be staggered based on the asset size of a cov- ered company’s U.S. operations. Companies with $250 billion or more in nonbank 

assets must submit plans on or before July 1, 2012; companies with $100 to $250 

billion or more in total nonbank assets must submit plans on or before July 1, 2013; 

and all other covered companies that predominantly operate through one or more 

insured depository institutions must submit plans on or before December 31, 2013. 

A company’s plan is required to be updated annually as well as after a company 

experiences a material event. 

Following submission of a plan, the FDIC and the FRB will review the plan to 

determine if it is not credible or would not facilitate an orderly resolution of the covered company under the Bankruptcy Code. If a resolution plan does not meet the 

statutory standards, after an opportunity to remedy its deficiencies, the agencies 

may jointly decide to impose more stringent regulatory requirements on the covered 

company. Further, if, after 2 years following the imposition of the more stringent 

standards, the resolution plan still does not meet the statutory standards, the FDIC 

and the FRB may, in consultation with the appropriate FSOC member, direct a 

company to divest certain assets or operations. 

The FDIC also issued an Interim Final Rule in September 2011 requiring any FDIC-insured depository institution with assets of $50 billion or more to develop, 

maintain and periodically submit contingency plans outlining how the FDIC would 

resolve the depository institution through the FDIC’s traditional resolution powers 

under the Federal Deposit Insurance Act. While not required by the Dodd-Frank 

Act, this complements the joint final rule on resolution plans for SIFIs. 

These two resolution plan rulemakings are designed to ensure comprehensive and 

coordinated resolution planning for both the insured depository and its holding company and affiliates in the event that an orderly liquidation is required. Both of these 

resolution plan requirements will improve efficiencies, risk management and contin-
85 

gency planning at the institutions themselves. We expect that the process of developing these plans will be a dialogue between the regulators and the firm. It is not 

a simple ‘‘check-the-box’’ exercise, and it must take into account each firm’s unique 

characteristics. The planning process must be an interactive dialogue, especially for 

the largest and most complicated firms. Ultimately, the goal is to have an integrated 

process of supervision and resolution that will reduce the risk of failure, but that 

will enable the FDIC to prepare to carry out an orderly resolution if necessary. 

The FDIC has initiated with the FRB a series of joint communications that will 

provide institutions with additional guidance on how initial resolution plans should 

be drafted. Covered companies have been informed that the planning process will 

be iterative and that frequent communications are expected as resolution plans are 

developed. 

Implementation of Joint Rules on SIFI Designation. Some of the key purposes of the FSOC, chaired by the Secretary of the Treasury, is to facilitate regulatory coordination and information sharing among its member agencies, to identify 

and respond to emerging risks to financial stability, and to promote market discipline. The FSOC is also responsible for designating SIFIs for heightened supervision by the FRB. 

In October of 2010, the FSOC issued an advanced notice of proposed rulemaking 

and, in January of 2011, followed up with a notice of proposed rulemaking describing the processes and procedures that will inform the FSOC’s designation of 

nonbank financial companies under the Dodd-Frank Act. In response to concerns 

raised by commenters, the FSOC issued a second notice of proposed rulemaking and 

proposed interpretive guidance on October 18, 2011 to clarify the process for SIFI 

designations, to specify additional details, and to enhance the transparency of the 

designation process. 

The second notice of proposed rulemaking and interpretive guidance supersedes 

the prior notice of proposed rulemaking, and describes the manner in which the 

FSOC intends to apply the statutory standards and considerations and the process 

and procedures that the FSOC intends to follow in making SIFI designations. Under 

the second notice of proposed rulemaking, nonbank financial companies will generally be assessed using a three-stage process where each stage will involve an increasingly in depth evaluation and analysis. The evaluation will be based on both 

quantitative thresholds and qualitative factors. The designation process will also 

analyze the extent to which the company can be resolved in bankruptcy, which is 

key to whether a company should be designated as a SIFI. 

Once designated, SIFIs will be subject to heightened supervision by the FRB and 

required to maintain detailed resolution plans as discussed above. 

International Efforts 

In the event of a cross-border resolution of a covered financial company, Section 

210 of the Dodd-Frank Act requires the FDIC to ‘‘coordinate, to the maximum extent possible’’ with appropriate foreign regulatory authorities. An important element 

of the FDIC’s implementation of the Dodd-Frank Act has been the creation of a new 

Office of Complex Financial Institutions. The international outreach and coordination group in this office will coordinate the FDIC’s efforts with those in other jurisdictions charged with similar responsibilities. 

While no international framework currently exists for the insolvency and resolution of financial institutions, the FDIC and other U.S. regulators have taken the 

lead in promoting consistent best practices in international insolvencies and resolutions. The structures of international financial companies are often highly complex, 

and the issues associated with their resolution can be challenging. With planning 

and cross-border coordination, however, disruptions to global financial markets can 

be minimized. 

The crises in 2008, and the current international instability, demonstrate the necessity for closer cooperation in supervision and in the resolution of cross-border institutions. Given our responsibility for the resolution of a global SIFI, this is a major 

focus of the FDIC. To achieve this goal, the FDIC and other U.S. regulators are pursuing a number of efforts. 

First, the FDIC and its colleagues are working through the Financial Stability 

Board (FSB) and the Basel Committee on Banking Supervision to promote greater 

harmonization of national laws governing resolutions and improved coordination. 

The FDIC co-chairs the Cross-Border Bank Resolution Group (CBRG) of the Basel 

Committee, which made specific recommendations for reforms to enhance resolution 

capabilities. These reforms focused on greater legal harmonization, improved information sharing, and market structure enhancements that would make the global financial system more resilient. Last year, the FSB and the G–20 leaders endorsed 

these recommendations and tasked the CBRG to assess progress. That progress re-
86 

port, released in July, identified a number of areas where significant improvements 

have been made, but also detailed areas requiring renewed national and international effort. 

In October, the FSB released a set of ‘‘Key Attributes of Effective Resolution Regimes for Financial Institutions.’’ These Key Attributes build on the CBRG recommendations and expand their scope to include nonbank financial institutions. In 

fact, the Key Attributes substantively build upon the framework included in the 

Dodd-Frank Act. Now that the Key Attributes were endorsed by the G–20 last 

month, all of the major financial centers are required to move toward a resolution 

framework to resolve systemic financial institutions in an orderly manner that 

places losses on shareholders and unsecured creditors. A number of key jurisdictions, including the United Kingdom and the European Union, have made significant progress. 

Second, the FDIC and its U.S. colleagues are working through Crisis Management 

Groups (CMGs) for all of the global SIFIs to enhance institution-specific planning 

for any future resolution. The CMGs allow the regulators to identify impediments 

to more effective resolution based on the unique characteristics of a particular financial institution. This work, initiated under the auspices of the FSB, has been underway for almost 2 years for the major U.S. and U.K. institutions; other countries are 

moving rapidly forward as well. 

Finally, the FDIC is actively engaged in working with individual foreign regulators to explore more effective means of cooperation. This work entails, initially, 

gaining a clear understanding of how U.S. and foreign laws governing cross-border 

institutions will interact in any crisis. The FDIC is working with these regulators 

to identify the most effective ways to implement the OLA for a U.S. cross-border 

institution under the host country’s applicable laws. 

In addition to efforts to achieve harmonization of legal frameworks, the FDIC has 

been engaged in cooperative resolution planning with supervisory and resolution authorities in foreign countries. In the wake of the financial crisis, there has been an 

increased international awareness of the need for greater inter-jurisdictional cooperation in the planning for resolution of specific cross-border institutions. Our initial interactions with foreign authorities have proven very promising, and the FDIC 

will continue to pursue these efforts vigorously. 

Similar to the United States, other countries have recognized the need to have 

a resolution regime separate from the bankruptcy process to resolve large, international financial companies in a manner that can take into account the impact on 

financial stability. 

Promoting Financial Stability by Strengthening Bank Capital. The FDIC 

strongly supports recent international efforts to strengthen banks’ capital adequacy 

through the Basel III standards and recent agreements regarding capital held by 

so-called ‘‘Global Systemically Important Banks.’’ 

The FDIC is working closely with the other Federal banking agencies to complete 

a notice of proposed rulemaking seeking comment on domestic implementation of 

the Basel III agreement published by the Basel Committee on Banking Supervision 

(BCBS) in December 2010. The agencies are also working to finalize changes to the 

Market Risk Capital Rule agreed to by the BCBS in 2009. The agencies have 

reached agreement on the notice of proposed rulemaking to implement the internationally agreed changes to the Market Risk Rule in a manner consistent with certain requirements of the Dodd-Frank Act, as described in more detail below. The 

FDIC Board of Directors is scheduled to consider this proposal tomorrow. 

Section 939 of the Dodd-Frank Act requires the agencies to remove references to 

credit ratings from their regulations. There are many references to credit ratings 

in the agencies’ current capital regulations, as well as in Basel III and the 2009 

BCBS reforms to the Market Risk Rules. The agencies’ permissible investment regulations also reference credit ratings. Replacing these various references requires the 

development of credit risk metrics that identify gradations of risk in a consistent 

and supportable manner, and in a manner that can be reasonably implemented by 

a wide range of banks. Tomorrow, the FDIC Board will consider a specific proposed 

alternative to credit ratings that the agencies have developed for use by banks subject to the Market Risk Rule. Developing this proposal has been a challenging task, 

and marks an important step in fulfilling international regulatory capital agreements in a manner consistent with the Act. The FDIC Board will also be considering 

a notice of proposed rulemaking regarding permissible investments for savings associations, a rulemaking that will mirror the Office of the Comptroller of the Currency’s (OCC) recently published proposal regarding permissible investments for national banks. 
87 

2The rule was proposed by the Federal Reserve Board, the Office of the Comptroller of the 

Currency, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission, the Federal Housing Finance Agency, and the Department of Housing and Urban Development. 

Other Rules in Progress 

The FDIC is also working with other regulators on implementing several additional important parts of the Dodd-Frank Act. 

Volcker Rule. In October, the FDIC, jointly with the FRB, the OCC, and the 

SEC, issued a notice of proposed rulemaking requesting public comment on a proposed regulation implementing the Volcker Rule requirements of section 619 of the 

Dodd-Frank Act. The comment period closes on January 13, 2012. 

Risk Retention Rule. In March 2011, six agencies, including the FDIC, issued 

a notice of proposed rulemaking seeking comment on a proposal to implement Section 941 of the Act.2 The proposed rule would require sponsors of asset-backed securities to retain at least 5 percent of the credit risk of the assets underlying the securities and not permit sponsors to transfer or hedge that credit risk. The proposed 

rule would provide sponsors with various options for meeting the risk-retention requirements. It also provides, as required by Section 941, proposed standards for a 

Qualified Residential Mortgage (QRM) which, if met, would result in exemption 

from the risk retention requirement. During the comment period, which was extended to August 1, 2011, the agencies received numerous comment letters. The 

agencies are in the process of evaluating those comments. 

Margin and Capital Requirements for Covered Swap Entities. In May, the 

FDIC, jointly with the FRB, the OCC, the Farm Credit Administration, and the 

Federal Housing Finance Agency (FHFA), published a notice of proposed rulemaking that would impose margin requirements on certain swaps entered into by 

regulated entities as required under sections 731 and 734 of the Dodd-Frank Act. 

Since the issuance of the notice of proposed rulemaking, the FSB has initiated an 

effort to develop an international convergence in margin requirements and has 

asked the BCBS, in conjunction with the International Organization of Securities 

Commissions, to develop a consultation document by June 2012. The FDIC, along 

with the other banking agencies, is actively participating in the FSB initiative. In 

order to reduce competitive concerns, the agencies have decided to take into consideration, to the extent possible, the margin recommendations developed by this international initiative as they work toward the development of a final rule by mid-2012. 

Incentive Compensation. The FDIC continues to work with other agencies, including the Federal banking agencies, FHFA, and the SEC, to implement the incentive compensation requirements in section 956 of the Dodd-Frank Act. Section 956 

addresses a key safety and soundness issue that contributed to the recent financial 

crisis—that poorly designed compensation structures can misalign incentives and 

promote excessive risk-taking within financial organizations. 

In April 2011, the agencies jointly issued a notice of proposed rulemaking that 

would, among other things, prohibit compensation arrangements that are ‘‘excessive’’ or that ‘‘could lead to material financial loss’’ at a covered financial institution 

and enhance regulatory reporting of incentive-based compensation arrangements. 

Section 956 exempts approximately 7,000 institutions with less than $1 billion in 

total assets from its requirements. For larger institutions, those with $50 billion or 

more in total consolidated assets, the proposed rule would prescribe payment deferral and other compensation structure requirements for senior policymakers and 

other key employees. 

The agencies are in the process of considering public comments received on the 

proposed rule. 

Consumer Financial Protection Bureau Transition. The FDIC has been 

working cooperatively with the Consumer Financial Protection Bureau (CFPB) on 

several transition issues, including supervision and enforcement cases, procedures 

for consultations on future rulemakings and consumer complaint processing. Several 

FDIC employees worked temporarily at the CFPB to assist in its startup. The FDIC 

continues to meet with CFPB officials weekly to establish processes required by the 

Act, such as the sharing of draft examination reports for institutions where the 

CFPB has jurisdiction. 

Stress Tests. The FDIC has been coordinating with the FRB to develop a proposed rule governing stress tests for financial companies. These tests, required 

under section 165 of the Dodd-Frank Act, are an essential component of the collective effort to ensure that financial companies have the resilience required to weather a future crisis. 

Diversity. The Director of the FDIC’s Office of Minority and Women Inclusion 

is continuing work to develop diversity standards for the FDIC workforce and man-
88 

* 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. 

agement, and for increased participation of minority- and women-owned businesses 

in FDIC programs and contracts, as provided in the Dodd-Frank Act. This work continues efforts begun by the Office’s predecessor, the FDIC’s Office of Diversity and 

Economic Opportunity. 

FDIC Community Banking Initiatives 

Given the impact of the recent financial crisis on community banks and concerns 

raised about the potential effect of the Dodd-Frank Act on these institutions, the 

FDIC believes that there is value in taking a broad-based look at community banks 

and the issues that will affect their future. As the primary Federal regulator for the 

majority of community banks, the FDIC has developed a set of community banking 

initiatives to further its dialogue with the industry and better its understanding of 

the challenges and opportunities for community banks. 

As part of these initiatives, the FDIC will hold a national conference early next 

year that will focus on the future of community banks, their unique role in supporting our Nation’s economy, and the challenges and opportunities that they face 

in this difficult economic environment. Following the conference, the FDIC will organize a series of roundtable discussions with community bankers in each of the 

FDIC’s six regional offices around the country in which senior FDIC executives, including myself, will participate. 

The FDIC is also undertaking a major research initiative to examine a variety of 

issues related to community banks, including their evolution, characteristics, performance, challenges, and role in supporting local communities. The FDIC’s research 

agenda will cover topics such as changes in community bank size and geographic 

concentration over time, measuring the performance of community banks, and 

changes in community bank business models and cost structures. The research will 

also look at how trends in technology and the small business economy have affected 

community banks and the lessons for community banks from the current crisis. 

Also as part of these initiatives, the FDIC is continuing to look for ways to improve the effectiveness of its examination and rulemaking processes. The FDIC will 

seek to identify supervisory improvements and efficiencies that can be made while 

maintaining our supervisory standards. In particular, the FDIC is exploring enhancements to its offsite reviews, pre-examination planning processes, information 

requests and examination coordination. In addition, the FDIC is exploring communications strategies to update the industry on upcoming guidance and rulemakings 

that affect FDIC-supervised community banks in an organized and understandable 

way so that institutions can more effectively plan to meet their compliance obligations. The FDIC continues to ensure that examination guidance takes into account 

the size, complexity, and risk profile of each institution. To that end, the FDIC now 

includes a section in each Financial Institution Letter sent to insured depository institutions that describes its applicability to institutions with total assets of less than 

$1 billion. 

Conclusion 

Today’s testimony highlights the FDIC’s progress in implementing financial reforms authorized by the Dodd-Frank Act. While the FDIC has completed the fundamental rulemakings necessary to fulfill its responsibilities under the Act, there is 

considerable work to do. Throughout this process, the FDIC has sought input from 

the industry and the public, has worked cooperatively with fellow regulators, and 

has been transparent in its deliberations and rulemakings. The FDIC believes that 

successful implementation of the Act will represent a significant step forward in 

providing a foundation for a financial system that is more stable and less susceptible to crises in the future, and better prepared to respond to future crises. 

Thank you. I would be glad to respond to your questions. 

PREPARED STATEMENT OF JOHN WALSH 

ACTING COMPTROLLER OF THE CURRENCY

COMPTROLLER OF THE CURRENCY * 

DECEMBER 6, 2011 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, I 

appreciate the opportunity to provide the Committee with a progress report on the 

initiatives the Office of the Comptroller of the Currency (OCC) has undertaken to 

implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- 
89 

Frank Act or Dodd-Frank) since July 21, 2011. The Committee’s letter of invitation 

requests that I testify about any significant actions and rules proposed or finalized 

by the OCC since July 21, 2011. In particular, the Committee is interested in hearing about the OCC’s progress in carrying out its responsibilities with respect to the 

Volcker Rule, the integration of the Office of Thrift Supervision (OTS) into the OCC 

pursuant to Title III of the Dodd-Frank Act, risk retention provisions under Title 

IX of Dodd-Frank, and the OCC’s contributions to the Financial Stability Oversight 

Council (FSOC) and coordination with other member agencies. 

Accordingly, my testimony highlights the OCC’s work in the following key areas: 

• The integration of the functions of the former OTS with respect to Federal savings associations, and former OTS staff, into the OCC, and the companion effort 

to integrate, where appropriate, Federal savings association regulations and 

policies into the regulations and policies for national banks; 

• Our efforts to date to work with the Bureau of Consumer Financial Protection 

(CFPB) as it commences operations; 

• An update on the OCC’s contributions to, and participation in, the FSOC; 

• OCC efforts underway to implement the Dodd-Frank Act provisions that 

strengthen risk-based capital, leverage, and liquidity requirements; and 

• Our progress in regulatory implementation of certain other key Dodd-Frank Act 

provisions. 

I. OTS/OCC Integration 

General 

On July 21, 2011, Dodd-Frank transferred to the OCC all functions of the OTS 

relating to Federal savings associations, and the OCC assumed responsibility for the 

ongoing examination, supervision, and regulation of Federal savings associations. 

From an operational perspective, the integration of the OTS into the OCC has been 

successfully completed. We have fully integrated OTS staff into all departments of 

the OCC’s organizational structure. Combined examination teams have begun working on exams at national banks and Federal savings associations. Prior to July 21, 

2011, the OCC communicated extensively with the thrift industry to prepare for this 

transfer of responsibility from the OTS to the OCC. Since that time, we have continued to participate in a variety of outreach activities to maintain an active dialogue 

with Federal savings associations, including several national teleconferences on supervisory issues of specific interest to them. We also will continue and expand the 

former OTS advisory committees on mutual savings associations and minority institutions as venues for important input on the unique challenges facing those institutions. And, as new issues emerge, the OCC will continue to communicate regularly 

with the thrift industry to clarify our expectations and respond to its concerns. 

Integration of Regulations 

As I explained in my testimony before this Committee in July 2011, the OCC is 

in the process of undertaking a comprehensive, multi-phased review of its regulations, as well as those of the OTS, to eliminate duplication and reduce unnecessary 

regulatory burden. On July 21, 2011, the OCC issued a final rule revising certain 

OCC rules that are central to internal agency functions and operations to take into 

account the transfer to the OCC of jurisdiction over Federal savings associations. 

The final rule also conformed the OCC’s preemption and visitorial powers regulations to the Dodd-Frank Act provisions that became effective on July 21st. The OCC 

also issued an interim final rule, effective on July 21, 2011, that republished most 

OTS regulations in the OCC’s chapter of the Code of Federal Regulations and renumbered them accordingly as OCC rules, with nomenclature and other technical 

amendments to reflect the OCC’s responsibilities for Federal savings associations. 

This action consolidates the regulations applicable to national banks and Federal 

savings associations in the regulations of the OCC. 

We are now in the process of further integrating and consolidating OCC and republished OTS regulations. We are considering more comprehensive substantive 

amendments to republished OTS regulations, as well as existing OCC rules, with 

the continuing objective of reducing duplication and providing consistent treatment, 

where appropriate, for both national banks and Federal savings associations. We expect this process to result in a more streamlined set of regulations that aims to reduce unnecessary regulatory burden. Throughout this process, the OCC is mindful 

that the Federal savings association charter has certain unique statutory attributes 

that are necessary to preserve. In all instances where revisions are undertaken, we 

will seek public comment to assist in making the regulations workable and effective 

for both national banks and Federal savings associations. 
90 

A similar effort is underway to integrate the more than 1,000 OTS supervisory 

policies into a consolidated OCC policy framework. The goal is to produce a consistent supervisory approach and integrated policy platform for both national banks 

and Federal savings associations, while recognizing differences anchored in statute. 

As part of this process, the OCC plans to rescind several hundred OTS documents 

that are duplicative or obsolete. The OCC will then focus on policy guidance documents that require substantive revision or combination, as well as policy guidance 

documents that are considered unique to savings associations. Upon completion, this 

process will result in a more streamlined set of policies for national banks and Federal savings associations that should eliminate confusion associated with duplicative 

or obsolete policy documents. 

Finally, the OCC has worked with the other Federal banking agencies to move 

savings associations to common financial reporting forms by discontinuing the Thrift 

Financial Report (TFR), currently used by most savings associations to report financial data, and requiring these institutions to use instead the Consolidated Reports 

on Income and Condition (Call Reports) filed by banks. The OCC worked with the 

other banking agencies to reduce confusion and potential burden on savings associations by publishing a number of Federal Register notices, posting on the FFIEC and 

OTS Web sites a ‘‘mapping’’ document that links TFR data items to the appropriate 

line items in the Call Report, and participating in various industry panel discussions and teleconferences to discuss issues associated with the conversion. Although 

the agencies recognize that there will be some initial adjustment for savings associations related to this conversion, going forward having a common reporting form and 

platform provides long-term efficiencies to the agencies and savings associations. 

II. Coordination with the Bureau of Consumer Financial Protection 

In my previous testimony, I discussed the transition of certain OCC functions and 

staff to the CFPB, as well as our efforts to assist the CFPB in standing up its operations as of the designated transfer date. We continue to be actively engaged with 

the CFPB on a number of fronts relating to our respective roles and responsibilities 

in connection with supervision of compliance by national banks and Federal savings 

associations with Federal consumer financial laws, processing of related consumer 

complaints, and consultation on CFPB rulemakings. 

There have been significant developments since the last hearing on this matter. 

Since that time, the CFPB commenced its operations, added staff, and engaged in 

a number of activities implementing the Dodd-Frank Act. For example, the CFPB 

has assumed responsibility for conducting examinations for compliance with Federal 

consumer financial laws at national banks and Federal savings associations with 

total assets greater than $10 billion and, as of the designated transfer date, the 

OCC is no longer responsible for such examinations at these institutions. The CFPB 

also has begun to develop and promulgate certain regulations. 

In the last several months, the OCC has assisted the CFPB in a number of areas 

related to their operations. We have been providing the CFPB with significant staff 

and infrastructure support by processing consumer complaints on behalf of the 

CFPB. We entered into a Memorandum of Understanding (MOU) with the CFPB 

under which the OCC’s Customer Assistance Group is performing intake, processing, analysis, and resolution of consumer complaints about national banks and 

Federal savings associations with total assets of more than $10 billion. The CFPB 

is currently handling complaints that concern credit cards offered by these large institutions, and plans call for them to begin handling those relating to mortgage 

lending and servicing this week. The OCC is handling all other complaints, but the 

MOU provides that the consumer complaint function for large institutions will be 

assumed in its entirety by the CFPB for all Federal consumer financial laws over 

the course of the next several months as the CFPB develops the capacity to handle 

these obligations. 

In addition, we recently issued a joint policy statement to clarify how the prudential regulators and the CFPB will measure the total assets of an insured depository 

institution for purposes of determining supervisory and enforcement responsibilities 

under the Dodd-Frank Act. Under section 1025 of the Dodd-Frank Act, the CFPB 

is given primary authority to examine an insured depository institution for compliance with Federal consumer financial laws if the institution has total assets greater 

than $10 billion. The prudential regulators retain exclusive supervisory and enforcement authority for insured depository institutions with total assets of $10 billion or 

less. The interagency policy statement describes the agreed-upon measure and a 

schedule for determining asset size for these purposes by using the total assets reported in four consecutive quarterly Call Reports. 

There is much that remains to be done, however. The OCC has established an 

internal Consumer Issues Steering Committee (CISC) to act as liaison with the 
91 

CFPB on the coordination of supervisory and regulatory matters. CISC members 

have scheduled weekly meetings, and have more frequent informal communications 

with CFPB staff on examination coordination, information sharing, rulemakings, 

and consumer compliance issues. 

One important project concerns the requirements for consultation by the CFPB 

with prudential regulators in connection with CFPB rulemakings. Under the DoddFrank Act, the CFPB has exclusive authority to prescribe regulations administering 

certain enumerated Federal consumer financial laws. With respect to this rulemaking authority, the CFPB is required to consult with the prudential regulators 

prior to proposing a rule and during the rulemaking process ‘‘regarding consistency 

with prudential, market, or systemic objectives’’ administered by the prudential regulators. The law states that if, during the consultation process, a prudential regulator provides a written objection to all or any part of a proposed CFPB rule under 

consideration, the CFPB must describe the objection and how it addressed it in its 

adopting release. This consultation process is important to ensure meaningful input 

by prudential supervisors on CFPB regulations. The CFPB currently has in process 

several rulemakings where interagency coordination and consultation will be critical. These include the ‘‘ability to repay’’ requirements for ‘‘qualified mortgages,’’ 

which should be carefully coordinated with the ‘‘qualified residential mortgage’’ criteria in the interagency risk retention rulemaking so that the interplay of the two 

standards is appreciated and unintended consequences do not result. 

The OCC and the other prudential regulators are currently working to develop an 

agreement on a consultation process that will meet these statutory objectives and 

provide the prudential regulators with reasonable time to effectively review, discuss, 

and comment on CFPB rulemakings. 

Another area of current discussion concerns implementation of the Dodd-Frank 

Act requirements that the CFPB coordinate its activities with the supervisory activities conducted by the prudential regulators in order to minimize regulatory burden 

on an institution. Section 1025 requires the CFPB to consult with the prudential 

regulators regarding respective schedules for examining an institution. Similarly, 

the CFPB and the prudential regulators are required to conduct their respective examinations simultaneously in an insured depository institution and to share and 

comment on related draft reports of examination that result from the simultaneous 

examinations. The law also provides that the regulated institution may opt out of 

a simultaneous examination by the prudential regulator and the CFPB. 

Candidly, aspects of this portion of the Dodd-Frank Act do not mesh well with 

how bank examination activities are actually conducted. Therefore, the OCC and the 

other prudential regulators have initiated efforts to develop a MOU that will implement these coordination requirements in a realistic and practical manner and prevent unnecessary regulatory burden on insured depository institutions—which we 

believe to have been the Congressional intent. We hope that uncertainty among regulated institutions about when and how they will be examined by the CFPB relative 

to their examinations by the prudential regulators can be clarified. 

III. Activities of the Financial Stability Oversight Council 

General 

The OCC continues to be an active participant in the activities of the FSOC as 

it carries out its mission to identify and respond to emerging risks that threaten 

the financial stability of the United States, to promote market discipline, and to facilitate coordination and information sharing among the various financial regulators. 

Since my last update to this Committee in July, the FSOC issued its 2011 Annual 

Report to Congress, which includes a summary of both the state of the U.S. financial system as a result of the 2007–09 market recession and some of the major forces 

that will shape the financial system’s future development. The report also details 

the progress of key domestic regulatory reforms resulting from the implementation 

of the Dodd-Frank Act. In addition, the FSOC has held two formal meetings and 

convened several conference calls among its members to discuss current market developments. As described in more detail below, formal actions that the FSOC has 

taken during this period include the publication of an enhanced notice of proposed 

rulemaking and guidance on the process the FSOC proposes to use for designating 

systemically important nonbank financial firms for enhanced supervision by the 

Federal Reserve Board (FRB). 

Equally important, however, have been the deliberations and information exchanges among agency principals and staff on market and regulatory developments 

that could have potential systemic risk implications for the U.S. financial sector and 

broader economy. These discussions have included updates on the agencies’ ongoing 

assessments and analyses of the situation in the European financial markets and 
92 

their potential ramifications for the United States and deliberations on various 

structural issues confronting the U.S. financial system that were identified in the 

FSOC’s annual report, including money market fund reform, the tri-party repo market, and efforts to address and reform the U.S. housing market. Facilitating these 

types of candid, confidential exchanges of information is, I believe, one of the most 

critical functions of the FSOC. 

Designations of Nonbank Financial Firms for Heightened Supervision 

The FSOC also is continuing its work under the provisions of the Dodd-Frank Act 

that require the designation of nonbank financial firms for enhanced supervision by 

the FRB. Based on feedback received on an initial notice of proposed rulemaking 

issued in January 2011, the FSOC determined that there was a need to seek comment on additional details regarding the standards for this designation process before issuing a final rule. On October 11, 2011, the FSOC issued a second notice of 

proposed rulemaking and proposed interpretive guidance (NPRM). The NPRM lays 

out the analytical and procedural framework that the FSOC proposes to use to determine whether a nonbank financial company could pose a threat to the financial 

stability of the United States. 

The NPRM sets forth a three-stage process by which nonbank financial companies 

generally will be assessed. The FSOC will apply uniform quantitative thresholds in 

stage 1, as described in the proposed interpretive guidance, to identify companies 

for further consideration. In stage 2, the FSOC will use information that is available 

from primary regulators and public information to further analyze the nonbank financial companies identified in stage 1. In stage 3, the FSOC will contact each 

nonbank financial company that the FSOC believes merits further review to collect 

information directly from the company that was not available in the earlier stages. 

At the end of stage 3, based on the results of the analyses conducted during each 

stage of review, the FSOC may vote to make a determination regarding the company. The comment period for the NPRM closes on December 19, 2011. 

IV. Strengthening Capital, Leverage, and Liquidity Requirements 

The financial crisis resulted in broad agreement to bolster the quality and quantity of capital held by financial institutions. The G20 has coordinated efforts by 

other international bodies, such as the Financial Stability Board and Basel Committee on Bank Supervision, to reach consensus on workable and effective enhanced 

standards. The OCC was actively involved in the development of these international 

standards through its participation on the Basel Committee and is working with the 

other U.S. Federal banking agencies to implement Dodd-Frank Act provisions relating to risk-based capital and leverage requirements in a manner that is consistent 

with those international standards. 

In the United States, the Dodd-Frank Act adds heightened prudential standards for all bank-holding companies with more than $50 billion in assets and places 

floors under the risk-based capital requirements for banks and bank-holding companies. In addition, Dodd-Frank requires all Federal agencies to review any regulation 

that requires the use of an assessment of creditworthiness of a security or money 

market instrument and to remove any references to, or requirements of reliance on, 

credit ratings and substitute such standard of creditworthiness as each agency determines is appropriate. The statute further provides that the agencies shall seek 

to establish, to the extent feasible, uniform standards of creditworthiness, taking 

into account the entities the agencies regulate and the purposes for which those entities would rely on such standards. 

The Basel Committee revisions that the OCC and the other Federal banking agencies are working to implement in the United States include: 

• A new, more rigorous definition of capital, which would exclude funds raised 

through hybrid instruments that were unable to absorb losses as the crisis 

deepened; 

• Increased minimum risk-based capital requirements, which include increased 

minimum Tier 1 capital requirements and a new common equity requirement; 

• The creation of a capital conservation ‘‘buffer’’ on top of regulatory minimums 

that would be designed to be drawn down in times of economic stress and would 

trigger restrictions on capital distributions (such as dividends); 

• Enhanced risk-based capital requirements for counterparty credit risk that are 

meant to capture the risk that a counterparty in a complex financial transaction 

could grow weaker at precisely the time that a bank’s exposure to the 

counterparty grows larger; 

• Revisions to the capital requirements applicable to traded positions, which 

would broaden the scope of those rules to better capture risks not adequately 
93 

1 In addition, on November 29, 2011 the OCC published a notice of proposed rulemaking seeking comment on revisions to its regulations pertaining to investment securities, securities offerings, and foreign bank capital equivalency deposits to replace references to credit ratings with 

alternative standards of creditworthiness. The comment period closes on December 29, 2011. 76 

FR 73526. 

addressed under the current regulatory measurement methodologies, including 

the risk that less liquid products, such as asset-backed securities and resecuritizations, could default or suffer severe losses; 

• The creation of a new international leverage ratio requirement to serve as a 

backstop to the risk-based capital rules. Unlike the current U.S. leverage ratio, 

the international leverage ratio incorporates off-balance sheet exposures; and 

• The adoption of a capital surcharge to be applied to a limited group of global, 

systemically important banks (G–SIBs), the failure of which would impose outsized costs on the financial system. 

Basel III also seeks to address global liquidity concerns arising from the recent 

financial crisis. These changes would include both a short- and long-term liquidity 

standard intended to assist a bank in maintaining sufficient liquidity during periods 

of financial stress. The Basel Committee included a long implementation timeline 

for both standards to provide regulators the opportunity to conduct further analysis 

and to make changes as necessary. The long-term standard, which is called the net 

stable funding ratio or NSFR, is not scheduled to become effective until 2018. The 

short-term requirement, the liquidity coverage ratio or LCR, is scheduled to go into 

effect earlier, in 2015. The Federal banking agencies currently are working together 

to develop and recommend changes to the LCR to ensure that it will produce appropriate requirements and incentives, especially during economic downturns, and to 

otherwise limit potential unintended consequences. 

Harmonizing the Dodd-Frank Act requirements with the revised international 

standards is one of the principal challenges the OCC and the other Federal banking 

agencies will face. For example, under the Dodd-Frank Act, the FRB is required to 

develop and implement heightened prudential standards for bank-holding companies with total consolidated assets over $50 billion, while the Basel Committee’s G– 

SIB surcharge will, in all likelihood, apply to a much smaller subset of much larger 

banking institutions. In our discussions with the FRB, the OCC has stressed the 

need to ensure that the heightened prudential standards being developed, including 

liquidity, and the Basel Committee reforms are carried out in a coordinated, mutually reinforcing manner, so as to enhance the safety and soundness of the U.S. and 

global banking systems, while not damaging competitive equity or restricting access 

to credit. Balancing these interests presents a number of challenges that the agencies are continuing to work through. 

The Federal banking agencies expect to soon publish proposed revisions to their 

regulations for determining market risk capital requirements for traded positions. 

This will be the first risk-based capital proposal to incorporate new nonratings 

based alternatives developed in response to section 939A.1 Interweaving all these 

national and international requirements, and meeting our statutory mandates and 

our commitments in Basel will be the challenge of the next 6–12 months. 

V. Other Rulemakings 

The OCC has issued a number of important proposed rules required under the 

Dodd-Frank Act. This portion of my testimony briefly highlights these proposals and 

discusses the key issues to be addressed in developing final rules. 

Credit Risk Retention Rulemaking 

Section 941 of the Dodd-Frank Act requires the OCC, together with the other Federal banking agencies and the Department of Housing and Urban Development, the 

Federal Housing Finance Agency (FHFA), and the Securities and Exchange Commission (SEC), to require sponsors of asset-backed securities to retain at least 5 percent of the credit risk of the assets they securitize. The purpose of this new regulatory regime is to correct adverse market incentive structures by giving securitizers 

direct financial disincentives against packaging loans that are underwritten poorly. 

Pursuant to this requirement, the interagency group issued a joint proposal. The 

proposal includes a number of options by which securitization sponsors could satisfy 

the statute’s central requirement to retain at least 5 percent of the credit risk of 

securitized assets. This aspect of the proposal was designed to recognize that the 

securitization markets have evolved over time to foster liquidity in a variety of diverse credit products, using different types of securitization structures. 

The proposal would also establish certain exemptions from the risk retention requirement, most notably, an exemption for securitizations backed entirely by ‘‘quali-
94 

fied residential mortgages’’ (QRMs). Consistent with the statutory provision, the definition of QRM includes underwriting and product features that historical loan performance data indicate result in a low risk of default. 

The proposal was published in the Federal Register on April 29, 2011, and comments were due by June 10, 2011. However, the agencies extended the comment period until August 1, 2011, due to the complexity of the rulemaking and to allow parties more time to consider the impact of the proposal. 

The proposal generated substantial interest and attracted thousands of comments 

on a number of key issues from loan originators, securitizers, consumers, and policymakers. Foremost among these was the role of risk retention, the QRM exemption, 

and the future role of Fannie Mae and Freddie Mac in the residential mortgage 

market. Most commenters on the QRM criteria expressed great concern that the 

QRM criteria were too stringent, particularly the 80 percent loan-to-value requirement for purchase money mortgages. Some commenters also focused on the fact that 

the proposal would not directly alter the current risk retention practices of Fannie 

Mae and Freddie Mac, under which they retain 100 percent of the credit risk on 

their sponsored securitizations in the form of a guarantee and opposed the difference in treatment from private securitizers. Other commenters favored it in recognition of the market liquidity Fannie Mae and Freddie Mac presently provide. The 

proposed menu of risk retention alternatives also attracted significant comment, 

supporting the overall approach but also raising numerous specific concerns on the 

part of securitizers as to whether the particular options would accommodate established structures for risk retention in differing types of securitization transactions. 

The agencies are carefully evaluating all of the comments received and are now 

actively engaged in considering the many issues raised as we determine how best 

to proceed with the risk retention rulemaking. 

Margin and Capital Requirements for Covered Swap Entities 

During the financial crisis, the lack of transparency in derivatives transactions 

among dealer banks and between dealer banks and their counterparties created uncertainty about whether market participants were significantly exposed to the risk 

of a default by a swap counterparty. To address this uncertainty, sections 731 and 

764 of the Dodd-Frank Act require the OCC, together with the FRB, Federal Deposit Insurance Corporation (FDIC), FHFA, and Farm Credit Administration (FCA), 

to impose minimum margin requirements on noncleared derivatives. 

Under the provisions of the Dodd-Frank Act, the OCC, together with the FRB, 

FDIC, FHFA, and FCA, published a proposal to establish minimum margin and capital requirements for registered swap dealers, major swap participants, securitybased swap dealers, and major security-based swap participants (swap entities) subject to agency supervision. The agencies proposed to require swap entities to collect 

margin for all uncleared transactions with other swap entities and with financial 

counterparties. However, for low-risk financial counterparties, the agencies proposed 

that swap entities would not be required to collect margin as long as its margin exposure to a particular low-risk financial counterparty does not exceed a specific 

threshold amount of margin. Consistent with the minimal risk that derivatives with 

commercial end users pose to the safety and soundness of swap entities and the U.S. 

financial system, the proposal also included a margin threshold approach for these 

end users, with the swap entity setting a margin threshold for each commercial end 

user in light of the swap entity’s assessment of credit risk of the end user. This approach was premised on current market practice, under which derivatives dealers 

view the question whether to require margin from commercial end users as a credit 

decision. 

The proposal was published in the Federal Register on May 11, 2011, and comments were due June 24, 2011. However, due to the complexity of the rulemaking, 

to allow parties more time to consider the impact of the proposed rule, and so that 

the comment period on the proposed rule would run concurrently with the comment 

period for similar margin and capital requirements proposed by the Commodity Futures Trading Commission, the agencies extended the comment period until July 11, 

2011. 

With very limited exception, commenters strenuously opposed the agencies’ proposed treatment of commercial end users. They urged the agencies to implement a 

categorical exemption, like the statutory exception from clearing requirements for 

commercial end users. They also indicated that the agencies’ proposal on documentation of margin obligations was a departure from existing practice and burdensome to implement. They further indicated that, as drafted, the agencies’ proposed 

threshold-based approach was inconsistent with the current credit assessment-based 

practices of swap entities. 
95 

Another key issue addressed by commenters concerns the proposal’s application 

of margin requirements to foreign branches and affiliates of U.S. banks. The agencies requested comment about a number of specific issues surrounding this topic, including whether it would affect competitive equality with foreign firms. Commenters 

also strenuously opposed this aspect of the proposal and indicated it would have a 

severe effect on their competitive position. These commenters noted that U.S. regulators are ahead of their G20 counterparts in formulating margin requirements, and 

imposition of U.S. margin rules on their foreign derivatives business at a time when 

their foreign competitors are not required to collect margin from their customers 

will effectively terminate this aspect of their business. They called for the agencies 

to delay imposition of this aspect of the proposal and work with foreign authorities 

to harmonize margin requirements internationally, phasing them in on a coordinated basis. 

The agencies are carefully considering all of these issues as we proceed with the 

design of the rule. 

Incentive Compensation Rulemaking 

On April 14, 2011, the Federal banking agencies, the National Credit Union Administration (NCUA), the SEC, and the FHFA issued a proposal to implement the 

incentive-based compensation provisions in Section 956 of the Dodd-Frank Act. The 

proposal applies to ‘‘covered financial institutions’’ (those with at least $1 billion in 

assets that offer incentive-based compensation) and has three main components: (1) 

a requirement that a ‘‘covered financial institution’’ disclose to its regulator the 

structure of its incentive-based compensation arrangements; (2) standards for incentive-based compensation that are comparable to the safety and soundness standards 

required under the Federal Deposit Insurance Act; and (3) a prohibition on incentive-based payment arrangements that encourage inappropriate risks by a covered 

financial institution by providing an executive officer, employee, director, or principal shareholder with compensation that is excessive or that could lead to a material financial loss to the institution. 

The material financial loss provision of the proposed rule establishes general requirements applicable to all covered institutions and additional requirements applicable to larger covered financial institutions (which for the Federal banking agencies, NCUA, and the SEC means those covered financial institutions with total consolidated assets of $50 billion or more). The general requirements provide that an 

incentive-based compensation arrangement, or any feature of any such arrangement, established or maintained by any covered financial institution for one or more 

covered persons must balance risk and financial rewards and be compatible with effective controls and risk management and supported by strong corporate governance. For larger financial institutions, the proposed rule also mandates deferral and 

includes a provision concerning individuals who have the ability to expose the institution to possible substantial losses (so called ‘‘material risk takers’’). These institutions must defer 50 percent of incentive-based compensation for executive officers 

for at least 3 years, and their boards of directors must identify, and approve, the 

incentive-based compensation arrangements for material risk takers. 

The comment period on the proposed rule closed on May 31, 2011, and the agencies collectively received thousands of comments—approximately 9,700 comments 

were received by the OCC alone. Among the major issues the agencies are facing 

are whether to continue to mandate deferral as proposed and whether to revise the 

material risk taker provision to more clearly delineate the individuals encompassed 

by the provision and the board of director’s responsibilities with respect to these individuals. 

Volcker Rule Proposal 

On November 7, 2011, the banking agencies and the SEC jointly published a proposal to implement section 619 of Dodd-Frank, also known as the Volcker Rule. Section 619 prohibits ‘‘banking entities’’ (insured depository institutions and any company that controls an insured depository institution) from engaging in proprietary 

trading and from acquiring or retaining an ownership interest in, sponsoring, or entering into certain relationships with hedge funds and private equity funds. Section 

619 expressly exempts certain permitted activities from these prohibitions, including 

trading in certain Government obligations, underwriting, market-making-related activities, risk-mitigating hedging, trading on behalf of customers, public welfare investments, organizing and offering funds for trust, fiduciary and advisory customers, 

and trading and fund activities solely outside of the United States. All permitted 

activities are subject to statutory backstops, regardless of the size of the institution 

involved, and compliance program requirements may apply as well. 
96 

2 2 U.S.C. §§ 1501 et seq. 3 5 U.S.C. §§ 801 et seq. 

The proposal is the result of months of intensive study and analysis by the agencies of the statutory language of section 619, its legislative history, the FSOC report 

on the implementation of the Volcker Rule, existing regulatory guidance, and the 

business practices of banking entities covered by the rule. 

The proposal implements the statutory prohibitions and restrictions on proprietary trading and covered fund activities and investments, the related statutory exemptions for permitted activities, and the statutory backstops that apply to all permitted activities. The proposal establishes requirements for engaging in the statutorily permitted activities and interprets many of the exceptions conservatively, including, in particular, the exceptions for underwriting, market-making-related activities, and risk-mitigating hedging. The proposal also defines two key statutory 

backstops: the prohibitions on engaging in an activity that would involve or result 

in either a material conflict of interest between the banking entity and its customers, or in a material exposure by the banking entity to a high-risk asset or trading strategy. Banking entities with significant trading activities also are required 

to report quantitative metrics to help evaluate the extent to which these activities 

are consistent with permissible market-making-related activities and whether they 

expose the institution to high-risk assets or trading strategies. 

The proposal further requires banking entities engaged in proprietary trading and 

covered fund activities and investments to develop and implement a compliance program that must address internal policies and procedures, internal controls, a management framework, independent testing, training, and making and keeping of 

records. The extent of these requirements escalates depending on the volume of the 

activity. Banking entities with significant trading or covered fund activities or investments must adopt a more detailed compliance program. Banking entities that 

solely are engaged in activities or in making investments that are permissible under 

the proposal will still need to satisfy certain compliance requirements designed to 

assure that their activities are permissible and do not violate any of the statutory 

backstop standards. Banking entities that do not engage in activities or make investments that are prohibited or restricted by the proposal must also put in place 

policies and procedures that are designed to prevent them from becoming engaged 

in such activities or from making such investments without establishing a compliance program required by the proposal. 

The proposed rule is open for public comment through January 13, 2012. 

Cost-Benefit Analysis 

The OCC recognizes the importance of considering the burdens associated with 

approaches to implementation of Dodd-Frank Act regulatory requirements and the 

impact of different approaches on smaller institutions. In conjunction with all its 

rulemakings, the OCC is subject to several standards that require the agency to 

consider the costs and burdens of the proposed regulation. Since the Committee’s 

last hearing, the Department of the Treasury’s Office of Inspector General (IG) completed its review, done at the request of the Ranking Member and other Members 

of this Committee, of OCC’s processes for performing economic analyses in support 

of our rulemakings and how those processes considered the costs, benefits, and economic impact of certain proposed rules promulgated as a result of the Dodd-Frank 

Act. On June 13, 2011, the IG issued an informational report on the economic analyses performed by the OCC with respect to three proposed rules. Among other findings, the IG report concluded that ‘‘OCC has processes in place to ensure that required economic analyses are performed consistently and with rigor in connection 

with its rulemaking authority. Furthermore, we found that those processes were followed for the three proposed rules we reviewed.’’ 

The OCC conducts analyses to determine the effects and impact of its regulations 

in accordance with the following three key statutes: the Unfunded Mandates Reform 

Act, the Congressional Review Act, and the Regulatory Flexibility Act. 

Consistent with the Unfunded Mandates Reform Act,2 the OCC prepares a written statement containing certain information and analysis specified in the statute 

if a rule contains 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 in any 1 year. 

The Congressional Review Act,3 generally provides a mechanism for Congressional review of agency regulations by requiring agencies to report to Congress and 

the General Accountability Office (GAO) when they issue a final rule and by establishing timeframes within which Congress may act to disapprove a rule. The statute 

requires the Office of Management and Budget (OMB) to determine whether the 
97 

4 5 U.S.C. §§ 601 et seq. 

final rule is a major rule for purposes of filing a report to Congress (Report to Congress); the OCC provides its views to OMB for consideration as the determination 

is made. Once this determination is made, the OCC must submit to Congress and 

the GAO a Report to Congress. As part of the Report to Congress, the OCC must 

state whether the rule is a ‘‘major rule’’ for Congressional Review Act purposes and 

must indicate whether the OCC prepared an analysis of costs and benefits. 

Finally, with certain exceptions, the Regulatory Flexibility Act 4 generally requires 

the OCC to review proposed regulations for their impact on small entities and, in 

certain cases, to consider less burdensome alternatives. After conducting this review, the OCC is required either to prepare and publish a Regulatory Flexibility 

Analysis or to certify that a Regulatory Flexibility Analysis is not required because 

the rule will not have a ‘‘significant economic impact on a substantial number of 

small entities.’’ 

The OCC also recently responded to a letter from Chairman Johnson requesting, 

among other things, a description of the OCC’s rulemaking process and the economic impact factors considered in OCC rulemakings. Our response to that request 

includes more detailed information about the procedures staff uses to assess the economic impact in accordance with the statutes described above. 

VI. Conclusion 

I appreciate the opportunity to update the Committee on the work we have done 

to implement the provisions of the Dodd-Frank Act, in particular, the completion of 

a smooth and workable integration of the OTS into the OCC and our progress on 

the numerous regulatory projects that are ongoing. Much has been accomplished 

and we will continue to move forward to complete these projects and look forward 

to keeping the Committee advised of our progress. I am happy to answer your questions. 

(99) 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM NEAL S. WOLIN 

Q.1. In October of last year, the FSOC issued an Integrated Implementation Roadmap for implementing the Wall Street Reform Act. 

While being respectful of the regulators independence, and the 

need for quality rules, will FSOC consider issuing an updated roadmap to provide more clarity on when we should expect various important rules to be finalized? 

A.1. The integrated Dodd-Frank Act implementation roadmap provided the public with a general guide to the agencies’ anticipated 

timelines and sequence for implementation of Dodd-Frank Act 

rules. Since the roadmap’s release, the Financial Stability Oversight Council’s (Council) independent member agencies have engaged extensively with the public to provide further detailed information about the status of their rulemakings, including frequently 

updating their Web sites as the status of a particular rule or anticipated timeline changes. The Council also has made available on its 

Web site links to each member agency’s Dodd-Frank Act implementation Web page. The Council member agency Web site portal is 

available at: http://www.treasury.gov/initiatives/fsoc/Pages/Member-Agency-Dodd-Frank-Act-Portal.aspx. We expect that agencies 

will continue to update their implementation timelines as they develop or change. 

Q.2. How has financial oversight and the implementation of Wall 

Street Reform benefited from the formal and informal coordination 

being done by FSOC? 

A.2. The Council has usefully played both formal and informal 

roles in coordinating the implementation of Wall Street Reform. 

Most of its members are independent regulators who have specific 

responsibilities to implement elements of Wall Street reform. In 

some cases the statute provides a formal role for the Council to 

consult with rulemaking agencies or for the Secretary, as Chairperson of the Council, to coordinate. For example, the Secretary, as 

Chairperson of the Council had a coordination role among the six 

agencies that released a joint rule proposal on credit risk retention 

and the five agencies that released substantially identical proposals 

to implement the Volcker Rule. Further, Federal Reserve Board 

(FRB) staff consulted and coordinated with the Council as the FRB 

was developing its proposal for enhanced prudential standards and 

early remediation requirements under sections 165 and 166 of the 

Dodd-Frank Act. The Council has served as a regular forum for 

independent agencies to discuss important aspects of Wall Street 

reform and has created opportunities to share information on key 

rulemakings. 

In addition, the Council has provided a forum for its members to 

monitor financial market developments and potential risks to fi-
100 

nancial stability. For example, the Council has discussed market 

developments and potential risks related to the credit ratings of 

U.S. debt, the failure of MF Global, the sovereign debt crisis in Europe, and trading losses by JPMorgan Chase. 

Q.3. Even as the SEC and the CFTC work to consult and harmonize their respective swap rules, it appears that the two agencies do not plan to adopt a joint, integrated and coordinated approach to implementing the new rules. Can the Treasury or FSOC 

assist in bringing the CFTC and SEC together on adopting a joint 

implementation plan for derivatives regulation that includes identical or coordinated dates for when the new swap rules go effective? 

A.3. Coordination among rulemaking agencies is essential and a 

particular focus of the Dodd-Frank Act. The Act requires the CFTC 

and SEC to conduct joint rulemakings to implement certain provisions of Title VII. Other provisions do not require joint 

rulemakings, but require the SEC and CFTC to treat similar products and entities in a similar manner. Although the SEC and 

CFTC are independent regulators, they should, wherever possible, 

have a coordinated and consistent approach to the comprehensive 

reforms to the derivatives markets in the Dodd-Frank Act. The 

Council has worked and will continue to work to facilitate coordination and information sharing among its member agencies, including 

with respect to Title VII implementation. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM NEAL S. WOLIN 

Q.1. Secretary Wolin, as Chairman of the Financial Stability Oversight Council, the Treasury Secretary is required to respond to 

emerging threats to the stability of the U.S. financial system. 

What specific actions has Treasury taken to protect the U.S. financial system from a global financial crisis sparked by the ongoing problems in the European Union? 

A.1. Secretary Geithner and other senior Treasury officials remain 

closely engaged with European counterparts. Since the onset of the 

eurozone crisis, Treasury officials have offered our perspective 

about the dangers it poses for the global recovery, and we have 

tried to share the lessons of our own financial crisis about the importance of responding to market challenges decisively and with 

overwhelming force. U.S. regulators are in active dialogue with our 

financial institutions to ensure that exposures are being monitored 

appropriately and to improve their ability to withstand a variety of 

possible financial contagion stress scenarios emanating from Europe. The Council and its member agencies will continue to carefully monitor the potential risks that could emerge from the European sovereign debt crisis. 

The United States has taken a number of actions since the crisis 

to increase the resiliency of our financial system to shocks from 

both domestic and external sources. In February 2009, U.S. financial regulators put into place a set of comprehensive stress tests for 

the 19 largest U.S. bank-holding companies and required 10 of 

these bank-holding companies to improve the quality and quantity 

of their capital. As a result, Tier 1 common equity at large bank- 
101 

holding companies increased by more than $400 billion to $960 billion from the first quarter of 2009 through the fourth quarter of 

2011, a more than 70 percent increase. The Dodd-Frank Act also 

provides the United States with a new, strong resolution regime for 

financial companies, and authorizes the FDIC to establish a bridge 

financial company to facilitate the FDIC’s orderly wind down of a 

failed financial company. We are working through the G–20 and Financial Stability Board to help ensure that major global banks and 

regulators across the globe develop cross-border recovery and resolution plans by the end of 2012. 

Q.2. In questions for the record following the July 21, 2011 DoddFrank hearing, I asked you to specify which regulators you were 

referring to in your Politico op-ed, where you stated that ‘‘For years 

regulators in Washington failed to make use of their authority to 

protect the system.’’ In your response, you did not identify specific 

regulators that had failed to use the authority that they had to protect the system. 

Please identify the specific regulators that you were referring to 

in your Politico op-ed. 

A.2. The failure of regulators prior to the crisis to make use of 

their authority to protect the financial system was not isolated to 

a specific agency. Risky practices were allowed that ultimately resulted in a significant cost to our financial system and the broader 

economy. The financial regulators responsible for consumer financial protection failed both to adopt appropriate rules and to enforce 

sufficiently existing rules and therefore allowed harmful mortgage 

lending practices to contribute to the crisis. These authorities have 

now been consolidated into a single agency with a dedicated consumer focus in the Consumer Financial Protection Bureau. 

Q.3. Secretary Wolin, the Dodd-Frank Act requires the Bureau of 

Consumer Financial Protection to follow Small Business Regulatory 

Enforcement Fairness Act process known as SBREFA. This process 

requires the Bureau to convene panels of small businesses to receive their feedback with respect to rulemaking. Earlier this year, 

the Federal Reserve Board proposed a rule implementing the ability to repay requirements and the Qualified Mortgage exemption 

under Dodd-Frank. This proposed rule transferred to the Bureau 

this past July. 

Will the Bureau comply with the SBREFA process requirements 

before finalizing the QM and Ability to Repay rule? 

A.3. As you know, the CFPB is an independent Federal regulator 

within the Federal Reserve System. Section 1100G of the DoddFrank Act specifically requires the CFPB to comply with the 

SBREFA and therefore convene small business review panels before issuing a proposed rule. 

The CFPB has acknowledged the need to reach out to small financial service providers to understand the costs and benefits of 

regulation. One method the CFPB is using to accomplish this, 

whenever required, is the SBREFA review panel process. The 

CFPB has already initiated SBREFA review panels for rules to be 

proposed under TILA and RESPA related to servicing standards 

and mortgage originator standards. 
102 

The ability-to-repay and QM rules were proposed by the Federal 

Reserve Board, which is not subject to SBREFA. The authority to 

complete the rulemaking was transferred from the Federal Reserve 

Board to the CFPB as required by the Dodd-Frank Act. As an independent regulator, the CFPB is responsible for determining compliance with the requirements of the SBREFA for the final rule to implement the ability-to-repay standard and QM definition. 

Q.4. Secretary Wolin, you said about the Office of Financial Research (OFR) in testimony earlier this year, ‘‘The combination of 

better, more granular data, and new analytic capabilities focused 

on systemic threats can help all market participants better understand risks within the financial system.’’ 

What sort of data and analytical tools is the OFR using that we 

did not have leading up to the last financial crisis? How will this 

help prevent the next crisis? 

A.4. The financial crisis exposed critical gaps in data available to 

policymakers and regulators—for example, a shadow banking system that was relatively unmonitored and exposures of individual financial institutions to their counterparties that were difficult to 

track. The OFR is working with members of the Financial Stability 

Oversight Council (Council), their agencies, and their staffs to identify those gaps, recognizing the need to collect only those data that 

are necessary to monitor threats to financial stability, to avoid 

redundancies in data collection, and to ensure that sensitive data 

remain secure. One key step in that process has been to prepare 

an inventory of data held by the Council’s member agencies. 

The OFR is also working with policymakers, regulators, and the 

private sector on establishing a global legal entity identifier (LEI)- 

a single global standard to identify parties to financial transactions 

uniquely. This will support better understanding of exposures and 

interconnections among and across financial institutions-knowledge 

of which was lacking prior to the crisis. 

In addition, the OFR is working with a network of researchers, 

academics, and practitioners, to strengthen tools for assessing 

threats to financial stability. 

Better data and analysis can support the design of stronger financial shock absorbers and guardrails to reduce the risk of crises. 

They can also enable earlier warnings and effective responses to 

mitigate the effects of crises when they do occur and help draw lessons for the future. 

Q.5.a. The agencies have submitted a proposed Volcker rule with 

over 1,300 questions, making it more of a concept release than a 

proposed rule. Additionally, the CFTC has not yet proposed its 

version of the Volcker Rule and might offer a competing version. 

Given the complexity of the issues involved and that the CFTC 

has not signed on, do you anticipate extending the comment period? 

A.5.a. The comment periods for the proposed rules of all five rulemaking agencies are now complete, including the CFTC’s substantially identical proposal. The agencies are now reviewing over 

18,000 letters submitted by public commenters. Treasury is actively 

working with the independent regulatory agencies in their efforts 

to coordinate and implement the statute effectively. 
103 

The Federal Reserve recently issued guidance on the statutory 

conformance period. That guidance confirms that the Dodd-Frank 

Act provides entities covered by the Volcker Rule a period of 2 

years from the statutory effective date, which would be until July 

21, 2014, to fully conform their activities and investments to the 

requirements of the Volcker Rule provisions of the Act and any 

final rules implementing those provisions. 

The Federal Reserve’s guidance states that during the conformance period banking entities should engage in good-faith planning 

efforts, appropriate for their activities and investments, to enable 

them to conform their activities and investments to the requirements of the Volcker Rule provisions of the Dodd-Frank Act and 

final implementing rules by no later than the end of the conformance period. 

Q.5.b. Do you anticipate doing a re-proposal? 

A.5.b. The five Volcker rulemaking agencies are in the process of 

reviewing comments in an effort to promulgate a strong, effective 

Volcker Rule. I am not aware of the need for regulators to do a reproposal of the Volcker rulemaking. 

Q.6. The agencies missed the October 18th statutory deadline for 

adopting a final Volcker rule, and despite agency delays, the rule 

is still scheduled to go into effect in July 2012. The Dodd-Frank Act 

had contemplated at least a 9-month timeframe of advance preparation for compliance. 

• Do you believe there will be sufficient time for banking entities 

to adjust to all of the changes imposed by the rule? 

• Would it make sense to phase in the implementation of the 

rule, so as to identify potential market disruptions caused by 

any single element of the rule? 

• There is ample precedent for a phase-in, such as implementation of Regulation NMS. Do you believe the Volcker Rule calls 

for a similar phased-in approach? 

A.6. The Federal Reserve recently issued guidance on the statutory 

conformance period. That guidance confirms that the Dodd-Frank 

Act provides entities covered by the Volcker Rule a period of 2 

years from the statutory effective date, which would be until July 

21, 2014, to fully conform their activities and investments to the 

requirements of the Volcker Rule provisions of the Act and any 

final rules implementing those provisions. 

The Federal Reserve’s guidance states that during the conformance period banking entities should engage in good-faith planning 

efforts, appropriate for their activities and investments, to enable 

them to conform their activities and investments to the requirements of the Volcker Rule provisions of the Dodd-Frank Act and 

final implementing rules by no later than the end of the conformance period. 

The ‘‘conformance period’’ should provide entities covered by the 

rule sufficient time to implement the rule. 
104 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER 

FROM NEAL S. WOLIN 

Q.1. As currently proposed, five separate regulators would be responsible not just for rulemaking but also implementation and ongoing supervision and enforcement of the rules adopted under Section 619 of Dodd-Frank. In your opinion, is there potential for inconsistent application of the rules across different markets and 

product classes? Is any effort being made to create a unified supervision framework? 

A.1. The five Volcker rulemaking agencies released substantively 

identical proposed rules, demonstrating a substantial commitment 

among agencies to a coordinated approach. The Secretary of the 

Treasury, as Chairperson of the FSOC, is coordinating the rulemaking implementing the Volcker Rule by the SEC, CFTC, and 

Federal banking agencies. 

Treasury remains committed to working with the rulemaking 

agencies toward a substantively identical final rule. Moreover, 

Treasury believes that it is critical for the agencies to work together on ‘‘consistent application and implementation’’ of the 

Volcker Rule, as the statute provides. 

Q.2. The proposed regulatory framework under Section 619 of 

Dodd-Frank will certainly impact liquidity in the markets for many 

financial products to some degree. What analysis has been done to 

estimate the impact in various representative markets (e.g., corporate bonds)? What are the main elements of the proposed rules 

which you believe mitigate potential harm to market liquidity? To 

the extent the proposed rules contain such mitigating elements, do 

you believe those safeguards are adequate? 

A.2. The health and liquidity of U.S. capital markets is essential 

for economic growth. Treasury is committed to effective implementation of the Volcker Rule, including prohibiting proprietary trading while promoting economically important activities that are essential to liquid and efficient capital markets, such as market-making, underwriting, and hedging. 

The Council published a study on effective implementation of the 

Volcker Rule on January 18, 2011, that included perspectives on liquidity in markets, developed on the basis of extensive public comment and outreach to market participants. 

The notice of proposed rulemaking requests additional public 

comment on many aspects of the potential costs and benefits of the 

proposed rules. As the five rulemaking agencies work through 

these comments, it is important that they promulgate a final rule 

that is strong and effective while also protecting the proper functioning of our capital markets. 

RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO 

FROM NEAL S. WOLIN 

Q.1. Last week the House Financial Services Committee passed 

unanimously a bill that exempts end users from margin requirements. Proposed margin rules ignore the clear intent of Congress 

that margin should not be imposed on end-user transactions. Do 

you all agree that end-user hedging does not meaningfully con-
105 

tribute to systemic risk, that the economy benefits from their risk 

management activity and that they should be exempt from margin 

requirements, and are you working together to provide consistent 

rules to provide end users with a clear exemption from margin requirements? 

A.1. Although the Department of the Treasury does not regulate 

the over-the-counter derivatives market, we recognize the importance of appropriate margin requirements and ensuring that end 

users can continue to prudently hedge risk. The CFTC, the SEC, 

and the banking agencies are in the process of crafting rules regarding margin requirements, and are focused on adopting requirements that will strengthen the financial system while allowing for 

proper commercial risk management. Both are essential for economic growth and job creation. Sections 731 and 764 of the DoddFrank Act give regulators the flexibility to set margin and capital 

requirements ‘‘appropriate for the risk associated with the noncleared swaps’’ (and noncleared security-based swaps). 

The CFTC and prudential regulators have proposed rules that, in 

general, would allow commercial end users that operate within established risk limits to enter into noncleared swaps contracts without having to post margin on those contracts—leaving those funds 

(or assets) free for job creation and investment. The SEC is expected to propose its margin rules in the coming months. The U.S. 

regulators have been coordinating their efforts in this rulemaking 

process, including provisions regarding margin requirements. They 

also held a joint public roundtable on issues related to margin requirements for swaps, including swaps with end-user counterparties. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM NEAL S. WOLIN 

Q.1. Under Dodd-Frank, the Volcker rule becomes effective on July 

21, 2012 regardless of whether a rule is finalized. Banking entities 

then have 2 years to come into compliance—July 21, 2014. 

• The proposed rule requires conformance ‘‘as soon as practicable’’ after July 21, 2012. Is that consistent with the statute 

which gives banking entities a full 2 years to come into compliance? What do you mean by ‘‘as soon as practicable?’’ How do 

banks plan around ‘‘as soon as practicable?’’ 

• If the Volcker rule takes effect near or after July 21, 2012, will 

you give banking entities a reasonable amount of time to digest and come into compliance with the final rule? 

A.1. The Federal Reserve recently issued guidance on the statutory 

conformance period. That guidance confirms that the Dodd-Frank 

Act provides entities covered by the Volcker Rule a period of 2 

years from the statutory effective date, which would be until July 

21, 2014, to fully conform their activities and investments to the 

requirements of the Volcker Rule provisions of the Act and any 

final rules implementing those provisions. 

The Federal Reserve’s guidance states that during the conformance period banking entities should engage in good-faith planning 

efforts, appropriate for their activities and investments, to enable 
106 

them to conform their activities and investments to the requirements of the Volcker Rule provisions of the Dodd-Frank Act and 

final implementing rules by no later than the end of the conformance period. 

Q.2. As written, the proposed interagency rule to implement the socalled ‘‘Volcker Rule’’ would impose new and very substantial and 

costly compliance burdens on many banks that do not have a 

standalone proprietary trading desk or substantial fund investments, and never have. Specifically, the proposed rule would require these institutions to establish, at a minimum, policies and 

procedures designed to prevent the occurrence of activities in which 

the institution is not engaged—in other words, the regulatory 

equivalent of proving a negative. It sounds to me like that could 

be a very costly undertaking for an institution that was never the 

intended target of the Volcker Rule. But more importantly, this 

makes even less sense given the economic challenges we face and 

the need to direct resources toward capital planning and lending. 

Can you comment on why this is necessary? Is there a less onerous way to implement the permitted activities? 

A.2. The statutory text of the Volcker Rule provides for a general 

prohibition on proprietary trading for all banking entities. The 

rulewriting agencies have designed a proposed compliance regime 

for banking entities based on the amount of trading firms engage 

in and that will provide supervisors with the information necessary 

to both prevent statutorily prohibited proprietary trading and protect permissible activities like market-making and hedging. This 

regime has been designed to complement existing compliance programs and risk management systems within large firms with active 

trading operations, and to have a limited impact on those banking 

entities that are small or have limited trading activity. 

Q.3. Dodd-Frank created the FSOC as a way to make sure all of 

the regulatory agencies are communicating and rules across the 

agencies can be as consistent as possible. However, we have seen 

recently with the release of the Volcker rule by the FDIC, Federal 

Reserve, OCC and SEC that even with the FSOC and a law that 

mandates coordination, not all of the agencies can work together. 

Despite the new construct, the CFTC is now working on its own 

rule and has not signed onto the existing rule with the rest of you. 

Have you all contemplated how it might work to have an individual 

who handles multiple product lines being forced to adhere to the 

two different standards? Couldn’t that be problematic functionally? 

Also, do you believe, since the CFTC is going to develop its own 

rule, we should extend the timeline for implementation so that the 

interested parties can view ALL of the regulators’ proposals and 

how they will interconnect before filing official comments? 

A.3. The five Volcker rulemaking agencies released substantively 

identical proposed rules, demonstrating a substantial commitment 

among agencies to a coordinated approach. The Secretary of the 

Treasury, as Chairperson of the FSOC, is coordinating the rulemaking implementing the Volcker Rule by the SEC, CFTC, and 

Federal banking agencies. 

The comment periods for all five rulemaking agencies are now 

complete. The agencies are now reviewing over 18,000 letters sub-
107 

mitted by public commenters. Treasury remains committed to 

working with the rulemaking agencies toward a substantively identical final rule. 

Q.4. The new Federal Insurance Office will play a critical role in 

negotiating with international bodies to ensure that U.S. companies are treated fairly. There are a number of issues that will be 

debated over the next year including Solvency II and whether the 

U.S. regulatory system will be deemed equivalent to Europe’s. With 

the U.S. insurance industry being the largest in the world with 

about $1.6 trillion in premiums, do you believe that FIO has the 

resources and access to the highest levels at Treasury to adequately represent the United States in these discussions? 

A.4. The Federal Insurance Office (FIO) provides the U.S. Government with dedicated expertise regarding the insurance industry. 

FIO is already playing a number of important roles, including supporting the Financial Stability Oversight Council with expertise on 

the insurance industry and engaging in international discussions 

regarding prudential matters in insurance policy. 

FIO has the full support and backing of the Treasury Department, and is integrated into the Department structure and its operations. The Treasury Department is committed to building the FIO 

with appropriate staffing and resources. 

Q.5. Follow-up—I understand that your intent is to have FIO be 

able to adequately represent the United States, so I ask that you 

report back to us as soon as possible about the status of FIO within 

the Department of Treasury, where FIO has been placed organizationally, and how FIO can be elevated to ensure it can properly 

represent the United States in international negotiations. 

A.5. FIO is an important office within the Department of the 

Treasury. FIO is an office within the Office of the Under Secretary 

for Domestic Finance and, as appropriate, works closely with the 

Office of the Under Secretary for International Affairs and other offices in Treasury. FIO has assumed a seat on the executive committee of the International Association of Insurance Supervisors 

(IAIS). FIO is providing important leadership in the EU–U.S. insurance dialogue regarding such matters as professional secrecy 

and confidentiality standards, group supervision, capital requirements, reinsurance, financial reporting, regulator peer reviews, and 

independent audit functions. FIO also participated in the recent 

U.S.-China Strategic and Economic Dialogue in Beijing. 

Q.6. To what extent has FIO and the new FIO Director been involved in discussions regarding systemically important financial institutions (SIFIs) in the international arena? I am concerned that 

international bodies may get out in front of the United States in 

SIFI designations, and believe that in general, insurance companies are not a systemic risk to the financial system. Had FIO been 

involved with these talks? 

A.6. The IAIS has been charged with recommending insurance institutions of global importance to the Financial Stability Board 

(FSB). FIO became a full member of the IAIS on October 1, 2011, 

and joined the IAIS Executive Committee on February 24, 2012. 

FIO has been working through the IAIS to shape international con-
108 

sensus so that the IAIS designation process, criteria, and timing 

are consistent with those of the Financial Stability Oversight Council. The IAIS has publicly announced that it will not recommend individual insurers for designation until the end of the first quarter 

of 2013. 

Q.7. FSOC’s proposed guidance will initially screen nonbanks for 

systemic relevance on the same $50bn threshold for banks. 

How is this appropriate for the investment fund industry, where 

assets are managed not owned, and frequently in multiple funds 

none of which is $50bn but you have to add several funds together 

to get to the $50bn number? 

A.7. The $50 billion threshold in Stage 1 of the Council’s analysis 

applies to firms’ total consolidated assets. The Council intends to 

apply the Stage 1 thresholds to all types of nonbank financial companies, including asset management firms, to identify firms for further evaluation in Stage 2. For purposes of applying the Council’s 

Stage 1 thresholds to separate funds that are managed by the same 

adviser, the Council’s guidance states that the Council may consider the aggregate risks posed by such separate funds, particularly 

if their investments are identical or highly similar. 

The Council recognizes that asset management companies may 

pose risks that are not well-measured by the quantitative thresholds approach, in part because assets under management are often 

not included in measures of consolidated assets. As a result, the 

Council, its member agencies, and the Office of Financial Research 

are analyzing the extent to which there are potential threats to 

U.S. financial stability arising from asset management companies. 

This analysis is considering what threats exist, if any, and whether 

such threats can be mitigated by subjecting such companies to Federal Reserve supervision and prudential standards, or whether they 

are better addressed through other regulatory measures. The 

Council may issue additional guidance for public comment regarding potential additional metrics and thresholds relevant to asset 

manager determinations, as appropriate. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM DANIEL K. TARULLO 

Q.1. Governor Tarullo, the Federal Reserve has recently started 

taking steps toward greater transparency. For example, the Fed 

has begun holding press conferences following monetary policy 

meetings. According to press reports, the Fed will next unveil a 

new communications policy to improve the clarity of its monetary 

policy objectives. 

• Will the Fed’s movement toward transparency be extended to 

the Fed’s bank supervision? 

• What steps could the Fed take to make it easier for Congress 

and the public to assess the Fed’s regulation of banks? 

A.1. In 2011, the Federal Reserve initiated steps designed to provide greater transparency around our supervision and regulation of 

the largest, most complex, and systemically critical institutions. A 

key objective of our supervisory program for these institutions is to 

ensure they have adequate capital and liquidity to conduct their 
109 

operations in a safe and sound manner and to make the adequacy 

of their capital and liquidity positions transparent to the public. An 

example of our effort to increase transparency is in the area of our 

Comprehensive Capital Analysis and Review (CCAR). 

The CCAR is a broad supervisory exercise that considers a range 

of factors that could impact the capital adequacy of these institutions including their internal capital planning process, capital distribution policies, pro forma, post-stress capital ratios, and projected path to compliance with the revised Basel Committee on 

Bank Supervision regulatory capital standards. Recently, we implemented a capital plan rule that explains our supervisory process 

for assessing the capital adequacy of CCAR institutions, developed 

standardized publicly available forms and instructions that identify 

the specific information we require these institutions to submit, 

published papers on the CCAR process, and disclosed information 

on the economic scenarios used in the exercise. We intend to further increase CCAR transparency by providing the public with 

meaningful summary information on the 2012 CCAR results without violating our commitment to ensure the integrity of confidential 

supervisory information. As we implement our revised supervisory 

approach for assessing the liquidity plans of these institutions, we 

will endeavor to provide a similar level of transparency. 

These types of actions are intended to make it easier for Congress and the public to obtain a clear understanding of the effectiveness of our supervisory program without jeopardizing the integrity of the process or disclosing confidential information that would 

place U.S. institutions at a competitive disadvantage to their international competitors. The Federal Reserve believes a similar level 

of transparency would be beneficial at systemically critical institutions located in other jurisdictions and is actively working through 

organizations such as the Basel Committee and the Financial Stability Board to achieve this objective. 

Q.2. The agencies have submitted a proposed Volcker rule with 

over 1,300 questions, making it more of a concept release than a 

proposed rule. Additionally, the CFTC has not yet proposed its 

version of the Volcker Rule and might offer a competing version. 

• Given the complexity of the issues involved and that the CFTC 

has not signed on, do you anticipate extending the comment 

period? 

• Do you anticipate doing a re-proposal? 

A.2. On December 23, 2011, the Federal Reserve, FDIC, OCC and 

SEC each acted to extend for an additional 30 days, until February 

13, 2012, the public comment period on the proposal to implement 

section 619 of the Dodd-Frank Act. On January 11, 2012, the CFTC 

sought public comments on a proposal to implement section 619 of 

the Dodd-Frank Act that is substantively the same as the proposal 

published by the Federal Reserve and the other agencies. The Federal Reserve and other agencies will carefully consider the public 

comments received and take those comments into account in 

crafting a final rule to implement section 619. 

Q.3. The agencies missed the October 18th statutory deadline for 

adopting a final Volcker rule, and despite agency delays, the rule 

is still scheduled to go into effect in July 2012. The Dodd-Frank Act 
110 

had contemplated at least a 9-month timeframe of advance preparation for compliance. 

• Do you believe there will be sufficient time for banking entities 

to adjust to all of the changes imposed by the rule? 

• Would it make sense to phase in the implementation of the 

rule, so as to identify potential market disruptions caused by 

any single element of the rule? 

• There is ample precedent for a phase-in, such as implementation of Regulation NMS. Do you believe the Volcker Rule calls 

for a similar phased-in approach? 

A.3. As part of the proposed rule, the Federal Reserve and other 

rule-writing agencies requested comment on potential alternative 

approaches for compliance with the proposed rule. The proposal 

specifically requested comment regarding whether a phased-in approach would be more effective than the approach contained in the 

proposed rule. The Federal Reserve and other agencies will carefully consider all public comments regarding this matter in crafting 

a final rule to implement section 619. 

In addition, the Dodd-Frank Act required the Federal Reserve to 

issue a final rule implementing the various conformance periods for 

activities and investments prohibited by the Volcker Rule by January 21, 2011—a date long before the proposal implementing the 

substantive provisions of the Volcker Rule was due or proposed. In 

its final rule establishing the conformance periods, the Federal Reserve explained that it would revisit the conformance period rule 

in light of the requirements of the final rule implementing the substantive provisions of the Volcker Rule. In doing so, the Federal Reserve will carefully consider your suggestions—which have also 

been noted by other commenters. 

In formulating the proposed rule, the agencies sought to limit the 

potential impact of the proposed rule on small banking entities and 

banking entities that engage in little or no activity prohibited by 

the Volcker Rule provisions of the Dodd-Frank Act. In particular, 

the agencies proposed to reduce the effect of the proposed rule on 

these banking entities by limiting the application of the reporting, 

recordkeeping, and the compliance program requirements of the 

proposed rule, to those banking entities that engage in little or no 

covered trading activities or covered fund activities and investments. The agencies also requested comment on a number of questions related to the costs and burdens associated with particular 

aspects of the proposal, as well as on any significant alternatives 

that would minimize the impact of the proposal on small banking 

entities. The Federal Reserve will carefully consider the public 

comments received on these points and take those comments into 

account in crafting a final rule consistent with the statute. 

RESPONSE TO WRITTEN QUESTION OF SENATOR SCHUMER 

FROM DANIEL K. TARULLO 

Q.1. The proposed regulatory framework under Section 619 of 

Dodd-Frank will certainly impact liquidity in the markets for many 

financial products to some degree. What analysis has been done to 

estimate the impact in various representative markets (e.g., cor-
111 

porate bonds)? What are the main elements of the proposed rules 

which you believe mitigate potential harm to market liquidity? To 

the extent the proposed rules contain such mitigating elements, do 

you believe those safeguards are adequate? 

A.1. Section 619 of the Dodd-Frank Act prohibits proprietary trading, but provides an exemption for market making-related activities. The implementing rule proposed by the agencies contains the 

same market making exemption contained in the statute. Consistent with the statutory exemption for market making-related activities, the proposal is designed to permit firms to continue to engage in legitimate market-making activity and provide liquidity in 

all areas of the trading markets. The proposal is designed to take 

into account the fact that features of market making activities will 

vary depending on the type of asset involved and the relative liquidity of a particular market. 

For example, the proposal offers a large number of metrics that 

are proposed to be developed over time and used for the purpose 

of helping banking firms and supervisors identify trading activity 

that warrants in-depth review. As explained in the interagency proposal, some metrics may be more useful for a given asset class than 

others, thereby allowing firms and the agencies flexibility in designing an approach that is most effective in meeting the statutory 

prohibitions in the Dodd-Frank Act and the exemption for market 

making-related activities. The agencies have also made clear in 

their proposal that we intend to take a gradual, heuristic approach 

to implementing and applying certain supervisory tools, such as 

metrics, that we have proposed to use to distinguish prohibited proprietary trading from permitted market making, revising and refining those tools during the conformance period so as to ensure they 

are appropriately tailored and do not chill market liquidity. The 

Federal Reserve and other rulemaking agencies have requested 

comment on the potential impact that particular parts of the rule 

might have on market liquidity and how any negative impacts 

might be minimized. We will carefully consider the public comments received on these points and take those comments into account, as appropriate, in crafting a final rule to implement section 

619. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM DANIEL K. TARULLO 

Q.1. Under Dodd-Frank, the Volcker rule becomes effective on July 

21, 2012 regardless of whether a rule is finalized. Banking entities 

then have 2 years to come into compliance July 21, 2014. 

• The proposed rule requires conformance ‘‘as soon as practicable’’ after July 21, 2012. Is that consistent with the statute 

which gives banking entities a full 2 years to come into compliance? What do you mean by ‘‘as soon as practicable?’’ How do 

banks plan around ‘‘as soon as practicable?’’ 

• If the Volcker rule takes effect near or after July 21, 2012, will 

you give banking entities a reasonable amount of time to digest and come into compliance with the final rule? 
112 

• As written, the proposed interagency rule to implement the socalled ‘‘Volcker Rule’’ would impose new and very substantial 

and costly compliance burdens on many banks that do not 

have a standalone proprietary trading desk or substantial fund 

investments, and never have. Specifically, the proposed rule 

would require these institutions to establish, at a minimum, 

policies and procedures designed to prevent the occurrence of 

activities in which the institution is not engaged—in other 

words, the regulatory equivalent of proving a negative. It 

sounds to me like that could be a very costly undertaking for 

an institution that was never the intended target of the 

Volcker Rule. But more importantly, this makes even less 

sense given the economic challenges we face and the need to 

direct resources toward capital planning and lending. 

Can you comment on why this is necessary? Is there a less onerous way to implement the permitted activities? 

A.1. The Dodd-Frank Act required the Federal Reserve to issue a 

final rule implementing the various conformance periods for activities and investments prohibited by the Volcker Rule by January 21, 

2011—a date long before the proposal implementing the substantive provisions of the Volcker Rule was due or proposed. In its 

final rule establishing the conformance periods, the Federal Reserve explained that it would revisit the conformance period rule 

in light of the requirements of the final rule implementing the substantive provisions of the Volcker Rule. In doing so, the Federal Reserve will carefully consider your suggestions—which have also 

been noted by other commenters. 

In formulating the proposed rule, the agencies sought to limit the 

potential impact of the proposed rule on small banking entities and 

banking entities that engage in little or no activity prohibited by 

the Volcker Rule provisions of the Dodd-Frank Act. In particular, 

the agencies proposed to reduce the effect of the proposed rule on 

these banking entities by limiting the application of the reporting, 

recordkeeping, and the compliance program requirements of the 

proposed rule, to those banking entities that engage in little or no 

covered trading activities or covered fund activities and investments. The agencies also requested comment on a number of questions related to the costs and burdens associated with particular 

aspects of the proposal, as well as on any significant alternatives 

that would minimize the impact of the proposal on small banking 

entities. The Federal Reserve will carefully consider the public 

comments received on these points and take those comments into 

account in crafting a final rule consistent with the statute. 

Q.2. FSOC’s proposed guidance will initially screen nonbanks for 

systemic relevance on the same $50bn threshold for banks. 

• How is this appropriate for the investment fund industry, 

where assets are managed not owned, and frequently in multiple funds none of which is $50bn but you have to add several 

funds together to get to the $50bn number? 

A.2. The FSOC has acknowledged in various statements that the 

same measurements of the size of an organization may not be appropriate for identifying the risk that organizations in different in-
113 

1See 76 FR 64264 (2011). 

dustries pose to the financial system. Indeed, in the preamble to its 

second notice of proposed rulemaking and proposed interpretive 

guidance, the FSOC recognized the need for further analysis of appropriate metrics for identifying the potential systemic risks posed 

by asset management companies and indicated its intent to consider whether asset management companies could in fact pose a 

threat to U.S. financial stability, the extent of any such threats, 

and whether such threats could be mitigated by subjecting these 

companies to Board supervision and prudential standards, or 

whether these threats would be better mitigated through other regulatory measures. The FSOC indicated that it may develop additional metrics and thresholds more appropriate for identifying 

asset management companies for further review.1

The FSOC also specifically noted that because a limited amount 

of data is currently available about hedge funds and private equity 

firms, it may establish additional metrics or thresholds tailored to 

evaluate these firms once these firms are required to provide data 

about their operations to the Securities and Exchange Commission, 

beginning in 2012, and this data becomes available for evaluation 

by the FSOC. 

As a member agency of the FSOC, the Board is continuing to 

work with the FSOC and its member agencies to establish a methodology to identify systemically important nonbank financial companies. 

RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO 

FROM DANIEL K. TARULLO 

Q.1. Last week the House Financial Services Committee passed 

unanimously a bill that exempts end users from margin requirements. Proposed margin rules ignore the clear intent of Congress 

that margin should not be imposed on end-user transactions. Do 

you all agree that end-user hedging does not meaningfully contribute to systemic risk, that the economy benefits from their risk 

management activity and that they should be exempt from margin 

requirements, and are you working together to provide consistent 

rules to provide end users with a clear exemption from margin requirements? 

A.1. Although section 723 of the Dodd-Frank Act provides an explicit exemption for certain end users from the swap clearing requirement, there is no exemption from the margin requirement in 

section 731 or section 764 of the Act for a swap dealer’s or major 

swap participant’s (MSP’s) swaps with end users. Sections 731 and 

764 of the Act require the CFTC, SEC, Board, and other prudential 

regulators to adopt rules for swap dealers and MSPs imposing initial and variation margin requirements on all noncleared swaps. 

The statute directs that these margin requirements be risk-based. 

The prudential regulators’ proposed rule implementing sections 

731 and 764 follows the statutory framework and proposes a riskbased approach to imposing margin requirements for transactions 

with nonfinancial end users. Nonfinancial end users appear to pose 

minimal risks to the safety and soundness of swap dealers and to 
114 

U.S. financial stability when they hedge commercial risks with derivatives and the related unsecured exposure remains below an appropriate credit exposure threshold. Accordingly, the proposed rule 

does not specify a minimum margin requirement for transactions 

with nonfinancial end users. Rather, the proposed rule, consistent 

with long-standing supervisory guidance, would permit a swap 

dealer to adopt, where appropriate, its own thresholds below which 

the swap dealer is not required to collect margin from counterparties that are nonfinancial end users. Such thresholds would be set 

forth in a credit support agreement and approved and monitored 

by the swap dealer as part of its own credit approval process. 

In issuing the proposal, the prudential regulators requested comment on a number of questions related to the effect of the proposed 

margin requirements on nonfinancial end users, including whether 

alternative approaches are preferable. We have received a variety 

of comments from members of the public, including commercial 

firms that use swaps to hedge their risk. Some of these comments 

have raised concerns regarding aspects of the proposed rule that 

commenters believe (i) would be inconsistent with current market 

practices with respect to nonfinancial end users and/or (ii) would 

have a negative impact on commercial firms and their use of derivatives to hedge. The prudential regulators are carefully considering all comments, and coordinating with the CFTC and the SEC, 

as we evaluate the proposal in light of comments received and formulate a final rule, as required by statute. 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM MARY L. SCHAPIRO 

Q.1. How has financial oversight and the implementation of Wall 

Street Reform benefited from the formal and informal coordination 

being done by FSOC? 

A.1. Financial oversight and implementation have benefited tremendously from the formal and informal coordination being done 

by FSOC. 

Formally, the FSOC has established several staff committees and 

workstreams made up of staff at its member agencies to address 

a variety of topics, including a study of the Volcker Rule; the identification of potential risks that flow across the financial system; 

the publication of the FSOC annual report; and consideration of 

processes for the designation of financial market utilities and 

nonbank financials for heightened review by the Federal Reserve. 

Just as important, I believe has been the progress made through 

informal coordination. By its very existence and unique mission, 

the FSOC has helped foster far greater communication between 

regulatory agencies—both at the principal level and at the staff 

level—about risks to the financial system and about more traditional regulatory efforts. These informal contacts have helped speed 

interactions, break down traditional silos, and substantially improved information sharing among the agencies and I believe all for 

the better. 

Q.2. The Securities Subcommittee recently held a hearing with the 

SEC Division Directors to discuss recent problems reported at the 
115 

SEC. Since that hearing, what changes are you making at the SEC 

to improve its operations? 

A.2. As our Division Directors testified in that November hearing, 

a significant amount of work has gone on at the SEC in the last 

3 years to improve our operations. As one highlight, the GAO’s 

audit of the SEC’s FY 2011 financial reports found that the SEC 

had succeeded in eliminating both of the two material weaknesses 

in its internal controls. Our staff has been working tirelessly to 

tackle longstanding issues in this area, and I am very proud of 

these results. 

As another example, the SEC’s Office of Compliance Inspections 

and Examinations (‘‘OCIE’’) continues to implement the improvement plan that was a result of OCIE’s self-assessment of the best 

way to improve process, strategy, structure, people and technology. 

The improvement plan initiatives are in various stages of development as OCIE moves forward with changes on a number of fronts. 

Since the November testimony, OCIE has implemented a couple of 

significant new improvements: 

• On January 3, 2012, OCIE nationally implemented its electronic examination workbook, the Tracking and Reporting Examinations National Documentation System (‘‘TRENDS’’), for 

all staff to use when conducting examinations of investment 

advisers and investment companies. TRENDS is a Web-based 

program that creates a uniform examination process and 

record-retention function for the National Examination Program, and streamlines the examination process to enable examiners to more efficiently carry out their examination-related 

responsibilities. 

• On January 17, 2012, the National Examination Program implemented a single comprehensive Inspections and Examinations Program Manual. The Manual represents the culmination of 15 months of work to review more than 200 NEP policies, identify policies that were no longer in effect or out of 

date, and capture the elements of those policies that were critical for the effective operation of the National Examination 

Program. We recognize that a comprehensive manual that allows all examination staff to have a common set of standards 

is critical to establishing a high performing and compliant organization. 

The OCIE reforms are bearing results, including improved actionable information for enforcement investigations. 

Furthermore, the structural reforms undertaken by our enforcement program are bearing fruit. In FY 2011, the Commission filed 

735 enforcement actions—more than ever filed in a single year in 

SEC history. The SEC was better able to discover and stop illegal 

activity earlier and obtained more than $2.8 billion in penalties 

and disgorgement ordered. Among the cases filed in FY 2011 were 

15 separate actions related to the financial crisis, naming 17 individuals, including 16 CEOs, CFOs, and other senior corporate officers. To date, the SEC has filed financial crisis-related actions 

against 95 individuals and entities, naming nearly 50 CEOs, CFOs, 

and other senior corporate officers. In FY 2011, the number of enforcement actions related to investment advisers and broker-deal-
116 

1See Securities Act § 2(b); Exchange Act § 3(f); Investment Company Act § 2(c); and Advisers 

Act § 202(c). 

ers also grew, with a total of 146 enforcement actions filed related 

to investment advisers and investment companies, a single-year 

record and 30 percent increase over FY 2010. The SEC also 

brought 112 enforcement actions related to broker-dealers, a 60 

percent increase over last fiscal year. 

Q.3. Does your agency take economic impact analysis seriously in 

your rules? If so, please discuss if there are any barriers to better 

analysis, such as your agency’s funding or ability to collect data 

from stakeholders who may be reluctant to share that information. 

A.3. High-quality economic analysis is an essential part of SEC 

rulemaking. The Commission has long recognized that a rule’s potential benefits and costs should be considered along with the protection of investors in making a reasoned determination that adopting a rule is in the public interest. 

When proposing a rule, the Commission engages in cost-benefit 

analysis and invites the public to comment on its analysis and provide any information and data that may better inform its decisionmaking. In adopting releases, the Commission responds to the information provided and revises its analysis as appropriate. This approach promotes a regulatory framework that strikes an appropriate balance between the costs and the benefits of regulation. 

In some cases, economic impact analysis is specifically required 

by statute. For example, the securities laws require the Commission, when it engages in rulemaking and is required to consider or 

determine whether the rulemaking is in the public interest, to consider, in addition to the protection of investors, whether the action 

will promote efficiency, competition, and capital formation.1 Section 

23(a) of the Exchange Act also requires the Commission, in making 

rules and regulations pursuant to the Exchange Act, to consider 

among other matters the impact any such rule or regulation would 

have on competition. The agency may not adopt a rule under the 

Exchange Act that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Act. In 

addition, the Commission considers the economic impact of its rules 

pursuant to requirements under the Regulatory Flexibility Act, the 

Paperwork Reduction Act, and the Small Business Regulatory Enforcement Fairness Act of 1996. 

The Commission also considers the costs and benefits of rules as 

a regular part of the rulemaking process. We are keenly aware that 

our rules have both costs and benefits, and that the steps we take 

to protect the investing public impact both financial markets and 

industry participants who must comply with our rules. This is especially relevant given the scope, significance, and complexity of 

the Dodd-Frank Wall Street Reform and Consumer Protection Act 

(‘‘Dodd-Frank Act’’). Our Division of Risk, Strategy, and Financial 

Innovation (‘‘RSFI’’) directly participates in the rulemaking process 

by helping to develop the conceptual framing for, and assisting in 

the subsequent writing of, the economic analysis sections of the 

Commission’s rulemaking releases. 
117 

2 In its report discussing cost-benefit analyses of Dodd-Frank Act rulemaking by financial regulators, the GAO noted that ‘‘the difficulty of reliably estimating the costs of regulations to the 

financial services industry and the Nation has long been recognized, and the benefits of regulation generally are regarded as even more difficult to measure.’’ GAO–12–151, p. 19; see also 

GAO–08–32. 3Securities Act Section 19(e), as added by Section 912 of the Dodd-Frank Act, provides that, 

for the purpose of evaluating any rule or program of the Commission issued or carried out under 

any provision of the securities laws and the purposes of considering proposing, adopting, or engaging in any such rule or program or developing new rules or programs, the Commission may: 

(1) gather information from and communicate with investors or other members of the public; 

(2) engage in such temporary investor testing programs as the Commission determines are in 

the public interest or would protect investors; and (3) consult with academics and consultants. 

Securities Act Section 19(f) provides that any action taken under Section 19(e) will not be construed to be a collection of information for purposes of the Paperwork Reduction Act. 

Certain costs or benefits may be difficult to quantify or value 

with precision, particularly those that are indirect or intangible.2

The primary difficulties can be traced to the absence of suitable 

data. This situation often arises in rulemaking because many rules 

are designed to modify the behavior of market participants in response to perceived problems. When there are no precedents that 

can be used as a basis for analysis, it is impossible to rigorously 

predict anticipated responses to proposed regulations. In addition, 

relevant data are only available from certain market participants. 

During the comment process, the SEC may ask the public to quantify their estimates of cost and benefits, especially when the dollar 

costs of proposed rulemaking are known only to or best determined 

by market participants. Although this can be an effective method 

for obtaining data, some firms are reluctant to provide information 

that is proprietary or confidential. Further, the process of providing 

the data may be burdensome to the individuals and firms and such 

data may be biased in favor of the respondent’s preferred outcome. 

The Commission’s ability to gather data for use in its cost-benefit 

analysis also is constrained in some respects by administrative 

laws, such as the Paperwork Reduction Act, although the DoddFrank Act provides the Commission with some relief from the data 

gathering constraints of the Paperwork Reduction Act in the rulemaking context.3

In light of recent court decisions, RSFI and the rule writing divisions, together with the Office of General Counsel, are examining 

improvements in the economic analysis the SEC employs in rulemaking. Although the existing processes are designed to provide a 

rigorous and transparent economic analysis, we are taking steps to 

improve this process so that future rules are consistent with best 

practices in economic analysis. 

Q.4. Even as you work to consult and harmonize the swap rules, 

it appears the SEC and CFTC do not plan to adopt a joint, integrated and coordinated approach to implementing the new rules. 

What can be done to ensure that the SEC and CFTC move together 

to issue an implementation plan for public comment that includes 

identical or coordinated dates for when the new rules go effective? 

A.4. The Dodd-Frank Act calls for the CFTC and the Commission 

to consult and coordinate for the purposes of assuring regulatory 

consistency and comparability to the extent possible. The DoddFrank Act also calls on the agencies to treat functionally or economically similar products or entities in a similar manner, but does 

not require identical rules. 
118 

Commission staff has consulted extensively with the CFTC in the 

development of our proposed rules. Our objective has been to establish consistent and comparable requirements, where possible, given 

the differences in the swap and security-based swap markets. The 

Dodd-Frank Act’s application to security-based swaps may differ 

from its application to the swaps regulated by the CFTC, as the 

relevant products, entities and markets themselves are different. 

Given this, differing approaches to the new requirements applicable to swaps and security-based swaps pursuant to the Dodd-Frank 

Act—including the timing of compliance with such requirements— 

may be warranted in some instances. 

As we have previously announced, the Commission intends to 

seek public comment on an implementation plan that will aim to 

permit the roll-out of the new security-based swap requirements in 

a logical, progressive, and efficient manner while minimizing unnecessary disruptions and costs to the markets. We will continue 

our efforts to coordinate as much as practicable with the CFTC as 

we move toward the publication of this implementation plan. 

Q.5. Congress created a new whistleblower program to encourage 

private citizens to bring quality tips of securities law violations to 

the attention of the SEC. Has this helped bring better quality information to the attention of the SEC enforcement staff to prosecute wrongdoers? 

A.5. Section 922 of the Dodd-Frank Act established a whistleblower 

program that requires the SEC to pay an award 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. The Act also required the 

Commission to promulgate rules to implement the program. Our 

final rules, adopted in May 2011, became effective on August 12th. 

Since then, the Commission has received hundreds of tips through 

the whistleblower program from individuals all over the country 

and in many parts of the world. That, of course, is in addition to 

the tens of thousands of tips, complaints, and referrals the agency 

receives every year. 

We are indeed reaping the early benefits of the whistleblower 

program through active and promising investigations utilizing crucial whistleblower information, some of which may lead to rewards 

in the near future. Though some expressed concern that the Commission will be inundated with low-quality submissions, to date, 

the contrary is proving to be the case. We continue to see an uptick 

in higher quality submissions, including potential violations that 

would have been difficult to detect or which otherwise may never 

have come to light without the assistance of the whistleblower. In 

addition, the quality of the information we are receiving has, in 

many instances, enabled our investigative staff to work more efficiently, thereby allowing us to better utilize our resources. 

Our new Office of the Whistleblower is reviewing these submissions and working with whistleblowers. The office recently filed its 

Annual Report to Congress detailing its many activities since its 
119 

4See U.S. Securities and Exchange Commission Annual Report on the Dodd-Frank Whistleblower Program, Fiscal Year 2011 (November 2011), available at http://www.sec.gov/about/offices/owb/whistleblower-annual-report-2011.pdf. 

creation.4 These include, among other things, the establishment of 

an outreach program, internal training programs, creation of policies and procedures, meetings with whistleblowers and their counsel, and coordination on investigations with Commission staff. The 

report also includes information about the number and types of 

whistleblower tips and complaints the agency has received since 

the rules became effective. 

Q.6. There have been several questions raised about the scope of 

the SEC’s proposed rule to implement provisions of Section 975 of 

the Wall Street Reform and Consumer Protection Act. Can you 

please provide an update on where this rulemaking stands? How 

are you responding to concerns that the proposed rule is broader 

than Congress intended? 

A.6. As you know, Section 975 of the Dodd-Frank Act amended Section 15B of the Exchange Act to require registration as a ‘‘municipal advisor’’ of any person that provides advice to a municipal entity with respect to municipal financial products or the issuance of 

municipal securities. On September 1, 2010, the Commission adopted an interim final temporary rule that established a procedure for 

advisors to temporarily satisfy the registration requirement as a 

transitional step toward the implementation of a permanent registration regime. The temporary rule is currently set to sunset on 

September 30, 2012. A municipal advisor that has completed the 

temporary registration form and received confirmation from the 

Commission that the form has been filed temporarily satisfies the 

registration requirement. The Commission has received approximately 1,000 confirmed registrations, including approximately 300 

from registered broker-dealers. 

In addition, on December 20, 2010, the Commission proposed for 

public comment rules that would govern the registration of municipal advisors and, among other things, proposed guidance and solicited comments on many important issues. We have received over 

1,000 comment letters on the proposal, and are reviewing them 

carefully. We expect to adopt final rules for the registration of municipal advisors later this year. 

We greatly appreciate these comments, including comments from 

the banking industry, public officials, market participants and 

Members of Congress, as the comments are helping us to formulate 

final rules that thoroughly consider the costs and benefits to investors, municipal entities, and obligated persons. In addition to reviewing the many comments received, Commission staff is consulting with staff at other regulators, market participants and 

other stakeholders regarding the appropriate scope of the definition 

of municipal advisor. This consultation should help promote a more 

effective and efficient implementation of the requirements of the 

Dodd-Frank Act that protects investors, municipal entities, obligated persons, and the public interest. The Commission expects 

that the final rule will strike an appropriate balance between ensuring that parties engaging in municipal advisory activities are 

registered, without needlessly requiring regulated persons already 
120 

under the jurisdiction of Federal and state governmental agencies 

and self-regulatory organizations to comply with additional regulation, examination and inspection burdens. 

Q.7. Once the definition of a municipal advisor is completed, the 

SEC and the MSRB then have to flesh out the regulatory regime 

that applies to currently unregulated municipal advisors. What 

kind of framework do you intend to apply to municipal advisors not 

employed by underwriters? 

A.7. Once the definition of a municipal advisor has been finalized, 

the Commission expects that the MSRB will propose several rule 

changes relating to the regulation of municipal advisors, including 

a proposal that would prohibit ‘‘pay-to-play’’ practices by municipal 

advisors, as well as proposals that would impose uniform standards 

for the training and conduct of municipal advisors. Like all self-regulatory organization rules, any proposals relating to the regulation 

of municipal advisors will be subject to public notice and comment, 

as well as Commission review. 

The municipal advisor regulatory framework will apply to all 

‘‘municipal advisors’’, as that term is defined in Section 15B of the 

Exchange Act and rules or regulations promulgated thereunder. 

Thus, without other action, this framework would be applicable to 

municipal advisors not employed by underwriters. 

Q.8. The sharing of swap data among international and domestic 

regulators is critical to reducing systemic risk in the global derivatives market. Could you describe how the SEC plans to further the 

goal of allowing U.S. and international regulators the ability to 

share swap data, and the types of international swap data sharing 

arrangements the United States plans to enter into with other financial regulatory authorities? Also, how will these international 

swap data sharing arrangements address the indemnification provisions contained in Title VII of the Wall Street Reform Act, and 

do you anticipate any challenges in implementing effective data 

sharing arrangements with international regulators resulting from 

such indemnification provisions that cannot be addressed through 

SEC ‘‘exemptive authority,’’ powers granted under Section 752 of 

the Wall Street Reform Act, or other authorities provided to your 

agency? 

A.8. The Commission and other regulators should have access to 

data pertaining to transactions and participants in the OTC derivatives markets that they oversee. By having access to such data, 

regulators will be in a better position to, among other things, monitor counterparties’ exposure to risk, identify concentrations of risk 

exposures, and evaluate systemic risks. 

The system that the Dodd-Frank Act (DFA) established to govern 

access by relevant foreign and domestic regulators to Security 

Based Swap (SBS) data relies primarily on Security Based Swap 

Data Repositories (SBSDR) making this information directly available to these regulators. Specifically, the DFA requires all cleared 

and uncleared SBSs to be reported to a SBSDR registered with the 

Commission or, if the SBS is uncleared and no SDR will accept the 

SBS, to the Commission. 

DFA Section 763(i) requires SBSDRs to share this SBS data, on 

a confidential basis, directly with certain domestic and foreign reg-
121 

5 November 19, 2010, available at http://www.sec.gov/news/press/2010/2010–229.htm. 

ulators and other parties that the Commission deems appropriate, 

provided that certain criteria are met, including notice to the Commission of the SBSDR’s receipt of a request for information. Pursuant to DFA Section 763(i), among other things, the SBSDR is required to obtain an agreement from the requesting regulator or 

third party stating that the requesting party will indemnify the 

Commission and the SBSDR for litigation expenses related to the 

SBSDR’s sharing of information with the requesting party (Indemnification Provision). 

Indemnification Provision 

As reflected in the SEC’s proposed rule regarding Security-Based 

Swap Data Repository Registration, Duties, and Core Principles 

(SBSDR Proposed Rules),5 the Indemnification Provision raises several challenges with respect to an SDR’s ability to share SBS data 

with domestic and foreign counterparts. First, foreign regulators, 

as is the case with the SEC, may be legally prohibited or otherwise 

restricted from agreeing to indemnify third parties, including 

SBSDRs and the Commission. Second, the Indemnification Provision could chill other regulators’ requests for access to data held by 

SDRs, thereby hindering their ability to fulfill their regulatory responsibilities. Foreign authorities have expressed these concerns 

about the potential effect of the Indemnification Provision. 

In the SBSDR Proposed Rules, the Commission highlighted two 

ways in which foreign regulators could obtain data maintained by 

SBSDRs without providing indemnification. First, as the Commission pointed out in proposing the SBSDR Proposed Rules, the Commission has general authority under the Section 24 of the Exchange Act to share nonpublic information in its possession with 

both domestic and foreign authorities and regulators. The Commission also has specific authority under Section 21(a) of the Exchange 

Act to help foreign authorities investigate matters that pertain to 

their oversight duties. The Indemnification Provision would not 

apply to a Commission decision to assist foreign regulators under 

Section 21(a) or to share SBS data in the Commission’s possession 

with foreign regulators pursuant to Section 24 of the Exchange Act, 

as discussed above. 

Furthermore, the Indemnification Provision need not apply 

where a U.S.-registered trade repository is separately registered in 

a foreign jurisdiction. Under such a circumstance, the foreign supervisor of the U.S.-registered trade repository should have direct 

access to information held in the repository pursuant to the law of 

that foreign jurisdiction, provided that applicable U.S. statutory 

confidentiality provisions are met. 

International SBS Data Sharing Arrangements 

The Commission may enter into a broad array of arrangements 

with regard to the sharing of SBS data, including memoranda of 

understanding, pacts, exchange of letters, protocols and undertakings. In the enforcement context, the Commission derives its 

ability to conclude reciprocal arrangements with foreign counterparts from statutory sources that: (i) allow the Commission to pro-
122 

6Specifically, the Commission’s authority to provide enforcement assistance to foreign authorities is contained in Section 21(a)(2) of the Exchange Act. Section 21(a) provides that: 

On request from a foreign securities authority, the Commission may provide assistance in accordance with this paragraph if the requesting authority states that the requesting authority 

is conducting an investigation which it deems necessary to determine whether any person has 

violated, is violating, or is about to violate any laws or rules relating to securities matters that 

the requesting authority administers or enforces. The Commission may, in its discretion, conduct such investigation as the Commission deems necessary to collect information and evidence 

pertinent to the request for assistance. Such assistance may be provided without regard to 

whether the facts stated in the request would also constitute a violation of the laws of the 

United States. In deciding whether to provide such assistance, the Commission shall consider 

whether (A) the requesting authority has agreed to provide reciprocal assistance in securities 

matters to the Commission; and (B) compliance with the request would prejudice the public interest of the United States. 7 A complete list of the SEC’s cooperative arrangements in the areas of enforcement cooperation, supervisory cooperation and technical assistance can be found at: http://www.sec.gov/ 

about/offices/oia/oialcooparrangements.htm. 

vide enforcement and supervisory assistance to foreign securities 

authorities;6 (ii) permit certain high-level Commission officials to 

share confidential information with certain types of entities at the 

Commission’s discretion; and (iii) allow the Commission to avoid 

compulsory disclosure of records provided to the Commission by 

foreign securities authorities. 

Since the late 1980s, the Commission successfully has used information-sharing arrangements to facilitate cooperation with its foreign counterparts. To date, the Commission has entered into 

around 40 memoranda of understanding with foreign securities authorities related to enforcement and supervisory cooperation.7 In 

addition, the Commission is a signatory to the IOSCO Multilateral 

Memorandum of Understanding, pursuant to which the Commission shares information with foreign regulators in 80 countries. 

The Commission staff believes that many of these agreements 

could serve as framework for sharing SBS information for enforcement-related purposes. In fact, prior to the adoption of the DFA, 

the SEC staff obtained SBS data from U.S. trade repositories pursuant to these MOUs on behalf of foreign regulators. The Commission staff will review our existing information sharing arrangements and discuss with our counterparts whether these arrangements fully cover the sharing of SBS data or whether amendments 

are necessary. 

Q.9. In 2010, the Commission adopted rules designed to make 

money market funds more resilient and less likely to break the 

buck. Please discuss the Commission’s experience with the implementation of the new rules and their impact on money market 

funds and the markets. 

A.9. As you note, in 2010 the Commission adopted rules designed 

to increase the resiliency of money market funds. These reforms 

imposed new liquidity requirements on money market funds, reduced their exposure to interest rate and credit spread risk, and 

provided a means by which a money market fund that had broken 

the buck could cease redeeming shares and liquidate in an orderly 

manner. The rule changes also have provided the Commission with 

important data that Commission staff uses daily to monitor the operations of money market funds. Through this monitoring, there is 

some evidence that these reforms are working as intended and that 

money market funds have much greater levels of liquidity to meet 

potential redemptions. There also is some evidence that, as a result 
123 

of these reforms, money market funds hold a greater amount of 

their portfolio in securities with a shorter maturity, which may 

have had an impact on the maturity structure of the short-term 

funding markets and increased rollover risk for entities relying on 

those markets for funding. 

I note, however, that while these reforms to date have been successful at what they were intended to do, they specifically were not 

designed to address some of the structural features of money market funds that can make them susceptible to runs. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM MARY L. SCHAPIRO 

Q.1.a. The agencies have submitted a proposed Volcker rule with 

over 1,300 questions, making it more of a concept release than a 

proposed rule. Additionally, the CFTC has not yet proposed its 

version of the Volcker Rule and might offer a competing version. 

Given the complexity of the issues involved and that the CFTC 

has not signed on, do you anticipate extending the comment period? 

A.1.a. The Commission and the Federal banking agencies extended 

the comment period for the Volcker proposal from January 13, 2012 

to February 13, 2012. This extension gave commenters additional 

time to review, assess, and provide comments on the proposal. 

Q.1.b. Do you anticipate doing a re-proposal? 

A.1.b. We are reviewing the public comments that were submitted 

during the extended comment period before considering whether or 

not the Commission should re-propose a rule to implement the 

Volcker Rule. 

Q.2.a. The agencies missed the October 18th statutory deadline for 

adopting a final Volcker rule, and despite agency delays, the rule 

is still scheduled to go into effect in July 2012. The Dodd-Frank Act 

had contemplated at least a 9-month timeframe of advance preparation for compliance. 

Do you believe there will be sufficient time for banking entities 

to adjust to all of the changes imposed by the rule? 

A.2.a. The joint Volcker Rule proposal requested comment on potential timeframes for compliance with the proposed rule. Some 

firms have indicated in meetings with Commission staff that the 

proposed effective date of July 21, 2012 will not provide sufficient 

time to establish a compliance program or to begin reporting quantitative measurements due to planned implementation of other new 

regulatory requirements and other systems issues. The Commission 

is considering this issue in light of comments received. 

Q.2.b. Would it make sense to phase in the implementation of the 

rule, so as to identify potential market disruptions caused by any 

single element of the rule? 

A.2.b. The joint Volcker Rule proposal asked for comment about a 

phased implementation of the proposed rule. We will continue to 

consider the option for such an implementation approach together 

with the other agencies involved. 
124 

Q.2.c. There is ample precedent for a phase-in, such as implementation of Regulation NMS. Do you believe the Volcker Rule calls for 

a similar phased-in approach? 

A.2.c. The Commission has some experience with a phased implementation of a new rule, and, depending on the circumstances, it 

can be an effective approach to ease potential compliance and systems issues. The joint Volcker Rule proposal requested comment on 

a phased-in approach, and we look forward to considering comment 

on the issue. 

RESPONSE TO WRITTEN QUESTION OF SENATOR SCHUMER 

FROM MARY L. SCHAPIRO 

Q.1. The proposed regulatory framework under Section 619 of 

Dodd-Frank will certainly impact liquidity in the markets for many 

financial products to some degree. What analysis has been done to 

estimate the impact in various representative markets (e.g., corporate bonds)? What are the main elements of the proposed rules 

which you believe mitigate potential harm to market liquidity? To 

the extent the proposed rules contain such mitigating elements, do 

you believe those safeguards are adequate? 

A.1. The agencies requested extensive comment in the joint proposal about the potential economic impacts of the proposed implementation of Section 619 of the Dodd-Frank Act. We hope commenters will address these issues, particularly with respect to the 

proposed rule’s potential impact on market liquidity, and that they 

will provide quantitative data, where possible. 

The Commission staff is aware of a few public analyses that have 

been conducted to date. For example, Oliver Wyman conducted a 

study, commissioned by the Securities Industry and Financial Markets Association, on the potential impact of the proposed rule on 

liquidity in the corporate bond market. We posted this study in our 

public comment file and we will consider it in developing the final 

rule. 

We believe the market making, underwriting, and hedging exceptions in the rule proposal should help mitigate any potential harm 

to market liquidity, while furthering the goals of the Volcker Rule. 

We are sensitive to issues involving market liquidity and will consider any comments discussing the proposed exception’s potential 

impact on market liquidity in developing a final rule. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM MARY L. SCHAPIRO 

Q.1. Last week the House Financial Services Committee passed 

unanimously a bill that exempts end users from margin requirements. Proposed margin rules ignore the clear intent of Congress 

that margin should not be imposed on end-user transactions. Do 

you all agree that end-user hedging does not meaningfully contribute to systemic risk, that the economy benefits from their risk 

management activity and that they should be exempt from margin 

requirements, and are you working together to provide consistent 

rules to provide end users with a clear exemption from margin requirements? 
125 

A.1. Federal margin requirements for securities were put into effect in response to the events of the Great Depression. They are designed to limit leverage in the system and protect dealers from 

uncollateralized exposure. This, in turn, protects the financial markets. 

We recognize that certain types of entities active in the OTC derivatives markets traditionally have not posted margin and that 

these entities are concerned that regulatory margin requirements 

could interfere with their ability to hedge commercial risk. The 

other Federal agencies implementing the OTC derivatives rulemaking mandated by the Dodd-Frank Act have proposed requirements to address these concerns. Commission staff is consulting 

with these agencies and taking their approaches into consideration 

as it formulates a rule proposal for Commission consideration. 

Q.2. Title VII of the Dodd-Frank Act states that the SEC and 

CFTC shall consult and coordinate to the extent possible for the 

purposes of assuring regulatory consistency and comparability. Will 

the SEC and CFTC propose the same rule on the extraterritorial 

application of Title VII? 

A.2. Since the Dodd-Frank Act’s passage, Commission staff has 

been engaged in ongoing discussions with CFTC staff regarding our 

respective approaches to implementing the statutory provisions of 

Title VII. In many cases, these discussions have led to a common 

approach. 

However, the Dodd-Frank Act’s application to security-based 

swaps may differ from its application to swaps, as the relevant 

products, entities and markets themselves are different. As a result, in certain instances, it may not be appropriate for the Commission’s and the CFTC’s rules to be identical, given the differences 

in the swap and security-based swap markets. 

We will continue to coordinate with the CFTC to develop as harmonized an approach as practicable and appropriate as we work to 

develop proposed rules concerning the treatment of cross-border security-based swap transactions. 

Q.3. Reviewing public comments and meeting with interested parties are good steps, but they are not a substitute for rigorous economic analysis that SEC Commissioners KathleenCasey and Troy 

Paredes called for and found lacking in the SEC staff study on Investment Advisers and Broker-Dealers. Before proposing any specific rule to public, is the SEC going to conduct and then make 

available for public comment rigorous economic analysis to inform 

its decisionmaking? 

A.3. In considering any possible regulatory action in connection 

with the study on the investment advisers and broker-dealers required under Section 913 of the Dodd-Frank Act, the Commission 

expects to follow its usual practice of including its economic analysis for review and public comment as part of any rule proposal. 

This process has important benefits, as the comment process provides a mechanism for refining our economic analysis by seeking 

feedback on specific issues and making requests for private data. 

This is especially important where, as here, data necessary to conduct an analysis may not be publicly available. The process also 

provides us with additional insights from affected parties that may 
126 

not have been known or considered during the proposal’s development. By analyzing and, where appropriate, incorporating this 

input into its analysis, the Commission is able to determine whether to proceed to a final rule and to produce the best possible final 

product. 

In this case, it is likely to be especially important for the Commission to ask the public to provide additional relevant data or empirical analysis. As such, Commission staff, including its economists, is drafting a public request for information to obtain data 

specific to the provision of retail financial advice and the regulatory 

alternatives. It is our hope commenters will provide information 

that will allow Commission staff to continue to analyze the various 

components of the market for retail financial advice. 

RESPONSE TO WRITTEN QUESTION OF SENATOR TOOMEY 

FROM MARY L. SCHAPIRO 

Q.1. FSOC’s proposed guidance will initially screen nonbanks for 

systemic relevance on the same $50bn threshold for banks. 

How is this appropriate for the investment fund industry, where 

assets are managed not owned, and frequently in multiple funds 

none of which is $50bn but you have to add several funds together 

to get to the $50bn number? 

A.1. FSOC’s proposed guidance recognized that its proposed thresholds may not be appropriate for the investment fund industry. The 

release proposing this guidance states: 

The Council recognizes that the quantitative thresholds it has identified for 

application during Stage 1 may not provide an appropriate means to identify a subset of nonbank financial companies for further review in all cases 

across all financial industries and firms. While the Council will apply the 

Stage 1 thresholds to all types of nonbank financial companies, including 

financial guarantors, asset management companies, private equity firms, 

and hedge funds, these companies may pose risks that are not well-measured by the quantitative thresholds approach. 

With respect to hedge funds and private equity firms in particular, the 

Council intends to apply the Stage 1 thresholds, but recognizes that less 

data is generally available about these companies than about certain other 

types of nonbank financial companies. Beginning in 2012, advisers to hedge 

funds and private equity firms and commodity pool operators and commodity trading advisors will be required to file Form PF with the Securities 

and Exchange Commission or the Commodity Futures Trading Commission, 

as applicable, on which form such companies will make certain financial 

disclosures. Using these and other data, the Council will consider whether 

to establish an additional set of metrics or thresholds tailored to evaluate 

hedge funds and private equity firms and their advisers. 

In addition, the Council, its member agencies, and the Office of Financial 

Research will analyze the extent to which there are potential threats to 

U.S. financial stability arising from asset management companies. This 

analysis will consider what threats exist, if any, and whether such threats 

can be mitigated by subjecting such companies to Board of Governors supervision and prudential standards, or whether they are better addressed 

through other regulatory measures. The Council may issue additional guidance for public comment regarding potential additional metrics and thresholds relevant to asset manager determinations. 

I expect that the matters your question raises will be addressed as 

FSOC considers potential additional or different metrics or thresholds tailored to the investment fund industry. 
127 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM GARY GENSLER 

Q.1. Does your agency take economic impact analysis seriously in 

your rules? If so, please discuss if there are any barriers to better 

analysis, such as your agency’s funding or ability to collect data 

from stakeholders who may be reluctant to share that information. 

A.1. The CFTC does take economic impact analysis seriously. For 

example, the Commission strives to include well-developed considerations of costs and benefits in each of its proposed rulemakings. 

Relevant considerations are presented not only in the cost-benefit 

analysis section of the CFTC’s rulemaking releases, but are discussed throughout the release in compliance with the Administrative Procedure Act, which requires the CFTC to set forth the legal, 

factual and policy basis for its rulemakings. 

In its Dodd-Frank Act rules, each staff rulemaking team includes 

a member from the Commission’s Office of the Chief Economist. 

Rulemakings involve quantified costs and benefits to the extent it 

is reasonably feasible and appropriate. For rules that do not have 

quantifiable costs, the Commission seeks to explain why such costs 

are not quantifiable and to explain the reasoning and supportive 

explanation of its predictive judgments using qualitative measures. 

With each proposed rule, the Commission has sought public comment regarding costs and benefits. Nonetheless, at times commenters omit specific cost estimates. 

Q.2. Even as you work to consult and harmonize the swap rules, 

it appears the SEC and CFTC do not plan to adopt a joint, integrated and coordinated approach to implementing the new rules. 

What can be done to ensure that your two agencies move together 

to issue an implementation plan for public comment that includes 

identical or coordinated dates for when the new rules go effective? 

A.2. The CFTC and the SEC are coordinating closely in writing 

rules to implement the derivatives provisions of the Dodd-Frank 

Act. We have jointly proposed rulemakings and coordinated and 

consulted on each of the other rulemakings, including sharing 

many of our memos, term sheets and draft work product. This close 

working relationship has benefited the rulemaking process, and 

will continue throughout completion of rulemaking and implementation. On May 2 and May 3, 2011, SEC and CFTC staff jointly 

held roundtable discussions to get the public’s views with regard to 

the very important issues associated with the implementation 

schedule for final rules. The Commissions gathered helpful information on a joint basis through this process as well as through 

subsequent analysis of written submissions. The Commissions have 

collected valuable information to guide efforts in a manner that facilitates efficient and coordinated implementation. 

Q.3. The sharing of swap data among international and domestic 

regulators is critical to reducing systemic risk in the global derivatives market. Could you describe how the CFTC plans to further 

the goal of allowing U.S. and international regulators the ability to 

share swap data, and the types of international swap data sharing 

arrangements the United States plans to enter into with other financial regulatory authorities? Also, how will these international 

swap data sharing arrangements address the indemnification pro-
128 

visions contained in Title VII of the Wall Street Reform Act, and 

do you anticipate any challenges in implementing effective data 

sharing arrangements with international regulators resulting from 

such indemnification provisions that cannot be addressed through 

CFTC ‘‘exemptive authority,’’ powers granted under Section 752 of 

the Wall Street Reform Act, or other authorities provided to your 

agency? 

A.3. The CFTC is working to ensure that both domestic and international regulators have access to swap data to support their regulatory mandates. The Commission was an active participant in the 

2010 Financial Stability Board report, which highlighted the fact 

that trade repository data will allow authorities to address 

vulnerabilities in the financial system and to develop well-informed 

regulatory, supervisory and other policies that promote financial 

stability and reduce systemic risks. 

The Commission specifically addressed access to swap data repository (SDR) data in its final SDR rulemaking. In that rulemaking, the CFTC noted that the Dodd-Frank Act requires a registered SDR to make available on a confidential basis all data obtained by the registered SDR to ‘‘appropriate domestic regulators’’ 

and ‘‘appropriate foreign regulators.’’ 

With respect to indemnification, in its SDR rulemaking, the 

CFTC notes that we are ‘‘mindful that the Confidentiality and Indemnification Agreement requirement . . . may be difficult for certain domestic and foreign regulators to execute with an SDR due 

to various home country laws and regulations.’’ Accordingly, the 

Commission rule allows for the provision of access to swap data reported and maintained by SDRs for domestic regulators without 

being subject to the notice and indemnification provisions of the 

Commodity Exchange Act (CEA) if the SDR is subject to the regulatory jurisdiction of, and registers with, the domestic regulator. In 

addition, pursuant to a separate provision of the CEA, the SDR 

may be permitted to provide direct electronic access to such regulator as a designee of the Commission. 

With respect to foreign regulatory authorities, the rule provides 

that data in an SDR may be accessed by an appropriate foreign 

regulator without the execution of a confidentiality and indemnification agreement in appropriate circumstances. Such access 

may be granted when the regulator is acting with respect to a SDR 

that is also registered with that regulator or when the foreign regulator, pursuant to section 8(e) of the CEA, receives SDR information from the Commission. 

The Commission continues to review the indemnification provisions of the CEA. CFTC staff is actively discussing with foreign 

regulators how to implement effective information sharing arrangements with non-U.S. regulators, and I anticipate that staff will 

make additional recommendations for the Commission’s consideration to facilitate regulators’ access to information necessary for 

regulatory, supervisory and enforcement purposes. 
129 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM GARY GENSLER 

Q.1. As you noted in your testimony, access by regulators to data 

about the swaps market is important. The Depository Trust & 

Clearing Corporation operates a regulators’ portal to give regulators access to certain OTC derivatives data. 

• Does the CFTC have access to and review this information? 

• If so, when did the CFTC begin accessing and reviewing this 

information? If not, why not? 

A.1. Commission staff expect that the Depository Trust & Clearing 

Corporation (DTCC) will seek registration as a Swap Data Repository (SDR). Commission staff make themselves available to all such 

applicants to consult on practical and technical issues, including in 

the case of SDRs how the CFTC will use technology to access SDR 

data. With regard to the DTCC regulators’ portal, Commission staff 

is working with the DTCC in order to obtain access. 

Q.2. The agencies have submitted a proposed Volcker rule with 

over 1,300 questions, making it more of a concept release than a 

proposed rule. Additionally, the CFTC has not yet proposed its 

version of the Volcker Rule and might offer a competing version. 

• Given the complexity of the issues involved and that the CFTC 

has not signed on, do you anticipate extending the comment 

period? 

• Do you anticipate doing a re-proposal? 

A.2. The CFTC’s proposed rule was published in the Federal Register on February 14, 2012. The Commission looks forward to receiving public comments and will carefully consider those comments before determining how to proceed further. 

Q.3. The agencies missed the October 18th statutory deadline for 

adopting a final Volcker rule, and despite agency delays, the rule 

is still scheduled to go into effect in July 2012. The Dodd-Frank Act 

had contemplated at least a 9-month timeframe of advance preparation for compliance. 

• Do you believe there will be sufficient time for banking entities 

to adjust to all of the changes imposed by the rule? 

• Would it make sense to phase in the implementation of the 

rule, so as to identify potential market disruptions caused by 

any single element of the rule? 

• There is ample precedent for a phase-in, such as implementation of Regulation NMS. Do you believe the Volcker Rule calls 

for a similar phased-in approach? 

A.3. The CFTC’s release of its proposed rulemaking specifically 

asks commenters to provide information regarding time needed to 

comply and proper phasing of implementation. The Commission 

will carefully take into account all public comments. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM GARY GENSLER 

Q.1. Last week the House Financial Services Committee passed 

unanimously a bill that exempts end users from margin require-
130 

ments. Proposed margin rules ignore the clear intent of Congress 

that margin should not be imposed on end-user transactions. Do 

you all agree that end-user hedging does not meaningfully contribute to systemic risk, that the economy benefits from their risk 

management activity and that they should be exempt from margin 

requirements, and are you working together to provide consistent 

rules to provide end users with a clear exemption from margin requirements? 

A.1. In the Dodd-Frank Act, Congress recognized the different levels of risk posed by transactions between financial entities and 

those that involve nonfinancial entities, as reflected in the nonfinancial, end-user exception to clearing. The risk of a crisis spreading throughout the financial system is greater the more interconnected financial companies are to each other. Interconnectedness among financial entities allows one entity’s failure to cause 

uncertainty and possible runs on the funding of other financial entities, which can spread risk and economic harm throughout the 

economy. Consistent with this, the CFTC’s proposed rules on margin requirements focus only on transactions between financial entities and exclude end users. 

Q.2. While the CFTC proposal may not require margin to be posted 

for uncleared swaps involving some commercial end users, the test 

for qualifying as an end user is based upon a distinction between 

financial entities and nonfinancial entities and any swap dealer is 

considered a financial entity. Therefore, the issue becomes how the 

CFTC defines swap dealers and whether many end users may be 

captured as swap dealers and subject to posting margin. Can you 

explain how many swap dealers you are expecting to require to register and what types of entities may be captured by this term? 

A.2. The Dodd-Frank Act includes a definition of the term ‘‘swap 

dealer’’ and also requires the CFTC and SEC to jointly adopt rules 

further defining the term. The number of entities required to register is uncertain and will depend on the decisions of businesses involved. In an effort to estimate how many entities may register as 

swap dealers, CFTC staff analyzed the membership statements of 

relevant trade associations that list swap dealers as members and 

other relevant sources. CFTC staff estimates that 100–150 entities 

may seek to register with the Commission as swap dealers. 

Q.3. Title VII of the Dodd-Frank Act states that the SEC and 

CFTC shall consult and coordinate to the extent possible for the 

purposes of assuring regulatory consistency and comparability. Will 

the SEC and CFTC propose the same rule on the extraterritorial 

application of Title VII? 

A.3. The CFTC and the SEC coordinate very closely with regard to 

all aspects of rulemaking under Title VII of the Dodd-Frank Act. 

The two agencies will continue to do so as the rulemaking process 

proceeds including, with regard to extraterritorial application. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM GARY GENSLER 

Q.1. Dodd-Frank created the FSOC as a way to make sure all of 

the regulatory agencies are communicating and rules across the 
131 

agencies can be as consistent as possible. However, we have seen 

recently with the release of the Volcker rule by the FDIC, Federal 

Reserve, OCC and SEC that even with the FSOC and a law that 

mandates coordination, not all of the agencies can work together. 

Despite the new construct, the CFTC is now working on its own 

rule and has not signed onto the existing rule with the rest of you. 

Have you all contemplated how it might work to have an individual 

who handles multiple product lines being forced to adhere to the 

two different standards? Couldn’t that be problematic functionally? 

Also, do you believe, since the CFTC is going to develop its own 

rule, we should extend the timeline for implementation so that the 

interested parties can view ALL of the regulators’ proposals and 

how they will interconnect before filing official comments? 

A.1. The CFTC’s proposed rule was published in the Federal Register on February 14, 2012. The Commission looks forward to receiving public comments and will carefully consider those comments before determining how to proceed further. The Commission 

will continue to coordinate closely with fellow regulators regarding 

implementation of all Dodd-Frank Act provisions. 

Q.2. The SEC and CFTC recently approved the final version of 

Form PF, the new systemic risk reporting form for SEC-registered 

managers to private funds. In addition to Form PF, the CFTC has 

proposed its own separate systemic risk reporting forms (Forms 

CPO–PQR and CTA–PR) for firms registered with the CFTC. The 

final Form PF release indicates that managers that are registered 

with both the SEC and CFTC may have the option to consolidate 

their information on Form PF, rather than reporting on separate 

forms, if the CFTC determines to makes changes to its proposed 

forms. 

The CFTC has not yet published final versions of its proposed 

forms. Does the CFTC intend to allow firms to reduce their compliance burden by submitting systemic risk information on a single 

form? 

A.2. Entities that are dual registrants may file Form PF for all operated pools without having to file Form CPO–PQR on a quarterly 

basis. Such firms will continue to have to file demographic information on Schedule A of Form CP–PQR on an annual basis. 

Q.3. The final Form PF release indicates that the SEC and CFTC 

will adopt policies and procedures to ensure strong confidentiality 

protections for information submitted on Form PF. Does the CFTC 

intend to adopt similar confidentiality safeguards for information 

submitted on Forms CPO–PQR and CTA–PR? As you know, the recent public disclosure of confidential trading information that was 

provided to the CFTC in 2008 was very troubling to market participants. 

A.3. The CFTC received considerable comment regarding confidential treatment of information submitted by registrants. In response, 

the final rule adopted by the Commission designates certain information in Forms CPO–PQR and CTA–PR as confidential. 
132 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM MARTIN J. GRUENBERG 

Q.1. Chairman Gruenberg, in your testimony you discuss the 

FDIC’s implementation of Title II of the Dodd-Frank Act and how 

the FDIC is preparing to resolve, if necessary, systemically significant institutions with its new orderly liquidation authority. 

Had MF Global been deemed systemically significant before its 

collapse, would the FDIC have been able to resolve MIT Global 

under Title II? 

A.1. Yes, the FDIC could have resolved MF Global had it been necessary. The FDIC has the legal authority, technical expertise, and 

operational capability to resolve a systemically significant financial 

institution with its new orderly liquidation authority. Since the 

Dodd-Frank Act was enacted on July 21, 2010, the FDIC has established a new Office of Complex Financial Institutions. This new office is monitoring risk, conducting resolution planning, and coordinating with regulators overseas. We also have completed a series 

of rulemakings that implement our orderly liquidation authority 

under Title II of the Dodd-Frank Act and have finalized the joint 

rulemaking with the Federal Reserve Board to implement the resolution requirements (‘‘living wills’’). 

Q.2. The agencies have submitted a proposed Volcker rule with 

over 1,300 questions, making it more of a concept release than a 

proposed rule. Additionally, the CFTC has not yet proposed its 

version of the Volcker Rule and might offer a competing version. 

• Given the complexity of the issues involved and that the CFTC 

has not signed on, do you anticipate extending the comment 

period? 

• Do you anticipate doing a re-proposal? 

A.2. On January 3, 2012, the agencies announced a 30-day extension of the comment period to February 13, 2012. On January 11, 

2012, the CFTC approved its notice of proposed rulemaking to implement the Volcker Rule, with substantially identical proposed 

rule text as in the interagency notice of proposed rulemaking. The 

comment period extension was intended to facilitate public comment on the provisions of the rule and the questions posed by the 

agencies, as well as coordination of the rulemaking among the responsible agencies. The agencies will carefully consider the comments received on the proposed Volcker Rule in the development 

of the final rule and, as part of this review, will consider whether 

a re-proposal is necessary. 

Q.3. The agencies missed the October 18th statutory deadline for 

adopting a final Volcker rule, and despite agency delays, the rule 

is still scheduled to go into effect in July 2012. The Dodd-Frank Act 

had contemplated at least a 9-month timeframe of advance preparation for compliance. 

• Do you believe there will be sufficient time for banking entities 

to adjust to all of the changes imposed by the rule? 

• Would it make sense to phase in the implementation of the 

rule, so as to identify potential market disruptions caused by 

any single element of the rule? 
133 

• There is ample precedent for a phase-in, such as implementation of Regulation NMS. Do you believe the Volcker Rule calls 

for a similar phased in approach? 

A.3. The FDIC and the other agencies recognize the complexities 

associated with Section 619 of the Dodd-Frank Act and the care 

and attention required for implementing and complying with the 

new rules. Perhaps because of these complexities, the statute specifically provides affected companies with a minimum of 2 years to 

come into compliance with Section 619, which can be extended by 

rule or order by the Federal Reserve Board. Further, it is our understanding that many of the institutions affected by these proposed rules have begun preparing for their promulgation. However, 

although alternative approaches are not explicitly under consideration, the agencies continuously gauge the reasonableness of the 

implementation of rules and their impact on stakeholders. 

RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO 

FROM MARTIN J. GRUENBERG 

Q.1. Last week the House Financial Services Committee passed 

unanimously a bill that exempts end users from margin requirements. Proposed margin rules ignore the clear intent of Congress 

that margin should not be imposed on end-user transactions. 

Do you all agree that end-user hedging does not meaningfully 

contribute to systemic risk, that the economy benefits from their 

risk management activity and that they should be exempt from 

margin requirements, and are you working together to provide consistent rules to provide end users with a clear exemption from margin requirements? 

A.1. Nonfinancial end users appear to pose minimal risks to the 

safety and soundness of swap dealers and to U.S. financial stability 

when they hedge commercial risks with derivatives and the related 

unsecured exposure remains below an appropriate credit exposure 

threshold. Accordingly, the proposed rule does not specify a minimum margin requirement for transactions with nonfinancial end 

users. Rather, the proposed rule, consistent with long-standing supervisory guidance, would permit a swap dealer to adopt, where appropriate, its own thresholds below which the swap dealer is not 

required to collect margin from counterparties that are nonfinancial end users. In addition, low-risk financial end users, including most community banks, would not be required to post collateral for initial margin unless their activity exceeds either substantial thresholds or the risk limits set by the swap dealer with 

which they are doing business. Such thresholds are usually explicitly set forth in a credit support agreement or other agreement and 

are approved and monitored by the swap dealer as part of its own 

credit approval process. 

As noted in the proposal, this approach is consistent with current 

market practices with respect to nonfinancial end users and low 

risk financial end users, in which swap dealers view the question 

of whether, and to what extent, to require margin from their 

counterparties as a part of the prudent credit decision process and 

consistent with safe and sound banking practices. Accordingly, the 

prudential regulators would expect that the direct costs and bene-
134 

fits of hedging with noncleared derivatives by nonfinancial end 

users and low risk financial end users, including with respect to opportunity costs and earnings volatility, would remain unchanged 

relative to current market practices under the terms of the proposed rule. 

In issuing the proposal, the prudential regulators requested comment on a variety of issues related to the effect of the proposed 

margin requirements on nonfinancial end users, including whether 

alternative approaches—such as an exemption similar to the mandatory clearing exemption—are preferable. We have received a variety of comments from members of the public, including commercial firms that use swaps to hedge their risk. The prudential regulators will carefully consider all comments as we evaluate the proposal in light of comments received and formulate a final rule. 

RESPONSE TO WRITTEN QUESTION OF SENATOR TOOMEY 

FROM MARTIN J. GRUENBERG 

Q.1. As written, the proposed interagency rule to implement the socalled ‘‘Volcker Rule’’ would impose new and very substantial and 

costly compliance burdens on many banks that do not have a 

standalone proprietary trading desk or substantial fund investments, and never have. Specifically, the proposed rule would require these institutions to establish, at a minimum, policies and 

procedures designed to prevent the occurrence of activities in which 

the institution is not engaged—in other words, the regulatory 

equivalent of proving a negative. It sounds to me like that could 

be a very costly undertaking for an institution that was never the 

intended target of the Volcker Rule. But more importantly, this 

makes even less sense given the economic challenges we face and 

the need to direct resources toward capital planning and lending. 

Can you comment on why this is necessary? Is there a less onerous way to implement the permitted activities? 

A.1. We agree that banking organizations that are not engaged in 

activities or investments prohibited by the Volcker Rule should not 

face an onerous compliance burden. In fact, the proposed regulations specifically provide that such a banking organization will 

have been deemed to satisfy compliance requirements if its existing 

compliance policies and procedures include provisions designed to 

prevent the institution from becoming engaged in statutorily prohibited activities or making statutorily restricted investments. Further, for those banks that do engage in trading activities covered 

by the statute, the regulations provide an asset size threshold for 

the reporting and record keeping requirements, which provide 

smaller institutions with significantly less burdensome requirements. We recognize the importance of this issue and will carefully 

consider comments concerning implementation burden. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM JOHN WALSH 

Q.1. Comptroller Walsh, in your testimony you discuss the DoddFrank requirement that the Bureau of Consumer Financial Protection and prudential regulators coordinate their supervision activi-
135 

ties in order to effectively regulate banks. You note that the Bureau must consult with prudential regulators and that the Bureau 

and prudential regulators are required to conduct examinations simultaneously. You state, however, ‘‘Candidly, aspects of this portion of the Dodd-Frank Act do not mesh well with how bank examination activities are actually conducted.’’ 

Would you please elaborate on this statement? 

A.1. Section 1025 of the Dodd-Frank Act requires the prudential 

regulators and the CFPB to coordinate their examination and supervision of insured depository institutions and their affiliates with 

assets of more than $10 billion in a number of ways. First, section 

1025 requires the prudential regulators and the CFPB to coordinate their examinations of such institutions and conduct simultaneous examinations unless an institution requests the examinations to be conducted separately. In addition, the prudential regulators and the CFPB must share draft reports of examination and 

the receiving agency must be provided at least 30 days to comment 

on the draft report before it is made final. Moreover, an agency 

must take into consideration any comments received from the other 

agency before issuing a final report of examination or taking supervisory action. 

We support the goal reflected in section 1025 of minimizing unnecessary regulatory burden in connection with the supervisory activities of the CFPB and the prudential regulators. However, as 

drafted, the requirements of section 1025 do not mesh well with 

the practicalities and scope of prudential regulators’ actual examination responsibilities and practices. First, the universe of institutions with over $10 billion in assets are examined in different 

ways—some are subject to continuous supervision by resident exam 

teams, others are subject to more discrete point-in-time exams. 

These differences present challenges in coordinating ‘‘simultaneous’’ examinations. The scope of the prudential regulators’ examinations also is much broader than the examination authority of 

the CFPB such that ‘‘simultaneous’’ examination activity could 

have little relevance to the apparent statutory objective unless the 

examination activity is related to the same activity, product or 

service at an institution. 

The banking agencies and the CFPB are currently discussing a 

potential Memorandum of Understanding that would better synchronize exam activities in such related areas. 

Q.2.a. The agencies have submitted a proposed Volcker rule with 

over 1,300 questions, making it more of a concept release than a 

proposed rule. Additionally, the CFTC has not yet proposed its 

version of the Volcker Rule and might offer a competing version. 

Given the complexity of the issues involved and that the CFTC 

has not signed on, do you anticipate extending the comment period? 

A.2.a. Due to the complexity of the issues involved and to facilitate 

coordination of the rulemaking among the responsible agencies as 

provided in section 619 of the Dodd-Frank Act, the OCC, Board, 

FDIC and SEC (the agencies) extended the comment period on the 

joint notice of proposed rulemaking implementing section 619 (the 

Proposal) from January 13, 2012 until February 13, 2012. The no-
136 

tice of extension of comment period was published in the Federal 

Register on January 3, 2012. See 77 Fed. Reg. 23. 

Q.2.b. Do you anticipate doing a re-proposal? 

A.2.b. The agencies will consider this question after they have had 

an opportunity to review all comments submitted on the Proposal 

and have evaluated the extent of changes that they envision making to the Proposal. 

Q.2.c. The agencies missed the October 18th statutory deadline for 

adopting a formal Volcker rule, and despite agency delays, the rule 

is still scheduled to go into effect in July 2012. The Dodd-Frank Act 

had contemplated at least a 9-month timeframe of advance preparation for compliance. Do you believe there will be sufficient time 

for banking entities to adjust to all of the changes imposed by the 

rule? 

A.2.c. Much of the timing for compliance with the final Volcker 

regulation is dictated by section 619 of the Dodd-Frank Act. Section 

619 goes into effect on July 21, 2012 (even without final rules), and 

provides a 2-year conformance period that runs until July 2014. 

Banking entities may use this conformance period to bring their existing activities, investments, and relationships into compliance 

with section 619. In addition, section 619 provides that banking entities may request up to three 1-year extensions of this conformance period from the Federal Reserve Board and another 5-year extension from the Board to divest of certain illiquid funds. 

On February 8, 2011, the Board issued a Conformance Rule implementing the conformance provisions of section 619. However, 

the Conformance Rule was re-issued on November 7, 2011, together 

with the Proposal issued by the agencies, and the Board is soliciting comment on whether any portion of the Conformance Rule 

should be revised in light of other elements of the Proposal. 

We also recognize that the Proposal (including its compliance 

program requirements and recordkeeping and reporting requirements), if adopted as published for comment, would become effective on July 21, 2012. Recognizing the potential issues this presents, the Proposal specifically solicits comment on whether this effective date will provide banking entities with sufficient time to 

comply with the prohibitions and restrictions on proprietary trading and covered fund activities and implement the proposed compliance program and reporting and recordkeeping requirements. The 

agencies plan to consider carefully any comments received on this 

issue. 

Q.2.d. Would it make sense to phase in the implementation of the 

rule, so as to identify potential market disruptions caused by any 

single element of the rule? 

A.2.d. The Proposal expressly requests comment on whether the 

agencies should use a gradual, phased-in approach to implement 

the statute rather than having the implementing rules become effective at one time and asks banking entities to identify prohibitions andrestrictions that should be implemented first, if the agencies choose to implement a phased-in approach. We plan to consider carefully any comments received on this issue. 
137 

Q.2.e. There is ample precedent for a phase-in, such as implementation of Regulation NMS. Do you believe the Volcker Rule calls for 

a similar phased-in approach? 

A.2.e. The Proposal solicits comment on this issue and the agencies 

plan to carefully consider any comments received on the merits of 

a phased-in approach. 

RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO 

FROM JOHN WALSH 

Q.1. Last week the House Financial Services Committee passed 

unanimously a bill that exempts end users from margin requirements. Proposed margin rules ignore the clear intent of Congress 

that margin should not be imposed on end-user transactions. Do 

you all agree that end-user hedging does not meaningfully contribute to systemic risk, that the economy benefits from their risk 

management activity and that they should be exempt from margin 

requirements, and are you working together to provide consistent 

rules to provide end users with a clear exemption from margin requirements? 

A.1. We agree that end-user hedging does not meaningfully contribute to systemic risk, and that the economy benefits from risk 

management activity. As the agencies stated as part of the rule 

proposal, nonfinancial end user hedging typically poses minimal 

risk to U.S. financial stability, particularly in the case of small 

margin exposures. (76 Federal Register 27564, 27570 (May 11, 

2011). 

However, swaps with a commercial end user do expose the dealer 

to credit risk, similar to an unsecured line of credit. The banking 

agencies have long required dealers to prudently manage this credit risk, in combination with their credit risk management measures 

for other credit exposures to the same end user. Banks have legal 

lending limits to ensure that they do not have potentially dangerous concentrations of risk with a single counterparty. Derivatives exposures are simply another use of those limits. While enduser activity has not historically contributed meaningfully to systemic risk, it has led to credit losses. Banks report charge-offs of 

derivatives exposures nearly every quarter. They are typically related to swaps with commercial borrowers, who indeed have used 

swaps as a hedge. Hedging by commercial end users does not necessarily translate into lower counterparty risk, nor for that matter 

does it insulate a business from poor operating or investment decisions that can lead to failure. 

The proposed margin requirements were designed to incorporate 

this existing safety and soundness practice, to prevent unusually 

large credit exposure to a commercial end user in the form of 

swaps from going unmanaged, by requiring margin when the dealer’s credit exposurefrom swaps exceed the bank’s internal credit 

limit for the counterparty. 

We received a number of comments, both from the industry and 

commercial counterparties, expressing concern about this aspect of 

the proposal. We did not intend our proposal to signal a change 

from current practices in this regard. Credit exposure from swaps 

with a commercial counterparty is typically a relatively small part 
138 

of the overall credit relationship to the firm, and banks rely on 

their credit risk management process to keep the complete exposure within the internal credit limit. As we proceed with developing 

a final rule, we will be careful to take the views of these commenters into account. 

RESPONSE TO WRITTEN QUESTION OF SENATOR TOOMEY 

FROM JOHN WALSH 

Q.1. Could you please explain the effect on banks, especially community banks, if the SEC’s municipal adviser proposal is finalized 

as written? For example, there will clearly be duplicative examinations and regulations. Do you think there is need for this duplication, or are there areas that the SEC would review that bank regulators do not? What do you think the costs and potential consequences of such duplicative examination would be? 

A.1. As proposed, the SEC’s municipal advisor rules apply not only 

to previously unregulated activities, but also to banks that provide 

traditional banking products and services to municipalities. Banks 

would be subject to ongoing supervision, examination, and enforcement by the SEC simply by providing municipalities with advice on 

traditional banking activities such as deposit accounts, savings accounts, certificates of deposit, bank loans and letters of credit, and 

trust and fiduciary services. Banks are already subject to ongoing 

supervision, examination, and enforcement by the OCC and other 

Federal banking regulators for these same activities. Duplicative 

regulation and supervision of traditional banking activities is unnecessary and may be especially burdensome on smaller, community institutions. These concerns were included in the attached 

comment letter from John Walsh, Acting Comptroller of the Currency, dated May 24, 2011, on the SEC’s Proposed Regulation of 

Municipal Advisors, File No. S7–45–10. 
139 

() 

Coll'lDtrOller of tile Currency AdmInistrator of N/ltlonal Banks 

Washington, PC 20219 

~y24,~1I 

Elixabtth M. MUIphy 

"'-

Seeurities md Exchaogc Commission 

100 F Street, N.£. 

Washington, D.C. 20549-1090 

Re: Proposed ~on ofMlmicipal AdvUoll, File No. 87-45-10 

Dear Ms. Murphy: 

I am writing to convey the commenb of the ()ffioe of the !AmpuoUer of the CUm:oey ("OCC") 

DB rules that the Securities md Exehaoge Commission (the "Commission" or '"SEC") has -

proposed 10 ilnplemenl the municipallliYisor ~tion requimneol maDdated by Section 97S 

vfTitk [X \If the Dudtl-Fnwk. Wall SL=I R.t:funn oW Cumwncr PnILcction Act of2010 

("Seo;:tioo 975,,),1 Section 975 defines the teml."municipa/ advisor" ao.h:S!ablishes municipal 

.adVOOn all a new category of SEC registrant The Proposed Rules broaden the 'definition of 

mUnicipal advisor, defint additional.terms. provide exclusions, and establish the related 

registntioo requir=en1S. . 

The Commission specifieally requested comments on whether to ~excludc ~ the definition of 

a 'municipal ~' banks providing advice to I mllll}cipal entity or obligale!l penon" with 

respec:l1O certain trlditional banking products and services, including deposit transactions and 

iNs! and fiduciary serviees.1 Section 97S was desigoed to strengtheri oversight of the munici~ 

securities nwlcet by extending reginarlon reqW=1S to previously ~guIated transactiOIlt.J 

In Contrast, traditional banking products and services, ~ I.'l eommereial d,eposit-1I:king and 

trust and fi~iary services, aheady are subject to exlecsive supelYision and regulation. In OW' 

view, imposing the additional registration, examination, and oiber requirements as set: forth in the 

Proposed Rules to \bose strvi= is \lIlIICa:SS!I!} I!Id duplicative. We therefore strongiy support 

the type of exclusion from the definition of"municipallldvisor" upon which the Commissioa 

sought com.rnent. 

, RqistroIion ofMuniclpll Advison, SEC ReIoaso No. lUlS75, 15 Feci. Re&- 124 (I .... 6,.2011) ('"PropoKd Rules"). . . 

, 76 Foo1 Res- 11 131. 

, s. Rep. No. 111 . i76, II 147 (lOIO). 
140 

Attached are oce staff comments that describe our CODCemll in more detaiL ne oce. 

appreciates the opportunity to comment on this proposal, and would welcome the OPJll?rtu:nity 10 

discuss any questions regardjng these COIllJIlel1ts, as appropriate. acc points of contaCt are . 

Ellen Broadman, Director, Securities and Corporate Pradiecs (202-374-5210) and Judy Foster, 

Risk. Specialist, CTedit and Market Risk (202-874-7450). 

·Sincerely, 

Slrl .. W YaC~:: Acting Comptroller of the Currcoey 

-2-
141 

c) 

COmptroller of the CUrrency . Administrator of Nallonal Banks 

Washlngtoo, DC 20219 

. OCC STAF? COMMM-s R£: SEC f RorOs.u. TO 

IMPLEMENT MUNICIPAL ADVISOR RtciSlltATION REQlJlltEMtJfTS . 

lbck;e;l'9uod 

. Section 975 IIIiended the Securities and Excbaoge Ad of 1934' ("Exchange Aetj 10 add 

"municipal ~rs~ as a new ca~gOTY of regulB1ed penoIIS to the exi$ting regulalory scb=e 

for municipal securities brok~ and, dealers. A municipal advisor is $iJbject to a comprehensive 

regulatory frllmework developed by the Securities and Exchange Commission (SEC) and the 

Munjcipa! Securities Rulemaking Board (MSRB). The SEC III! propo$ed rules implememing 

Section 915. j 10 addition, seetion 975 direct3 the MSRB to iS5\Je rules providing for. among 

o~ thin?- C?otinulng education requirements a.nd professiODal standards specific to municipal 

,adVISOrs. .' . 

. The statute defines a municipal advisor IS SOmeoDC who "pmvidcs advice to or on behalf of. 

municipal entity or obiigaled pmoIl. with respecI to munieipal !inanCiaJ products or the issuanr::e 

. (lfmunitipal securities ... •

1 The staMe limits mUnicipal finaJJcial products to "rDunicipa! . 

derivatives, guuantetd inveStmetit eontrads, and investment Strategies." The Slat\lle also 

clarifies that investment StraIegies are "plans or pmgr8ffiS for !be investment of the ~ of . 

municipal securities that are nOl municipal derivatives, guamlteed irJvenment eontracts, and the 

r=mcndation of and lircikerage of municipal eScrow invt.stments.ooI In the Proj,osed Rules, 

the Commission expands the meaning of "investment strategies" to include ~plans, programs, or 

pooh of assets that invest IiindiI held by or on behalf of a municipal entity," and requires that 

' ,lsuS.C.f na",lOCI. 

, RcgisnIion ofMon",ipoJ Mvison, SEC Re\u$e No. ~Jm, 76 feo!. RoJ.124 0"';' 6, 2011) ("Proposed 1W1os"). · , 

• s,; SRB'N~2111G-t7(Nov. 1,2010). ~Ihe MSRB ha$nquested<OmrneIllSOo .. wnlrublhal 

would apply 10 m""ic~ odviJon;, indudin&: IWIe G·17 (ipplyOl, fo~ ,blin, .. 1o to municipal odvisGn): Rule G· 

20 (cif\:t and p1IUities); IWIe G·36 (1\dIIc:~ do(y .. Ie): IIId I dnlI pr<lpOSll ~biti", "»0)' 10 plly" IIC!ivities. 

Tho MSIUI has IlOl yo! isMd PI'OI'O'IIs .. tho quali~, 1It",,,,,, !Old cettirlWiol> requimnerits for_. odYIsan. . - . . 

'IS U.s,C, t 730--4( X4). 

'IS U.s.C, f 71o-oI[~Xs)!Old IS U.S,J:. t?So-4(.)(3~ 

.,. 
142 

persons advising muniCi~al entities on investment strategies and other financial products register 

"as ''municipal adVisors. ~ . . . " 

It appears that variOIl$ traditional banking products and services prqvided to municipal clients 

would satisfy the SEC's proposed definition of"''investment strategies." As a result, banks would 

become municipal advisors simply by providing these traditional products and services. While 

the Proposed Rules include cenaiit exemptions; the proposed.framework docs not exempt from 

registnltion banks that offer traditional banking products and services to municipal entities, 

including deposit products,.and trust and fiduciary services. 

For decades, banks have provided traditional banking products and services to-municipal entities 

and obligated personslO as an integral part of their corrunercial, ttust, and fiduciary busipesses . . 

Traditional banking prodUCts and services ate critical financial management tools, especially for 

smaller municipalities wtose financing needs cannot De ~ through public offerings of 

municipalseQlIities. In particular, as an alternative to public financing, a .municipal entity may 

prefer to obtain funding through a bank loan, which is typically less expensive and more readily 

available in smaller sums. Municipal entities may also opt to minimize their liquidity risks and ·. 

investment concerns by utilizing the bank's cash management services for d"cposit ~unts . . 

Banks' deposit accounts,loan transactions, trost and fidi.K:1ary services, and other traditional 

products and services already are subject to an extc:Mi~ and comprehensive regularo,ty 

framework and supervision by the federal banking agencies. The OCC monitors, assesses, 

·regulates. and cru:orces eoinpliance with federal regulations, guidance, and policies regarding all 

Nnk activities, including deposit llreounts,lnI;st"services, and o!her-traditional banking products . 

aDd services provided to all bank customers.! 1 ·In addition, the OCC·evaluates banks to ensure 

the products and services offered do not expose the institution to litigation, financial loss, or 

reputation risk. 12 Thorough on-sitei:~ons occur on a regular basis, and at large banks, the · 

oCC has examiners on-site fuJ I-time. Banks must develop internal recordkceping and auditing 

systems to track trnnsa<:tions ~th a.ll bani: customers •. including mwticipal entities, which 

facilill!te:S an effective examinatioD process aud ensures bimb ate themselves monitoring the 

t 16 Fed. itt1-•• jO. ·Howo:ver, it is IDItlear which typr:s of comm~icalioru would be C(ln5ideRd "Jdviee~ becIu5e . 

neither Section 97500r!he ~ Ru\ofdefine dIe!eJm. 

""Oblipled p<mnM mtIIIS Many penon, Inc:ludin& an issuer of municipll seeurilie;s, who is either ,enmity Of 

througll an enterprise, fuocI. Of accom! of St>cb pmoo, cornmined by conmtd or oiber arn>ogetnml !O 5upport !he 

pl)'men! ohl1 Of pin qf.die obligltiooJ on !he muoicipil securities to be sold in an offering of mllllicipal securitit$. M 

.1.5 U.S.CO § 1&o-4(eXI0). ~ SEC l boclarificd llI.obligated penoos can incilldeenlities ICling lIS conduit · 

tibrro-.ven such lIS pri¥J!e uni~!ies, non-profi! hospi!&l$, and pri""t. ~!i0ll!. 76 Fed. Rq.1! 829 n.U. 

" S,,, '"r., Comptroller'J Hm:lbook, BQnJr. S~pvvisitNt Proc~ (2007); Comptroller', Handbook, A..ud 

M4f!<lgHfOllI (2000); CompllVl\er', HIDdbook,lmp B<!nlr. SupvI'iJjllfl (2010); Comptroller', Handbook, CQlOm~nll)' Bank S~pcnoh/(ln (201 0). . . 

" Su, '"1-, Comptroll<:r'5 Hm:lbook, BQnJr. S1IpfnIi.JIIHI PTOCal (2007) (de!Cribing the evahwion of. bank', 

. repw.uonal risk). 

-4-
143 

activitieS as well.1l The DCC evaluates !he effoctiv ness of the r=dkoeping systems during 

.the extensive on-sjte examinations.l

' The OCC also analyzes bank. management to ensure the 

leadership at each bank has the training and experience necessary to provide the products and· 

services offered by that b~.lS .. .. ... 

Traditional banking products WId services are critical to the day-to-day financial operations ofa 

municipal entity. Given the·extensive and well-established regulatory·and supervisory 

framework governing traditional banlcing products and services, discussed i.n more detail beloW, 

the municipal advisor framework in the Proposed Rules would be unnecessary. and duplieative. 

At a minimum, the Commission should clarify that banks providing municipal entity customers 

advice regarding traditional banking products in<:lucling deposit accounts, savings accounts, 

certificates of deposit, bankers. acceptances, bank loans and letters of credit, and certain loan 

participations 00: not nee<! to register as municipal advisors. 6 . . 

Neither the statute nor the·coJTeSponding legislative history·indicate that Congress intellded that . 

the registration requirements in Seetion 975 be triggered by providing traditional banking 

pr:oducts and services to municipal entities. Rath.er, Congress sought to target previously 

unregUlated niarket partici~ts and financial transactions, not parti~ipants in already highlyregulated banking activities. \7 .In ~cular, Congress identified financial advisors, certain third 

.party solicitors, and individuals ~ering complex financia\ instnunents such as guaranteed 

investment contracts, swaps, and other municipal derivatives as the intended group of municipal 

advisors. 11 Notably absent from this list is any ref=ce to retail bankers or the traditional. 

.banking products and services they pro~de. 

Treatment ofMllDicipl 1 Deposits, Lenen Or Credit. I ud Liquidity Facilities 

"Su, e.g., 12 C:f.R. f9.8 (rmntiOl'l ofr=rds ~ all fidl>Ciary ~o;Q\If\ts); 12 c.F.il § 12.3 (£militia 

r.eardkccping requiremc:nts);·12· C.f.R. § 204.3 (requirin& filing or. "'part of deposits); 12 C.f.R. § 2()5.13 

(retention of reo;oo\$ ",11Ied to eloctrgnic fImds 1mI$(en:) . . 

" Se, Compcroller's Handbook, //llmo .... Conll"o& (200 I){do$cribing tho c:omponenl$ ofan .ffecti~ cpnlrOl sySlom 

and tho procedures to OlWIIino and lSSCSIlhe comlrOls) . 

. "Su CompU"Olier's Handbook, 80M. Svpuvi3ion Prouu (2007) (dmiling!he CAMELS raling sys1em and 

standards for evaluatinl bank llWIagemonl).. . 

.. 1 S·U.5.C. § 78c note (defi..nina ~idenlified bankiDg product" to includ1:: dcpo$i!. account, savings ICCOUQt, 

certifiC8le of deposit, or oilier deposit instrument issued by • bmk; . banker'I~; • le!lor of cn:dil issuod or 

loan made by a bank; I partieiparion in • loan whicb Ihe bank O!" an affiliate oflhe bank ('llber!han I broker or 

doaler) fimd:s, participates" In, or owns till! is sole! to ~ individuals). 

I> S. Rep. No. 111. 176,11147 ("Sec:tioo 975 SImlgthe"" QVUiight ofmunicipalsccwitiQ and broadens cumnt 

municipal securitiei market protections 10 cover pn:vio",1y 1IfI"'",11Ied markel participants and previo",ly 

""",,,,late<! finam:iallnll\Slctions with sit"", counties, cities and other municipal entities."). 

"s. Rep. No. 111-176,11149. 

-5-
144 

The I'r9posed Rules require a:per,son giving advice with regard 10 "plans, programs, or pools of 

assets that invest funds held by or on behalf6fa municipal entity" to register as a municipal 

advisor unless covered by an c)[.dusion." This definition appears-broad enough to cover 

deposits of municipal funds in commercial, checlting. savings, time, and trust accoUnts al insured 

deposi~ry instituti?~. A!; ~ result of this b~d definition, banks si;mply offering a.deposit 

acrounf" to a murnclpal entIty would be subject to the Proposed Rules' rec::ordkeepmg . ' 

requirements for municipal adviSOrs.11 These.banks may also be" subject to future professional 

. qualification standards and continuing education requirements t)lat have not yet been 

established. 22 . . . . . 

As noted above, the OCC and the other federal banking agencies have an existing regulatory 

framCW(lrk and oversight o.ver traditional banking products and services, which include bank 

deposit transactions.21 The federal regulatory framework includes .stringent recordkeeping 

~meots thai: are specific to deposit accounts at banking institutions.14 Subjecting banks to 

recordkeeping reqUirements"that are inteoded for advisors in the mtmicipal secUrities .market is 

unne<:essary and dup~ica1ive:. 

The OCC also already evaluates the ability 'ofbank management to monitor and cOntrol 

traditioria!" banking products and services, including the adminisniuion of deposit 8COOunts. 

through il:guIar and extensive on-Site examinations.!! Subjecting banks and their employees to 

the training requiren!ents associated with the municiplll advisors'regulatory fram.ework. 

including any future municipal adviSor.certificatioll l!lld testing ~gram, ~ a result ora bank 

" 16 Fed.·Rq. at 830 (" .:.bccause every IiIInk KCOWlt of. munidPai emity is comprised of fUnds 'held by" or 01:1 

behalf ofl municipal diy,' money managcn providing Idvi~ to mWlieiJ>al ~ with respect to their bank 

IC(:OUII1S could be munieipal ad~ "). ' ' 

""12 U,S.c. § 1113(1) (defining~il). 

It Proposed Rule 151111-1 (outlining tile boob Jnd TtCOrds dial must be 'made mid mIIi.n.ined by municipal advisorJ). . . 

21 15 U.S.C. § 78o-4{c)(7): MSRS Norice20Jil-I.7 (AWlication ofMSRS Ruie;s to Municipal Advlson){Nov.l, 

2010). . 

21 Su. e.g., 12 U.S,C. § 24(Sevcnlh) (authorizing nmonal ~ 10 recei"" dcma!id.d<{lOsits, Nesotiablc Orderof . 

Withdnw~Dt$, timedeposib, brokmd deposits, irid special deposits): 12 U.S,c. § 9O(deposiu of public 

funds); 12 C.F.R..1'an 5 (providing rI!~ policies, end procedures for corpontte activities); 12 C.F.lt § 7.4002 

(rqullting nationaJ'bank clIarges on deposillCCOUrlu); 12 C.F.R. P&rt 30 ($Bfety lI)ci 5QUndness .tandarIb); 12 

C.F.R. P11'1205 (direct de:positrJnd "itlldn. ..... 11 of funds): 12 C.F.R. P&rt 217 (intereSt on dernaoo deposits): 12 

C.F.R. P&rt229 (Rq1.IllliQn CC- Availability ofFunduod Colleaion QfCIleclu): aiId 12 C.F.R. Put 230 

. (Regu)atloll DD - TrutIl in S.vin,,~ . 

1< Su. e.g. . 12 C.F.R. § 204j {lilingofreponof depositS>; 12 C.F.R. § 205.13 (rmntion oh1ecttonic funds trIlUfer 

-> . 

.. SH Comptroller's HIJIdbook, Bank S>lpvWslrm Procus (2007) (dctliling tile CAMElS millg system and 

stIndanis for evaluating ~ management). 
145 

communication with a municipal entity regarding its deposit account is both unnecessary and 

duplicative of the existirig r~nsibiJities concerning traditional banking products and services. 

The Commission's proposal wou!d exempt certain ~viders of letters of credit or liquidity 

facilities from the definition of"obligatcd persons.Hl/j However, it remains unclear whether a 

bank rilay fall within the definition of municipal advisor (and thus subject to registration) mere!y · 

by providing lletter of credit to a lI)unicipal entity. We suggest that the Commission further 

clarify that banks providing !etters of credit to municipal entities or obligated persons (without 

otherwise providing advice to them) also tile exempt from the definition of "municipaJ advisor." 

National banks have long offered letters ofcTct!it and other liquidity facilities to their clients as 

lra!iitiona! banking products.lI Letters of credit and other liquidity facilities tile subject to the 

same thorough regulation and supervision as other traditional banking products and services, and 

. therefore further regulation ofletters of credit issued·by bank providers i.s UIlIlCCCSSIII}' and 

duplicative?' .Therefore, we encomage the Commission to clarifY that providers ofleners of 

credit or other liquidity facilities BTC exempt from the definition of "municipal advisor.". 

Treatment orBank Trust and Fiduciary Services 

Section 975 and the Proposed Rules would require persons who advise municipal entities on 

municipal financial products, including "investment strategies," 10 register as mUnicipal 

advisors.

lt· Trust and fiduciary services offered by banks, which are already subject ILl extensive 

standards, !pay fall within this definition. 30 Thus. banks providing advice to municipal entities 

related to these services could be required to regi~ as municipal advisors Wlder the Proposed 

·Rules, making them subje~ to ~e municipal advisor regulatory .&ameworlc.?l In addition to the . 

"76 Fed. Reg.~ 881-882 (propo$Cd rule ·15Bal.l(i). to boo codified at 17 C.F.R. § 240.1SBaI-l(i}l (a,luding 

proYideB of municipal boncllNunnce, Iencn of ~it, or OIlIer liquidity fKilitles from.the defini\iOll of oblipted .... , . 

lJ S", 1.,",12 U.S.C § 24(Sev~th): 12 U.S.C.·' 84: 12 C.F.R. Pari 5: 12 C.F.1t § 7.1016 (~e"oflcnm of 

~it); 12 C.F.1t §"32.2(t) ($!Indby letter of ~il): OCC Interpretive UIW" t«I. 494 (Dec.. 20, 1989)(confirmin, 

lellers ofen:dit an pUt of the business ofb&nkingauthoriud fornationlll banks). & . Dbo IS U.S.C. § 78c IID\I! 

(I.aen of ~it, banker:s i oceplallca, II!d loan pvti<;ipations as identified bankin8 prodllCtl). . 

Us... ..g., 12 C.F.I( Part 12 (legal lending limilS); 12 C.F.R..Part215 (reaulaliOll ofloans to bank insiders): 

CoMptroller's HIOdbooIc, Trad, FilttU'JCI. (1998): FedtnoJ ~ Baud Comrnen:ilot Bani< Ewnillltion Manua~ 

Uabi/iliu and C:zpllQ/ (2006). 

'II 76 Fed. Reg. at 830 (the Proposed Rules expand ~ definition of investment strategies 10 include plans, pI"Oplm$, 

andpoob ofassels ibet in~ muniCipal f\md$). . . . 

.. 76 Fed. Reg. at a:17 (requesting comment Oft. whether banks providing fiduciory sOlVic:es 10 municipal entities 

should be ""eluded from the defin~ion of municipal advisor). 

" Similuly, the ""ten! 10 which. banks providing ttadilional CUSlodial savices may be encompassed by !he ddin~ioo 

of municipal advisor is unClear. and '"" JU&gCS! rho SEC provide clarifiauion thai diose activities also ~ exempL 

·7· 
146 

regi$lration"requirements, Section 975 imposes 'on municjpal advisors a new fiduciary duty to 

their municipal entity clienlS.

ll . 

Trust. fiduciary, and custody services are core banking functi·ons. Banks have long provided 

these services to municipal entities as an integml part oftbe asset IDlIUIgemenl and advisory 

services that banks provide to all of their trust, fidllCiary, and custody customers.

ll National 

banks must comply with federal statutes, regulations issued by the federal banking agencies, and 

supervisory guidan.ce ~ificall'i governing banks providing trust, fiduciary, and custody 

products and services: Throughout the course of the banking relationship, a national bank mar ' 

provide to its clients a variety o.f services uP9n whicb the OCC imposes a fiduciary obligation.1 

For example, the OCC's Part 9 regulation sets forth specific fiduciary stand~ governing the . 

nalional banks thaI provide investment advice to any customer for a fee.36 Moreover, banks are 

subjoct 10 fiduciary standards under federal. and state laws inlended 10 proleettrust beneficiaries, 

retiremenl plan participants, mU<licipal entities, and other ~ ofin~ors.n The atc also 

requires national banks utilizing their fiduciary power.; granted in 12 U.S.C. § 92a to keep 

separate, detailed records orall fiduciary_related'transactions.l • The acc supervises the 

· fiduciary activities ofbanks through regular and exlensive on-site examinations 10 ensure.bank 

compliance with all fiduciary obligations.l9 

'. ' . . , 

JI 15 U.S.CO § 1So-4{cXt) \munkipal odvUor ODd ..,y penon associated wilh such m!",icipal advisor shall be 

deemed !D have • fid!JCiary duty 10 Illy municipal enlity for whOm such mu;nicipal advisor KU as 0: municipaJ 

advisor, IIId no mllllicipllldviser mil)' en&qc in lIlY ICI, p...aiec, or COIIDe ofb\lsiness Which Is DOl consiS!cJlI wi!h 

· • mun icipal advisor's fiduciary iluty or till! is in _travention of Illy rule oftM [MSRB]"). Su alto MSRB Notice 

2011-12(Fcb. 14, 20(1) (,hft R~1c 0-3610 prohibitl<1lviUci ineonsi.tcm wolh lI,is fld""i...,.d141). 

» Su Comptrol1er's Huidbook, ,uUt Mal!llgtmrni (2000): Comptroller's ~ CuJlady Sv-;~ (2002): 

OCC I~Wpretive LettcrNo. ]018 (Apr. 19,2007) (national banks'.eus\Odyactivitics are permi$sibl~ bankill& 

activities often offered in conjllllCtion Wilb !he dcli'lCl)' offiduciary services.): ace Interpreti ... Lett .... NQ. 695 

(Deo;. 8, IW5) ($COp!: of!hc Uerl:i$e of Qltional bank fiduc:iary powell). 

,. Su 12 U.S.c. i 921 (trust powers of nationoJ Jmd..s); 12 C.F.R. § 5.26 (licensing requirements for fiducial)" 

powen); 1.2 CoF.R. Pan 9 (fiduciary ICtivities ofllltionil b:ank$): Comp/iylltr'S HIIIdbook, Autl MlInIlgOIIe1Il 

OpmJIi(1lU and C"""aU (201 I); Comptrolltr'5 Hl!Idbook, CJatody Servlcu (2002): Comptroller'. Handbook, 

Au. Mtmnem.nl (2000). . 

1> 12 C.F.R. § 9.2(c)(dcfining fiduciary cap.~ity) . 

.. S" 12 C.F.R. § 9.2(~1 (liducial)'capacity includes pI'O"idinr; in...,tment l dvk.o fer . fee); 12 C.F.R. § 9.101 

(expWnin, \he I)'p<5 ofinVU!J1l<;l( advice IIw ~bjece biDb to a fiduciary duty) . . 

· 17 S ..... ", EmployCe ~n( ODd Income Security Actor ]914 (ERJSA), 29 U.S.C, § 1001 et ~.~ 12 C.F.R. 

Pan 12 (recordkeepmg requirements). 

II Su 12 U.S.C. § 92a(tl, 12 C.F.R. § 9.8:.12 C.F.R. § 12.J. 

11 Su Comptroller'1 Hllldbook, Rd;,OI7IUU PiIJl! Sv-;ica (20(7): Comptroller's Haoc!book, Ifrvasm.m 

Mtl1HIgtmf,!/ SuvI~Q (2001): Comptroller's Hllldbook, Aut! Man<1fOl7l.nl (2000): Compuoller's HIIIldbook. 

CDnjIicu of "UDal (2000). Sa a/:sa CompUoller's Handbook, Bon! SoqwyullJl! Proun (2007) (highlighting tile 

incrased repuwlon risk upOsure IIw ICWIlIpanin fiduciary services) . 

• g. 
147 

By establishing the municipal advisor framework, Congress sought 10 increase ~arency, . 

restrict coniliclS.ofinteresl, promote fair dealing. and prohiblt fraudulent practices. HO\OlCver, 

as described above, banks acting in a fiduciary capacity already are subject to extensive and 

significant prudential regulation, including strict fiduciary duty obligations, that ensure b~ 

provide trust and fiduciary~mers with fair treatment In this context the regulation ofbanks 

as municipal advisors is ~ and duplicates the existing obligations illready iroposed:on 

bank fiduciaries. . . 

Municipal Securities Purchases and Reque.;t; for Proposals ("RFP,") 

The Proposed Rules also should clarify that banks would not be deemed to be providing "advice" 

10 a municipal entity simply by providing terms upon wbicb the bank. would. purc~ for the 

bank', own account securities issued hy the municipal entity, such as bond, tax, and rtcvenue 

anticipation notes. Responses to IDs from a municipal entitY regarding certain investment 

products the banks offer, such as money market mutual funds or exempt securities, also should . 

not be treatedas "advice" for the reasons diseusse<lbelow. . . . 

Municipal entities often issue RFPs 10 banks to" obll;in f)mding to meet the ml1ll;icipal entity's 

operating needs. Banks respond 10 theRFPs on a competitive basis. providing the municipality 

with alternative mechanisms such.as bond, tax, and revenue anticipation notes to'meet their 

short-tenD operating neCds. B~ also are asked to respond to RFPs.related to the investment of 

operating ~ received from tax ~l1octions and olher sources. Many municipalities are . 

required by statute 10 issue RFPs to banks fortheir operating accounts. The operating acoounta 

tAke the fonn of chttking accoun.ts, often with sweeps inlO mutual fund.~, rqrurcha.~ B.gMem~ts, 

and certificates of deposit. Banks are chosen by competitive bid, with the business going to 

10V(eSt cost and highest yield offer to the municipality. Theses services have It!ng been a. 

customary co.urse of dealing between banks and municipalities. Banks providing .products and' 

services offered in ~nse 10 RFPs ~ subject to stringent regulation and oversight by 

prudential regulators. 

Furthermore, banks providing lerms for the purchase ofmuni!?ipal sec::urities for the bank.'s own 

aecounl should be excluded from. registration as "municipal advisors." Banks are authorized io 

purchase municipal sec::urities for their own iCCOWlt, subject 10 extensive regulation and 

oversighl4l Again, these activities already are inonitortd for compliance with the eltisting 

... S. Rep. NG. 111-176 at 149. 

"Su. .. ,.. 12 U.S.C. § 24(Seventh); 12 C.F.R. Part 7; Comptroller', Handbook, s"IIlSuprl'ViliOll Procui (2007); 

ComplJOlla", HllldbGok, AIJel MQ~QB_U.I (2000); CGmplJOller's Handbook, lArge Bank SllJXnuiOn (2010);· 

ComplJOlIer's Handbook, CQm/lnlnlly Bank $lJpoYuiOII (201 0) . 

.. s.~ .. ,.. 12 U.S.C. § 24(Sevel'l1l1); 12 C.F.R. Part I (permissible inV'C5lmCm securities); 17 C_F.R. Part 30 (safety 

'and fOIII!dDcss standards); CQmplJOllc!-'s Hondbook, Btmk SwpqviJiQII PrtJ<:us (2007); An E:uminer'l Quide to 

Investment ProdIlCtS and PJactiCoo$ (1m); Comptroller', Handbook for Nitiorwi BMk Examiners, § 203.1 

'/IfWS/n!W S'ClUII~ (1990). 

. :-9-
148 

regulatOry framework dwing regular and thorough on-site examinations, and additional oversight 

iii unoeces:sary and would be duplicative. . 
149 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

nM JOl-!NSON SOUTH DAKOTA, CI-jt\.AMAN 

JIIC1<!U,EO RI100fl(;lAN() 

CHARL( .. S E SCHUMfR, Nfli\' 'rOfli\ 

ROBFRT M!:N!:NI)EZ NEW J~H!.>I:.Y 

DII.Nlfl K Ai(.AKA HAWIIII 

SHeRRon lJI'\uWN OHIO 

JO~ TlS1(H MONTANA 

HERSI(OHL Y';!5tONSI"l 

MARl< WARNER VII'IGfNl1l 

JFH' ME'll<l(Y O"lrGO~ 

MICHAEl S[NNEf', COLORADO 

1(11. V HA('AN, NORTH CAROLINA 

DWIGHT FETTIG, STAfF OmCCTOfl 

WILLIAM D DUHNKE, Rr-"l'BtltAN STArr OIR~crOR 

The Honorable Ben Bernanke 

Chairman 

Board of Governors of the Federal 

Reserve System 

20th Street and Constitution Ave, NE 

Washington, D.C. 20551 

Mr. Raj Date 

Special Advisor to the Secretary of 

the Treasury 

Consumer Financial Protection Bureau 

1801 L Street, NW 

Washington, D.C. 20036 

The Honorable Martin Gruenberg 

Acting Chairman 

Federal Deposit Insurance Corporation 

550 17th Street, NW 

Washington, D.C. 20429 

Mr. Edward DeMarco 

Acting Director 

Federal Housing Finance Agency 

1700 G Street, NW 

Washington, D.C. 20551 

Dear Chairmen, Directors, and Advisor: 

lanitcd ~tatcs ~rnetc COMMITTEE ON BANKING. HOUSING, AND 

URBAN AFFAIRS 

WASHINGTON. DC 20510-6075 

November 9, 2011 

The Honorable Debbie Matz 

Chairman 

National Credit Union Administration 

1775 Duke St. 

Alexandria, VA 22314 

Mr. John Walsh 

Acting Comptroller 

Office of the Comptroller of the Currency 

250 E Street, SW 

Washington, DC 20219 

The Honorable Gary Gensler 

Chairman 

U.S. Commodity Futures Trading 

Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

The Honorable Mary Schapiro 

Chairman 

U.S. Securities and Exchange Commission 

100 F Street, NE 

Washington, DC 20549 

As you know, the key to designing and maintaining effective financial rules is taking a 

smart regulatory approach that, over the long run, provides the greatest benefit at the 

lowest cost to society as a whole. This approach should promote public participation and 

consider a wide range offactors for each rule you write. It should also ensure that new and 

existing regulations work together in concert to provide clear direction to those entities 

you supervise, as well as provide robust safeguards for those whom the rules are designed 

to protect. 
150 

Special Advisor Date 

November 9, 2011 

Page 2of3 

We must not forget that our economy suffered from inadequate regulations that 

contributed to the worst financial crisis since the Great Depression. American families and 

small businesses bore tremendous costs in lost jobs, homes, and savings. In response, 

Congress enacted the Wall Street 

Reform and Consumer Protection Act to address regulatory gaps and enhance protections 

for consumers, investors, and taxpayers while ensuring our financial markets remain the 

envy of the world. The long-term success of these reforms depends upon your agencies 

crafting clear, effective and robust financial regulations that build a stronger foundation for 

sustainable economic growth. 

Efforts to repeal or undermine these new Wall Street reforms threaten the stability of our 

financial system at a time when we can least afford it. These efforts to slow down Wall 

Street reform prevent responsible businesses, including community banks and credit 

unions, from having the certainty they deserve with finalized rules that fully honor 

Congressional intent behind the new law. To ensure the Wall Street Reform Act continues 

to be implemented thoughtfully and responsibly with full consideration of relevant issues, 

we respectfully ask that you send us a written response to the following requests: 

1. Provide a detailed description of your agency's rulemaking process, including 

the variety of economic impact factors considered in your rulemaking. Please 

note to what degree you consider the benefits from your ru\emaking, including 

providing certainty to the marketplace and preventing catastrophic costs from a 

financial crisis. Also describe any difficulties you may have in quantifying 

benefits and costs, as well as any challenges you may face in collecting the data 

necessary to conduct economic analysis of your rulemaking. 

2. Provide your agency's current and future plans to regularly review and, when 

appropriate, modify regulations to improve their effectiveness while reducing 

compliance burdens. Please include a description of actions your agency has 

taken, or plans to take, to streamline regulations; for example, the Consumer 

Financial Protection Bureau's "Know Before You Owe" effort drastically 

Simplifies mortgage and student loan disclosure requirements. Also note 

statutory impediments, if any, that prevent your agency from streamlining any 

duplicative or inefficient rules under your purview. 

3. Provide details of how your agency encourages public participation in the 

rulemaking process, including through administrative procedures, public 

accessibility, and informal supervisory poliCies and procedures. 
151 

Special Advisor Date 

November 9, 2011 

Page 3 of3 

4. Provide details of how your agency addresses the unique challenges facing 

smaller institutions when dealing with regulatory compliance, including any 

related advisory committees your agency may have or other opportunities for 

small institutions to be heard by your agency. Please also detail how your 

agency responds to concerns raised by small institutions. 

5. Describe how regulatory interagency coordination has improved since the 

creation of the Financial Stability OverSight Council established by the Wall 

Street Reform Act. Provide specifics of how coordination has helped, either 

formally or informally, in your rulemaking process. 

Strong financial regulations will greatly benefit the American people for generations to 

come. Robust and efficient regulations will provide greater certainty to the marketplace, 

and will restore the business and consumer confidence necessary for economic growth. 

They will also provide greater clarity to American consumers and investors so that they are 

empowered to make sound financial decisions. Thank you for your consideration, and we 

look forward to working with you. 

Sincerely, 

o\--~~ TlMJOH~ Chairman 
152 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTDN, DC 20549 

THE CHAI RMAN 

The Honorable Tim Johnson 

Chairman 

Committee on Banking, Housing, and 

Urban Affairs 

United States Senate 

534 Dirksen Senate Office Building 

Washington, DC 20510 

Dear Chairman Johnson: 

December 20, 2011 

Thank you for your November 9, 2011 letter regarding the ruJemaking approach of the 

federal financial regulators. I share your view that the approach should promote public 

participation, consider a wide range of factors, result in regulations that work in concert with 

other regulations to provide clear direction to the entities we regulate, and provide robust 

safeguards for those whom the rules are designed to protect. You asked for a response to a 

number of questions to ensure that the Dodd-Frank Wall Street Reform and Consumer Protection 

Act continues to be implemented thoughtfully and responsibly with full consideration of relevant 

issues. Your questions and my responses appear below. 

1. Provide a detailed description of your agen(y's rulemakillg process, including the 

variety of economic impact factors considered in your rulemaking. Please note to what degree 

you consider the benefits from your rulemaking, including providing certainty to the 

marketplace and preventing catastropllic costs from afinancial crisis. Also describe any 

difficulties you may have in quantifying benefits and costs, as well as any challenges you may 

face in collecting the data necessary to conduct economic analysis of your rule making. 

The Commission's rulemaking process is governed by the Administrative Procedure Act 

("APA") and other federal statutes that prescribe the manner in which the Commission may 

undertake to consider or adopt rules of general applicability. In general, the Commission 

engages in "infomlal" rulemaking, I in which it seeks comments in advance from the public 

before adopting substantive regulations or amendments to existing regulations. 

The APA requires that agencies provide interested parties with adequate notice of 

proposed rulemaking and the opportunity to participate in the rulemaking "through submission of 

I "Informal" rulemaking is distinct from "formal" rulemaking. Sections 556 and 557 of the APA provide 

procedures that apply to "rules Ithat] are required by statute to be made on the record after opportunity for an agency 

hearing," 5 U's.c. § 553. Known generally as "formal" rulemakings. these rulemakings require oral evidentiary 

hcanngs lhat employ speCIal procedures analogous to those used in judicial trials. See 5 USc. §§ 556, 557. 
153 

The I lonorable Tim Johnson 

Page 2 

written data, views, or arguments .... ,,2 The Commission's practice in this type of "notice and 

comment" rulemaking generally proceeds as follows. First, the Commission publishes a 

"proposing release" for the rulemaking in the Federal Register. This document sets forth the text 

of the proposed rule, describes and explains the proposed rule, and solicits comments, including 

relevant data, from members of the public. Typically, one or more of the Divisions of the 

Commission has been responsible for preparation of the proposing release, following extensive 

analysis of an issue, consideration of alternatives, and consultation with other Commission staff 

and the Commissioners. The staff s final recommendation is presented to Commission for its 

approval, and typically the Commission holds an open meeting under the Government in the 

Sunshine Act to consider the recommendation and vote on approving it for publication in the 

Federal Register" 

After the proposing rclease is published, there is a period of time in which the public may 

provide its comments. The proposing release invites comment from the public on all aspects of 

the proposed rule, including on specific questions about the operation of details of the proposed 

rule or alternatives to the proposal. The Commission places copies of comment letters 

submitted. as well as any other data or information important to the Commission's consideration 

of the rulemaking, into the public rulemaking file. The public also is invited to submit comments 

bye-mail. Submitted comments generally are available on the Commission's website. The 

Commission staff and Commissioners also may meet with interested parties concerning the 

rulemaking, and memoranda of such meetings are generally placed in the public comment file. 

After the comment period closes, the staff and Commission complete their analysis of the 

comment letters. In making a recommendation to the Commission on how to proceed, the staff 

will consider the comments provided in determining whether to adopt the rule as proposed, 

modify the rule to respond to issues raised in the comments, or substantially reconsider or revise 

the approach contained in the proposed rule. If the Commission determines to proceed with an 

approach significantly different from the rules proposed, it may necd to re-propose the rules in 

order to give the public adequate notice and the opportunity to comment on the re-proposed 

rules. 

A Commission vote to adopt final rules generally occurs at an open mecting. although it 

may occur through seriatim vote. If the Commission approves adoption of the rules, the 

Commission publishes a release in the Federal Regis/er, with an explanation ofthe reasons for 

adoption and responses to the more salient issues raised in the comment letters. The rules are 

generally effective no earlier than 30 days after publication in thc Federal ReRisler, although the 

APA permits more immediate effectiveness in certain circumstances.4 

, 5 lJ S.c. § 553(c). An agency may adopt substantive rules without prior notice and commenl in limited 

circumstances. See 5 U.S.C. § 553(b). The Commission does not frequently use this procedure 

; On occasion. the Commission may vote on a rulemaking proposal without a Commission meeting. through its 

seriatim voting process See 17 CFR 200.42. 

" See 5 U.S.c. § 553(d) (effectiveness in less than 30 days is pennissible if(l) rule is a substantive rule that grants 

an exemption or relieves a restriction. (2) rule is an interpretative rule or statement of policy, or (3) agency finds 

good cause for more immedlate effectiveness), If the rule is "major" under the Congressional Review Act, it may 

not be effective for 60 days after publication in the f'edera/ Regisler. 
154 

The Honorable Tim Johnson 

Page 3 

Economic Factors Considered in Commission Rulemaking - The Commission considers 

many factors in its rulemakings. In some cases, thc authorizing statutes direct the Commission 

to consider particular elements relevant to those particular rules. In others, the statute directs the 

Commission more generally to consider the "public interest" or the "protection of investors:' In 

addition to these matters, however. the Commission also considers a variety of economic factors. 

In some cases, these are considerations specifically required by statute. For example, the 

securities laws require the Commission, when it engages in rulemaking and is required to 

consider or determine whether the rulemaking is in the public interest, to consider, in addition to 

the protection of investors, whether the action will promote efficiency, competition, and capital 

formation.s In addition, Section 23(a) of the Exchange Act requires the Commission, in making 

rules and regulations pursuant to the Exchange Act, to consider among other matters the impact 

any such rule or regulation would have on competition. The agency may not adopt a rule under 

the Exchange Act that would impose a burden on competition not necessary or appropriate in 

furtherance of the purposes of the Act. 

The Commission also considers thc costs and benefits of rules as a regular part of the 

rulemaking process. We are kcenly aware that our rules have both costs and benefits, and that 

the steps we take to protect the investing public impact both financial markets and industry 

participants who must comply with our rules. This is especially relevant given the scope, 

significance, and complexity of the Dodd-Frank Act. The SEC's Division of Risk, Strategy, and 

Financial Innovation ("RSFJ") directly assists in the rulemaking process by helping to develop 

the conceptual framing for, and assisting in the subsequent writing of, the economic analysis 

sections of the Commission's nllemaking releases. 

It is important to recognize that cost-benefit analysis is a tool that informs the nile 

making process and is not designed to be the sole determinant of whether a nile should be 

adopted. Economic analysis of agency rules considers the direct and indirect costs and benefits 

of the Commission's proposed decisions in comparison with those ofalternative approaches. 

Analysis of the likely economic efTccts of proposed rules, while critical to the rulemaking 

process, can be challenging. 

Certain costs or benefits may be difficult to quantify or value with precision, particularly 

those that are indirect or intangible." The primary difficulties can be traced to the absence of 

suitable data. This situation often arises in rulemaking because many niles are designed to 

modify the behavior of market participants in response to perceived problems. When there are 

no precedents that can be used as a basis for analysis. it is impossible to rigorously predict 

anticipated responses to proposed regulations. In addition, relevant data are often only available 

from certain market participants. During the comment process. the SEC may ask the public to 

, See SecuritJ~s Act § 2(b); Exchange Act § 3(t); Investment Company Act § 2(c); and Advisers Act § 202(c), 

" In its report discussing cost-benefit analyses of Dodd-Frank Act rulemaking by financial regulators, the GAO 

noted that "the difficulty of reliably estimating the costs ofrcgulations to the financial services industry and the 

nation has long been recognized, and the benefits of regulation generally are regarded as even more difficult to 

measure." GAO-12-1SI. p. 19; see also GAO·08-32. 
155 

The Honorable Tim Johnson 

Page 4 

quantify their estimates of cost and benefits, especially when the dollar costs of proposed 

rulemaking are known only to or best determined by market palticipants. Although this can be 

an effective method for obtaining data, it may be burdensome to the individuals and firms to 

actually provide it and such data may to be biased in favor of the respondent's preferred 

outcome. 

In light of recent court decisions, RSFI and the rule writing divisions are examining 

improvements in the economic analysis the SEC employs in rulemaking. Although the existing 

procedures and policies are designed to provide a rigorous and transparent economic analysis, we 

are taking steps to improve this process so that future rules are consistent with best practices in 

economic analysis. 

When engaging in rulemaking, the Commission invites the public to comment on our 

analysis and provide any information and data that may better inform our decision making. In 

adopting releases, the Commission responds to the information provided and revises its analysis 

as appropriate. This approach promotes a regulatory framework that strikes an appropriate 

balance between the costs and the benefits ofregulation.1 

The Commission's ability to gather data for use in its cost-benefit analysis is constrained 

in some respects by administrative laws, such as the Paperwork Reduction Act, although the 

Dodd-Frank Act provides the Commission with some relief from the data gathering constraints 

of the Paperwork Reduction Act in the rulemaking context.8 

Regulatory Flexibility Act Analysis - The Regulatory Flexibility Act ("Reg Flex Act") 9 requires 

agencies, when proposing or adopting rules. to consider the special needs of small businesses. 

When an agency publishes a notice of proposed rulemaking, the Reg Flex Act generally requires 

the agency to prepare and make available for public comment an initial regulatory flexibility 

1 After reviewing cosl-benefil analyses included in six of our Dodd-Frank Act rulemaking releases, the SECs 

Inspector General issued a repon in June 2011 While Ihe IG is conlinuing to review the CommissJOn's cost-benefit 

analyses, this repon concluded that "a systematic cost-benefit analysis was conducted for each of the six rules 

reviewed. Overall, [the OIG] found that the SEC formed teams with sufficient expertise to conduct a comprehensive 

and thoughtful review of the economic analysiS of the six proposed released that [the OIG] scrutinized in [its] 

review." See U.S. SEC Office of the Inspector General, Report of Review of Economic Analyses Perfonned by the 

Securihes and Exchange Commission in Connection with Dodd-Frank Rulemakings (June 13,2011) 

http://w~,,w.sec-oig.gov!ReponsiAudibll1spcctions/2_011/Repor! 6 13 I lJ2Qf at 43. We look forward to continuing 

to work with the OIG as il conducts a further review. 

, Securities Act Section 19(e), as added by Section 912 oflhe Dodd-Frank Act, provides that, for the purpose of 

evaluating any rule or program of the Commission issued or carried out under any provision orthe securities laws 

and the purposes of considering proposing, adopting, or engaging in any such rule or program or developing new 

rules or programs, the Commission may: (I) gather information from and communicate with investors or other 

members of the public; (2) engage in such temporary investor testing programs as the Commission determines arc in 

the public interest or would protect investors; and (3) consult with academics and consultants. Securities Act 

Section 19(1) provides that any action taken under Section 19(e) will not bc construed to be a collection of 

infonnation for purposes of the Paperwork RedUCTion Act. 

, 5 U.S.c. ~§ 601-612 
156 

The Honorable Tim Johnson 

Page 5 

analysis ("IRF A") that describes the impact of the proposed rule on small entities. IO Among 

other things, the IRF A must describe the significant alternatives to the rules that the agency has 

considered that would accomplish the stated objectives of the applicable statute while 

minimizing any significant economic impacts of the proposed rules on small entities. When an 

agency publishes a final rule, the agency must prepare and make available to the public a final 

regulatory flexibility analysis ("FRFA"). Among other things, the FRFA must include a 

statement ofthe significant issues raised by the public comments in response to the IRF A, a 

statement of the assessment of the agency of such issues, and a statement of any changes made in 

the proposed rule as a result of such commcnts. 

Paperwork Reduction Act Analysis - The Paperwork Reduction Act of 1980" was 

intended to reduce tederal paperwork burdcns on individuals and companies. A federal agency 

generally may not conduct or sponsor a "collection of infOlmation" without the approval of 

OMB. In general, each time the Commission requires or requests information from ten or more 

persons by asking identical qucstions, such as through a form or other disclosure requirement, it 

must tirst obtain OMB approval. For rules proposed for public comment, the Commission 

generally submits the rule and an estimate of the rule's paperwork burden to OMB at the time it 

publishes the proposed rule in the Federal Register. 

The proposing release for a rule solicits specific comments concerning the proposed 

collection of information, including: whether the proposed collection of information is necessary 

for the proper performance of the functions of the agency; whether the agency's estimate of the 

burden of the proposed collection of information is accurate; whether there are ways to enhance 

the quality, utility, and clarity of the information to be collected; and whether there are ways to 

minimize the burden of collection of information on those who are to rcspond. 

The adopting release for a rule summarizes: any comments received and explains the 

agency's response to the comments; explains any modification made to the rule as it applies to 

the collection of information, and why the modification \vas made: and reports any changes to 

the burden estimate. purpose, use, or necessity of thc collection of information. 

"Major" Rule Analvsis - Under the Small Business Regulatory Enforcement Fairness Act 

of 1996.'2 a rule generally cannot take eifect until the Commission submits a report on the 

rulemaking (regardless of its impact on small entitics) to each House of Congress and thc 

Comptroller General of the Government Accountability Oftice. The report generally includes: a 

copy of the rule, general statement on major/non-major status, proposed effective date of the 

rule, cost-benefit analysis, Reg Flex Act compliance, and any other relevant information. If a 

IU Under the Reg Flex Act, the Commission is required to consider impacts on the small entities to which a rule 

directly applies; the Commission also typically considers indirect economic impacts as part of its broader economic 

analysis. The Reg Flex Act provides that agencies do not need to prepare initial and final regulatory llexibility 

analyses ifthe head of the agency certifies that the rule will not, if promulgated, "have a significant economic 

impact on a substantial number of small entities." 5 U.S.C. § 605(b). 

" 44 U.S.c. §§ 3501-3520. 

" Pub. L. No. 104-121, Title 11,110 Stat. 847.857 (1996). 
157 

The Honorable Tim Johnson 

Page 6 

rule is '"major," its effectiveness generally will be delayed for a 60-day period pending 

Congressional review. I) SEC staff provide an initial analysis to OMB, which makes the final 

determination as to whether a rule is "major." The Act provides Congress with a special 

procedural mechanism for overriding an agency rule during a defined period aftcr reccipt of an 

agency's rulemaking report. 

2. Provide your agency's current andfuture plans to regularly review and, when 

appropriate, modify regulations to improve their effectiveness while reducing compliance 

burdens. Please include a description of actions your agency has taken, or plans to take, to 

streamline regulations; for example, the Consumer Financial Protection Bureau ~f "Know 

Before You Owe" effort drastically simplifies mortgage and student loan disclosure 

requirements. Also note statutory impediments, if any, that prevent your agency from 

streamlining any duplicative or inefficient rules under your purview. 

The Commission and staff currently have formal and informal processes for identifying 

existing rules for review and for conducting thosc revicws to assess the rules' continued utility 

and effectiveness in light of the continuing evolution of the securities markets and changcs in the 

securities laws and regulatory priorities. Which process or processes may apply in the case of a 

given rule may vary depending on multiple factors. 

One of the ongoing processes for review of existing rules is the review process under 

Section 610(a) of the Reg Flex Act, which requires an agcncy to review its rules that have a 

significant economic impact upon a substantial number of small entities within 10 years of the 

publication of such rules as final rules. The purpose of the review is "to determine whether such 

rules should be continued without change, or should bc amended or rescinded ... to minimize 

any significant economic impact of the rules upon a substantial number of small entities." The 

Reg Flex Act sets forth specific considerations that must be addressed in the review of each rule: 

(i) the continued need for the rule; (ii) the nature of complaints or comments received concerning 

the rule from the public; (iii) the complexity of the rule; (iv) the extent to which the rule 

overlaps, duplicates, or conflicts with other federal rules, and, to the extent feasible, with statc 

and local governmental rules; and (v) the length of time since the rule has been evaluated or the 

degree to which technology, economic conditions, or other factors have changed in the area 

affected by the rule. 

The Commission annually publishes a list of rules that are scheduled to be reviewed by 

the Commission staff during the next 12 months pursuant to Section 610(a) of the Reg Flcx Act 

The Commission's stated policy is to conduct such a I O-year review of all final rules to assess 

not only their continued compliance with the Reg Flex Act, but also to assess generally their 

13 A rule is major ifOMB determines that it is likely to result in: (I) an annual effect on the economy of$IOO 

million or more. (2) a major increase in costs or prices for consumers or individual industries, or (3) significant 

adverse effects on competition, employment, investment, productivity, innovation or the ability of U.S.-based 

enterprises to compete with foreign-based enterprises in domestic export markets. See 5 U.S.c. § 804. 
158 

The Honorable Tim Johnson 

Page 7 

continued utility.14 The list published by the Commission, therefore, may be broader than that 

required by the Reg Flex Act, because it may include rules that do not have a significant 

economic impact on a substantial number of sma I! entities. In publishing the list, the 

Commission solicits comments generally on the listed rules, and particularly on whether the rules 

affect small businesses in new or different ways than when they were tirst adopted. The 

Commission accepts comments electronically - through a comment form on the Commission's 

website, an e-mail comment box, or the Federal eRulemaking Portal or in paper mailed to thc 

Commission's Secretary. 

In addition to the annual list ofrules scheduled for a la-year review, the Commission 

also publishes twice yearly an agenda of anticipated rulemaking actions pursuant to section 

602(a) of the Reg Flex Act. While the Reg flex Act requires these semi-annual agendas to 

include only rules that are likely to have a significant economic impact on a substantial number 

of small entities, the Commission' s general practice has been to include in its agendas all 

anticipated rulemakings for which it has provided or will provide notice and comment, regardless 

of their impact on small entities. The complete agenda is available at www.reginfo.gov, and 

information on regulatory matters in the agenda is available at www.regulations.gov. IS The 

agenda includes both potential changes to existing rules, including rescission, and new 

rulemaking actions. TIle Commission publishes a notice of each agenda on its website and 

invites questions and public comment, through the electronic or paper means described above. on 

the agenda and on the individual agenda entries. 

'Ine SEC currently plans to review a number of existing rules pursuant to these processes. 

For example, the Commission's semi-annual rulemaking agcnda under the Reg Flex Act lists a 

number of existing rules that are under consideration for revision. In addition, as discussed in 

more detail below, I recently instructed the staff to take a fresh look at the SEC's existing 

offering rules to develop ideas for the Commission to consider that would reduce the regulatory 

burdens on small business capital formation in a manner consistent with investor protection. 

In addition, on September 6,201 I, the Commission published a Request for Information 

in the Federal Register. on the Commission's Web site, and on the Federal eRulemaking Portal 

(www.rcgulatiolls.gov). The Request for Information invited interested members of the public to 

submit comments to assist the Commission in considering the development of a plan for the 

retrospective review of its regulations. The comment period closed on October 6.2011. We 

received over 70 comments. which we are in the process of considering. 

14 When the Commission implemented the Reg Flex Act in 1980. it stated that it "intend[ed] to conduct a broader 

review [than that required by the RFA], with a view to identifying those rules in need of modification or even 

rescission." Securities Act Release No. 6302 (Mar. 20,1981).46 Fed. Reg. 19251 (Mar. 30.1981). 

15 The agenda also is published in the Federal ReRisler, but the version of the agenda published in the Federal 

Register includes only those rules for which the agency has indicated thai preparation of a Reg Flex Act analysis is 

required (Le., rules that are likel) to have a significant economic impact on a substantial number of small entities). 
159 

The Honorable Tim Johnson 

Page 8 

3. Provide details of how your agency encourages public participation in tile rulemaking 

process, including through administrative procedures, public accessibility, and informal 

supervisory policies and procedures. 

Public comment is vitally important to the Commission's rulemaking. As discussed 

earlier, the Commission generally engages in rule making in which it publishes notice of 

proposed rules and seeks public comment before adopting substantive regulations or 

amendments to existing regulations. The notice and comment period provides market 

participants, investors, regulated parties, and other interested persons the opportunity to offer 

views and suggestions on our proposals, as well as empirical data regarding their impact. It is 

important to note that the Commission generally considers comments received even after the 

expiration of the comment period. In addition, the Commission has reopened or extended 

comment periods in appropriate circumstances to provide additional opportunities for comment. 

The views and data received from comments provide invaluable information that helps 

the Commission in crafting final rules that further our mission to protect investors, maintain fair, 

orderly, and efficient markets, and facilitate capital formation. We carefully review and analyze 

the comments received on our proposed rules, and address comments in our releases adopting 

final rules. In doing so, we coordinate the review across the agency so that appropriate staff 

expertise can be brought to bear on rulemaking. 

Recognizing the importance of the rulemakings required under the Dodd-Frank Act, the 

Commission expanded its open and transparent rulemaking process shortly after the Act was 

signed into law by providing an opportunity for public input even before issuing formal rule 

proposals. To facilitate early public comment on Dodd-Frank implementation, the Commission 

made available a series of e-mail boxes, organized by topic, to receive preliminary views from 

the public. These e-mail boxes are on the SEC website. In addition, our staff has sought the 

views of affected stakeholders and the public. This approach has resulted in hundreds of 

meetings with a broad cross-section of interested parties. To further this public outreach effort, 

the SEC staff has held joint public roundtables with the Commodity Futures Trading 

Commission statT on select key topics. Through these processes, we have received a wide 

variety of vicws and information that is useful to us in proposing and, ultimately, adopting rules. 

The SEC also hosted a roundtable on the agency's required rulemaking under Section 1502 of 

the Dodd-Frank Act, which relates to reporting requirements regarding conflict minerals 

originating in the Democratic Republic of the Congo and adjoining countries. 

4. Provide details of how your agency addresses the unique challenges facing smaller 

institutions when dealing with regulatory compliance, including any related advisory 

committees your agency may have or otller opportunities for small institutions to be heard by 

your agency. Please also detail how your agellcy respollds to concerns raised by small 

institutions. 

In promulgating rules, the SEC takes into account the rules' impact on smaller 

institutions. As discussed above, the Reg Flex Act requires federal agencies, including the SEC, 

to consider the impact of regulations on small entities in developing proposed and final 

regulations and to consider alternatives that would lower the burden on small entities. Consistent 
160 

The Honorable Tim Johnson 

Page 9 

with that Act, whenever notice and comment on a rulemaking is required, the SEC analyzes the 

rulemaking's effects on small businesses and alternatives. 

We anticipate that an analysis under the Reg Flex Act will be required for almost all of 

the rules that the SEC promulgates under the Dodd-Frank Act, and the SEC already has provided 

targeted relief to smaller institutions in a number of the rules that it has adopted under the DoddFrank Act. For example, in implementing Sections 404 and 406 of the Dodd-Frank Act, which 

require certain advisers to hedge funds and other private funds to report information for use by 

the Financial Stability Oversight Council, the SEC divided advisers by size into two broad 

groups large advisers and smaller advisers. For smaller advisers, the amount of information 

reported and the frequency of reporting is much less than for larger advisers. In addition, in 

connection with the Commission's rules under Section 951 of the Dodd-Frank Act, which 

require issuers to provide for periodic votes on executive compensation and the frequency of 

those votes, we provided additional time for smaller reporting companies to comply with those 

requirements. 

The SEC also is committed to reviewing the impact of existing rules on smaller 

institutions. As discussed earlier, Section 610 of the Reg Flex Act requires an agency to review 

its rules that have a significant economic impact upon a substantial number of small entities 

within 10 years of the publication of such rules as final rules. 

Also, as noted above, I recently instructed the staff to take a fresh look at the SEC's 

offering rules to develop ideas for the Commission to consider that would reduce the regulatory 

burdens on small business capital formation in a manner consistent with investor protection. 

Areas of focus for the staff will include: 

the restrictions on communications in initial public offerings; 

• whether the restrictions on general solicitation in private otTerings should be revisited in 

light of current technologies, capital-raising trends, and our mandates to protect investors 

and facilitate capital formation; 

the number of shareholders that trigger public reporting, including questions surrounding 

the use of special purpose vehicles that hold securities of a private company for groups of 

investors; and 

• regulatory questions posed by new capital raising strategies, such as crowd funding. 

In conducting this review, the staff will solicit input and data from multiple sources, 

including small businesses, investor groups, and the public-at-large. The review also will 

include the evaluation of recommendations from our SEC Government-Business Forum on 

Small Business Capital Formation (see the discussion below) and our recently-created Advisory 

Committee on Small and Emerging Companies, as well as suggestions we receive through the 

website solicitation of suggestions. 
161 

The Honorable Tim Johnson 

Page 10 

In addition to considering the regulatory compliance challenges of smaller institutions in 

promulgating and reviewing rules, the SEC provides these institutions with a number of avenues 

for airing their compliance concerns. The SEC holds an annual SEC Government-Business 

Forum on Small Business Capital Formation. This gathering has assembled annually since 1982. 

as mandated by the Small Business Investment Incentive Act of 1980. A major purpose of the 

Forum is to provide a platform for small businesses to highlight perceived unnecessary 

impediments to the capital-raising process. Previous Forums have developed numerous 

recommendations seeking legislative and regulatory changes in the areas of securities and 

financial services regulation, taxation and state and federal assistance. Participants in the Forum 

typically have included small business executives, venture capitalists, government officials, trade 

association representatives, lawyers, accountants, academics and small business advocates. In 

recent years, the format of the Forum typically has emphasized small interactive breakout groups 

developing recommendations for governmental action. 

Our Compliance Outreach Program also provides a forum for regulated entities to learn 

about effective compliance practices, discuss compliance issues, and for senior officers to share 

experiences. The mission of the program is to improve compliance by opening the lines of 

communication between SEC staff and Chief Compliance Officers and other senior officers of 

registered broker dealers, investment advisers and investment companies. The program features 

a number of elements, including regional events at various locations across the country and 

national events sponsored in Washington, DC. 

The Commission also recently established an Advisory Committee on Small and 

Emerging Companies. The Advisory Committee is intended to provide a formal mechanism 

through which the Commission can receive advice and recommendations specifically related to 

privately held small businesses and publicly traded companies with less than $250 million in 

public market capitalization. The members of the Advisory Committee include representatives 

from a range of small and emerging companies, and investors in those types of companies, with 

real world cxpcrience under our rules. The Advisory Committee held its first meeting on 

October 31,2011, where it considered a number of issues related to capital formation for small 

and emerging companies, including the triggers for registration and public reporting and 

suspension of reporting obligations, possible scaling of regulations for newly public companies, 

crowdfunding, possible moditications to Regulation A, and the restrictions on general 

solicitation. We understand that the Advisory Committee intends to provide preliminary 

recommendations to the Commission on many of these topics in the coming weeks, and we look 

forward to receiving those recommendations. 

5. Describe how regulatory interagency coordination has improved since the 

creation of the Financial Stability Oversight Counsel established by the Wall Street Reform 

Act. Provide specifics of how coordination has helped, either formally or Informally, in your 

rulemaking process. 

The Commission is committed to working closely, cooperatively, and regularly with our 

fellow regulators to strengthen our implemcntation of the regulatory structure established by the 
162 

The Honorable Tim Johnson 

Page 11 

Dodd-Frank Act and in carrying out our mission to protect investors, maintain fair, orderly, and 

efficient markets, and facilitate capital formation. 

We meet regularly, both formally and informally, with other financial regulators. SEC 

statTworking groups, for example, consult and coordinate with the staffs of the CFTC, Federal 

Reserve Board, and other federal regulators on implementation of Title VII of the Dodd-Frank 

Act. As you know, the SEC's rules will apply to security-based swaps. while the CFTC's rules 

will apply to swaps. Our objective is (0 establish consistent and comparable requirements, to the 

extent possible, for swaps and security-based swaps, taking into account differences in products, 

participants, and markets, and this objective will continue to guide our efforts as we move 

toward adoption. While. in some instances, the CFTC has released proposed rules before we 

have, in each of these cases, the rules were the subject of extensive interagency discussions. 

In addition. as required by the Dodd-Frank Act. we are working with the CFTC to adopt 

joint rules further defining key definitional terms relating to the products covered by Title VII 

and certain categories of market intermediaries and participants. Joint rulemaking regarding key 

definitions will help to ensure regulatory consistency and comparability, and thus help to prevent 

gaps, reb'lllatory arbitrage, and confusion. 

Commission staff also is working closely with the Federal Reserve Board and the CFTC 

to develop, as required by Title VIII of the Dodd-Frank Act, a common framework to supervise 

financial market utilities, such as clearing agencies registered with the SEC, that are designated 

by the Financial Stability Oversight Council as systemically important. This framework 

provides for consulting and working together on examinations of systemically important 

financial market utilities consistent with Title VIII. This added layer of protection, or "second 

set of eyes," called for by the Act will help provide assurance that the U.S. financial system 

receives well coordinated oversight from all relevant supervisory authorities. 

There has also been an extensive, collaborative effort by the Federal banking agencies, 

the SEC, the CFTC and our respective staffs to implement a number of other Dodd-Frank Act 

provisions. For example, the Commission joined its fellow regulators in issuing for public 

comment proposed risk retention rules for asset backed securities, the "Vo1cker Rule" 

prohibiting banking entities from engaging in proprietary trading and having certain relationships 

with hedge funds and private equity funds, and a rule governing the incentive-based 

compensation arrangements of certain financial institutions. We also jointly adopted with the 

CFTC, based on consultation with FSOC, a new rule that requires hedge fund advisers and other 

private fund advisers registered with the Commission to report systemic risk information on a 

new "Form PF." 

Finally, because the world today is a global marketplace and what we do to implement 

many provisions of the Act will affect foreign entities, the Commission is consulting bilaterally 

and through multilateral organizations with counterparts abroad. The SEC and CFTC, for 

example, are directed by the Dodd-Frank Act to consult and coordinate with foreign regulators 

on the establishment of consistent international standards with respect to the regulation of swaps, 

security-based swaps, swap entities, and security-based swap entities. We believe that the 
163 

The Honorable Tim Johnson 

Page 12 

IOSCO Task Force on OTC Derivatives Regulation, which the SEC co-chairs, and other 

international forums will hclp us achieve this goal. 

Thank you for your lettcr and your interest in our rulemaking approach. If you have any 

questions or would like to further discuss this letter, please feel free to contact me at (202) 551-

2100, or have your staff call Eric Spitler, Director of the Offiee of Legislative and 

Intergovernmental Affairs, at (202) 551-2010. 

Sincerely, 

~d)(J~ 

Mary L. Schapiro 

Chairn1an 
164 

~ FEDERAL DEPOSIT INSURANCE CORPORA TlON, Washington. DC 20429 

Honorable Tim Jolmson 

Chairman 

Committee on [3anking, Housing and Urban Affairs 

United States Senate 

Washington, D,C 20510 

Dear Chairman .Johnson: 

January 11,2012 

Thank you for your letter of;..Jovember 9, 2011, regarding implementation of the 

important financial reforms mandated by the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act), 

As you know, the Dodd-Frank Act vested the Federal Deposit Insurance 

Corporation with sole rule ""Titing authority in two primary areas: orderly liquidation 

authority and deposit insurance ret'Jrms that strengthen the Deposit Insurance Fund 

COIF), I am pleased to report that .... ithin one year after passage of the Dodd-frank Act, 

the FDIC had completed tiYe major final rules tor which the Act granted it sole 

rukmaking authority, TIl(lsC rul()makings included final rules impJemcming inCrea5()S in 

depo5it insurance c()\'erage. and the FDIC's enhanced authority to manage the DIF, which 

included adoption vI' a long-term illlld management plan designed to maintain a positive 

fund balanee c\'cn during a banking crisis while preserving steadl' and predictable 

ussessment rates through economic and credit cycles. Funhcrmore, the FDIC has largely 

completed the core rulemakings necessary to cany out its systemic resolution 

responsibilities under the Dodd-Fmnk Act and has, along with Federal Reserve Boanl 

statI: started the process of engaging with individual companies Oll the preparation of 

their resolution plans, 

As we proceed with implementing the Dodd-Frank Act, we arc mindful that one 

of the critical lessons of history is that efficient and stable financial markets require clear 

regulatory guidelines that promote market discipline and sound risk management The 

FOIC believes that, in crafting these rules, it is essential to solicit input from all interested 

parties to ensure the mlemaking process is open and transparent and [0 earefull) consider 

al1ernativc approaches to regulatory goals (0 minimize burden while maintaining 

supervisory standards. We believe that successful implementation of the Act will 

represent a signiticant step forward in providing a foundation for a financial "stem that 

is mor~ stable and less susceptible to crises in the future and better prepared to respond to 

future crises, 
165 

We arc working on a number affronts to achieve that necessary balmlce, as 

described more fully in the enclosed responses to your questions. Also enclosed is the 

FDIC's current statement of policy providing direction on rulemaking at the FDIC. One 

of the main purposes of the policy statement is to ensure that our rulemaking process 

achieves legislative goals effectively and efficiently. We also are enclosing our recently 

issued regulatory review plan and cxmnplcs of the kinds of analyses the FDIC undertakes 

for rulernakings. 

If you ha\'c further q1~estions, please do not hesitate to callmc at (202) 898-3888 

or Paul Nash, Deputy to the Chairman for External Affairs. at (202) 898-6962. 

Enclosure'S 

Sincerely, 

J~J.~ Martrn J. Gruenberg 

Acting Chairman 
166 

FDIC Responses to Questions from 

Chairman ,Johnson, Senate Committee on 

Banking Housing and Urban Affairs 

on the Rulcmaking Process 

QI. Provide a dctailed description of your agency's rulemaking process, including 

the variety of economic impact factors considered in your rulemaking. Please note 

to what degree you consider the benefits from your rulemaking, including providing 

certainty to the marketplace and preventing catastrophic costs from a financial 

crisis. Also describe any difficulties you may have in quantifying benefits and costs, 

as well as any challenges you may face in collecting the data necessary to conduct 

('conomic analysis of your rulemaking. 

AI: In our experience. therc is no doubt that banks. consumers. and members of the 

public benefit from having clear rules alld procedures, which provide much needed 

certainlY ia the marketplace. '[nere are several ways thc FDIC works [0 achieve this. 

First, the FDIC conducts all rulcmakings in accordance with the requirements of the 

Administrative Procedure Act (APA).l The FDIC satisfies all of the basIC requiremenTS 

for infonnal rulemakings under the APA, which generally include the follo\\,'ing:: 

• publication of a Notice of Proposed Rulemaking (NPR) in the Federal Register; 

• opportunity for public participation by submission of ",Tinell comments: 

• consideration by the agency of the public comments and other relevant material: 

and 

• publication of a final rule not less than 30 days before its effective date, Wilh a 

statement explaining the purpose of the rule. 

The FDIC also is subject to certain other laws to minimize regulatory burden and has 

taken actions, including interagency coordination, to reduce burden and provide certainty 

to the marketplace. These laws include: 

Rl.'gulatory Flexibility Act: Requires agencies to conduct and publish an initial 

regulatory flexibility analysis that describes the impact of a proposed rule on 

small entities or cenify that the final rule docs not have a significant economic 

impact on a substantial numbt:r of small entities (financial institutions With (otal 

assets of S J 75 million or Jess under current Smalll3usiness Administration 

standards). ) 

• Papennlrk Reduction Act: Requires agencies that conduct or sponsor a 

"collection of infonnation" from the public to file a request ',,"1th the Oftke of 

, 5 U.S.c. § SOO N seq 

, 5 [; S.c. ~ 553. 

, 5 U.s.c. }~ 601·12. 
167 

Management and Budget (OMB) for approval, to minimize burden for inJividuals 

and small businesses and cost to the federal government.' 

• Section 722 of the Gramm-Leach-Bliley Act: Requires the fcdl'ral banking 

agencies [0 usc plain language in all proposed and final rulcs puh!i~hed after 

January I, 2000 5 

• Section 302 of the Riegle Community Development and Regulatory 

Improvement Act: In detem1ining the effective date and administrative 

compliance requirements for new regulations that impose additional reporting, 

disclosure, or other requirements, requires federal banking agencies to consider 

any administrative burdens that the regulation would place on depository 

institutions, including small depository institutions and bank customers, and the 

benciits of the regulation. 6 

• Section 2222 of the Economic Growth and Regulatory Paperwork Reduction 

Act (EGRPR.>\): Requires federal banking agencies to conduct a comprehensive 

review of each of their regulations cvery 10 years to identify any outdated, 

unnecessary, or unduly burden~ome regulatory requirements imposed on 

regulated financial institutions.' 

• Small Business Regulatory Enforcement Fairness Act (SBREFA): Requires 

agencies to determine wheL~er a rule is a "major rule" (a final rule that will result 

in a signiflcant impact on the economy, consumers, industry, or government) and 

(0 file reports with Congress and the U.S, Govcrnmcnt Accountability Oftlce 

(GAO) for review of rules issued under the APA8 

Since 1998, the FDIC has had a Statement of Policy on the Development and ReI'few 0/ 

FDIC Regulations and Policies (Policy Statement), which enumerates hasic principles 

that guide the FDIC's development and review of rulemaking (Attachment 1). OW' 

Policy Statement provides that the FDIC "is committed to improving the quality o1'i(s 

regulations and polieie;;. to minimizing regulatory hurdens on the public and the banking 

indmtry. and generally to ensurin¥ that its regulations and policies achieve legislative 

goals effeclin:ly and eflicicntly." In the FDIC's rec.:ntly issued regulatory review plan. 

we committed to reviewing the Policy Statement to dctem1ine whether incorporating 

audiu(\lul prInciple,; regurding cosl-henefit analysis or making other change& would 

bettcr serve the purpose of reducing regulatory burden. A copy of the FDIC's r~gulalory 

review plan is enclosed as Attachment 2.1 {l 

With respect to economic impact factors considered in rulemakings, our current 

procedures allow staff the discretion and flexibility necessary for the FDIC to conduct the 

, 441:.:> c. ~ 3501 el seq 

, Pub.L. j()6· J 02. 11 Li,S C. § 4809. 

I, Put> L lU:;·323. 12 [I S C 14S02 

Pub L 1')4·20~,121·SC ~,311 

'( "5 esc ~ 801 at .'h~tl 

. FDIC Policy Statement. 63 FR 25157 (May 7,1998) . 

. n http:: www fdic.gov'regulati(lns:lawsiplans'index.html. 
168 

most effec.\ive economic analysis appropriate for specific rulemakings. In a recent 

evaluation of FDIC economic analysis, the FDIC Inspector General recognized the 

importance off1exibility in detennining the most appropriate economic analysis. stating 

that: 

The Policy Statcment is not prescriptiYe in terms of the analysis that must be 

performed in order to comply with its principles because the nature of analysis 

required depends on the particular rulemaking. b complying with the Policy 

Statement, each rulcmaking team which is comprised of subject maner experts -

detcnnines the appropriate type of analysis needed, taking into consideration any 

analysis prescribcd by Congress and the legislative history of an authorizing 

st,ltute. At other times a statute is less prescriptiv\!, and rulemaking Teams 

determint!. haged on the nature ohhe rule and any legislatl\·e history, tbe 

appropriate analysis 10 perform in order to evaluate the impact of a particular 

rulcmakmg. J J 

Attadunent 3 sets forth a number of detailed examples of the kinds of analyses the FDIC 

undertakes in differing statutory and regulatory contexts, pointing up the need for 

t1exibility as refelTed to above. 

The FDIC faces certain challenges in conducting the kinds of cost-benefit analyses 

prescribed in O!\-1.B Circular A-4 in every rulemaking. For example, the FDIC is subject 

to mallY express statutory requirements, including some contained in the Dodd-Frank 

Act. The FDIC In~pectoT General's Report acknowledged these challenges. concluding 

that "[ejach proposed rulemaking effort implcm(!nt~ a specific CongressIOnal mandate in 

th-: Dodd-Frank An; thus, the FDIC's conSIderation of alternatives or cost and benc!ll 

factors was limited hy those statulOry requirements." Additional challenges are noted in 

the GAO report entitled. "Dodd-Frank Act Regulations: Implementation Could lknelit 

trom Additional Analyses and Coordination."(:; For example, tbe rDrc faces challenges 

in e\'aluating benefits and costs due to light time frames for issuing regulations and a lack 

of available data. Often, data that is available is proprietary and should not be made 

public during the public rulemaking process. Also, requiring data input lor cost-benefit 

analysis could result in increasing. rather than reducing, regulatory Durden for institutions 

that are required to submit data. The GAO repon also noted that it has long been 

recognized that the private costs of regulation are difficult to obtain, in part because 

bus messes ha'<' difticuh} separating the costs of regulatory compliance from other costs 

reluted to risk management or recordkecping, and measuring the benefits is a more 

difficult and perhaps mtractable challenge. in part because regulatio!ls seeking to enSLlre 

financial stability aim to prevent low-probability. high-cost e,·entsL , 

11 EVAL 11-003. entitled, Elalualion of the FDIC's Economic Analysis of Three Rulemakings to 

Implement Pro>;sion, of the Dodd-Frank Act, page 9 (June 10 t I )(httP:·'.\vww.fdicig gov ·repoml J 11-

003EV.pdf). 

" (;.'\(2:12: 15 J, I'ov 10, 20 II 

IJ ld .. at 19; GAO-08-32, at 12-13. Oct. 2007 
169 

Q2. Provide your agency's current and future plans to regularly review and, when 

appropriatr, modify regulations to improve their effectiveness while reducing 

compliance burdens. Please include a description of actions your agency has taken, 

or plans to take, to streamline regulations; for example, the Consumer Financial 

Protection Bureau's "Know Before You Owe" cffort drastically simplifies mortgage 

and student loan disclosure requirements. Also note statutory impediments, if any, 

that prevent your agency from streamlining any duplicative or inefficient rules 

under your pun'iew. 

A2: The FDIC and the other agencies that are members of the Federal Financial 

Institutions Examination Council (FFIEC) are required by EGRPRA to undertake a 

comprehensive review of their regulations at least once every ten years to identify and 

eliminate any outdated, unnecessary. or unduly burdensome regulations. 14 The FDIC 

completed its last comprehensive review in 2006 and must therefore complete the next 

regulatory rcyiew by 20 16. In order 10 pr~pare for the next EGRPRA r('view process, the 

FDIC expects to publish for public comment in early 20 J 2 a plan outlining the process 

for the FDIC's next comprehensive review ofi15 rules. 

In addition to the comprehensive regulatory review process mandated hy EGRPR-A., the 

FDIC regularly considers ways \0 streamlin<.: its regulations, For instance. as part of our 

efforts to implement the Dodd-Frank Act, the FDIC is engaged in an ongoing review of 

its existing rules affected by the Dodd-Frank Act. As appropriate, we will be updating, 

,tre,mllining, or rescinding some of our rules to comply with and confonn to the DoddFrank Act. MoreQ\.cr. in response to inpm from members of the FDIC's Ad\'isory 

Committee on Community Banking, we conducted a review of questionnaires and reports 

that banks file with us and made changes to streamline the filing process through greater 

u~e (,[technology and automation. 

Finally, on November 10, 2011, the FDIC released a regulatory review plan that outlines 

a number of initiatives that the FDIC will be undertaking to review its existing rules and 

rulemaking process to make sure they continue to be the most effective without imposing 

unnecessary hurdens on the industry (attached). 

Q3. Provide details of how your agency encourages public participation in the 

rulemaking process, including through administrative procedures, public 

accessibility, and informal supervisory policies and procedures. 

A3: The FDlC makes every effort to encourage widespread public participation in Ollr 

rulemaking process. \Ve do this by publishing Advance Notices of Proposed 

Rulemakings (A"iPRs). Notices of Proposed Rulemakings (NPRs) and Interim Rules for 

public comment, including posting those documents and the comments received on our 

website for easy access by the public. The FDIC recognizes the importance of providing 

adequate tim..: for the puhlic comment process so We generally provide a 60-day comment 

period for each 5ignificanl proposed nlle, 3nd for some rules wc have even prO\'ided 

comment periods as long as 90 days. Howevcr, therc may be circumstances under \"hich 

" Pub. L 104,208. 12 USC § 3311. 
170 

th<: FDIC must propose rules ""ith a shorter comment period. as permitted by the AP A. 

such as when it may be necessary to meet a statutory deadline. In addition. the FDIC 

often puts informal supervisory guidance out for comment by all stakeholders. 

In August 2010, the FDIC announced an "open door policy" that made it easier for the 

public to provide input and track the rulemaking process for the FDIC's implemenlation 

of the Dodd-Frank Aet. The FDIC's open door policy goes beyond the notice and 

comment requirements of the APA governing federal agency rulemakings by providing 

the public the ability to playa role in the process eyen before specific regulations are 

drafted and proposed. In addition, the FDIC's policy enhances transparency and 

accountability in the r1.l1emaking process through the agency's voluntary disclosure of 

meetings between senior FDIC officials and private sector individuals to discuss how to 

int(!rpret or implement provisions of the Dodd-Frank Act that are subject to independent 

or joint rulcmaking. 

The key elements of the FDIC's open door policy include: 

The FDIC holds roundtable discussions as needed with e).1:ernaI parties on 

implementation issues related to the Dodd-Frank regulatory refom1s. These 

events are designed to provide balanced public input throughout the ruJemaking 

process and arc available for public viewing via webcasts posted to the FDIC 

website. 

The FDIC releases, on a regular basis, the names and aftiliations of private sector 

individuals \vho meet with senior FDIC officials to discuss how the FDIC should 

interpret or Implement provisions of the Dodd-Frank Act that are subject to 

independent or joint rulcmaking. fbe FOlC also discloses the subject matter of 

the m<:ctings. I

; 

To encourage public input in the process from the widest audience possible, the 

FDIC has created a dedicated electronic mailbox to collect input from interested 

pOrlies. These comments are revkwed f0r content and applicability and become 

part of the public record posted on the FDIC websiteI6 

Con~istent with its open door policy, the FDIC has provided a dedicated link on 

its website through which members of the public can re~uesl a meeting with 

FDIC staff 0n regulatory reform implementation issues. 7 

The f'DIC web casts all open Board meetings, including those regarding 

regulatory refonn, and these webcasts are made available on the FDIC \ .... ebsite. 

Staffmemorunda and draft Federal Register notices pertaining to matters 

considered by the FDIC's Board are routinely provided to members of the public 

attending open meetings and also are posted on the FDIC website·--in most cases, 

in their entirety. 1& 

j'\ SB(J http~:i,~:?(\.\ w .fdic.go" 'r£gulatiuns 'refonn/nl~~J~~ .. tJL11J 

,,, See i.lITJ2hiwww.Ldic.gO-.ireguiaiion ... la.l..;; . .n.l!.QiiuQmmcnU:. 

" See b1!p~~.{::Igicsurvn'.,.i.nguisiteasp.com!fdic~-'!>J.Q[£webcorporate.J!l1~S3GJR6. 

:l\ Sl!e haps /'~~.'.~': fqLc.~,gQv/regulatLQ..I].~J.~.:\:s,Tederal!indel( html, 
171 

[n addition, the FDIC has set up a subscription list allowing members of the public to 

sign up for a subscription service to receive email noticcs on major developmcnts, and 

has made bill summaries and other resources on the Dodd-Frank Act available on the 

FDIC's dedicated financial reform wcbpage, http://'''''\-v\¥.fdj£.g9~V!tjrg!I}g;!U:ef(m11!. 

Q-t: Provide details of how your agency addresses the unique challenges facing 

smaller institutions when dealing with regulatory compliance, including any related 

advisory committees your agency may have or other opportunities for small 

institutions to he heard by your agency. Please also detail how your agency 

responds to concerns raised by small institutions. 

A4: The FDIC is the primary federal supervisor for the majority of community banks in 

the United States. Community banks, detined as institutions l:vith assets under $1 biilion, 

make up nearly 7,000 of the approximately 7.500 FDIC-insured financial institutions in 

the coumry. TI1e financial crisis and ensuing recession have taken a serious toll on 

community banks. StilL the large majority of community banks have come through this 

CrIsis in good shape and provide a "ide range of critical scn'ices [or their communilles, 

During the J'ec~nt real .:state and economic downtum, the FDIC has advocated policies 

that help community banks navigate these challenging times and comply with new laws 

and regulations, Through our regional and field offices, the FDIC actively communicates 

with the community banks we supervise and provides recommendations for addressing 

financial and regulatory compliance issues. The FDIC beneilts from a cooperative 

rdationship with the conununity banking sector through engagement with individual 

institutions and, at the state and national levels, through dialogue with industry trade 

groups. 

Given the importance of commtmity banking to the national and local economies. as well 

3S (0 the financial sen'ices sector, in 2009 the FDIC established an Advi~ory Committee 

on (',)mmunity Banking, The Advisory Committee comprises representatives fwm 

community hanks a .. '1d academia and provides the FDIC with an infonned perspeclive on 

the challenges small banks face. The FDIC leverages tbe Ad\·isor)' Committee's 

knowl<:dge and experience to obtain input on banking policy, refine our supervisory 

programs. aud address unnecessary regulatory burden. The Advisory Committee has 

pWYid.:d valuable input on credit conditions, regulatory compliance matters. und 

community banks' ability to remain competitive in the financial services marketplace, 

In addition, the FDIC sponsors training events for community banks, including regional 

and national teleconferences on risk management and consumer protection matters, and 

Directors Colleges to help bank directors better understand new regulations and the 

supen'jsory process, 

As thc primary federal regulator tar the vast majorit), of the community banks, the FDIC 

is sensitlve to their resource constraints and we have taken steps to streamline o'versight 

and strengthen communication with these institutions. In 2011, we instituted an intemal 

process that considers. prior to issuance, the anticipated impact of any new FDIC 
172 

directive or guidance on small banks. This pro<.:ess helps smaller institutions gauge the 

effect of new supervisory expectations and provides an internal reasonableness check. 

We also continue to assess community banks' resource capabilities when updating the 

Consolidated Repons of Condition and Income (Call Reports) and have made appropriate 

adjustments. For example, on November 21, 2011, the FDIC, the Of1ice of the 

Comptroller of the Currency, and the Board of Governors of the Federal Reserve System 

published a Federal Register notice seeking public comment on proposed Call Report 

changes for 2012. 19 Proposed changes to be effective with the June 30, 2012 Call Report 

arc focused primarily on institutions w'ith total assets of $1 billion or more. We also have 

initiated the practice that, in connection with the issuance of any new Financial Institution 

Letters (or FILs), there is a statemenl near the beginning indicating the impact (if any) on 

insured institutions with Jess than $1 billion in asset, - enabling smaller institutions to 

easily identij~' any FILs that are not relevant to smuller entities. 

A focus on wmmunity banks will be a major priority for the FDIC over the coming year. 

The FDIC has developed a set of community banking mitiatiyes to further it, dialogue 

with lh.: industry and betkr our understanding of the challenges and opportunities for 

community hanks. First. W~ will host a national conference in febmary 2012 te' kick (11T 

this effort that WIll focus on the future of community banks, their unique role in 

supporting our nation's e<.:onomy, and the challenges and opportunities that they [ace in 

this difilcult economic em·ironment. Following thl: conference, the FDIC will hold a 

series of roundtable discussions with community bankers in each of the FOlC's six 

regional offices around the country in which senior FDIC executives, including the 

Chairman. will participate. 

In addition, we are undertaking a major research initiative to examine a variety of issues 

related to commlU1ity banks, including their evolution, characteristics, performance, 

challenges, and role in supporting local communities. The FDIC's research agenda will 

cover topics such as changes in community bank size and geographic concentration over 

time, measuring the performance of c.ommunity banks, and changes in business models 

and C(\st ,rructures. The research also will look at how trends in technology and the small 

husioess economy have afTected community banks and the lessons for community hanks 

from the current crisis. 

Also as part of these initiatives, the FDIC is continuing to look for ways to impw\"(:, the 

effectiveness of its examination and mlemaking processes. We are seeking to identify 

supa\'isory improvements and efficiencies that can be made while maintaining our 

~upcr\'isory standards. For example, the FDIC is exploring enhancements to our offsite 

reviews, pre-examination planning processes, infonnation requests, and examination 

coordination. In addition we are exploring communications strategies to update the 

industry on upcoming guidance and rulemakings that affect FDIC-supervist:d community 

hanks in an orgal'i7ed and understandable way so that institutions can more effectively 

plan t() meet their compliance obligations. The FDIC continues to ensure that 

-_.------_._---
173 

examination guidance takes into account the size, complexity and risk profile of each 

in~titution. The FDIC now includes an up-front section in each Financial Institution 

Letter sent to insured depository institutions that describes its applicability to institutions 

with total assets ofless than $1 billion. 

\Vith regard to our efforts to respond to smaller institutions' concerns with the 

examination process, the FDIC follows an open, two-way communication process. The 

FDIC considers bankers' comments about our conclusions in the shared interest of 

accurately assessing an institution's risk profile, understanding its strategic goals. and 

st:rving the local community. We conduct, on average. more than 4.350 on-site safety 

and soundness, compliance, and Community Reinvestment Act (CRA) examinations 

<umually (approximately 54 percent of FDIC-supervised institutions are examined each 

year for safety and soundness and 40 percent arc examined for compliance and eRA), 

and re.cognize that questions about and even disagreements with our findings may 

sometimes arise, especially in difficult economic times. Ibe FDIC has a number of 

informal and fODnal outlets for bankers to express their concerns when this occurs. 

\Vhen banks disagree or are uncomfortable with examination fmdings, they are advised to 

discuss such concerns with us; however, they also can appeal supervisory determinations 

through a formal process, which culminates with a review by the Supervision Appeals 

RC\'kw Commince chaired by an FDIC Board member, or seek the impartial assistance 

of the FDIC's Offic.e of the Ombudsm:m. In addition, bankers have an opportunity after 

each examination to submit an anonymous survey (or they can identify themselves and 

request specific follov,-up by FDIC staff) about their experiences to the agency. The 

FDIC \ve!comes feedback from the industry and relies on bankers' infonncd perspectives 

a~ we considc:r rdinemcnls to our supervisory process. 

Q5: Describe how regulatory interagency coordination has improved since the 

creation of the Financial Stability Oversight Council established by the Wall Street 

Reform Act. Provide specifics of how coordination has helped, either formally or 

informally, in your rulemaking process. 

A5: The FDIC has a long history of coordinating with our fellow banking regulators in 

our rulcmaking process by virtue of the makeup of our Board of Directors, which 

includes beads of other banking agencies, as well a~ through the FFIEC and other less 

formal consultative efforts. Moreover, many statutorily-required rulemakings are joint or 

interagem:yefforts. 'The Financial Stability Oversight Council CFSOC) has strengthened 

and broadened previous coordinating relationships by increasing the scope of activities 

and regulators who are required to coordinate and consult and by providing a forum and 

procedures to execute such coordination. 

Moreover, the FSOC has provided a useful means for agencies to facilitate 

communication on rulemakings required by the Dodd-Frank Act. For exampie. the 

FSOC facilitated c()ordmation on the joint FDICTreasury rule on :Vlaximum Obligation 

Limitation (MOL) required by the Dodd-Frank Act. In that case, the rDIC and Treasury 

consulted with the other FSOC-member agencies before issuing the proposed rule. 
174 

TIle FDIC believes that additional interagency conmlUnication on signiticant Dodd-Frank 

ACl ruJemakings is useful even when consultation or coordination is not statutorily 

required. The FDIC intends to work with the other FSOC member agencies to enhance 

communication and coordination efforts. 
175 

Attachment 1 
176 

rDle Law, Regulatil}lls, Related Acts - Statements of Policy 

FD!C La.w, R"'lUI"IIc'ns, RelatQd Acts 

DEVELOPMENT AND REVIEW OF FDIC REGULATIONS AND POLICIES 

Stafement of Policy 

The Federal Deposit Insuranw Corporation is committed to 

the quality of its regulations and policies, to minlmiziOfl 

on the public and the banking in<iuslry, and generally to 

its regulations and policies achieve !egislative goals effectively and 

and written policies: 

statement of policy (Policy) Is to establish basic 

FDlC's promulgation and review of regutations and 

The scope of this Policy is limited to regulations and 

issued by the Board of Directors of the Fmc. 

industry and the public should be minimized, 

statement of policy the FDIC gives careful 

an issuance, Frequently a reguletion is 

FDIC may Identify a need for a superviSOry 

or to clarify its poHcy for the benefit of 

need for a regulation or statement 01 

seeks to minimize to the exlent practicable tho 

imposes on the bankiny industry anti the public, 

recordk .. ,pirlQ requirements Imposed by a regulation are 

regulation or statement of policy on 

conSidered. Particuiar attention is focused on 

have on small instituiions and Whether ttl€re are 

the FD1C1s goal whtch would minimize any burden on 

._. __ ::_. ''-' the potential benefits aSSOCIated with the 

are weighed against the potentia! costs, 

sho~jld be clearly and understandably written, The 

and statements of policy as clear and as 

those who are affected by them. In 

and statements of policy, the Seard 

orclan!z.!:!o",.1 strl)cture :as well as the specmc 

components to achieving a clear and useful 

opportunity to participste in the 

to improve its regulations and sta1e-ment 

Vilhether a new regulation is being 

the Soard gives carefu! consideration to 

publlc polley" Pub-He participation In the 

is an opportunity for the Board to heal' directly from affected 

members pubIJc with important experience and thoughtful insights related 

to the pertin-ent issues~ A person or Drgantzation may petition the Board for the 

issuance, amendment. or reps"1 of any regulation or pOlicy by suomltting a 

writlen petaion to the Executive Secretary of the FDIC. The petilion should 

iltlp:ihvv,w,tai"goviregulations/iawsirulesl5000-400,html 

Page 1 

11115/2011 
177 

!,'Dle Law, Regulations, Related Acts - Statements of Policy 

Includl> a complete and concl • ., statement of the petitione". lntere.! in the 

subject matler and the reasons why the petition shoukl be granted, 

MI rulemaking i. carried ou! in accordance with the APA, by which the Board 

provide. the public with notices of proposed rulemaking and opportunities to 

submit comments the proposals, The Board will ollen .""k public comment 

on proposed statements 01 policy as weH, All comments and proposed 

alternatives received dvring the comment periOd are considered prior to the 

issuance of a final J1)~ or statement of pOlicy, The Board takes final action on 

proposed regulaiions and poiicies as promptly as ¢ircumstances allow. If a 

significant period of time elap •• s following the publication of a proposed rule Of 

polley without final acllon, the Board will consider withdrawing Ihe proposal or 

republishing i1 for comment !f the Board decides to reconsider El propos-ed 

has been Vlithdrawn., it wHi begin the 

dm,elo,Dmenl process anew, 

Council 

regulators through 

unffo,," those regulations and policies that implement 

common statutory or supervisory policies. 

should be reviewed p.erlodicaHy, Tv 

statements of policy are 

meet !he principles set forth in this 

undertake a: feview of each 

E.xecutive Secretary of the FDIC Vim, 

coordination with other financial 

By order of the Board of Directors, April 28, 199Bhttp:,IWww,faic,gov/regu!ationSi1awsirulesI5000-400,html 

Page 2 of2 

ill 5/20 I ] 
178 

Attachment 2 
179 

FDIC: FDIC's Plans to Review Existing Regulations lor Continued Effectiveness 

FDIC's Plans Revi~w Existing Regul.aticHis for Continued 

Effe-ctjv~l1ess 

On July the President issued Executive Order 13579, "Regulation 

and Independent The FDIC has a long"slandlng 

policy and practice proposed and existing regufaUons to 

evaluate their impact. is an overview of the- FDIC's plans to review 

eXIsting regulations for effectiveness. 

FDIC will be undertaking a number 

process, 

Evaluation. of Examinations and RulemavJngs Affectjn~ Community Sanks 

The FDIC undertaking a community bank Initiative In which the FDIC will 

review both examination process and rulemaking process to further our 

Imoerslanding of tM challenges and opportunities for community banks, We 

plan 10 hold a conl""'OO6 earty in 2012 on the future of community banking 

and are tradng the evolution of community banks over the past 2D years, 

in models and cost structures, so that we can 

The FDIC is key challenges 

banKS, such as raising keeping up with technology, 

personnel, end meeting aoHgatlons 

,'IVU"'V"''''', we are our own riSk-management and compliance 

make the prot-"ess more 

and en open dialogue 

bankers across 

on these and other motters, FDIC will further 

pubilc meeUngs of our Advisory Committee on 

http://\yww,fdiG,goY/rcgulati(1!ls!laws!p!ansJinde:,<,html 

Page 1 of 

llilSl2011 
180 

FDIC: FDIC's Plans 10 Review Existing Regulations for Continued Ellectivencss 

Community Banking, a forum where we hear firsthand from a broad cross~ 

section of communl1y bankers about both the challenges and the 

opportunities they see In their markets, as well as some of the concerns they 

have about the regulatory environment This overall effort in regard to 

community banks will be a major priority for the FDIC during 2012 

Stream!ming and iransparency 

The FDIC has already taken steps to reduce burden and increase 

transparency In rulemaking In response to input from members of the 

FD1C's Adviso"Y CommIttee on Community Bankmg on ways to reduce 

regulatory burden, we conduc::ed a review during 2011 of the questionnaires 

and reports that banks tHe with us and made changes to streamline the filmg 

process thr~lJgh greater use of technology and automatIon Also, to make 11 

easier for smaller institutions to understand the impact of new regulato:y 

changes or guidance, we speCIfically added a statement up front in our 

Financial Institution Letters (the vehicle used to alert banks to any regulatory 

changes or gUIdance) as to whether the change applies to institutions under 

$1 billion 

The FD!C has also put in place a number of measures to promote 

transparency In aur rulemak.lng process. Includmg ho!dlng publlc roundtable 

discussions on Dodd-Frank implementation Issues via webcast. releasing 

the names and affiliations of private sector mdividuals who meet with sentor 

FD1C officials to dlscuss matters subject to ru!emaking under the DoddFrar.k Act; establlshmg a dedicated mailbox to collect and pest on the FDIC's 

website input from the public; and hostmg a dedIcated webpage that 

provldes information on the Dodd-Frank Act implementation process at the 

FDIC. 

Contlnued AnalYSIS of the Costs and BenefIts of Ru!emski:'g 

In (ts general rule making process, the FDIC continually focuses on the 

potential costs and benefits of the rules that it adopts. A number of statutes 

help ensure that regulatory agencies consider and minimize regulatory 

burdens. For example, under the Regulatory Flexibility Act, the Riegle 

Community Development and Regulatory Improvement Act and the Small 

BUSiness Regulatory Enforcement Fairness Act the FO IC must analyze a 

proposed rule's Impact on depository institutions, customers of depository 

lI1stitutions. small depoSitory institutions, and industry competition. The FDIC 

considers the effect of its regulations on competItion wi:hin the industry and 

spec(ficaf!y analyzes effects on banks and their abllity to raise capital These 

analyses are an ;mportant way in which the FDIC strives to ensure that Its 

rules meet staiutory rulewntlng requlre'Tlents In the most effiCIent manner 

posslb!e, 

Many of the FDIC's reguial.Jons are required by s:atute and/or are armed at 

protecting the Deposit Insurance Fund. !t is the FDIC's longstanding policy to 

ensure that the rules it adopts are the leasi burdensome to achieve those 

goals. The FDIC's Statement of Pohey recognizes our comm:tment to 

minimIZing regulatory burdens on the public and the banking II1dus1ry and 

the need to ensure that our regulations and policies achieve regu!atory goals 

effectively. 

A recent lnspedor General's report (which can be found online at 

;"':~p .Jc,,'''et;)~:s i' I': 1,{·D:..,£\/ ;:"0') (i)O;: I-;e:p) examined three FDIC 

rulemaking projects The Inspector General's findings confirmed that the 

FDIC staff worked with other financial regUlatory agencies to ensure a 

coordinated rulemaklng effort; performed quantitative analysis of relevant 

data: conSIdered alternative approaches to the rules; and, where applicable, 

included information about the analysis that was conducted and assumptions 

that were used in the text of the proposed rule. The report also found that 

each of the proposed rules examined by the Inspector General was 

considered by the FDIC Board of Directors in open, public meetings 

Economic Gro......th and Regulatory Pape-f'\'IIork Reduction Act {EGRPRA\ 

Finally and importantly. the FDIC will be undertaking a comprehensive 

hnp:,'/wv.'W,fdic,go\,iregu]ations·laws/plansiindex.html 

Page:2 of 3 

1l!1SI2011 
181 

FDIC: FDIC's Plans to Review Existing Regulations for Continued EfTectiveness 

review of its regulations in order to identify any outdated. unnecessary or 

unduly burdensome regulations pursuant to the EGRPRA. This well~ 

establIshed process requires the FDIC to conduct a complete review of all its 

regulations at least every ten years The FDIC completed its last review 

under EGRPRA !n 2006 and must complete Its next comprehensIVe review 

by the year 2016 1n order to prepare for the upcoming EGRPRA review 

process, the FDJC w!ll pubhsh for public comment in early 2012 a plan 

outlining the process for the FDIC's next comprehensive revIew of Its rules, 

}lQIOO CooIact Us Searc!L ±lelp Si1eMap Forms En !CopanoJ 

)iileb~""'-Er~oli<¥..£IalnJIlIri!Jng Act of2010 USA.gov FDIC Office of Inspector General 

hltp:lly,,""'Vo·.fdic.gov/regulationsilaws/plans/index.btml 

Page 3 on 

IU15/2011 
182 

Attachment 3 - Examples of the kinds of analyses the FDIC undertakes 

In selling assessnU!llts. the FDIC considers specific factors required by statUiI'. 

In administering the risk-based deposit insurance assessment system. the FDIC must 

comply with certain express statutory requirements. For example, Section 70fthc 

Federal Deposit Insurance Act (the 17DI Act) directs the FDIC to create a risk-based 

assessment system, taking into consideration the probability that the Deposit Insurance 

Fund (DIF) will incur a loss with respect to an institution, and taking into consideration 

the institution's categories and concentrations of assets and liabilities, any other relevant 

f~dors, the amount of Joss, and the revenue needs of the DIF.l Section 7 authorizes the 

FDIC to set assessments in such amounts as it detelmines to be necessary or appropriate. 

and in doing so Lie FDIC must consider enumerated factors, including the estimated case 

resolution expenses and income of the DIF and the projected effects of assessments on 

the capital and camings of insured depository institutions.2 

Witll respect fO Ihe size (~rlhe Deposit Insurance Fund, statutory requirements /'eprcsen/ 

a congressional balanCing of benefits and costs' 

The FDIC also is subject to requirements contained in the Dodd-Frank Act. Under the 

Dodd-Frank Act, Congress rcquired that the FDIC take steps to assure that the Dfl' 

reserve ratio r~aches 1.35 percent by September 30, 2020. Tbis statutory requirement 

represents a CO!lf,'Tcssional balancing of benefits and costs, ensuring that the D1F will 

have sufficient re,ourcc5 within a reasonable amount of time without imposing extremely 

high deposit insurance assessments on a banking industry trying to recover from a severe 

downturn. Given the actual and projected losses to the DIF resulting from the current 

tinandal crisis, this requirement creates specific revenue needs for the DIF that the FDIC 

must meet. 

The Dodd-Frank Act also required the FDIC (0 amend its regulations to redefine the 

assessment h~se used for eaJclllating deposit insurance assessments a5 avcrage 

consolidated total assets minus average tangible equity (with some possible exceptions). 

During the rulcmaking process, the FDIC considered eosts to the industry and economy. 

QUI1n1itariJ'e and qualitative analysis undertaken/or the assessmenl rules: 

The FDIC conducted economic analysis during the rulemaking process on tile assessment 

base, assessment rates, and large bank pricing consistent v";th the broad principJes 

guiding economic analysis of the executive orders and OMB Circular 1\-4. The FDIC 

determined the most appropriate and effective type of analysis needed 10 evaluate tbe 

impact of the ruJemaking on the industry and the public. Specitlcally, the FDIC 

undertook extensive analysis consistent ""ith its Policy Statement and statutory 

rcquirements to ensure that the revised assessment system would creatc the necessary 

rC\'CI1UC stream to mCi:t statutnrily mandated goals without imposing unnecessary 

12 usc ~18J7(b)(l)(C) 

12 U.S,C §J817(b)(2)(B) 
183 

additional cost. In addition, the FDIC updates its long-term loss, income, and DIF 

reserve ratio projections every six months to determine the appropriate assessment rates 

and revenue needed to comply with the statute and to ensure that it remains on track to 

restore the D!F reserve ratio within the statutory Jeadlim:. By definition, this analysis 

considered possible future benetlts and costs. In the Final Rule 011 Ass.:ssments and 

Large Bank Pricing. the FDIC sought to maximize the benefits to the industry and the 

economy relative to potential costs of inappropriately assessing risk or not building the 

fund balance high ('no ugh. Using the loss, income, and DIF reserve ratio projections. the 

FDIC examined many different alternative asSt~ssment rate schedules to determine one 

that would maintain the revenue needed und meet other statutory requirements (e.g., the 

FDI Act requirement that the assessment system be risk based), without either materially 

increasing or decreasing overall assessment costs for the bunking industry. 

In revising the assessment system, the FDIC also considered the beneilts of improved risk 

pricing lor large and highly complex institutiolJs. These benefits are quantified using the 

regression model aYailabk in Appendix 2 of the Final Rull::, which estimalt.!s how well 

the revised risk ll1ea~ures would have predicted the expert judgment ranking of 

institutions when applied from 2005 through 2008. The FDIC also tested other 

methodologies ;md the inclusion of other risk measures in the scorecards used to 

determine the a%essmenl nue for large and highly complex institutions and found that 

these alternative approaches had weaker predic1ive ability. The statistical analysis 

produced quantifiable results that weigh the costs and benefits of altemative approaches. 

Further, during its analysis the FOlC considered including additional metrics in the 

:;corecard that may have improved the predictive ability of the scorecard; however, these 

metrics were not included due to the potential burden on the industry. While this analysis 

did not expres~lv "monetize" the benefit, it did include a signiticant cost-benefit analysis 

that is rele\'unt io!' the statutory criteria being anaJyzed.] 

During the rulcmaking process, the FOlC also considen:d certain costs ofreYising risk 

pricing. For example, the FOlC responded to industry comments by implementing 

modifications to detinitions that affect certain items on the scorecard. These 

modifications reduce the t:ost to the Industry of recurring data collection related to the 

~corccard items. Following the adopdon of the tinal rule, the FDIC received further 

COl11m~nts voicing concern about operational obstacles to implementing other ddinitions 

on the scorecard. In light of those comments, the FDIC delayed the implem~ntation of 

those definitions in order to explore options for addressing those problems. 

As required by the FDI Act, the FDIC analyzed the effect of its assessment proposal on 

the capital and earnings of the industry. While this analysis did not expressly "monetize" 

the cost, it did include a significant cost analysis that is relevant for the statutory criteria 

being analyzed. 4 

3 The analysis found that all of the measures are statistically significant in explaining the expert judgment 

ranking of institutions at the 5 percent or I percent level in several years. All ofthe estimated c.oefficients 

h~ve a posItive Slg11, \vhich is consistent with expectations since each measure was normJlil".l"d into it score 

til(\( increases with risk. 

, The analysis found that projected decreases in a,sessmcnlS would prevent three institutions from 

hecom:ng under-capitalized (I.e. irom falling below fOllr percent equay to assets) that "ere proje;;ted to do 
184 

The FDIC also undertook extensive analysis to ensure that the assessment revenue 

generated by large banks overall under the Large Bank Pricing rule was proportional to 

the large banks' overall share of the assessment base to be consistent with congressional 

intent. 

Any additional analysis of the costs and benefits of the rule would have required data and 

resources beyond those available to the FDIC, particularly given the need for timely 

action. Congress intended that the change in the assessment base shift the assessment 

burden from smaller to larger insured financial institutions. Given this intent, delay in 

adopting the rules necessary to implement the new assessment base would, in the FDIC's 

vie.w, have been unwarranted.; Furthermore, given the statutory directive and intent of 

Congress, it is not clear how additional cost-benefit analysis would have changed the rtlle 

adopted on the assessment base. 

O\1B gtlidunce recommends "monetizing" the costs and benefits for each of the 

altematiyes considered. In the context of the large bank pricing rule, it is not clear how 

monetizing benefits would have altered the final rule. Congress has mandated a riskbased system and the fDIC's analysis showed that the proposed system significantly 

improved risk differentiation. The FDIC evaluated other reasonable altemalives to the 

structure oftht.: large bank pricing rule, and proposed the approach that W:lS most 

supported by a comprehensiYe, statistically bas.:d analysis_ 

Quantilalire and qualitative analysis undertaken/or the Designated Reserve Ratio ruleThe FDIC conducted economic analysis during the rulcmaking process for setting the 

DRR consistent with the broad principles guiding economic analysis of the executive 

orders and OMB Circular ."\-4. Wl1en setting the ORR, the FDIC is requircd by statute to 

consider past, eUITcnt and future risk ofloss to the DlF, economic conditions affecting 

insured depository institutions, measures to prevent sharp swings in assessment rates, ,md 

other factors the FDIC deems appropriate 6 The Proposed Rule addressing Assessments, 

Large Bank Pricing, and the Designated Reserve Ratio contemplated altcmatiYl: DRRs 

and th .. ir impact on the fund, dividend policy. and prcmium volatility. 

so otherWise Lower a.s;;;essments would also prevent one Institution from declinmg below 1\q) rercent 

('quit) to assets that \I'lould have othcn,ise, ~() bank facing an incr~a.se in assessments. \t.ould, a<i a result of 

the ""cssment I~crea,e, fall below the four percent or two percent thresholds The analYSIS also found that 

approximately 84 percent ofprotita~1e institullons (whose assets total nearly S5 billion) were projected to 

have a dc-crcu:->e In assessments in an amount between zero a:ld ten percent of inc()~)c, while only one 

percent ofinstitu!Jolls (whose assets total approximately S5A bl!honl would face "'Sessment increases 

between zero and ten percent of their income 

, Sce. e g, Statements of Senator Hutchison, ! 56 Cong. Rec. S3154 ("lay 5, 20 iO) (Co- Sponsor of 

Amendment NO 37.jQ. which contaim the new assessment base) and 156 Cong. Rec S3297 (\1ay 6. 201U) 

Similar Jrguments In favor of the amendment were made by co-sponsor Senators rester, Johanns, and 

13rmm. Statements of Senator Tester, Senator Johanns, and Senator Brown, 156 Cong. Rec 53296.53197, 

S3298 (May 6. 2010). 

, 12 US.C §lR17(b)(3)(C). 
185 

Analysis conducted for the rule considered potential henefits and costs to the industry <Uld 

to the public, including the impact on banks and on financial stability, In particular, the 

analysis quantified the cost to the banking industry in tcnns of assessment rates and 

premium volatility, For example, the analysis showed that under one altcmative DRR 

and dividend policy, banks would have to pay assessment rates nearly tive times higher 

during crisis years than non-crisis years,? The analysis also considered the benefits of a 

])RR that could be accompanied by more stable, predictable assessment rates and could 

maintain public confidence in the fund, although these benefits probably calmot be 

quantified. 

Any additional analysis of the costs and henefits of the rule would have required data and 

resources beyond those available to the FDIC, particularly given the statutory deadline 

that a ORR must be set for each year. It is not apparent to the FDIC that attempts to 

monetize or quantify benefits would ha\'e added materially to the extensive analysis 

already conducted during the ruiemaking or have changed the final rule, 

, 1",;s conclusion, based "pon analyst> undertaken in c<)nnection WIth the rulcmaking, is rdlectcd in 

toward a Long-Term Srrmeg)jer Depostl Insurance Fund Management, FDIC Quarterly, Vol. 4, No, 4, 

201fJ. 
186 

C) 

Comptroller of the Currency 

Administrator of National Banks 

Washington, DC 20219 

December 5,2011 

The Honorable Tim Johnson 

Chainnan 

Committee on Banking, Housing and Urban Affairs 

United States Senate 

Washington, D.C. 20510 

Dear Chainnan Johnson: 

Thank you for your November 9, 2011 letter regarding the implementation by the Office of the 

Comptroller of the Currency (OCC) of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act). We appreciate the opportunity to respond and share with you 

infonnation concerning our regulatory work, which currently includes a comprehensive review 

of all national bank and Federal savings association regulations with a view toward streamlining 

and reducing unnecessary burden, as well as other regulatory projects to implement specific 

provisions of the Dodd-Frank Act. Detailed answers to your questions are set forth in the 

attachment that follows. 

If you have further questions or need additional infonnation, please contact me or Robert 

Garsson, Deputy Comptroller for Public Affairs, at 202-874-4880. 

Jt~ John Walsh 

Acting Comptroller of the Currency 

Enclosures: 

1. Guide to OCC RuJemaking Procedures 

2. Letter dated November 29, 2011, from John Walsh, Acting Comptroller of the Currency, to 

Cass Sunstein, Administrator, Office oflnformation and Regulatory Affairs, Office of 

Management and Budget 
187 

December 5, 2011 

OCC Responses to Questions from Chairman Johnson 

1. Provide a detailed description of your agency's rulemaking process, including the variety of 

economic impact factors considered in your rulemaking. Please note to what degree you 

consider the benefits from your rulemaking, including providing certainty to the marketplace and 

preventing catastrophic costs from afinancial crisis. Also describe any difficulties you may have 

in quantifYing benefits and costs, as well as any challenges you may face in collecting the data 

necessary to conduct economic analysis of your rulemaking. 

The DCC takes seriously the need to understand how its rules affect the public and private 

sectors and the economy as a whole. As part of this effort, the DCC conducts several types of 

economic impact assessments for all proposed and final rules. This includes any analysis 

required by the Unfunded Mandates Reform Act (UMRA), the Congressional Review Act 

(CRA), and the Regulatory Flexibility Act (RF A).! Specifically, under UMRA, the DCC 

assesses whether a proposed or final rule includes a "Federal mandate" that may result in the 

expenditure by state, local, or tribal governments, in the aggregate, or by the private sector, of 

$100 million or more in anyone year (adjusted for inflation). If this threshold is met, the DCC 

prepares a more detailed economic assessment of the rule's anticipated costs and benefits. Under 

the CRA, the DCC determines, among other things, whether a final rule is likely to result in a 

$100 million or more annual effect on the economy. Under the RF A, the DCC determines if a 

proposed or final rule is likely to have a "significant economic impact on a substantial number of 

small entities." 

In preparing cost-benefit studies, the DCC refers to the Office of Management and Budget's 

Circular A-4. This document provides guidance to Federal agencies on the development of 

regulatory analyses wlder Executive Order 12866 and, although the DCC is not subject to this 

Executive Order, we use Circular A-4 as a best practices guide in preparing our analyses. These 

analyses typically include an assessment of a rule's benefits, along with cost-benefit comparisons 

of scenarios in which the rule does not apply and those in which one or more plausible 

alternatives to the rule apply. 

In order to assess costs and benefits, the DCC examines data from national bank QuarterlY 

Reports of Condition and Income (Call Reports) or Thrift Financial Reports (TFRs)? It also 

estimates costs or benefits that are likely to result from complying with the rule, including those 

that affect the amount of regulatory capital an institution must hold. In addition, the DCC 

considers broader economic factors such as the potential impact of the rule on lending, domestic 

and international competition, and economic growth. 

The costs associated with a rule can be difficult to quantify with precision, as are some types of 

benefits. In particular, some benefits are qualitative in nature and inherently difficult to quantify. 

For example, a new rule might reduce the impact of moral hazard or require additional financial 

1 UMRA: 2 U.S.C. 1501 et seq.; CRA: 5 U.S.C 801 el seq.; and RFA: 5 U.S.C. 601 el seq. 

2 In 2012, TFRs will be eliminated and all national banks and Federal thrifts will file Call Reports 
188 

disclosures that enhance market discipline. Other rules may provide predictability to the 

marketplace and thereby enhance its stability. In these situations, the OCC enumerates the 

qualitative benefits in its analysis but does not attribute to them a specific dollar value. 

One challenge the OCC faces is collecting data where a rule affects balance sheet or income 

statement items that are not captured in Call Reports or TFRs. In these cases, the OCC may 

consider data from credible industry or media reports and academic literature and consult with 

OCC subject matter experts. The OCC also considers any public comments it receives that 

present cost-benefit information. Through the appropriate use of these various data sources, the 

OCC is able to perform the required economic assessment. 

The OCC recently revised its Guide to OCC RuIemaking Procedures, which contains a detailed 

and comprehensive description of its entire rulemaking process. Among other things, the Guide 

describes the various steps the OCC takes at each point in the rulemaking process and seeks to 

ensure that the OCC complies with rulemaking requirements imposed by relevant statutes and 

Executive Orders. It also promotes the integrity of the OCC's rulemaking process by ensuring 

accountability and appropriate documentation of decision-making. We are including a copy of 

the Guide with this letter. 

2. Provide your agency's current andfoture plans to regularly review and, when appropriate, 

modify regulations to improve their effectiveness while reducing compliance burdens. Please 

include a description of actions your agency has taken, or plans to take, to streamline 

regulations -for example, the CFPB's "Know Before You Owe" effort drastically simplifies 

mortgage and student loan disclosure requirements. Also note statutory impediments, if any, that 

prevent your agency from streamlining any duplicative or inefficient rules under your purview. 

Title ill of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) 

transferred to the OCC all the functions of the Office of Thrift Supervision (OTS) and the 

Director of the OTS related to Federal saving associations, as well as OTS rulemaking authority 

related to both state and Federal savings associations. In cormection with this transfer, the acc 

has undertaken a comprehensive review of national bank and Federal thrift regulations to make 

them more effective by combining them where possible, reducing duplication, and eliminating 

unnecessary requirements. As part of this review, we have committed to seek public comment 

about ways to improve each rule as we prepare the final, integrated rulebook. In addition, the 

OCC is subject to a decennial regulatory review requirement unique to the Federal banking 

agencies, pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 

(EGRPRA).3 The OCC and the other banking agencies completed the last EGRPRA review over 

a period that ended December 2006, and, as the statute requires, we will complete the next 

EGRPRA review not later than 2016. 

The acc recently sent a letter to Mr. Cass Sunstein, Administrator of the Office of Information 

and Regulatory Affairs, Office of Management and Budget, providing additional information 

about the OCC's efforts to increase regulatory effectiveness and reduce regulatory burden. A 

copy of that letter is included as part of this response. 

, 12 U.S.C. 3311. 
189 

3. Provide details of how your agency encourages public participation in the rulemaking 

process, including through administrative procedures, public accessibility, and informal 

supervisory policies and procedures. 

The OCC encourages the public to participate in the rulemaking process through its compliance 

with the Administrative Procedure Act (APA) 4 and its use of various forms of media to make the 

public aware of its rulemaking initiatives. Consistent with the AP A, the OCC publishes for 

comment in the Federal Register a notice of each proposed rulemaking (NPR). Each NPR is 

accompanied by a news release intended to increase awareness of the proposed rule and 

comment process. In addition to being distributed to reporters and media outlets, these news 

releases are posted to the OCC's web site and featured on its home page (www.occ.gov). In 

addition, every news release is distributed to the nearly 13,000 subscribers to our e-mall 

subseription service. Each news release is also distributed via Twitter and the OCC's official 

Facebook page and through OCC syndicated news feeds. 

For each NPR, the OCC generally provides the public with at least a 60 day comment period and 

details the numerous channels through which comments can be submitted, including by hard 

copy or electronically, either to the OCC's web site or through the Federal government's erulernaking portal. The OCC solicits comments on a wide variety of issues raised by each 

proposal, including on any regulatory burden associated with a proposal. The agency values all 

public feedback and carefully considers all the comments it receives as it formulates a final rule. 

In addition, the OCC has, from time to time, issued an Advance Notice of Proposed Rulemaking 

(ANPR) to invite public comment in advance of formulating a proposed rulemaking. An ANPR 

can be helpful to the OCC in obtaining information from interested parties relevant to a potential 

rulernaking and can assist the OCC in understanding different perspectives on a matter that is 

likely to be the subject of a future rulemaking. 

The OCC is also carrying on the work of two advisory committees established by the OTS: the 

Mutual Savings Association Advisory Committee (MSAAC) and the Minority Depository 

Institutions Advisory Committee (MDlAC). These committees will provide the OCC with 

insight into the unique challenges facing these groups so that these concerns can be factored into 

the rulemakings that will affect them. 

4. Provide details of how your agency addresses the unique challenges faCing smaller 

institutions when dealing with regulatory compliance, including any related advisory committees 

your agency may have or other opportunities for small institutions to be heard by your agency. 

Please also detail how your agency responds to concerns raised by small institutions. 

As part of its rulemaking process, the OCC carefully considers concerns raised by small 

institutions in a number of ways. The RFA generally requires the OCC to review proposed 

regulations for their impact on small entities and, in certain cases, to consider less burdensome 

alternatives. After conducting this review, the OCC is required either to prepare an Initial 

, 5 U.S.C. 551 et seq. 
190 

Regulatory Flexibility Analysis or to certify that the proposed rule will not have a "significant 

economic impact on a substantial number of small entities." The OCC follows similar 

procedures when promulgating a final rule. 

The OCC's organizational structure also distinguishes between the supervision of small and large 

institutions, which allows the OCC to focus on the unique challcnges facing community 

institutions. For example, the OCC's Community Bank Supervision p~ogram, which is managed 

separately from its Large Bank Supervision program, is built around its local field offices, with 

approximately 75% of OCC examination staff dedicated to supervising these community 

institutions. These examiners are based in over 60 cities throughout the United States in close 

proximity to the banks they supervise. 

The primary responsibility for the supervision of individual community banks is delegated to the 

local Assistant Deputy Comptroller (ADC). This structure ensures that community banks 

receive the benefits of highly trained bank examiners with local knowledge and experience, 

along with the resources and specialized expertise that a nationwide organization can provide. 

While OCC bank supervision policies and procedures establish a common framework and set of 

expectations, examiners are taught to tailor the supervision of each community bank to its 

individual risk profile, business model and management strategies. As a result, the OCC's ADCs 

are given considerable decision-making authority, reflecting their experience, expertise and "on 

the ground" knowledge of the institutions they supervise. 

The OCC recognizes the importance of communicating regularly with community banks outside 

of the supervision process, in order to clarify its expectations for smaller institutions, discuss 

emerging issues of interest to community bankers, and respond to their concerns. The OCC 

participates in numerous industry-sponsored events and hosts a variety of outreach activities, 

such as Meet the Comptroller events, the Washington Visits program, chief executive officer 

roundtables, and teleconferences on topical issues. These events provide many opportunities for 

constructive exchanges at the national and local level. In addition, as noted above, the OCC is 

carrying on the work of the MSAAC and the MDIAC, which will provide formal mechanisms 

for the OCC to bear the concerns particular to these subsets of the smaller institutions we 

regulate. 

5. Describe how regulatory interagency coordination has improved since the creation of the 

FSOC. Provide specifics of how coordination has helped, either formally or informally, in your 

rulemaking process. 

The OCC and the other Federal banking agencies have a history of coordination in issuing 

regulations and guidance. III many instances, Congress bas required the agencies to conduct 

these activities jointly; in others, the agencies have recognized that it is appropriate to do so to 

avoid inequities and opportunities for regulatory arbitrage. The FSOC provides a broader forum 

for coordination and the sharing of information among all the U.S. financial institution 

regulatory agencies. The relationships among the regulators that the FSOC has established 

facilitate more informal coordination and consultation as agencies work on the many 

rulemalcings that the agencies individually and jointly must undertake to implement Dodd-Frank. 
191 

For example, oee staff members - ranging from senior deputy comptrollers to staff members -

are in frequent contact with their counterparts at the other banking agencies and, increasingly, 

with the other fmandal sector regulators with whom they share implementation responsibilities 

for the Dodd-Frank Act. These less fonnal interactions provide multiple channels for facilitating 

consistent and comparable regulations, as appropriate in light of the structure and activities of the 

institutions under the agencies' respective jurisdictions. 

Moreover, in certain instances -with respect to the Dodd-Frank Act's Volcker Rule and the rule 

on credit risk retention, both of which are to be implemented by multiple agencies - the statute 

assigns the Secretary of the Treasury, in his capacity as Chairperson of the FSOC, responsibility 

for coordinating the issuance of interagency regulations. The agencies' proposal to implement 

the Volcker Rule, published in October of this year, was issuedjointly by all but one ofthe 

participating agencies. The proposed rule on credit risk retention was issued jointly by all the 

agencies that have implementation responsibilities for that statutory provision, even though joint 

action by all of the participating agencies on each element of the statute was not required. 
192 

GUIDE TO oee RULE MAKING PROCEDURES 

A STAFF MANUAL 

OFFICE OF THE COMPTROLLER OF THE CURRENCY 

DECEMBER 1, 2011 
193 

Table of Contents 

Introduction and Overview ........................................................................................................... 1 

Purposes ....................................................................................................................................... 1 

Overview of the Rulemaking Process .......................................................................................... 2 

Management of the Rulemaking Process ............................................................................ .3 

Interagency Rulemakings .................................................................................................... .4 

Contents of the Manual ................................................................................................................. 5 

Chapter I - Initiating a Rulemaking Project ............................................................................... 6 

Procedures .................................................................................................................................... 6 

1. Prepare a Project Initiation Memorandum for Discretionary Rulemakings .................... 6 

2. Establish a Working Group .............................................................................................. 6 

3. Identify and Address the Issues ....................................................................................... 7 

4. Contact the Policy Analysis Division .............................................................................. 8 

Practice Tips ................................................................................................................................. 8 

References .................................................................................................................................... 9 

Chapter II - Preparinl! a Notice of Proposed Rulemaking ................................................. .10 

Procedures ................................................................................................................................. 1 0 

1. Develop and Draft the ProposaL ................................................................................... 1 0 

2. Ensure Compliance with Applicable Statutes and Executive Orders ............................ 11 

The Paperwork Reduction Act ................................................................................................... 11 

The Regulatory Flexibility Act (Reg Flex Act) ......................................................................... 13 

Unfunded Mandates Reform Act (UMRA) ............................................................................... 16 

3. Coordinate Economic Analysis with PAD .................................................................... 17 

4. Prepare and Distribute a Gold Border Package ............................................................. 17 

5. Review and Address Gold Border Conunents ............................................................... 19 

6. Prepare and Distribute Red Border Package .... : ............................................................. 19 

7. Coordinate Publication and Distribution of the NPRM ................................................. 20 

Practice Tips ............................................................................................................................... 22 

Drafting the NPRM ............................................................................................................ 22 

Ex Parte Communications .................................................................................................. 22 

Ensuring Compliance willi Applicable Statutes ................................................................ 23 

The OMB Clearance Process Under the PRA ................................................................... 23 

Preparation and Distribution of the Gold Border Package ................................................ 23 

Preparation and Distribution of the Red Border Package .................................................. 23 

References .................................................................................................................................. 24 

Chapter III - Preparing a Final Rule ......................................................................................... 25 

Procedures .................................................................................................................................. 25 

1. Review and Summarize Public Comments .................................................................... 25 

2. Develop and Draft the Final Rule .................................................................................. 26 

3. Ensure Compliance with Applicable Statutes and Executive Orders ............................ 27 

ThePRA ..................................................................................................................................... 28 

The Reg Flex Act ...................................................................................................................... .28 

Congressional Review Act/Small Business Regulatory Enforcement Fairness Act ................. 29 

Unfunded Mandates Act ............................................................................................................ 30 

4. Coordinate Economic Analysis with PAD .................................................................... 30 

ii 
194 

5. Prepare and Distribute the Gold Border Package .........•............................................... .31 

6. Review and Address Gold Border Comments ............................................................... 31 

7. Prepare and Distribute the Red Border Package ............................................................ 31 

8. Coordinate Publication and Distribution of the Final Rule ........................................... 31 

9. Congressional Review Act/Small Business Regulatory Enforcement Fairness Act ..... 31 

10. Examiner View/OCC Supervisory Guidance Update .................................................. 32 

Practice Tips ............................................................................................................................... 33 

Docket Management-Public Comments ............................................................................ 33 

Preparing and Distributing the Gold Border Package ........................................................ 34 

References ................................................................................................................................. .34 

Chapter IV ~ Closing the Rulemaking Project: Documentation and Rccordkeeping 

Procedures ................................................................................................................................ 35 

. 1. Complete the Rulemaking Checklist ............................................................................. 35 

2. Complete the Rulemaking File ...................................................................................... 35 

3. File Completion Form .................................................................................................... 36 

Appendix I .................................................................................................................................... 37 

Policy Analysis Division, Economics Department 

Standard Procedures for Economic Analysis of Proposed Rules ...................................... 37 

Standard Procedures for Economic Analysis afFinal Rules ............................................. 39 

Appendix n .................................................................................................................................. AO 

Comment Management Instructions 

Appendix In ................................................................................................................................. 42 

Procedures for Preparing a Report to Congress 

Appendix IV ................................................................................................................................ .44 

Regulatory Specialist File Completion Form 

Appendix V ..................................................... , ............................................................................. 45 

LRA Rulemaking Checklist 

iii 
195 

A STAFF MANUAL 

INTRODUCTION AND OVERVIEW 

PURPOSES 

The acc's Policies and Procedures Manual (pPM) describes the processes that the acc uses 

for the internal review and approval of significant documents, including rulemaking documents.l 

This Rulemaking Manual (Manual) supplements the PPM by describing in detail the procedures 

that the acc uses to develop and issue regulations.2 

The purposes of the procedures set forth in this Manual are as follows: 

• To facilitate the effective and efficient development and issuance of the acc's 

regulations; 

• To ensure that the acc complies with the rulemaking requirements imposed by statutes 

such as the Administrative Procedure Act (APA) and the Regulatory Flexibility Act (Reg 

Flex Act) and by the executive orders that apply to various aspects of the rulemaking 

process, as well as with the applicable substantive requirements of the Federal banking 

laws; 

• To promote coordination among the various acc departments involved in the 

rulemaking process; 

• To use an approach to rulemaking that: 

o ensures the opportunity for timely, substantive input into the rulemaking process 

by the Comptroller, the Executive Committee, and senior acc officials, 

consistent with PPM 1000-10; and 

o makes full use of the range of cross-disciplinary expertise available from acc 

staff resources; and 

• To promote the integrity of the acc's rulemaking processes by ensuring accountability 

in those processes and appropriate documentation of decision-making. 

I See "Internal oee Review Processes far Palicymaking, Rulemaking, and O1her Significant Documents," 

PPM 1000-10 (REV) (April 26, 2005). 

1 This Manual is intended to serve as a guide for internal OCC processes and does not create any rights for 

tbird-parties. 
196 

OVERVIEW OF THE RULEMAKING PROCESS 

An OCC rulemaking typically begins with the development and issuance of a notice of proposed 

rulemaking (NPRM). The NPRM contains the text of proposed additions or amendments to our 

rules and a preamble (referred to in the Federal Register as the Supplemental Information 

section) that explains the policy and legal bases for the proposed changes, their purpose, and the 

effect the changes would have on the institutions we supervise as well as any required regulatory 

analysis. The OCC publishes the NPRM in the Federal Register and invites public comment on 

it, usually for a period of no less than 60 days. After analysis and resolution of any issues raised 

by the commenters or by OCC staff, a final rule is prepared and published in the Federal 

Register. A rulemaking also may begin with an advance notice of proposed rulemaking (ANPR) 

that precedes the 1-<l'RM. An ANPR typically is used to solicit general comments and public 

input in an issue area that may be tlle subject of future agency rulemaking. . 

TIle process for developing and issuing final rules typically comprises four phases. The first 

phase, the project initiation phase, will vary depending upon the circumstances prompting the 

rulemaking. In many cases, the rulemaking is not discretionary. It may be required by statute or 

undertaken pursuant to interagency agreement, or specific initiative directed by the Comptroller. 

In tllOse cases, the project initiation phase consists primarily of identifYing the key OCC 

departments to be involved in developing the rule and the individuals on the rulemaking working 

group. When a rulemaking is undertaken on a discretionary basis to carry out the responsibilities 

of the agency or further the purposes and objectives of the National Bank Act, the Home 

Owners' Loan Act or other statutes administered by the OCC, a staff working group, under the 

sponsorship of one or more members of tile Executive Committee develops an idea for a 

rulemaking by preparing materials describing proposed changes to the OCC's regulations, and 

the issues and consequences associated with adopting such changes. Executive Committee 

members and senior staff have tIle opportunity to review the materials and provide views about 

the desirability, scope, and content of tile rulemaking project. 

In the second phase ofthe project, a staff working group drafts an NPRM and supporting 

materials. The supporting materials typically include a Reviewers' Memorandum, circulated to 

the Comptroller, the Executive Committee, and other senior OCC officials with the Gold Border 

draft of the NPRM, which describes significant issues in the rulemaking, notes how the staff 

draft addresses them, and solicits input on the result. This Gold Border review may result in 

revisions to the draft NPRM, which are identified and explained in the Red Border memorandum 

that ultimately is provided to the Comptroller, together Witll a revised NPRM, for review and 

signature.3 

In the third phase of tlJe rulemaking, after tlJe conclusion of the public comment period for the 

NPRIvl, the working group reviews comments and identifies and addresses significant issues 

raised by the commenters, consults Witll the Comptroller and senior OCC officials on how to 

proceed, and revises the proposed regulation accordingly. TIlere is another Gold Border review 

process for the draft final rule, with a similar opportunity for review and comment by tlJe 

Comptroller, the Executive Committee, and other senior OCC officials. Again, changes resulting 

from the Gold Border review are identified and explained iri tlJe Red Border package that is 

presented to the Comptroller for signature. 

'The Gold and Red Border processes are described in detail in PPM 1000-10. 

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In the fourth and final phase of the project, documentation for the ruJemaking is assembled, filed, 

and retained for the OCC' s records. 

Management of the Rulemaking Process 

Rulemaking projects ordinarily are managed by the Legislative and Regulatory Activities 

Division (LRA) in the Law Department. LRA assigns an attorney - referred to in this Manual as 

the project manager-typically to lead the staff working group and manage the project. The 

project manager works closely with the LRA Assistant Director and Director to plan work, 

establish deadlines, and facilitate communication between the working group and senior OCC 

officials when, for example, issues require resolution before work on the project can proceed to 

the next step. The members of the working group may include supervisory, examination, 

licensing, or policy staff, as well as lawyers from other units in the Law Department, depending 

on the subject matter of the rulemaking project. Working groups are assembled with the goal of 

drawing on and using to maximum advantage the OCC staff resources having substantive 

expertise to contribute to the project. Executive Committee members have the opportunity to 

determine the units or staff members reporting to them that should participate in a rulemaking. 

TIle project manager is responsible for leading and facilitating the identification and resolution of 

issues that arise in connection with the rulemaking, for preparing draft documents, and for 

ensuring that the OCC complies with the various rulemaking statutes and executive orders that 

apply to our rulemakings. The project manager relies on the expertise of working group 

members, but also is responsible for the substantive accuracy of the project documents. This 

means that the project manager should be, or become, as substantively knowledgeable about the 

area covered by the regulation as is feasible during the rulemaking process. The project manager 

also is responsible for coordinating any required economic analyses with the Policy Analysis 

Division (pAD). 

The project manager is responsible for ensuring appropriate review of project documents within 

the Law Department - including review and clearance, as appropriate, by the Assistant Director 

and Director of LRA, the Deputy Chief Counsel, and the Chief Counsel, and by other senior 

officials of the OCC. 

The project manager works closely with the LRA Rcgulatory Specialist, who is responsible for 

certain aspects of the OCC's compliance with the applicable statutes and executive orders, 

including the Paperwork Reduction Act (PRA), and for reviewing documents to ensure that they 

conform to Federal Register requirements. The Regulatory Specialist also serves as the OCC's 

liaison to the Federal Register and to the Office of Management and Budget COMB) during the 

process of obtaining a major 11Jle detennination and PRA clearance, if necessary. 

Finally, together with the Regulatory Specialist, the project manager ensures that alJ aspects of 

the rulemaking process are appropriately documented and that LRA records for the rulemaking 

are complete. All records relating to the rulemaking process are kept in accordal1ce with Record 

Retention Act. See 44 U.S.C. § 31 OJ. 

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Interagency Rulemakings 

The acc conducts rulemakings individually or together with other Federal agencies, often the 

other Federal banking agencies (tbe Federal Reserve Board and the FDIC). Interagency 

rulemakings are usually prepared by interagency working groups. The acc is represented on 

these groups by such staff members as the Chief Counsel or other Executive Committee sponsor 

of the rulemaking may determine. The Chief Counselor other Executive Committee sponsor 

typically will designate one staff member to serve as the lead acc representative on the 

interagency group. In these cases, the project manager's responsibilities are adapted consistent 

with the purposes of the rulemaking and the roles assigned to other acc staff members. 

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Contents ofthe Manual 

This manual is organized into four chapters, one for each phase of the rulemaking process 

described in the Overview. Each chapter sets forth the procedw'es used in that phase of the 

rulemaking. Each chapter also contains a section entitled "Practice Tips," which provides 

guidance on common practical or technical questions that routinely arise in rulemakings. 

Finally, each chapter contains a "References" section that directs the project manager and other 

users to primary and authoritative secondary sources of standards or information pertaining to 

that phase of the rulemaking. 

The "References" section may list both external and internal sources. External sources include, 

for example, the manuals, handbooks, or websites of Federal agencies such as the OMB or the 

Small Business Administration (SBA) that administer statutes or executive orders that apply to 

acc rulemakings. Internal sources include acc memoranda concerning those statutes and 

executive orders or other administrative law issues and sample work products of the type 

discussed in the Manual. 11lese resources are available electronically in a shared electronic 

folder maintained by LRA. References are provided so that participants in each rulemaking need 

not repeat analysis that has been done before or search for sources of information that have 

previously been identified. Attorneys working on rulemaking projects are, however, responsible 

for ensuring that the research on a legal issue is current and that the 'analysis and fonns provided 

are suitable for the particular project at hand. Prior memoranda and sample work product cannot 

substitute for consulting the primary sources - statutes and executive orders - and authoritative 

secondary sources directly. 

Appended to the Manual is an "Attorney Checklist" that lists the procedures described here and 

details additional steps necessary to ensure that the procedures are successfully completed. The 

Checklist is intended to serve both as a reminder and guide to the project manager about what 

procedures are necessary and, when completed, as documentation that those procedures have 

been followed. 

The procedures described ill the Manual are those ordinarily used in rulemaking projects, subject 

to such exceptions as the Comptroller or the Executive Committee may direct. Adherence to 

Illese procedures should have the effect of improving the standardization, and therefore the 

transparency and predictability, of the OCC's rulemaking processes. They should facilitate, not 

replace, the exercise of judgment by the project manager and other staff working group 

members, however. It remains essential that staff members approach each rulemaking project 

individually and retain the flexibility to seek appropriate adjustment in procedures Illat do not 

suit the particular pl'Oject. 

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CHAPTER I - INITIATING A RULEMAKING PROJECT 

Each OCC rulemaking is sponsored, or co-sponsored, by the ChiefCounseI, as the Law 

Department has responsibility for the legal sufficiency of the OCC's rulemakings. In 

rulemakings co-sponsored by the Chief Counsel together with another Executive Committee 

member, the Executive Committee-level review procedures and clearances described in this 

Manual either are conducted jointly by the co-sponsors or otherwise as the co-sponsors may 

direct. 

This chapter describes the steps needed to begin a rulemaking project. 

PROCEDURES 

The OCC undertakes rulemaldng in different types of circumstances: in many cases, we are 

required to do so by statutory directive or a rulemaldng may be undertaken pursuant to an 

interagency agreement, typically among principals of the Federal banking agencies, or because a 

specific regulatory initiative is directed by the Comptroller. In other cases, we undertake a 

rulemaking on a discretionary basis to can)' out the responsibilities of the Office or the purposes 

and objectives of the National Bank Act and/or the Home Owners' Loan Act. Most OCC 

rulemakings fall into the first category. Any additional steps needed in the case of discretionary 

rulemakings are specifically described in the procedures that follow. 

1. Prepare a Project Initiation Memorandum for Discretionary Rulemakings 

For discretionary rulemaking projects, the project manager prepares a project initiation 

memorandum for the signature of the Chief Counsel and Executive Committee co-sponsor, if 

applicable, and distributes the memorandum to the Executive Committee. The purpose of the 

memorandum is to solicit the views ofthe Comptroller, the Executive Committee, and other key 

OCC staff about undertaking the rulemaking project The memorandum describes the purpose of 

the rulemaldng and identifies the major substantive issues likely to be involved. It also identifies 

the units within the OCC that will likely have an interest in the.rulemaking. The project 

initiation memorandum also may contain a preliminary timeline targeting completion dates for 

the principal parts of the process. A project initiation memorandum is not necessary if the 

rulemaking is mandated by statute or already agreed to or directed by the Comptroller. 

2. Establish a Working Group 

In consultation with senior Law Depa11ment managers as appropriate, the project manager must 

ensure the participation of units or staff members with expertise helpful to the project In the 

case of discretionary rulemaking projects, the initiation, scope and direction of the rulemaking 

are subject to the views expressed by the Comptroller and other members of the Executive 

Committee in response to the project initiation memorandum. 

TIle working group thus typically consists of the project manager, other attorneys within the Law 

Department, and staff' from each OCC unit with expertise pertaining to the project. The working 

group members lend subject !U'ea expertise to the rulemaking project, including the identification 

and recommended resolution of substantive issues, make drafting recommendations, and review 

and comment on draft documents. 

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» Note on Interagency Rulemakings. Congress often requires banking agencies to write 

regulations necessary to implement new legislatioll jointly or in consultation with one 

another. Sometimes the banking agencies are required to consult or coordinate with other 

agencies, such as the Securities and Exchange Commission (SEC), Commodity Futures 

Trading Commission (CFTC), or Federal Housing Finance Agency (FHF A). In such 

cases, interagency working groups are usually established. The DCC's representation on 

these interagency groups typically is determined in consultation Witll the Chief Counsel, 

who may designate a lead DCC representative who communicates the agency's position 

on issues that arise. If the LRA project manager is not the lead DCC representative, the 

project manager supports tile lead and other participating DCC staff in preparing the draft 

rulemaking documents and internal DCC memoranda or, if tile DCC does not have the 

primary drafting responsibility, in communicating DCC comments on drafts to the 

interagency working group and comments prepared by another agency internally to DCC 

staff. 

a Members of the interagency working group should set specific timetables and 

deadlines for the rulemaking process. Members should strive to resolve all issues 

or disagreements among the agencies through working group meetings, 

conference calls, or written communication. If disagreements cannot be resolved 

at the working group level, the project manager should present the issue(s) to the 

Chief Counselor other appropriate Executive Committee member for the issue to 

be resolved by ilie agencies' senior management or principals. 

3. Identify and Address the Issues 

Convene Working Group Meetings. The project manager convenes an initial working group 

meeting to discuss the objectives of tile rulemaking, discuss the contributions of the respective 

members of the group, and establish appropriate time frames. The project manager schedules 

subsequent meetings of the working group as needed to q,iscuss and reach a recommended 

resolution ofilie substantive issues presented by the rulemaking. 

Input From Senior OCC Management. OCC staff uses several methods to obtain input from 

senior DCC management in resolving significant issues that may arise in the ruJemaking. 

• A group or subcommittee of the DCC's Executive Committee may review and resolve 

issues pertaining to specific ru!emakings. For example, to implement the Dodd-Frank 

Wall Street Refonn and Consumer Protection Act, Public Law 111-203 (Dodd-Frank 

Act), the DCC formed the Financial Reform Oversight Group (FROG). 

• The project manager, in consultation with tile working group, may prepare an issues 

memorandum to seek senior management guidance on issues of significance in the 

rulemaking. The issues memorandum typically is more specific tllan the project 

initiation memorandum. It describes one or more proposed approaches to preparing 

the regulation, identifies and discusses major issues, and presents ilie working group's 

recommendations for resolving these issues. Upon completion, the Chief Counsel 

and Executive COirunittee co-sponsor, if applicable, sign the issues memorandum and 

it is distributed to the Comptroller and ilie Executive Committee. In appropriate 

circumstances, tile matter may be scheduled for discussion by the Regulatory Policy, 

Legal, and External Affairs Subcommittee (RPLEA) of the Executive Committee. 

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202 

• The project manager or Law Department management may conduct direct meetings 

with the Comptroller, Executive Committee members, or other senior DCC staff with 

expertise related to the rulemaking, e.g., the project manager facilitates input from 

senior management, as needed, by ensuring that arrangements are made to obtain 

input in a timely fashion and by preparing any internal memoranda, coordinating 

briefings, or assembling any information necessary for senior managers to make 

infonned judgments on the issues. 

» Note on Interagency Rulemakings. Interagency rulemakings are often initiated without 

project initiation memoranda and the pacing of the interagency work may not allow time 

for the preparation of an issues memorandum. Nonetheless, these rulemakings frequently 

raise significant policy issues requiring guidance from senior DCC management, and it is 

essential that senior DCC management have the opportunity to provide that guidance 

before issues are resolved at the staff level by the interagency working group. 

Address Comments Raised during (he Issues Memoralldum Review Process. The project 

manager collects reviewers' comments. Comments that raise significant substantive issues are 

discussed by the working group and brought to the attention of the Deputy Chief Counsel, the 

Chief Counsel, and senior DCC officials with expertise on the rulemaking, if applicable. 

4. Contact the Policy Analysis Division 

At this stage in the rulemaking, the project manager should contact the Director of the DCC's 

PAD to discuss the rule and request the assignment of an economist to the project PAD will 

perform the economic analysis necessary to complete the regulatory analysis section of the 

preamble. This analysis is discussed in the next chapter. 

PRACTICE Tips 

• All documents created for a rulemaking should be maintained in a separate directory in 

the project manager's g:\ drive. Documents should be clearly labeled and, if there are 

multiple versions of a document, the date should appear in the document name. 

• The LRA Assistant Director and Director review the project initiation memorandum prior 

to distribution, and there may be other reviewers as well depending on the content of the 

rulemaking and the DCC units participating in it. Clearance by the Deputy Chief 

Counsel and the Chief Counsel is required for project initiation memoranda initiated by 

the Law Department. 

• After the Chief Counsel and Executive Committee co-sponsor, if applicable, sign the 

project initiation memorandum or the issues memorandum, the project manager circulates 

the document for simultaneous review by the Comptroller and the Executive Committee. 

Copies of these and other rulemaking documents also are usually given to members of the 

working group, Law Dep811ment Division Directors, District Counsel, and any other 

reviewers who have a particular interest in the project. 

• All rulemaking documents circulated to the Executive Committee for review must 

contain a tracking number for internal routing purposes. The number must be obtained 

before the document circulates. A staff member in the Comptroller's Dffice assigns the 

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203 

tracking number. This tracking number is the same for all subsequent documents 

circulated for review that relate to the rulemaking project, except for the leading 

designation "IN" (for project initiation memo), "IS" (for issues memo), and "OB" (for 

Oold Border). 

• Ordinarily, the project manager should request comments on the project initiation 

memorandum and the issues memorandum (and other rulemaking documents) within 2 

weeks from the date of circulation. If review must be expedited, the attorney prepares a 

brief cover memorandum explaining the reason that expedited review is needed. 

• The project manager retains copies of responses from Executive Committee members to 

all circulated documents for inclusion in the rulemaking file. 

REFERENCES 

• Sample project initiation and issues memoranda may be found on the'LRA g:\ drive at 

g:\ADMIN LAW FILES BY TOPIC. 

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Chapter II - Preparing a Notice of Proposed Rulemaking 

The rulemaking process usually begins with the issuance of a NPRM, which sets out and 

describes the proposed amendments to the OCC's regulations. In some instanceS, the oce also 

may issue an ANPR before issuing the NPRM. An ANPR typically does not include regulatory 

text but usually contains a general discussion about the nature of the problem or issue to be 

addressed and solicits suggestions about how to approach it. For example, an ANPR may be 

used when the OCC wishes to solicit views about how to approach rulemaking in a new area not 

currently covered by our rules, or about which of two or more alternative approaches to 

regulating in a particular area would be more effective. 

PROCEDURES 

1. Develop and Draft the Proposal 

The project manager schedules OCC staff working group meetings as necessary to discuss the 

content of the proposal. In consultation with the working group, the project manager prepares a 

draft NPRM. The NPRM consists of two parts: the proposed regulatory text and the preamble to 

these textual changes. 

The project manager ensures that the NPRM conforms to applicable substantive legal 

requirements and the requirements of the AP A. For example, in the early stages of a project, it 

may be necessary to consider whether the rulemaking falls within any exceptions to the APA's 

general requirement for notice and comment. At this stage of the project, consideration may also 

be given to whether the rulernaking warrants an enhanced opportunity for notice and comment, 

such as a public meeting or hearing. As a technical maner, the style of the NPRM also must be 

consistent with the drafting requirements contained in the Federal Register Document Drafting 

Handbook. 

The regulatory text contains the proposed amendments to the OCC's regulations. TIle preamble 

explains the legal basis and supervisory reasons for the changes and describes their anticipated 

effect on national banks andlor savings associations. The preamble may contain questions or 

requests for comment on specific substantive issues. In addition, the preamble contains the 

required regulatory analysis of the proposal and requests comment on the proposal's effect on 

community banks and savings associations and the extent to which the proposal is consistent 

with plain language standards as required by section 722 of the Gramm-Leach-Bliley Act. 

In general, the OCC requests comment on an NPRM for 60 days. The project manager discusses 

any shorter comment period with the Assistant Director and, as necessary, with senior Law 

Department management. 

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2. Ensure Compliance with Applicable Statutes and Executive Orders 

The preamble to the proposal contains a section entitled "Regulatory Analysis" that describes 

how the acc is complying or will comply with the requirements ofllie various statutes (in 

addition to the Federal banking laws) and executive orders that apply to our rulemakings. 

The OCC conducts analyses in the following areas: the Paperwork Reduction Act (PRA), the 

Regulatory Flexibility Act (Reg Flex Act), the Unfunded Mandates RefOlID Act (UMRA), 

section 722 of the Gramm-Leach-Bliley Act, 12 U.S.C. § 4809 (plain language), and the 

Congressional Review Act (CRA) (enacted as part of the Small Business Regulatory 

Enforcement Fairness Act (SBREFA)).4 These statutes require the acc to determine the effect, 

or impact, a rulemaking will have according to the various standards they set forth. With the 

exception of the PRA and section 722 of the Gramm-Leach-BJiJey Act, these determinations 

described in this paragraph are made by the Director of PAD in consultation with the Chief 

Counsel's Office, as appropriate. The project manager's requests for economic analyses, the 

analyses that PAD provides, and the determinations of the Director of PAD are documented in, 

and coordinated through, an exchange of memoranda that is described at Step 3, below. As 

described in the following discussion, the OCC's conclusions concerning the statutes also are 

documented through statements in the preamble to the NPRM, as well as in the ruJemaking file. 

As the required regulatory analyses focus on the economic impact of the rule, they are an 

important component of the ruJemaking process and should be carefully and comprehensively 

completed. 

The Paperwork Reduction Act 

The PRA generally provides that the acc may not conduct a "collection of information" unless 

it receives approval from OMB, which indicates that the collection meets the policy criteria of 

the PRA and OMB's implementing regulations. A "collection of information" means obtaining, 

causing to be obtained, or soliciting information, or requiring that information to be obtained 

through identical questions or by identical reporting, recordkeeping, or disclosure requirements 

on at least IO·persons (including entities such as national banks and savings associations).5 An 

information collection is subject to the requirements of the PRA without regard to whether it is 

mandatory, voluntary, or required to obtain or retain a benefit.6 

To comply with the PRA, the OCC must demonstrate that the collection is the least burdensome 

necessary to obtain the information, does not duplicate available information, maximizes 

4 Pursuant to section 315 ofthe Dodd-Frank Act, which amended dIe definition of "independent agency" to 

include the OCC, the OCC is no longer subject to E.O. 12866. As a result, the OCC is not required to detemine 

whether the mle is a "significant regulatory action" nor submit a Notice of Proposed Regulatory Action (NOPRA) 

for each rulemaking to the Office ofInformation and RegulatOlY Affairn (OIRA) oflhe OMB. In addition, pursuant 

to section 315, the OCC is no longer subject to E.O. 13132 and therefore is not required to follow that executive 

order's ''Fundamental Fedemlism Principles" and "Federalism Policymaking Criteria" in developing any regulation 

that has Fedemlism implications .. 

, The Congressional Review Act is applicable only to final and interim final rules WId is discussed in 

Chapterffi. 

, Although this Manual adllresses the PRA only in the context of role making, it is important to note that an 

infonnation collection is subject to the requirements oflbe PRA whenever the oce request infonnation, regardless 

of whether it appears in a regulation, in guidance, or in any other type ofOCC issuance, or any other form such as 

oral or electronic. 

I I 
206 

practical utility, and minimizes costs to the agency without shifting disproportionate costs or 

burdens to the public. Tn order to obtain OMB approval of an information collection contained 

in a rulemaking, the OCC must submit a clearance package to OMB that, in general, describes 

the infonnation collection(s) in the proposal and estimates the amount of paperwork burden the 

collection imposes. The preamble also must contain this same information. 

The project manager, together with the LRA Regulatory Specialist, identifies any provisions in 

the proposal that may impose paperwork burden. Tfthe rule imposes paperwork burden, then the 

preamble must identify which sections impose the burden and estimate the average burden hours 

per respondent, the number of respondents, and the start-up cost (if any) of complying with the 

rule. The project manager and the LRA Regulatory Specialist, in consultation with client and 

other departments within OCC, develop this infonnation. lfthe regulation imposes no 

paperwork burden, no PRA analysis needs to be included in the preamble. 

If an ANPR contains regulatory text, the project manager reviews the ANPR under the PRA, but 

an OMB clearance package is not required. The preamble to the ANPR may request comments 

on paperwork burden issues. 

". Note on Interageney Rulemakings. The OCC prepares its own PRA analysis for 

rulemakings conducted jointly or in coordination with other agencies. To ensure 

consistency to the greatest extent practicable, however, the Regulatory Specialist consults 

and coordinates with the other agencies in preparing the PRA material for inclusion in the 

preamble to the proposed rule. 

To obtain OMB clearance under the PRA, the Regulatory Specialist submits a clearance package 

to OMB, in consultation with the project manager, the working group or client staff, and the 

LRA Assistant Director. This package is submitted via OMB's ROCIS System. It includes a 

supporting statement, citation to the NPRM, any applicable form or instrument, and citations to 

any relevant regulations and statutes. OMB has 60 days from the publication of the NPRM to 

either approve or file public comments on the paperwork collection contained in the NPRM. 

OMB also must provide at least 30 days for public comment during this 60-day period. The 

OCC must include any OMB comments in its rulemaking file. 

The project manager should follow the procedures below to ensure compliance with the PRA and 

to complete the estimation of paperwork burden: 

• Coordinate with the Regulatory Specialist to identify the paperwork imposed by the 

proposed rule; 

• As necessary, meet with appropriate OCC staff to evaluate the costs of the paperwork 

burden imposed by the proposed rule; 

• If an interagency rule, ensure that the OCC has consulted and coordinated with the other 

p31ticipating agencies in identifying and estimating paperwork burden; 

• Ensure that the PRA paperwork burden detennination and analysis comport with any 

economic analysis of the proposal conducted by PAD; 

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o If there are.differences consult with PAD and the Regulatory Specialist to ensure 

proper coordination; and 

o If differences remain, adequately explain such differences in the rulemaking file; 

Ensure that the Regulatory Specialist submits a PRA clearance package to OMB; and 

• Ifnecessary, ensure that the preamble to the proposed rule contains the necessary 

description of paperwork burden and request for comments regarding this burden. 

The Regulatorv Flexibility Act (Reg Flex Act) 

With certain exceptions, the Reg Flex Act generally requires the OCC to review proposed 

regulations fo1' their impact on small entities and, in certain cases, to consider less burdensome 

alternatives. After conducting this review, the OCC is required either to prepare and publish a 

Regulatory Flexibility Analysis or to certify that a Regulatory Flexibility Analysis is not required 

because the proposed rule will not hBve a "significant economic impact on a substantial number 

of small entities.,,7 Executive Order 13272, Proper Consideration of Small Entities in Agency 

Rulemaking (Aug. 13,2002), outlines the procedures each agency must establish to comply with 

the Reg Flex Act. 8 

SBA regulations currently define small entities to include banks and savings associations with 

total assets of$175 million or less.9 The Reg Flex Act does not define the term "significant 

economic impact," nor does SBA guidance provide a bright-line definition. The SBA has said 

that "[s]ignificance should not be viewed in absolute terms, but sp.ould be seen as relative to the 

size of the business, tlle size of the competitor's business, and the impact the regulation has on 

larger competitors.,,10 The SBA guidance, cited in the margin and in the References section of 

this chapter, provides examples of measures that may be useful for detennining the significance 

ofthe economic impact of a rule. Similarly, neither the Reg Flex Act nor the SBA guidance 

defines what comprises a "substantial number" of small entities. The SBA guidance, however, 

discusses considerations that the SBA' s Office of Advocacy views as appropriately influencing 

an agency's determination in that regard. 

The Reg Flex Act does not apply to ANPRs (provided that tlley do not contain proposed 

regulatory text) and regulations not required to be issued pursuBllt to the AP A's notice and 

7 S U.S.C. § GOS(h). 

Act; review 

8 E.O. 

draft 

13272 

rules 

states 

to assess 

that 

the 

each 

potential 

agency 

impact 

shall: establish 

on small 

procedures 

entities; issue 

to promote 

procedures 

compliance 

to ensure 

with 

that 

Ille 

tlli. 

~ 

impact is 

properly considered; notify the SBA's Chief Counsel for Advocacy of draft rules that w'e covered by the Reg Flex 

.e&.. SBA notification shall \>e made when (a) an agency submits a draft role to OMB/OlRA under E.O. J 2866, or 

(b) ifllO OMB/OlRA submission is required, at a reasonable time prior to rule pUblication. The agency must give 

consideration to any SBA comments and respond to these comments in the explanation oflhe final rule. 

9 See 13 C.F.R. J21.201 (Sector 52, Subsector 552). 111is dollar figure is adjusted periodically for inflation. 

10 SBA Office of Advocacy, A Guide for Government Agencies, How to Comply with the Regulatory 

Flexibility Act (Implementing the President's Small Business Agenda and Executive Order 13272) at 17 (May 

2003). 

13 
208 

comment procedures. Thus, the Reg Flex Act does not apply if the agency finds, for good cause, 

that notice and comment are not required. 

The Reg Flex Act pennits the OCC to decide not to prepare a Regulatory Flexibility Analysis if 

the Comptroller certifies that the regulation ''will not, if promulgated, have a significant 

economic impact on a substantial number of small entities."]] In analyzing whether the rule is 

eligible for this certification, the PAD, identifies the number of small banks and savings 

associations that would be subject to the proposed requirements and the actions that small banks 

and savings associations would have to take in order to comply with them. 

The Director of PAD, in consultation with the Chief Counsel's Office, determines whether the 

regulation is eligible for certification. If the regulation is eligible for certification, the project 

manager prepares and includes in the preamble to the proposal a certification substantially 

similar to the following: 

The GCC certifies that this regulation, if adopted, will not have a significant 

economic impact on a substantial number of small entities. Accordingly, a 

Regulatory Flexibility Analysis is not required. 

This statement is followed by a brief explanation of the factual basis for the certification. The 

SBA's Office of Advocacy interprets this "factual basis" requirement to mean that, at a 

minimum, a certification should contain a description of the number of affected entities and the 

si7..e of the economic impacts and why either the number of entities or the size of the impacts 

justifies the certification. Therefore, a certification should state more than simply that the agency. 

has found that the proposed or final rule will not have a significant economic impact on a 

substantial number of small entities. 

Pursuant to E.O. 13272, if the rule is not eligible for certification, the Regulatory Specialist, in 

consultation with the project manager and the Assistant Director, notifies the SBA's Chief 

Counsel for Advocacy of the draft proposed rule "at a reasonable time" prior to its publication. 

The OCC also must give "appropriate consideration" to any comments provided by SBA 

regarding such a proposed rule and include in the preamble to the final rule the DCC's response 

to the SBA's written comments. However, such a response is not required if the Comptroller 

certifies that the public interest would not be served by doing so. 

The project manager then completes the following steps: 

Prepare (JJf Initial Regulatory Flexibility Analysis (IRFA). If the proposal is not eligible for 

certification, that is, if it is likely to have a significant economic impact on a substantial number 

of small entities, the project manager prepares an IRFA in consultation with PAD. The Reg Flex 

Act requires that the IRF A include: 

• A description of the reasons why the proposal is under consideration; 

• A succinct statement of the objectives of, and the legal basis for, the proposed rule; 

IJ 5 U.S.C. § 605(b) (Reg Flex Act certification provision). 

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209 

• A description of, and where feasible, an estimate of the number of small entities to which 

the proposed rule will apply; 

• A description of the projected reporting, recordkeeping and other compliance 

requirements ofthe proposed rule, including an estimate of the classes of small entities 

that will be subject to such requirements and the type of professional skills necessary for 

preparation of the report or record; 

• An identification, to the extent practicable, of all relevant Federal rules that may 

duplicate, overlap or conflict with the proposed rule; and 

• A description of any significant alternatives to,the proposed rule that accomplish the 

stated objectives of applicable statutes and which minimize any significant economic 

impact of the proposed rule on small entities, including a discussion of significant 

alternatives such as: 

o The establishment of differing compliance or reporting requirements or timetables 

that take into account the resources available to small entities; 

o The clarification, consolidation or simplification of compliance and reporting 

requirements for small entities; 

o The use of performance standards rather than design standards; and 

o The exemption from the rule, or any part of the Juie, for small entities, 

Transmit a comp/de copy of the IRFA to Advocacy for review, The Gee should not publish 

the NPRM in the Federal Register until we receive the results from Advocacy of their review. 

We should indicate to Advocacy in our submission any deadlines we have for the publication of 

the 1'I'PRM.12 

Make the IRFA available to the public. The IRFA must be made available to the public. This 

can be done by publishing the complete IRFA in the preamble to the NPRM or by including in 

the preamble a summary of the IRFA and a statement describing how copies of the complete 

analysis may be obtained from the Gee. 

) Note on Interagency Rulemaltings. The ace independently detennines the 

applicability of the Reg Flex Act and the eligibility of a rulemaking for certification 

under the Act for rulemakings conducted jointly or in coordination with other agencies. 

To ensure consistency to the greatest extent practicable, however, the project manager 

and the RegUlatory Specialist consult and coordinate with the other agencies in preparing 

material pertaining to the Reg Flex Act for inclusion in the preamble to the proposed rule. 

'2 Pursuant to 5 U.S.C. 609(b) ofthe RFA, this requirement only applies to "covered agencies," defined in 

609(d) as the EPA and OSHA. However, the OCC complies with this requirement and SBA encournges agencies to 

do so. 

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Unfunded Mandates Reform Act aIMRA) 

Consistent with the UMRA, J3 the OCC assesses the effects of Federal regulatory actions on 

State, local, and tribal governments, and the private sector other than to the extent a proposed 

regulation incorporates requirements specifically set forth in law. The UMRA does not apply to 

ANPRs. . 

UMRA provides that agencies must prepare a written statement containing certain infonnation 

and analysis specified in the statute if a proposed rule contains a Federal mandate that may result 

in the expenditure by State, local, and tribal governments, in the aggregate, or by the private 

sector, of $1 00 million or more in anyone year. As a general matter, a Federal mandate is any 

provision in legislation, statute, or rule that would impose an enforceable duty on the private 

sector. However, pursuant to section 20 I ofthe UMRA 14, a regulation does not impose a 

mandate to the extent it incorporates requirements "specifically set forth in the law." A summary 

of the written statement must be contained in any NPRM or Final Rule. 

The Director of PAD, in consultation with the ChiefCounse!'s Office, as appropriate, determines 

whether the requirements of the UMRA are trig~ered. If so, then the UMRA requires that the 

preamble contain a budgetary impact statement. 5 The OCC then also must identify and consider 

a reasonable number of regulatory alternatives before promulgating the rule. In such a case, 

PAD prepares the economic aDalysis required for the budgetary impact statement, and the project 

manager and PAD (together with the working group, as appropriate) work in coordination to 

develop regulatory alternatives. . 

If the $100 million threshold is not exceeded, the project manager prepares and includes in the 

preamble to the proposal a statement to that effect together with a brief reason supporting that 

conclusion. 

~ Note on Interagency Rulemakings. The OCC independently determines whether the 

UMRA requires the preparation of a budgetary impact statement. The UMRA does not 

apply to the Federal Reserve Board and the FDIC. 

"2 U.S.C. 1501 etseq. 

"2 U.S.C. 1531. 

" Section 202(a), 2 U.S.C. § 1532, requires this written statement to include: (1) the legal authority for the 

rule; (2) a qualitative and quantitative cost-benefit assessment of the Federal mandate (including the costs and 

benefits to State, local, and tribal governments or the private sector and the available Federal resources to fund this 

mandate, as well as tbe effect of the Federal mandate on health, safety, and the natural environment); (3) feasible 

estimates offuture compliance costs and any disproportionate budgetary effects on various governmental or private 

sectors; (4) a description of the macro-economic effects of rlle mandate, if feasible; and (5) a description of any 

required agency consultation with elected representatives of the affected State, local, and tribal governments. In 

addition, section 205 of the UMRA, 2 U.S.C. § 1535, requires an agency to identify and consider a reasonable 

number of regulatory alternatives and select the least costly, most cost-effective or least burdensome alternative for, 

as applicable, Slate, local, tribal govemments, and the private sector that achieves the objectives of the rule. 

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3. Coordinate Economic Analysis with PAD 

The Director of PAD, in consultation with the Chief Counsel's Office, as appropriate, makes the 

determinations required pursuant to the Reg Flex Act and the UMRA. PAD prepares the 

economic analyses necessary to support those determinations. The project manager works with 

PAD to provide legal support for this analysis. To facilitate PAD's work in this regard, during 

the development of the NPRM, the project manager sends a memorandum to the Director of 

PAD requesting PAD's economic analysis of the proposed rule and the determinations of the 

Director of PAD pursuant to the Reg Flex Act and the UMRA. PAD's analysis will be used to 

complete the regulatory analysis section of the preamble. This memorandum should include a 

description of these laws, a summary of the draft proposal, and a description of those sections of 

the proposal that will impact national banks and savings associations, identifying any mandates 

in the proposed rule. The attorney also should attach a draft of the NPRM. This memorandum 

should be sent to PAD no later than the distribution of the Gold Border package. It should 

request that PAD provide the project manager with their written response no later than the Gold 

Border comment due date. For more complex rulernakings, the memorandum to PAD should be 

sent at an earlier date. These determinations and analysis typically are set forth in a 

memorandum that PAD provides to the project manager. 

• If the substance of a rule changes following receipt of PAD's analysis, the project 

attorney must request PAD to revise the analysis based on the changes and provide an 

updated analysis memorandum, approved by the Director of PAD, as soon as possible. 

• The project manager must ensure that this updated analysis memorandum, in a suitable 

form, adequately reviews the costs associated with the revisions to the proposed rule, and 

contains the economic analyses necessary to support determinations required pursuant to 

the Reg Flex Act, and UMRA. 

The project manager must review the UMRA and PRA analyses, bring any discrepancies 

between the two to the attention of PAD and the Regulatory Specialist, and ensure that the 

rulemaking file contains an adequate explanation of any differences. 

The project manager retains copies of memoranda sent to and received from PAD for the 

rulemaldng file. 

PAD has developed additional procedures to facilitate the development and coordination of 

economic analyses. Among other things, these procedures note that PAD may refer to OMB 

Circular A-4 in preparing certain economic analyses. Project managers should familiarize 

themselves with these procedures, a copy of which is attached as Appendix 1. 

4. Prepare and Distribute a Gold Border Package 

TIle OCC uses the Gold Border process to ensure that the Comptroller and other senior OCC 

officials have an opportunity to review and comment on significant agency documents, including 

rulemaking documents, and to facilitate that process on an efficient basis. When the draft 

Federal Register document for the proposed rule is finished, the project manager prepares a Gold 

BOl'der package for clearance and circulation. 

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The Gold Border package consists of the draft Federal Register document containing the NPRM, 

the Gold Border Reviewers' Memorandum (Gold Border Memo), and the Gold Border cover 

sheet. 

Gold Border Memo. The Gold Border memorandum is a memorandum, usually prepared for the 

signature of the Chief Counsel and Executive Committee co-sponsor, if applicable, to those 

individuals who will be reviewing the Gold Border package (Gold Border Reviewers). It 

typically contains a summary of the most significant provisions of the proposal, a description of 

any major issues presented by the NPRM, and recommendations for resolving those issues. If 

staff views differ with respect to resolution of significant issues, the differences and the reasons 

for them are explained. The Gold Border memorandum also may seek input on any other issues 

that have arisen during the drafting process. 

Gold Border Cover Sheet. The Gold Border cover sheet provides a vehicle for distributing the 

Gold Border package. The cover sheet, which for hard copy distribution is printed on gold 

paper, contains a very brief summary of the proposed rule. 

The cover sheet indicates a due date for comments, usually two weeks after the distribution date. 

If a shorter review period is necessary, the cover sheet should highlight the shorter deadline and 

explain the circumstances warranting the need for expedited review unless otherwise directed by 

the Chief Counsel. Gold Border reviewers for rulemakings always include the Comptroller, the 

members of the Executive Committee, the Director of PAD, the Deputy Comptroller for Public 

Affairs, the Director for Congressional Liaison, the Director for Press Relations, the Director of 

Public Affairs (Operations), the District DeputyComptrollers, Deputy Chief Counsels, Law 

Department Division Directors, and District Counsels. Particular Deputy Comptrcllers and other 

reviewers may be added depending on the content of the proposal. Courtesy copies of the 

package may be provided to OCC staff working group members or other interested staff. 

The Gold Border reviewers are asked to return the cover sheet, with any comments on the draft, 

to the project manager. 

» Note on Interagency Rulemakings. The timing of the distribution of the Gold Border 

package is especially important in interagency rulemakings. Each of the Federal banking 

agencies (and other agencies with which the acc may be required to consult on 

rulemakings) has a different process for review and clearance of rulemaking documents. 

It is essential that acc senior management have an opportunity to review and comment 

on a rulemaking document in a time frame that permits the project manager and other 

OCC staff to communicate their views to the interagency staff working on the projects. 

Timing of the Gold Border package should be discussed with the Assistant Director, the 

Director, and senior OCC management as needed. 

o If agency staff on the interagency working group cannot reach agreement on a 

substantive or procedural aspect of the rulemaking, the gold border package should 

explain this disagreement and summarize the OCC position. If interagency staff is 

unable to resolve the disagreement, the project manager should raise the issue(s) with 

the Chief Counselor other appropriate Executive Committee member for the issue to 

be resolved by the agencies' senior management or principals. 

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5. Review and Address Gold Border Comments 

The project manager prepares a brief summary of significant Gold Border comments. The 

summary is circulated to the OCC working group, LRA managers, the Deputy Chief Counsel, 

and the Chief Counsel and Executive Committee co-sponsor, if applicable, for simultaneous 

review. If necessary, the project manager initiates an OCC and/or interagency working group 

meeting to discuss significant, substantive Gold Border comments. As appropriate, the project 

manager discusses comments with the Chief Counsel and makes recommendations about how to 

address the comments. The project manager ensures that Gold Border reviewers are made aware 

of how their comments have been addressed. This may occur informally through discussion 

between the Chief Counsel and Executive Committee co-sponsor, ifappJicable, and the members 

of the Executive Committee Or through staff-to-staff communications, depending on the nature 

of the issue. The project manager retains copies of the Gold J;lorder comments for the 

rulemaking file. If there are Significant changes to the NPRM based on the Gold Border 

package, the project manager should request PAD, by memorandum, to review their regulatory 

analysis in light of these changes. 

6. Prepare and Distribute Red Border Package 

Once any issues raised by Gold Border commenters (or, in the case of an interagency 

ruiemaking. by other agencies) have been resolved, the project manager revises the NPRM and 

prepares the Red Border package. This package consists of the revised draft NPRM, the Red 

Border Decision Memorandum, and the Red Border cover sheet 

}> Note on Interagency Rulemakings. The project manager also incorporates comments 

received from the other agencies where the OCC is the lead drafting agency. If another 

agency is drafting the rule, the project manager should review this draft to make sure that 

OCC Gold Border reviewers' comments have been incorporated. 

Red Border Decision Memorandum. The Red Border Decision Memorandum is prepared for 

the signature of the Chief Counsel and Executive Committee co-sponsor, if applicable, for 

transmittal to the Comptroller. The memorandum briefly summarizes the major provisions of the 

rule and highlights any significant changes from the Gold Border version of the draft NPRM. 

The memorandum also may indicate how comments sent by Executive Committee members 

during the Gold Border process have been addressed. 

Red Border Cover Sheet. The Red Border cover sheet transmits, and contains a brief description 

of, the proposed rule. Use the acc template for this form. 

When the Red Border materials are complete and the Chief Counsel and Executive Committee 

co-sponsor, if applicable, have signed the Red Border memorandum and cover sheet, the package 

is sent to the Comptroller for signature. The project manager alerts reviewers and staff 

participants in the luJemaking that the package has been sent to the Comptroller to sign. Because 

the time between transmittal to the Comptroller and signature is usually fairly short, the project 

manager need not distribute copies ofthe Red Border package to reviewers and staff participants 

except upon request. The project manager provides copies of the signed NPRM Red Border 

package to reviewers and staff participants. 

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:> Note on Interagency Rulemakings. Sometimes, there is interagency negotiation on the 

language of a rulemaking document late in the process of its review and approval. The 

project manager facilitates communication among the agencies and ensures that the 

OCC's position on issues on which there is disagreement is reflected in the documents or 

that the issue is brought to the attention of the Chief Counsel, and Executive Committee 

co-sponsor, if applicable, other senior OCC managers, or the Comptroller for resolution. 

Coordinate witlt Public Affairs. The Director of Public Affairs (Operations) will have been 

alerted to the progress of the rulemaking project through receipt of the Gold Border package. 

Well ahead of the date on which the NPRM will be released, the project manager consults with 

Public Affairs (Operations) about whether that office will need materials describing or 

explaining the NPRM. As needed, the project manager assists in the drafting of a press release 

and prepares a Q & A document or talking points for use by Public Affairs. lfthe rulemaking is 

expected to generate significant interest, the project manager consults with the Chief Counsel, 

Executive Committee co-sponsor, if applicable, and other senior OCC managers about the need 

for similar materials for distribution to other OCC staff members, including Congressional 

Liaison, EICs, or District Deputy Comptrollers and their staffs. 

:> Note on Interagency Rulemakings. The participating agencies ordinarily issue a joint 

press release (if any release is issued) for interagency rulemakings. Public Affairs 

coordinates the drafting and release of the press statement with the other agencies. 

However, the draft interagency press release should be reviewed by the project manager 

and LRA management, as appropriate, prior to release. 

7. Coordinate Publication and Distribution of the NPRM 

After the Red Border package has been signed by the Comptroller, the project manager 

coordinates the publication and distribution of the NPRM by taking the following steps. 

Submission to and Publication in tlte Federal Register. The Comptroller's Office returns the 

Red Border package to the project manager after the Comptroller has signed and dated the Red 

Border cover sheet (indicating the Comptroller'S decision) and signature page. LRA's 

Regulatory Specialist then coordinates submission of the document to the Federal Register, 

which is done both electronically and by paper copy. The project manager provides the 

Reguiatory Specialist with an electronic copy oCtile signed version ofthe NPRM. The 

Regulatory Specialist notifies, and provides an electronic copy to, reviewers and staff who have 

participated in 1he rulemaking. The Regulatory Specialist includes a copy of the submission for 

inclusion in the rulemaking file. 

• Before 1he document is sent to the Federal Register, the project manager obtains the 

Chief Counsel's prior approval to publish in the Federal Register. This can be done via 

email. 

• The paper submission to the Federal Register consists ofthe original NPRM, with the 

original signature of the Comptroller and two certified copies of the NPRM. 

TIle Regulatory Specialist coordinates any revisions requested by the Federal Register and clears 

all substantive revisions with the project attorney. 

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Upon publication in the Federal Register, the Regulatory Specialist notifies interested parties 

and distributes the Federal Register version of the NPRM via email. 

The project manager proofreads the Federal Register version to locate any printing errors: If any 

Federal Register errors are noted, the Regulatory Specialist, in consultation with the project 

manager and LRA management, notifies the Federal Register and arranges for a correction to be 

printed. If the OCC is responsible for the error, the proj ect manager prepares a correction 

document revising the NPRM and circulates it on Red Border for the signature of the 

Comptroller and subsequent pUblication in the Federal Register. The Chief Counsel may act 

under delegated authority to approve technical revisions to a Federal Register document. 16 

Preparation and Distrtbution of the OCC Bulletin. At the conclusion oftl1e Red Border 

process, the project manager prepares an OCC Bulletin, which is the document the OCC uses to 

transmit a rulemaking document to national banks, Federal savings associations, and OCC staff. 

This document informs the reader that the document was published in the Federal Register, 

summarizes the major points ofthe NPRM, and includes an attached copy of the Federal 

Register document. The project manager should prepare a draft of the bulletin in accordance 

willi the OCC's Style Manual and send a draft of this bulletin to Communications for review. 

After Communications bas reviewed the bulletin, the project manager circulates the document on 

a Green Border. 

After the NPRM is published in the Federal Register, llie project manager provides 

Communications with an electronic copy ofthe fmal Federal Register document and the final 

Bulletin, along with the bard copy of the Bulletin signed by the Chief Counsel and Executive 

Committee co-sponsor, if applicable. Communications handles the distribution of the Bulletin 

and attached Federal Register document 

16 See "Delegation of Authority - Federal Register Materials" from the Comptroller aftlle Currency to the 

First Senior Deputy Comptroller and Chief Counsel, dated January 5, 2009. 

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Practice Tips 

Drafting the NPRM 

It is usually best to draft the regulatory text first - before the preamble - since the 

preamble should describe and explain the text. A section-by-section format for the 

preamble is helpful to provide a clear explanation of the regulatory text. 

• The project manager should verify the statutory authority citation for the OCC rule and 

use as the base for all amendments the latest version of the rule. The most current 

infonnation can be found using the e-CFR. 

• Specific questions for commenters about the rulemaking set forth in the preamble should 

be numbered, and the preamble should request comrnenters to respond to these questions 

by number. This will allow the OCC to more easily review, summarize and organize 

public comments, especially in rulemakings for which we expect a large number of 

comment letters. 

• Consult with the Regulatory Specialist to ensure compliance with Federal Register 

drafting requirements, which are set forth in the Federal Register Document Drafting 

Handbook, which may be found at http://www.archives.gov/federalregisteriwritelbandbooklddh.pdf. The Federal Register handbook also refers to the 

GPO's Style manual, which may be found at 

bttp;//www.gpoaccess.gov/stylemanua)/browse.html. 

• Use plain language drafting techniques, as appropriate. Consult the REFERENCES section 

of this chapter for plain language resources. 

• The project manager should consult with LRA staff for examples of recent proposed rules 

that could serve as a template. 

Ex Parte Communications17 

• OCC staff are not prohibited from meeting with outside parties, engaging in discussions 

with those parties, or accepting documents from those parties before the NPRM is issued, 

but those actions raise issues of transparency and fairness of the rulemaking process. 

OCC policy is that such discussions, and any documents received, that involve 

substantive issues of the merits of the possible rulemaking must be docwnented for 

inclusion in the rulemaking file. This rule also applies after an ANPR is issued. See 

"Procedures, I. Review and Summarize Public Comments, Note on Meetings with 

Outside Parties" in Chapter III for more information on OCC policy regarding such 

communications. 

17 The AP A defines an ex parte contact as an "oral or written communication not on the public record with 

respect to which reasonable prior notice to all parties is not given." 5 U.S.C. § 551(14). Requests for status reports 

on a rulemaking (and responses by agency staff to such requests) are not ex parle communications under this 

definition. Jd. 

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Ensuring compliance with applicable statutes 

• The list of statutes and executive orders described in the PROCEDURES section is not 

necessarily exclusive. Consult with the Assistant Director early in the drafting process 

to be sure other laws, e.g., the Federal Advisory Committee Act, do not apply or require 

special procedures. Check references and Web sites to ensure that the information you 

have is the most current available. 

• Agency certifications and Final Regulatory Flexibility Analyses (FRF As) under the Reg 

Flex Act for final rules are subject to judicial review. Deficient certifications and FRFAs 

invite unnecessary litigation risk and could result in a final rule being remanded back to 

the OCC for additional Reg Flex analysis. 

• Perform, or coordinate, the analyses required under the statutes concurrently with the 

drafting of the Federal Register document so that they can be included in the Gold 

Border package for review, if possible. 

The OMB clearance process under the PRA 

• The OMB clearance process for PRA can affect the timing of publication of the NPRM 

and present unexpected delays. Coordinate with the LRA Regulatory Specialist on this as 

early as feasible in the drafting process. 

Preparation and distribution of the Gold Border package 

• Insert the tracking number on the Gold Border cover sheet, with the initial designation 

"GB." Contact the Comptroller's Office, ext 4880, for the number, if a number has not 

previously been assigned to the project 

• Confirm that comments have been received from all Gold Border Reviewers at the end of 

the Gold Border conunent period. If an Executive Committee member has not 

commented, contact his or her executive assistant to ascertain whether the BC member 

plans to comment and the likely timing of the comment. 

Preparation and distribution of the Red Border package 

When the Red Border rulemaking document contains important changes to the version 

that circulated on Gold Border, it is often helpful to prepare a recllined version of the 

NPRM, marked to show changes to the Gold Border version, to facilitate review of the 

Red Border package by the Comptroller. 

• The Comptroller's Office assigns the Red Border a log number, which they should insert 

on the cover sheet. The package must have a log number before it is given to the 

Comptroller. The log number is different from the tracking number referred to above. 

• The Comptroller needs to sign only one copy of the Federal Register document. If the 

signature page is returned with the date line blank, check with the Comptroller's office as 

to the date it was signed and insert that date. The Federal Register does not accept an 

auto-penned document. 

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• Two copies are certified by stamping them with the certification stamp. The stamped 

copies are signed by the Regulatory Specialist, or an OCC manager who supervises this 

staff member (e.g., the Assistant Director, the Director, etc.). 

REFERENCES 

• National Archives and Records Administration, Office of the Federal Register, Federal 

Register Document Drafting Handbook, available at http://www.archives.gov/federalregister/write/handbooklddh.pdf. 

• The GPO's Style Manual. available at 

http://www.gpoaccess.gov/stylemanuallbrowse.html. 

• The OCC's Style Manual (revised 2011) is available on the OCC's intranet site at 

http://occnet.occ/OCCnet/publicaffairs/style.pdf. 

• Plain language resource materials are available at 

http://www.plainlanguage.gov/resources/index.cfin. 

• Paperwork Reduction Act of 1995, 44 U.S.C. § 3501 et. seq. See also 5 C.F.R. 

Part 1320 (OMB implementing regulations for PRA); Office ofInformation and 

Regulatory Affairs, Office of Management and Budget, The Paperwork Reduction Act of 

1995: Implementing Guidance for OMB Review of Agency Information Collection 

(draft, August 16,1999) (unpublished, available from LRA Regulatory Specialist). 

• Regulatory Flexibility Act, 5 U.S.C. § 600 el. seq. Executive Order 13272, "Proper 

Consideration of Small Entities in Agency Rulemaking" (August 13, 2002). See also 

SBA Office of Advocacy, A Guide for Government Agencies: How to Comply with the 

Regulatory Flexibility Act (2003), available at www.sba.gov/advollaws/rfaguide.pdf. 

• Administrative Procedure Act. 5 U.S.C. §§ 553-559. 

• Unfunded Mandates Act of 1995, Pub. Law 104-4,2 U.S.C. § 150l. 

• Gramm-Leach-Bliley Act, Pub. Law 106-'102,12 U.S.C. § 4809. 

• Executive Orders are available at: http://www.archives.gov/federal-register/executiveorders/disposition.html. 

• . United States Attorney General's Manual on the Administrative Procedure Act (1947), 

available at http://www.oalj.dol.gov/public/apa/refinc/agtc.htm. Other administrative law 

resource materials available at http://www.oaij.dol.govllibapa.htm. 

• OCC's independent regulatory authority: 12 U.S.C. § 1 (cross-referencing 12 U.S.C. 

§ 1462a(b)(3)). 

• Sample documents, including sample gold border comment summary, sample economic 

analyses, sampleIRFA, may be found on the LRA g:\ drive at g:\ADMlN LAW FILES 

BY TOPIC. 

• Templates for gold border and red border cover sheets are available in the "OCC Forms" 

section of Word. 

• CFR List of Subjects, available on the LRA g:\ drive at g:\OCC Rulemaking 

Procedures\CFR LIST OF SUBJECTS.doc. 

• "Internal OCC Review Processes for PoJicymaking, Rulemaking, and Other Significant 

Documents," PPM 1000-10 (REV) (April 26, 2005). 

• OCC memoranda on various topics of administrative law may be found on the LRA g:\ 

drive at g:\ADMlN LAW FILES BY TOPIC. 

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CHAPTER III - PREPARING A FINAL RULE 

PROCEDURES 

The procedures for preparing a final rule are similar to those that the OCC uses for preparing a 

proposal. Accordingly, this chapter highlights the aspects of the final rule process that are 

different fTom the NPRM process and cross-references the NPRM procedures in Chapter II 

where appropriate. 

1. Review and Summarize Public Comments 

Periodically while the comment period is open, and at the end of the comment period, the project 

manager obtains copies of public comment letters sent to the OCC in response to our request for 

comments in the NPRM. Shortly after the comment period has closed, the project manager 

prepares a summary of the public comments on the NPRM. The format for the summary is 

determined by the subject matter and complexity of the proposal; however, it is often helpful to 

categorize the comments by subject matter or CFR cite. The conunent summary also indicates 

the type or identity of commenters raising significant issues. 

• In some rulemakings, other agencies may submit comment letters to the OCC. The OCC 

typically addresses these comment letters in the preamble. In cases where agencies 

disagree with the DCC's approach in the proposal, the DCC typically seeks to contact the 

agency to obtain further information about their comment. Any such communication 

should be documented in the rulemaking file. (See ''Note on Meetings with Outside 

Parties," below.) 

The project manager circulates the comment summary simultaneously to OCC staff, interagency 

staff if applicable, and OCC managers. Copies of the letters typically are not provided for 

review, unless a reviewer asks for them. 

The project manager is responsible for reviewing the docket and ensuring that comment letters 

are accurately posted to D:\FR COMMENTS by Communications staff and to 

www.regulations.govbyLRA staff. See "Practice Tips - Docket Management: Public 

Comments" for specific instructions . 

. > Note on Interagency Rulemakings. In an interagency rulemaking, each agency 

prepares its own summary of the comments it received. These comment summaries are 

shared with the other agencies. 

> Note on Meetings with Outside Parties. Meetings or other discussions between OCC 

officials and national banks or other interested pruties during the pendency of a 

rulemaking are not prohibited under the AP A. However, such communications could 

cause questions to be raised about the transparency and fairness of the OCC's rulemaking 

processes. To avoid even the apperu'rulce of unfairness in this regard, the OCC applies 

the following policies: 

o Due to the time demrulds placed on DCC resources by such meetings, OCC staff 

generally try to limit meetings to those involving national brulks or Federal 

savings associations. National banks, Federal savings associations or their· 

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representatives, or other parties, wishing to arrange an in-person meeting will be 

asked to submit an outline of the points they wish to present at the meeting. This 

outline is not an agenda of topics but rather should summarize the points the 

parties intend to make at the meeting. The outline, together with documentation 

of the meeting prepared by an acc staff member, will be made a part of the 

public record, for example, through posting together with other comments on 

regulations.gov. A summary of the discussion need not be prepared by acc staff 

if materials submitted by the party and included in the rulemaking file are 

sufficiently comprehensive. 

o acc staffwill inform the external party that such a summary and/or materials 

will be made a part of tile public comment file and that they should identify any 

confidential business or proprietary information in the material. 

o Informational discussions, including explanations of the published proposal, 

information about status or timing of the rulemaking, or a private party's cursory 

expressions of opinion unaccompanied by reasoned support, need not be 

documented. J8 

2. Develop and Draft the Final Rule 

The project manager convenes or requests meetings as necessary to discuss and develop 

recommended responses to issues raised by the commenters, including meetings with the acc or 

interagency working group and with the Chief Counsel, Executive Committee co-sponsor, if 

applicable, and other acc senior managers. Based on the input received, the project manager 

drafts the regulatory text and preamble for the final rule. In some cases - particularly where the 

resolution of a legal issue is crucial to the content of the final rule - consideration should be 

given to developing a memorandum that clearly sets forth and explains the legal basis for the 

final rule. The project manager should consult with senior Law Department managers, including 

the Chief Counsel, before undertaking to prepare such a memorandum. 

The project manager also ensures that any outstanding legal issues, or issues arising as a result of 

acc (or interagency) staff review and discussion, are resolved. This includes any administrative 

law issues, such as whether a provision to be included in the final rule is a "logical outgrowth" of 

the proposal under the applicable APA case law. The APA also contains a few express 

requirements that apply to final rules, including that the final rule document contain a statement 

of the basis and purpose of the rule and that its effective date be delayed, subject to certain 

exceptions. 

The project manager ensures that the final rule complies with any applicable delayed effective 

date requirements. With certain exceptions, the AP A requires that final rules take effect no 

earlier than 30 days after the date of publication in the Federal Register. In addition, with 

exceptions that parallel those in the AP A, the Riegle Community Development and Regulatory 

Improvement Act of 1994 (CDR! Act) requires rules that impose additional reporting, disclosure, 

or other new requirements to take effect on the first day of a calendar quarter that begins on or 

after the date on which the regulations are published in final form. The APA delayed effective 

date operates as a "floor," i.e., the effective date of a finaJ rule usually can be no earlier than 30 

18 ace policy is that ex parte discussions that occur before all NPRM is issued require similar 

documentation that eventually will be included in the rulemaking file. See "Practice Tips, Drafting the NPRM," 

Chapter II. 

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days after publication and, if the rule is covered by the CDR! Act, dIe effective date will be 30 

days plus the number of days until the first day ofthe calendar quarter following publication. 

The OCC may cause a final rule to take effect sooner than the effective dates prescribed by the 

AP A and CDRl Act upon a finding of "good cause" to do so, provided dIe basis for the finding is 

published in the preamble to the final rule. 

The regulatory text consists of the amendatory text contained in the proposal with edits based on 

dIe public comments received. The preamble usually includes a sumr:nary of the proposed rule; 

the number of comments received, usually grouped by type of interested party; a summary of the 

comments received and the OCC's (or interagency) response to the comments; and a description 

of the final rule, usually in section-by-section format, that highlights any changes from the 

proposal. The preamble also includes the required regulatory analyses. 

• Each public comment letter received need not be separately addressed in the preamble. 

The AP A requires that the preamble to the final rule address significant issues concerning 

the proposal raised by the comment letters. Comment letters that address the same 

point(s) may be summarized as a group. 

3. Ensure Compliance with Applicable Statutes and Executive Orders 

The project manager works with the PAD, the Regulatory Specialist, and the working group to 

finalize the regulatory analyses for the fmal rule. The project manager should do these analyses 

concurrently wid! the drafting of the Gold Border package, ifpossible. 

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ThePRA 

Refer to Chapter II for a discussion of the requirements of the PRA. The PRA and OMB's 

implementing regulations prescribe particular requirements for information collections contained 

in final rules. 

If the information collection contained in the NPRM remains unchanged in the final rule, the 

project manager includes in the preamble a statement that the fmal rule contains a collection of 

information; that the information collection was submitted to and approved by OMS; whether 

public comments were received on the information col1ection and, if so, how they were 

addressed. The preamble to the final rule includes the OMS control number assigned to the < 

collection and indicates that failure to display the OMB control number has legal significance. 

If the information collection contained in the NPRM has changed in the final rule, the Regulatory 

Specialist makes a revised submission to OMS on or before the date the final rule is published. 

The preamble to the final rule states that the final rule contains a collection of information; that 

the information collection was submitted to and approved by OMB at the proposed rule stage 

and was assigned a particular OMB control number; and that failure to display the OMS control 

number has legal significance. The preamble also states how the collection has changed; 

whether public comments were received on the information collection and, if so, how they were 

addressed; and what the new burden estimates are. 

In addition, the preamble indicates that the rule has been resubmitted to OMS for review. It 

notes that the provisions that do not contain PRA requirements can go into effect but that the 

effective date of the final rule's information collection requirements are stayed until the OCC 

receives OMS approval. OMS has up to 60 days to complete its review and provide approval. 

When approval is received, the OCC must publish a notice in the Federal Register and include 

the OMB control number and statement of legal consequences. 

IfOMB has filed comments on the collection of information aspects of the NPRM, the OCC 

must resubmit the revised collection for review at the final stage of rulemaking. The preamble to 

the final rule must explain how any collection of infonnation contained in the final rule responds 

to comments received from OMB, as well as any comments from the public. The OCC must 

explain any substantive or material change to the rule. 

Tile Reg Flex Act 

Even ifthe OCC has certified that an NPRM would not result in a final rule having a significant 

economic impact on a substantial number of small entities, the OCC may conclude that changes 

made in the final rule cause it to be likely to have such an impact. 19 In such a case, the OCC 

must determine whether preparation of a Reg Flex Act analysis for the final rule is required. 

Chapter II, supra, discusses how this determination is made. 

If the oec concludes that the final rule will not have a significant economic impact all. a 

substantial number of small entities, the preamble to the final rule includes a certification 

statement, as described in Chapter II, with a brief reason why the certification is appropriate. 

19 Likewise. changes made in the final rule could result in the OCC concluding that an NPRM that did have 

8 significant economic impact on a substantial number of small entities now, in final fonn, does not cross that 

threshold. 

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Agency certifications under the Reg Flex Act in final rules are subject to judicial review. 

Deficient certifications invite unnecessary litigation risk and may result in a final rule being 

remanded back to the OCC for additional Reg Flex analysis. 

In the case of a regulation for which an IRF A was prepared, or for which a Final Regulatory 

Flexibility Analysis (FRFA) is otherwise required, the project manager prepares the FRFA, in 

consultation with PAD and the Regulatory Specialist. The project manager includes in the 

preamble a summary of the FRFA, together with a statement describing how copies of the 

complete analysis may be obtained, or the text ofthe complete FRFA. The complete analysis 

must be transmitted to the SBA's Office of Advocacy and made available to the public. As with 

agency Reg Flex Act certifications, FRF As are subject to judicial review. 

Pursuant to E.O. 13272, if the final rule is not eligiblc for certification under the Reg Flex Act, 

the Regulatory Specialist, in consultation with the project manager and the Assistant Director, 

notifies the SBA's ChiefCoul1sel for Advocacy of the draft final rule "at a reasonable time" prior 

to its publication. 

• Executive Order 13272 requires the OCC to "give every appropriate consideration" to 

comments provided by the SBA's Office of Advocacy on rules for which no Reg Flex 

Act certification has been provided and to respond in the preamble to the final regulation 

to questions raised by Advocacy. . 

Small BanklFederal Savings Association Compliance Guide. For any final rule which is 

determined to have a significant impact on a substantial number of s\IlaIl entities and for which a 

FRF A is prepared, the SBREFA requires the OCC to publish one or more small business 

compliance guides to assist small entities in complying with the rule. This work need not be 

completed by the time the final rule is issued, but the project manager typically will begin work 

011 the guide promptly after issuance of the final rule. 

Congressional Review Act /Small Business Regulatory Enforcement Fairness Act 

The Congressional Review Act, adopted as pru.1 of the SBREFA, generally provides a 

mechanism for Congressional review of agency regulations by requiring agencies to report to 

Congress and the General Accountability Office (GAO) when they issue a final rule and by 

establishing time frames within which Congress may act to disapprove a rule. To comply with 

the Congressional Review Act, the OCC must submit a Report to Congress and the GAO. The 

procedures for compliwlce with the Congressional Review Act are described at Step 9, below. 

As part of this Repolt, the OCC must state whether the rule is a "major rule" for Congressional 

Review Act purposes and must indicate whether the OCC prepared an analysis of costs and 

benefits. 

The Congressional Review Act defines "major rule" to mean any rule that the Administrator of 

the Office ofInformation and Regulatory Affairs (OIRA) of the OMB finds has resulted in or is 

likely to result in: (1) an annual effect on the economy of $100,000,000 01' more; (2) a major 

increase in costs or prices for consumers, individual industries, Federal, State, or local 

government agencies, or geographic regions; or (3) significwlt adverse effects on competition, 

employment, investment, productivity, innovation, or on the ability of United States-based 

enterprises to compete with foreign-based enterprises in domestic and export markets. (5 U.S.C. 

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§ 804(2)(A»). In general, if a final rule is a "major rule," it may not take effect until the later of: 

(I) 60 days after the filing of the required reports to Congress or publication of the rule in the 

Federal Register, whichever is later; or (2) the date the rule would otherwise take effect unless a 

joint resolution of disapproval is enacted. 

In order to determine whether the final rule is a major rule for purposes of the Report to 

Congress, the OCC must submit a request to aIRA for a major rule determination. 

Prior to this OIRA submission, LRA requests the Director of PAD's determination as to 

whether the rule is a "major rule" under this definition. This request should be made at 

the same time LRA requests the Director of PAD's determination under the Reg Flex Act 

and UMRA. (See Step 4, below.) 

• This DIRA submission may be made via email.using the "Request for Major Rule 

Determination" form available on the LRA g:\ drive at g:\OCC Rulemaking Procedures. 

The submission is made by the Regulatory Specialist. 

• The project manager must ensure that OIRA's decision has been received prior to 

submission of the final rule to the Federal Register, and must plan this submission 

accordingly. 

Unfunded Mandates Act 

The project manager updates the discussion of the UMRA in the preamble to the final rule based 

on new or updated analyses received from PAD, if any. 

4. Coordinate Economic Analysis with PAD 

The Director of PAD, in consultation with the Chief Counsel's Office, as appropriate, makes the 

determinations required pursuant to the Reg Flex Act, COIigressional Review Act, and UMRA. 

PAD prepares the economic analyses necessary to support those detenninations. Prior to 

distribution of the Gold Border package, the project manager sends a memorandum to PAD 

requesting an updated analysis of the final rule pursuant to the Reg Flex Act and the UMRA and 

a major rule determination under the Congressional Review Act. This memorandum indicates 

the differences between the proposed rule and the draft final role and discusses any comments 

received relating to the applicable statutes and executive orders. The project manager sends this 

memorandum to PAD no later than the time of the distribution of the Gold Border package, 

requesting that PAD provide the project manager with its written response no later than the Gold 

Border comment due date. Whenever possible, particularly in the case of complex rulemakings, 

the memorandum to PAD should be sent at the earliest possible date. 

• If the substance ofa rule changes following receipt of PAD's revised analysis, the 

project attorney must request PAD to revise the analysis based on the changes and 

provide an updated analysis memorandum, approved by the Director of PAD, as soon as 

possible. 

• The project manager must ensure that this updated analysis memorandum, in suitable 

form, adequately reviews the costs associated with the revisions to the proposed rule, and 

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contains the economic analyses necessary to support determinations required pursuant to 

the Reg Flex Act, Congressional Review Act, and UMRA. 

5. Prepare and Distribute the Gold Border Package 

The Gold Border package for the final rule consists of the same types of documents as the Gold 

Border package for the NPRM: draft final rule (regulatory text and preamble), the Gold Border 

Memorandum, and the Gold Border cover sheet. The distribution and review process are the 

same as for the Gold Border package for an NPRM. See Chapter II. 

Gold Border Memorandum. The Gold Border memorandum contains a summary of the most 

significant provisions of the draft. final rule, notes any changes made to the proposed rule, and 

describes any remaining issues raised by the public comments or by OCC (or interagency) staff. 

Gold Border Cover Sheet. See the discussion of the Gold Border cover sheet in Chapter II. 

6. Review and Address GQld Border Comments 

The procedures for reviewing Gold Border comments are the same as for the NPRM. See 

Chapter II. 

7. Prepare and Distribute the Red Border Package 

The procedures for preparing and distributing the Red Border package are the same as for the 

NPRM. See Chapter II. 

8. Coordinate Publication and Distribution ofthe Final Rule 

For the most part, the procedures for publication and distribution of the final rule are the same as 

discussed in Chapter II for the NPRM. However, an additional step is required to comply with 

the Congressional Review Act once the firial rule has been signed by the Comptrol!er. 

9. Congressional Review Act/Small Business Regulatory Enforcement Fairness Act 

The Congressional Review ActiSBREFA generally provides a mechanism for Congressional 

review of agency regulations by requiring agencies to report to Congress and the GAO when 

they issue final rules and by establishing time frames within which Congress may act to 

disapprove a rule. 

• The project manager prepares the Report to Congress with the assistance of the 

Regulatory Specialist and delivers the Report in person to the Speaker's Office and 

the President ofthe Senate's Office at the Capitol and obtains a signed receipt with 

the date, time, signature, and printed name of the receiving party at the respective 

offices. This receipt is then included in the official file by the Regulatory Specialist. TIle 

Regulatory Specialist e-mails the report to the GAO on the same day. Delivery of this 

Report starts the clock for the Congressional review process. Accordingly, the project 

manager ensures l.llat it is filed in a timely manner, usually on the same day as a final rule 

is published in the Federal Register. 

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• Three to four business days after delivery of the report, the project manager checks 

www.thomas.loc.gov to see if it has been officially received as reported in the 

Congressional Record for both the House and the Senate. If not, consult with LRA 

managers to determine appropriate follow-up. 

• See Appendix III for specific procedures for filing this Report, and the LRA g:1 drive at 

g:\OCC Rulemaking Procedures for sample documents and forms. 

10.' Examiner View/OCC Supervisory Guidance Update 

If the final rule amends an existing, or creates a new, possible violation of law, the project 

manager must provide the cite and a brief description of the revised/new violation to LRA's 

Examiner View (EV) Coordinator. The EV Coordinator will provide this new information to EV 

staff so that they may appropriately update EV. 

• This information should be provided to the LRA EV Coordinator prior to the effective 

date of the new/revised violation. 

In addition, the project manager must notify appropriate policy and/or supervisory staff of the 

final rule for any necessary revisions to ecc supervisory guidance. In most cases, this staff will 

be a member of the rulemaking working group. 

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PRACTICE TIPS 

Docket Management - Pu blic Comments 

Once the comment period has begun, the Project Attorney (or designee) must confirm 

that Regulations.Gov contains the rulemaking docket and is uploading comment letters to 

the correct docket. 

The project manager is responsible for reviewing the public comment process for the 

project docket to ensure public comments are accurately posted to O:\FR COMMENTS 

by Communications staff and to www.regulations.gov by LRA staff. After the close of . 

the comment period, the project manager must compare both of these comment 

repositories for consistency and ensure that comments have been processed appropriately. 

• Electronic copies of comments e-mailed to regs.comments@occ.treas.gov are directed to 

LRA.COMMENTPROCESSlNG(alocc.treas.gov. The project manager must review or 

request that support staff or a regulatory specialist review the 

LRA.COMMENTPROCESSlNG@occ.treas.gov mailbox to ensure that there is not a 

backlog of e-mailed comments that have not been processed according to Appendix II: 

Comment Management Instructions. 

• The project manager must ensure electronic copies of comments that are sent directly to 

www.regulations.gov are processed and provided to Communications as specified in 

Appendix rI: Comment Management Instructions. 

• The Communications Division scans and e-mails to LRA SUppOit staff public comments 

that are faxed or otherwise received by OCC in paper format. These comments are 

subsequently processed by LRA support staff or a regulatory specialist as specified in 

Appendix II: Comment Management Instructions. 

• For a paper comment received directly by LRA, the project manager will ensure that the 

paper comment is scanned and uploaded to www.regulations.gov and that the paper 

comment is sent via interoffice mail to the Communications Division. 

• LRA support staff will identify likely form letter public comments and consult with the 

project manager regarding where these comments should reside ~ network drive or email folder). The project manager is responsible for managing the identification of 

duplicate comment letters, using specialized software ifnecessary/o and consulting with 

management regarding resources necessary for reviewing customized form letters ("near 

duplicates" form letters). These comments are subsequently processed by LRA support 

staff or a regulatory specialist following Appendix II: Comment Management 

Instructions. 

• The project manager will consult with LRA management regarding public comments that 

are received in non-written fOim (e.g., audio, video, physical objects). 

2D LRA is currently using DiscoverText software, which is available at www.disCDvertextcom. 

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Preparing and distributing the Gold Border package 

• The project manager should insert the tracking number on the Gold Border cover sheet, 

with the initial designation "GB." Contact the Comptroller's Office, x4880, for the 

nwnber. This number differs from the number provided for the NPRM. 

The project manager should prepare a redlined version of the final rule, showing changes 

made to the NPRM. 

REFERENCES 

o See REFERENCES section of Chapter II. 

o For the procedural steps required to file the report to Congress pursuant to the 

Congressional Review Act, 5 U.S.C. § 804, et seq., see Appendix III, and the 

Congressional Review Act memorandum on the LRA g:\ drive at g:\OCC Rulemaking 

Procedures. 

• Sample documents including sample final rules, comment summaries, economic 

analyses, and FRFAs are available on the g:\ drive at g:\OCC Rulemaking Procedures. 

o Templates for Red and Gold Borders are available in the "OCC Forms" section in the 

OCC's Word application. The project manager should consult with LRA staff for 

examples of recent final rules that could serve as a template. 

• For effective date requirements, see § 302 of the Riegle Community Development and 

Regulatory Improvement Act of 1994, P.L. 103-325, 12 U.S.C. § 4802. 

For guidance on the Congressional Review Act, see Presidential Memorandum 

"Guidance for Implementing the Congressional Review Act", March 30, 1999 available 

on the LRA g:\ drive at g:\OCC Rulemaking Procedures. 

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CHAPTER IV - CLOSING THE RULEMAKING PROJECT: 

DOCUMENTATION AND RECORDKEEPING 

The project manager is responsible for ensuring that a rulemaking project is closed in an orderly 

fashion and that the OCC's records reflect compliance with rulemaking procedures. LRA 

maintains a rulemaking file for each OCC rulemaking that contains significant documents in the 

rulemaking. Inclusion of a document in the rulemaking file does not determine whether it may, 

or must, be made public or be produced in response to a request under the Freedom of 

Information Act, a demand made during discovery in a litigated case, or other demand for 

information of the OCC. Such determinations are made on a case-specific basis in consultation 

with the Litigation Division, the Administrative and Internal Law Division, or the 

Communications Division, as appropriate. 

PROCEDURES 

1. Complete the Rulemaking Checklist 

A rulemaking checklist is maintained for each rulemaking. The checklist contains the key steps 

in the rulemaking process. The project manager indicates on the checklist the date on which 

each step is completed. At the conclusion of a rulemaking project, the project manager transmits 

the checklist to the Regulatory Specialist for inclusion in the rulemaking file. The checklist is 

maintained in the rulemaking file. ' 

2. Complete the Rulemaking File 

The Regulatory Specialist is responsible for maintaining and keeping the rulemaking file for 

each rulemaking. Upon completion of the rulemaking, the project manager works with the 

Regulatory Specialist to ensure that the key rulemaking documents are included in the file. Once 

the rulemaking file is complete, the Regulatory Specialist uploads the file to CCORe. 

The rulemaking file contains the following documents: 

• Any project initiation memorandum; 

• Any issues memorandum; 

• Memoranda submitted to PAD requesting economic analysis of the proposed and final 

rules, and memoranda received from PAD containing such analysis; 

• If separately prepared, any regulatory impact analysis, initial or final regulatory 

flexibility analysis, or similar analysis conducted pursuant to a requirement in a statute or 

executive order; 

• The Gold Border Reviewers' Memorandum, CQver sheet, and the Gold Border draft of the 

proposed and final rules; 

• The Red Border Memorandum, cover sheet, and the Red Border draft of the proposed and. 

final rnles; 

The proposed and final rules as submitted to the Federal Register; 

• Any correspondence to or from OMB regarding the proposed or final rule, including emails; 

• Any cOlTespondence, other than a comment letter, to or from any other Federal agency, 

State or local government official, or associations or representatives of State or local 

government officials; 

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• The proposed and final rules as published in the Federal Register; 

• The report to Congress and delivery receipts (for final rules only); 

• A list of public comments received during the rulemaking; 

• Any c,omment summaries prepared in connection with the rulemaking; 

• Any public comments filed by OMB under the PRA regarding collections of information 

contained in the rule (the Regulatory Specialist maintains a separate file for the PRA 

filing documents); 

• The press release, if any; 

• The OCC Bulletin; and 

• The rulemaking checklist; 

3. File Completion Form 

Once the rulemaking file is complete, the Regulatory Specialist completes and signs the 

Regulatory Specialist File Completion Form, in which he or she indicates that he or she has 

reviewed the rulemaking checklist and all relevant checklist items have been completed and that 

the agency rulemaking file is complete. See Appendix IV or the LRA g:\ drive at g:\OCC 

Rulemaking Procedures. 

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Appendix I 

Policv Analysis Division, Economics Department 

Standard procedures for economic analysis of proposed ruJei 

(Revised 10/18111) 

1. Legislative and Regulatory Activities (LRA) project attorney contacts the Policy 

Analysis Division (PAD) Director to discuss the rule andlor provide PAD with 

documentatiOll (e.g., an issues memorandum for GCC discretionary rulemakings) and 

request assignment of PAD staff to the project. 

2. PAD Director2 reviews the LRA request and assigns the task to a PAD staff member. 

The extent of PAD staff involvement in the rulemaking process after the PAD Director 

assigns staff to the project -- but before the LRA project attorney provides a formal 

request for analysis -- will vary based on, among other things, the circumstances 

prompting the rulemaking. 

3. LRA project attorney sends assigned PAD staff and the PAD Director a draft rule and a 

memo requesting economic analysis that, among other things, identifies mandates in the 

rule. 

4. Ifnecessary, PAD staff requests copies of background or supporting material that LRA 

may have collected as part of the rule-writing process from the LRA project attorney.3 

5. PAD staff prepares a preliminary impact assessment that:4 

a. Describes the rule and its requirements; 

b. Identifies the institutions that will be affected by the rule; 

c. Estimates the likely impact of the rule; and, 

d. Assesses the likely impact on small institutions in accordance with the 

requirements of the Regulatory Flexibility Act (RFA). 

6. PAD staff determines if the estimated costs of the rule will: 

a. Result in expenditures of $1 00 million or more annually by state, local, and tribal 

governments, or by the private sector as required by the Unfunded Mandates 

RefOlm Act of 1995 (UMRA); 5 and, 

b. Have a significant economic impact on a substantial number of small entities 

(pursuant to the RF A). 

7. PAD staff then completes the following tasks as necessary: 

I The procedures in this document apply to requests for analysis that the PAD Director receives after September 15, 

2011. 

2 We use "PAD Direclor" to refer to the director or the director's designee. 

l lfthe rulemaking began with an advance noticed of proposed rulemaking (ANPR), LRA should provide PAD staff 

with any comment summaries prepared by staff in LRA or at another agency (provided the other agency sends LRA 

staff a copy of the summary). 

• For guidance on preparing an analysis of a significant rule, see step 8 and OMB Circular A-4. 

, In tbese procedures, we refer to rules with cost estimates at or above the criteria described in this step as 

"significant" and rules wilh estimated costs below the criteria as "not significant." 

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i. If 6(a) and 6(b) are false, then skip to step 10. 

a. If 6(a) is true, then complete steps 8 and 10. 

b. If 6(a) and (b) are true, then complete steps 8 through 10. 

c. If 6(b) is true, then complete steps 9 and 10. 

8 .. If the PAD staff preliminary analysis concludes that the impact of the rule is significant 

(i.e., above the UMRA threshold) then: 

a. PAD staff prepares a full cost-benefit analysis that, at a minimum, includes the 

elements in a cost assessment of a proposed rule that is not significant and adds 

the following elements: 

i. A statement of the need for the proposed regulatory action (for guidance, 

see Circular A-4, pages 1-6), 

Ii. A qualitative or quantitative assessment of the benefits of the proposed 

rule (for suggestions regarding methods for treating non-monetized 

benefits and costs, see Circular A-4 pages 26-28), 

iii. A comparison to the baseline, which is the state of the world in the 

absence of the proposed rule, and 

iv. A comparison to one or more plausible alternatives to the proposed rule 

(for suggested alternative regulatory approaches, see Circular A-4, pages 

7_9).6 

b. PAD staff sends the draft to the PAD director for comment and upon approval 

from PAD director, 

c. PAD staff circulates the draft assessment memo for comments and suggestions to 

the LRA project attorney and the subject matter expert(s).7 

9. Ifthe preliminary assessment is that the rule will have a significant economic impact on 

a substantial number of small entities, PAD staffwill: 

a. Consult with the project attorney if PAD staff is not already aware of alternatives 

for small entities evaluated by LRA staff (before the request for analysis was sent 

to PAD); and, 

b. Prepare analysis necessary to comply with the RF A; or, 

c. If additional information is required, prepare questions that LRA may include ill 

the proposed rule to solicit input for analysis of the impact of the final rule on 

small entities.8 

• Ifpossible, when 11Ilemakings are required by statute, the baseline or one of the alternatives should include the 

statutory requirements but exclude mandates in the rule that are not required by statute. Aualysis of the statutory 

requirements will be useful when preparing analysis of the final rule to comply with the Congressional Review Act 

~CRA). 

The subject matter expert is staff or management in the acc department most closely related to the 

implementation of the rule. In some cases, the PAD Director may opt to review tbe draft assessment memo before 

PAD staff circulates it to staff in other divisions. 

8 For guidance on the RF A, PAD staff may refer to the Small Business Administrations, Office of Advocacy's 

Guide for Government Agencies. 

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10. After incorporating comments (if any) PAD staffsends a draft final memo to the PAD 

Director, and the PAD Director either: 

a. Approves and distributes the memo; 9 or, 

b. Directs PAD staff to revise the memo and then resubmit it to the Director for 

approval and distribution. 

11. As circumstances warrant, LRA (either the project attorney or a manager) will inform 

PAD staff and the PAD Director of significant cbanges made to the draft rule that PAD 

used to prepare the analysis memorandum and shall request an updated and revised 

memorandum. After consulting with the PAD Director, PAD staff will prepare an 

updated analysis memorandum for the Director's review and approval. 

12. LRA will ensure that this updated analysis memorandum, in a suitable form, 

adequately reviews the costs associated with the revisions to the proposed rule and 

contains the economic analysis necessary to support the required determinations under 

the RF A and UMRA. 

Standard procedures for economic analysis of final rules 

1. LRA project attorney contacts the PAD Director (and staff that drafted the analysis memo 

for the NPRM) and provides documentation (e.g., a comment summary andlor the draft 

final rule).lO 

2. See procedures for proposed rules. Repeat steps 3 through 5 for< the draft final rule and 

incorporate analysis required by the Congressional Review Act (CRA) and relevant 

information (if any) obtained from the public andlor regulated entities. 

a. If the draft final rule does not exceed any ofthe thresholds listed in the CRA or 

the UMRA, and it does not have a significant economic impact on a substantial 

number of small entities, repeat step 10. 

b. If the draft final rule does not exceed any of the thresholds listed in the CRA or 

the UMRA and it does have a significant economic impact on a substantial 

number of small entities, repeat steps 9 and 10. 

c. Otherwise, repeat steps 8 through 10 incorporating relevant information obtained 

from the public andlor regulated entities. 

3. If necessary, repeat step 11. 

• The PAD Director sends ilie analysis memo is to the LRA project attorney witll a copy to (a) at least one LRA 

manager and (b) LRA staff responsible for preparing estimates required by the Paperwork Reduction Act (PRA). 

)0 Ifnecessory, the PAD director will inform the project attorney ifthere are any changes to PAD stilffassigned to 

the project. 

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Appendix II 

Comment Management Instructions 

1. Check LRA.COMMENTPROCESSING@occ.treas.gov inbox for new comments. 

2. Delete spam. 

3. Highlight all new comments. 

4. Click ADOBE PDF in toolbar. 

5. Click "Convert Selected Messages." 

6. Click "Create New PDF." 

7. Save File in any location (it can be deleted at the end of this process). 

8. In PDF file, highlight one comment letter at a time, go to File->Save Files from Portfolio. 

9. Save files in G:\Comment Letters\DOCKET\. 

10. Delete file from PDF portfolio. 

11. Repeat steps 8-10 until all comment letters have been processed. 

a. Ifit is obvious that certain comment letters are form letters, then mUltiple 

comments can be highlighted and saved to G:\Comment 

Letters\DOCKET\NAME OF FORM LEITER. 

b. If the email is saved to a form letter folder, make certain that the files are 

numbered. 

12. Mark email as read and/or delete email. 

13. Upload comments to FDMS (only upload one example of each identical duplicate form 

letter and list a count of the fmm letters in the title of each fOlm comment letter type in 

the FDMS entry). 

a. Instructions for one document at a time: 

i. On FDMS inbox page (the default start page) click on the appropriate 

docket. 

ii. Click on "Add Document" in top right corner of the page. 

iii. Fill in all the required information and submitter n:une, organization, city, 

and state if possible. 

iv. Upload comment. 

v. Post comments that do not include confidential business information, 

customer account information, or other sensitive il1folmation. Refer 

comments not posted to the project manager for review and direction 011 

whether to post. 

b. Instructions for multiple documents: 

i. On FDMS inbox page (the default start page) locate appropriate docket 

and bulk import image. It is the image at the far right of an arrow pointing 

to a file folder. 

ii. Add the saved comment letters. 

iii. Fill out comment names. 

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iv. On FDMS inbox page (the default start page) click on the appropriate 

docket. 

v. Go through comments and fill in all the required information and 

submitter name, organization, city, and state, if possible. 

vi. Only post comments that do not include confidential business information, 

customer account information, or other sensitive information. Refer 

comments containing such information to the project manager for review 

and direction on whether to post. 

c.· Move files to G:\Comment Letters\DOCKE1iProcessed. 

14. Check FDMS website for new comments: 

a. On in box page (the default start page) change search parameters to "Documents" 

"assigned to me" "created" Within the past "6" "days" wiili a status of 

''Nonpublic.'' 

i. If you have not checked comments within that time frame, then expand to 

ilie necessary number of days, 

b. Check all documents to be exported. 

c. Click export. 

d. Click ~'Download Export File." 

e. Open file with "WinZip." 

f. Extract files to G:\Comment Letters\DOCKE1iProcessed. 

g. Rename file to reflect the submitter. 

h. Email files to Communications staff. 

Only post comments th'at do not include confidential business information, customer account 

information, or other sensitive information. Refer comments containing such information to the 

project manager for review 

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Appendix III 

Procedures for Preparing a Report to Congress 

1. Fill out the Report to Congress form, save, and name the file REPOR TIOCONGRBSS 

[RIN number].pdf(the RIN number can be found at the top of the published Federal 

Register document). The LRA Regulatory Specialist is the submitter of the report-- you 

need to put this on the form if it's not there already. 

2. Prepare a short summary of the final rule in MS Word. The summary of the rule from the 

Federal Register document may be used for this purpose. Save and name this file 

REPORTTOCONGRBSSSUMM [RIN number].doc. 

3. Prepare the attached transmittal letter for the Report to Congress and name the file 

RBPORTIOCONGRESSTRANSMITIAL [RIN numberJ.doc. The transmittal letter 

will go out under the LRA Regulatory Specialist's name. 

4. E-mail the three files from steps 1,2, and 3 above to the LRA Regulatory Specialist, who 

will review the Report to Congress form, summary, and the transmittal letter. He/she will 

work with the project manager to make any necessary changes. 

5, When all is in order, the LRA Regulatory Specialist will sign three originals of the 

Report to Congress and 3 transmittal letters (one original for the President of the Senate, 

one original for the Speaker of the House, and one original for GAO). 

6. The LRA Regulatory Specialist will return the signed originals to the' project manager. 

7. The project manager must fill out the attached Receipt for Submission of a Federal Rule 

Under the Congressional Review Act. 

8. Assemble the Report to Congress package in the following order from top to bottom: 

receipt for submission, transmittal letter, original signed Report to Congress Form, 

summary of rule, and a copy of the final rule as published in the Federal Register. 

9. Make a copy of each assembled package for the rulemaking file and provide the copies to 

the LRA Regulatory Specialist. 

10. The project manager will give the LRA Regulatory Specialist the original package 

addressed to GAO. The Regulatory Specialist will scan and e-mail the report to GAO. 

11. The project manager must deliver the Report to Congress in person to the Speaker'S 

Office and the President ofthe Senate's office at the Capitol and receive a signed 

receipt with the date, time, signature, and printed name of the receiving party at the 

respective offices. 

12. Three to 4 business days after you have delivered the Report to Congress, start checking 

to see if it has been 'officially received as reported in the Congressional Record online for 

both the HOUSE and the SENATE using a term and date-range search at this link: -

42 
237 

http://thomas.loc.govlhome/rl08query.htmI(Note: this link is only going to be good for 

the 108th Congress, when a new Congress is installed, the link will change. Check 

http://thomas.loc.gov!home/thomas.html for updated links.) Please note that there can be 

a significant delay between delivery of the documents and publication in the 

Congressional Record. In some cases, it may be necessary to call the Committees or the 

House and Senate clerks to confirm official receipt. 

43 
238 

Appendix IV 

Regulatory Specialist File Completion Form. 

Comptroller of the Currency 

Administrator of National Banks 

Washington, DC 20219 

T1TLEOFRULEMAKlNG: ___________________ _ 

CFRPARTS: __________________ _ RlN: _____ _ 

PIlBLICATlON DATE OF FINAL RULE: ________________ _ 

I HAVE REVIEWED THAT ATTACHED RULEMAKING CHECKLIST FOR TIUS RULE MAKING. ALL 

RELEVANT CHECKLIST ACTIONS HAVE BEEN COMPLETED AND THE AGENCY RULEMAKlNG FILE 

IS COMPLETE. 

______________ ISIGNATURE) 

[INSERT NAME) 

LRA REGULATORY SPECIALIST 

Date: __________ _ 

44 
239 

Appendix V 

LRA RULEMAKING CHECKLIST 

TrrLEOFRULE~G: __________________________ ~ __ 

CFRPARTS: __________________ __ 

RlN: ______________ _ 

PROJECT~ANAGER: ________________________ __ 

Working Group Members: 

45 
240 

1. Project Initiation 

Policy Analysis Division (PAD) contacted 

II. Proposed Rule (NPRM) 

Proposed rule drafted and circulated to working 

group for review 

Gold border memo and cover sheet prepared 

Gold border package signed and approved for 

distribution by Chief Counsel, and Executive 

. Committee CQMSpOnSOTt jf applicable 

o Gold border number: 

package 

o Comments due on 

o Comments receivedfrom all reviewers 

o Electronic version of Gold Border package sent 

to Comptroller's Office 

Paperwork Reduction 

o Preamble language 

CI Documentution of our analysis (information 

about how decisions were reached, who was 

consulted, and their views) included in file 

Reg Flex Act 

o Ifno! exempt, certification of no significant 

impact drafted OR 

D SBA notified, and Initial Reg Flex analysis 

(lRF A) sent to SBA for review 

IJ Preamble language drafted 

rJ Documentation of our analysis included in 

file 

46 
241 

o 

o 

version ofNPRM prepared and 

review 

Red border memo and cover sheet prepared 

PAD via memo, to economic 

analysis if substantive cbanges made to NPRM 

based On Gold Border comment, 

o Draft press release andlor Q&As, if 

necessary 

Red Border package approved by Chief 

and Executive Committee co-sponsor, if applicable 

sent to 

signature 

SBA', comments on IRFA pursuant to Reg FIC){ 

Act, received and incorporated into NPRM befure 

publication, if appliceble 

Comptroller's signature obtained 

PRA clearance p.,kage submitted to OMB, if 

applicable, on or before date published ill Federal 

Register 

approval to send to Federal 

Register ohtaille<l 

Register 

Document published in Federal Register 

Comment period ends on __ _ 

of»';'PRM 

OCC interested parties 

OCC Bulletin prepared and sent to Communications 

for review 

o Draft distributed on green border 

OCC Bulletin signed by Chief Couns.l, and 

Executive Committee co-sponsor, if applicable 

47 
242 

Electronic copy Register document 

final OCC Bulletin ond hard copy of Green Border 

COVer sheet (with reviewer.;' initials} ond Bulletin 

signed by Chief Counsel and Executive Committee 

eo-sponsor, if applicable, sent to CommuniClltions 

Final acc Bulletin distributed by CommuniClltions 

Federal Register version ofNPRM proofread and 

Federal Register is notified of any errors 

'. checked to confirm rulemaking 

docket exists and is uploading comment letters to 

the correct docket. 

Public comments reviewed and comment summary 

prepared 

!J Comment summary sent to Chie(Co.unsel~ 

Executive Committee co~sponsor} if 

applicable, and working group for review 

Gold Border package signed and approved for 

distribution by Chief Counsel, and Executive 

Committee. co-sponsor, if applicable 

D Gold Border number: 

package distributed to reviewers 

IJ Comments due on 

[J Comments receivedfr;;m all G;;ld Border 

Reviewers 

Comptroller's Office 

OMBPRA 

applicable 

sent to 

received~ jf 

Memo to requesting analysis of 

final rule pu"uant to Reg Flex Act, Unfunded 

Mandates Reform Act and Congressional Review 

Act Business Regulatory Enforcement 

and sent 

48 
243 

re<:eived from PAD containing economic 

analysis pursuant to the Reg Flex Act, Unfunded 

Mandates Act, and CRAISBREFA 

PRA 

Certification 

drafted OR 

in 

IJ Final Reg Flex analysis (FRFA) sent to 

SBA for review 

IJ Preamble language updated, ifnecessmy 

Red Border memo and cover sheet prepared 

PAD contacte~ via memo, to review economic 

analysis if substantive changes made to final rule 

bllSed on Gold Border comments 

Public Relations notified of 

0" Draft press release andlor Q&As, if 

hecessary 

SBA's comments on FRFA pursuant to Reg Flex 

Act received and incorporated into final rule before 

publication, if applicBble 

Red Border package sent to Comptroller for 

signature 

Comptroller's signature obtained 

PRA clearance package to OMB, if 

applicable, on or before date rule published in 

Federal Register 

OCC Bulletin prepared and sent to Communications 

for review 

IJ Draft distributed on green border 

49 
244 

UV'" yuu • .,uvu in the FederaJ Register on_ 1:1 Effective Date __ _ 

Report to Congress prepared and 

project manager or Regulatory Specialist to: 

1:1 Senate Banking Committee via 

Appointments Desk (delivery receipt 

obtained and placed in official rulemaking 

file) 

IJ House Financial Services Committee via 

the Speaker's Office (delivery receipt 

obtained and placed in official rulemaking 

file) 

Q GAO (fax receipt obtained and placed in 

official rulemaking file) 

Federal Register version 

interested parties 

ace Bulletin signed by Chief~u,,,,><,,,',,u 

Executive Committee co-sponsor, ifappJicabJe 

Electronic copy of Federal Register document and 

final oce Bulletin and hard copy of Green Border 

cover sheet (with reviewers' initials) and Bulletin 

signed by Chief Counsel and Executive Committee 

",,-sponSOT, if applicable, sent to Communications 

Federal Register notified of any errors 

Small bank compliance guide prepared pursuant to 

Reg Flex Act, jf necessary 

50 
245 

IV. Project Closing 

• Rulemaking checklist provided 10 Regulatol)' 

Specialist I 

0 Regulatory Specialist signs-off on 

completeness check 

· Lotus Notes entry closed 

· Official rulem.king file organized and closed 

· Regulatory Specialist uploads rulemaking file to 

CCORe. 

51 
246 

() 

Comptroller of the Currency 

Administrator of National Banks 

Washington, DC 20219 

November 29, 201 I 

Mr. Cass SUl1stein 

Administrator 

Office oflnfonnation and Regulatory Affairs 

Office of Management and Budget 

725 17th Street, NW 

Washington, DC 20503 

near Mr. Sunstein: 

I BIn writing to follow up on our conversation about the 'ongoing efforts oflhe Office of the 

Comptroller of the Currency (ace) to increase regulatory effectiveness and reduce regulatory 

burden, consistent with the goals of Executive O:der 13563. This letter highlights key aspects of 

our work in this regard. Most importantly, the OCC currently is revieWing alJ of its regulations 

for the purpose of integrating the rules governing Federal savings associations into the rules for 

national banks. As pBIl ofthis comprehensive review program, we plan to seek public comment 

about ways to improve each of our rules to promote efficiency and reduce burden as we prepare 

the final, integrated rulebook. In addition, although Executive Order 13563 does not appJy to the 

OCC by its ten118, O'.lr agency is subject to a statutory requirement unique to the Federal banking 

agencies, pursuant to the Economic Growth and RegulataD' Paperwork Redtlction Act of 1996 

(EGRPRA)l that imposes regulation review requirements similar in scope and purpose to those 

in the Executive Order. We completed the last review over a period that ended December 2006, 

and, as the statute requires, we will complete the next EGRPRA review not later than 2016. 

The oee recognizes tbe importance ofreviewing its r~Jes to reduce unnecessary regulatory 

burden and is addressing that goal on a number of fronts. For example, Title III oftlle DoddFrank Wall Street Refonn .nd Consumer Protection Ace (Dodd-Frank Act) transfen-ed to tbe 

oec all the fUllction; oftllc Ofnce of Thrift Supervision (OTS) and the Director of the OTS 

related to Federal saving associations, as well as OTS 11lJemaking autllolity related to both stale 

and Federal savings associations. In connection with this transfer, the oee has undertaken a 

comprehensive review of both ace and OTS regulations to malee them more effective by 

combining them where possible, reducing duplication, and eliminating unnecessary 

requirenlCJ.lts. 

, Pub. L. No. 104-208, S2222, lJO Stet. 3009, 3009-414 (Sep!. 30, J996), co dined al12 U.S.c. § 3311. 'Pub. L. No. J Jl-203 (July 21, 2010). 
247 

On May 26,2011, in a Federal Register publication, we proposed revisions to oee and OTS 

rules that relate to internal agency functions and operations and that implement certain 

provisions of the Dodd-Frank Act3 As the proposal slated, this issuance was part oHhe oee's 

review of national bank and savings association regulations "to detemline what changes [were] 

needed to facilitate a smooth regulatory transition.'04 The fmal rule was published on July 21, 

2011,5 the date on which OTS functions offICially transferred 10 the oee. 

Shortly thereafter, in order to facilitate the oee's administration and enforcement of the OTS 

rules and to make appropriate changes to these rules to reflect the oee's supervision of Federal 

savings associations, the oee republished as its own the fOI1l1er OTS regulations with 

nomenclature and other minor changes. 6 Recognizing this republication as the next, but not the 

fmal, step in the oee's integration process, the republication notice slated 1hat, going forward: 

[T]he oee will consider more comprehensive substantive amendments, as 

necessary, to the RepUblished Regulations. For example, we may propose to 

repeal or combine provisions in cases where oee and former OTS rules are 

substantively identical or substantially overlap. In addition, we may propose to 

repeal or modify oee or former OTS rules where differences in regulatory 

approach are not required by statute or warranted by features unique to either the 

national bank or Federal savings association charter. This substantive review also 

will provide an opportunity for the oee to ask for co=ents suggesting revisions 

to the rules for both national banks and Federal savings associations that would 

remove provisions that are "outmoded, ineffective, insufficient, or excessivel1 

burdensome," consistent with the goals outlined in [Executive Order 13563). 

Consistent with this statement, oee staff is currently undertaking a substantive review of aU 

national bank and Federal savings association regulations in an effort to consolidate, where 

statutorily penIDssible and consistent with safety and soundness, two distinct sets of regulations 

(tilOse of national banks and those of savings associations) into a single, streamlined set. In this 

effort, the oee is also specifically seeking to identify regulations that are "ounnoded, 

ineffective, insufficient, or excessively burdensome." We ,';.;11 then publish, as one or more 

Notices of Proposed Rulemaking, revised rules on which industry and the public can comment, 

After carefuJ coruideration of these co=ents, the oee will issue a fmaJ rule. 

As noted above, tile oee also is subject to EGRPRA, which requires the Federal Financial 

lnstitutiom Examination Council (FFIEn and each Federal hankinl! agency to review it., 

regulations every 10 years. The purpose ofthls review is to identify outdated or othen,,>ise 

unnecessary regulatory requirements. This joint exercise provides the banking ageneies v,oitb the 

opportunity to consider how to streamline the regulatory process for the financial institutions we 

regulate. 

, 76 Fed. Reg. 3055? (May 26, 20J 1). 

, M., at 30558. 

; 76 Fed. Reg. 43549 (July 2J, 20J 1). 

• 76 Fed. Reg. 48950 (Aug. 9,201 J). 

, M., at 4895 J. 

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248 

The OCC /ind the other Federal banking agencies began their most recent EGRl'RA review in 

June 2003. Over a three-year period ending in December 2006, the agencies received public 

comments on over 130 regulations, carefully analyzed these conunents, and proposed ch,ll1ges to 

their regulations, alJ with the goal of eliminating burden where possible. A nnal report was 

submitted 10 Congress on July 31,2007. The neJ,.1 EGRPRA review is due 10 be completed in 

2016. At the conclusion of !he EGRPRA review, the final report will be submitted to Congress 

and made available to the public. 

The OCC encourages and considers public comments concerning the impact of tile rules we 

issue. We undertake analyses of costs a.'1d benefits consistent with the requirements of several 

statu1es. Under the Paperwork Reduction Act,S tl1e acc assesses the anticipated cost of any 

paperwork associated witl1 its regulatory provisions. Under the Congressional Review Act/ tl1e 

acc provides to Congress and others any cost-benefit or other impact analyses prepared as part 

of a [mal rulemaking. Under the Regulatory Flexibility Act,lO the acc conducts an analysis of 

any rule likely to have a significant economic impact on a substantial number of small entities. 

This includes, of course, smail commlinity banks. 

In addition, the acc's ongoing work with the other Federal financial regulatory agencies helps 

avoid duplication and promotes consistency in regulatory and supervisory approaches. As you 

know, the OCC participates in the Financial Stability Oversight Council and the FFIEC. In 

addition to these principal-level contacts, acc staff - ranging from senior deputy comptrollers 

to staff members participating in interagency working groups - are in frequent contact with their 

counterparts a1 the other banking agencies and, increasingly, with the other financial sector 

regulators with whom we share implementation responsibilities for the Dodd-Frank Act. These 

less formal interactions provide multiple chlllmeis for coordinating efforts to facilitate consistent 

and comparable regulation, as appropriate in light of the structure and activities of the 

institutions under our respective jurisdictions. 

As another way of gaining insight into how our regulations and other actions affect the Federal 

savings associations that were transferred to our supervision effective in July 2011, Ole acc is 

carrying on the work of two advisory conunittees that the aTS had administered, the Mutual 

Savings Association Advisory Committee (MSAAC) and the Minority Depository Institutions 

Advisory Committee (MDIAC). With respect to the MSAAC, the ace believes it is necessary 

and in the public interest for it to study tile needs of and challenges facing mutual savings 

associations. With rt>specll0 th(' MorAe. the ac(' seeks tD preserve the present number Df 

minority depository institutions a.'1d to encourage the creation of new ones. J J 

'44 U.S.C. § 3501 ef seq. 

95 US.C. § SOl ef seq. 

)0 5 U.S.C. § 601 sf seq. 

II Willi respeC! to both committees, 111e Dec is currently seeking·nominations for persons to serve as committee 

members. Nolices seeking nominations were publisbed in the Federal Register. See 76 Fed. Reg. 7] 437 (NOY. 17. 

20) J) and 76 Fed. Reg. 71438 (Nov. 17,2011). 

-3-
249 

Consistent with the Administrative Procedure Act (APA),12 the OCC strongly encourages the 

public to participate in the rulemaking process. The OCC generally provides the public with at 

least a 60 day conm1ent period for each proposed rulemaking and details numerous channels 

through which comments can be submitted. The acc solicits comments on the regulatory 

burden associated with a proposal and encourages feedback on how any burden could be 

reduced. The agency values tIils feedback and carefully considers all the comments we receive 

as we formulate a final rule. 

Finally, apart from any statutorily mandated regulatory review, the acc has a longstanding and 

demonstrated commitment to regulation review. For example, during the mid-1990s (and prior 

to the enactment ofEGRPRA), the acc engaged in a three-year, top-to-bottom review of all of 

its regulations in a successful effort to streamline its regulatory process.13 Consistent with this 

agency culture, the acc views the integration of the national bank and savings association rules 

discussed above, along with all of its other interactions with the public, industry, and other 

agencies, as opportunities to inform its decisions to achieve rules that are both effective and 

efficient 

We appreciate the opportunity to share with you our on-going regulatory review efforts. Please 

do not hesitate to contact me if you have any questions. 

Sincerely, 

Acting Comptroller of the Currency 

12 5 U.S.C. § 551 of seq. . 

l' Since this time, tile overwhelming majority of the regulations that tlle oec has issued have been promulgated in 

respDDse to an explicit congressional mandate. 10 these situations, tbe agency's discretion is limited by the 

parameters that Congress sets forth. 

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250 

BOARO OF GOVERNORS 

OF THE 

FEOERAL RESERVE SYSTEM 

The Honorable Tim Johnson 

Chairman 

Committee on Banking, Housing, 

and Urban Affairs 

United Statcs Senate 

Washington, D.C. 20510 

Dcar Mr. Chairman: 

WASHINGTON. O. C. 20551 

February 9, 2012 

BEN 5, B~RNANI(E 

CHAIRMAN 

This is in reply to your letter of November 9, 2011, regarding the importance of 

conducting an evaluation of the costs and benefits of rulemakings conducted by the 

Federal banking regulators under the Dodd-Frank Wall Street Reform and Consumer 

Protection Act ("Dodd-Frank Act"). The attached responses provide detail about our 

efforts to assess the benefits and costs of rules. 

As your letter points out, Congress enacted the Dodd-Frank Act to address a 

number of deficiencies that contributed to the worst financial crisis in many years for the 

U.S. and to enhance protections for consumers, investors and taxpayers. It is critical that 

the agencies, including the Federal Reserve, implement this Act in a thoughtful manner 

that gives full effect to the Congrcssional intent behind the statute and does so in a 

manner that responsibly balances the costs and benefits of our implementation efforts. 

In this spirit, let me assure you that the Federal Reserve takes quite seriously the 

importance of evaluating the burdens imposed by our efforts to issue rules implementing 

the Dodd-frank Act and adopting an approach that balances costs and burdens within the 

requirements of each statutory mandate. We tlo this in a variety of ways, and at several 

different stages in the regulatory process. 

For example, betore the Federal Reserve devclops a regulatory proposal, we often 

collect information through surveys and meetings directly from the parties that we expect 

will be affected by the rulemaking. This helps us to become informed about the benefits 

and costs of the proposed rule and craft a proposal that is both effective and minimizes 

regulatory burden. During the rulemaking process, we also specifically seek comment 

from the public on the benefits and costs of our proposed approach as well as on a variety 

of alternative approaches to the proposal. In adopting the final rule, we aim for a 

regulatory alternative that faithfully reflects the statutory provisions and the intent of 

Congress while minimizing regulatory burden. We also provide an analysis of the costs 
251 

The Honorablc Tim Johnson 

Page Two 

to small organizations of our rulernaking consistent with the Regulatory Flexibility Act 

and compute the anticipated costs of paperwork consistent with the Paperwork Reduction 

Act. 

Measuring the impact of agency regulations on affected persons and the overall 

cconomy is very challenging, especially in the contcxt of the numerous related rules 

required by the Dodd-Frank Act to be issued during the same time period by a number of 

agencies. The Federal Reserve believes strongly that public comment can enlighten our 

regulatory actions and inform our implementation of our statutory responsibilities. 

Consequently, the Federal Reserve has long followed the practice of providing the public 

a minimum of 60 days to comment on all significant rulemaking proposals, with longer 

periods permitted for especially complex or significant proposals, such as our recent 

proposal on enhanced prudential standards. We also have extended the comment period 

in cases where we believe additional time hclps to promote the public's interest, such as 

in the casc of the Volcker Rule and risk retention proposals. Similarly, we also favor 

secking public comment on significant statements of regulatory guidance, and typically 

invite the public to comment on major statements of supervisory guidance, such as our 

guidance regarding incentive compensation. In addition, we make available to the public 

our examination manuals, supervisory letters, transaction approvals (and denials), and 

other matters of interest to the public related to implementation of our statutory 

responsibilities. 

We also consult regularly with our fellow bank regulatory agencies on matters 

that might affect their institutions as wcll as on matters of common interest whcre a 

single regulatory approach across banking organizations of different charters would 

reduce compliance burden and risk. We accomplish this in many ways. The Federal 

Reserve participates in the Federal Financial Institutions Examination Council and in the 

financial Stability Oversight Council, both of which facilitate interagency consultation 

and cooperation. Moreover, members of the Board as well as staff at senior levels have 

long established working associations with their peers at other agencies and have regular 

meetings to disclIss policies of common interest and applicability. These many avenues 

of consultation at mUltiple levels increase the coordination and consistency of regulation 

across a banking industry that has many regulators and charters. We have expanded 

these channels to include regular consultation with the SEC, CFTC. CFPB and other 

agencies as changes in the law have caused our spheres of regulatory responsibilities 

increasingly to overlap. 

The Federal Reserve also has for many years had a policy of conducting a zerobased review of each of its regulations on a periodic basis--typically every five years. 

The purpose of this review is to update each rule, reduce unnecessary burden. and 

streamline regulatory requirements based on our experience in implementing the rule and 

where permitted by thc authorizing statutory provisions that motivated the rule. 
252 

The Honorable Tim Johnson 

Page Three 

Through these steps, more fully explained in the attached responses, the Federal 

Reserve seeks to carry out our statutory duties in a manner that is both consistent with the 

legislation enacted by Congress and maximizes benefits and minimizes costs associated 

with our implementation efforts. 

Sincerely, 

Enclosure 
253 

Attachment 

1. Provide a detailed description of your agency's rulemaking process, including tbe 

variety of economic impact factors considered in your rulemaking. Please note to what 

degree you consider tbe benefits from your rulemaking, including providing certainty to 

the marketplace and preventing catastrophic costs from a financial crisis. Also describe 

any difficulties you may have in quantifying benefits and costs, as well as any challenges 

you may face in collecting the data neeessary to conduct economic analysis of your 

rulemaking. 

For every new regulation put forth by the Federal Reserve alone or jointly with other agencies, 

including those promulgated under the Dodd-Frank Act, it is the policy of the Federal Reserve to 

consider the various options available consistent with the statutory mandate being implemented; 

analyze the possible economic impact of implementing proposals to the extent pennitted by 

available data; evaluate the compliance, record-keeping, and reporting burdens; and recommend 

the best course of action consistent with the statutory mandate based on an evaluation of the 

alternatives. If the regulation concerns an area where considerable infonnation is available, a 

correspondingly more exhaustive regulatory analysis will be undertaken. For significant DoddFrank regulations, we assemble interdisciplinary teams, bringing together economists, 

supervisors, legal staff, and other specialists to help develop sensible poliey alternatives and to 

help avoid unintended consequences. During the proposal stage, we specifically seek comment 

from the public on the costs and benefits of our proposed approach through surveys and 

meetings, as well as on alternative approaches to our proposal. This helps lIS to become 

infonned about the benefits and costs of the proposed rule and craft a proposal that both is 

consistent with the Congressionally established mandate and minimizes regulatory burden. In 

adopting the final rule, we aim for a regulatory alternative that faithfully reflects the statutory 

provisions and the intent of Congress while minimizing regulatory burden. In addition, the 

Board is subject to two laws that require specific types of analysis--the Paperwork Reduction Act 

C"PRA") and the ReglIlatory Flexibility Act C"RF An). The PRA and RF A require evaluations of 

the rulemaking's paperwork burden and effect on small entities, respectively. The Federal 

Reserve includes a separate analysis under each of these laws in its rulemaking publications. 

Federal financial regulators face considerable challenges in quantifying all potential benefits and 

costs of a particular rule, such as the benefits from marketplace certainty or the prevention of a 

future financial crisis, especially in the context of the numerous related rules required by the 

Dodd-Frank Act to be issued during the same time period by a number of agencies. The GAO 

recently noted that the difficulty of reliably estimating the costs of reglIlations to the financial 

services industry and the nation has long been recognized, and the benefits of regulation 

generally are regarded as even more difticult to measure.' This task is further complicated by 

the need for the Federal Reserve to write rules that are often focused primarily on ensuring the 

safety and soundness of financial institutions. The benetlts of a safe and secure financial system 

are clear, but they are difficult to quantify. Like other agencies. the Federal Reserve must often 

rely on infonnation from regulated finns and from other affected parties for infonnation 

regarding potential costs and benefits of a rulemaking. These parties often cannot quantify costs 

'GAO Report GAO-12-151. p.19; See also p. 36. 
254 

-2-

or benefits and, even where that is possible, may not have the incentive to provide that 

information or may be concerned about providing that information, which may reveal 

confidential business practices, in a public rulemaking. 

2. Provide your agency's current and future plans to regularly review and, when 

appropriate, modify regulations to improve their effectiveness while reducing compliance 

burdens. Please include a description of actions your agency has taken, or plans to take, to 

streamline regulations; for example, the Consumer Financial Protection Bureau's "Know 

Before You Owe" elTort drastically simplifies mortgage and student loan disclosure 

requirements. Also note statutory impediments, if any, that prevent your agency from 

streamlining any duplicative or inefficient rules under your purview. 

The Federal Reserve has for many years had a policy of conducting a zero-based review of each 

of its regulations on a periodic basis--typically every five years. The purpose of this review is to 

update each rule, reduce unnecessary burden, and streamline regulatory requirements based on 

our experience in implementing the rule and where permitted by the authorizing statutory 

provisions that motivated the rule. In selecting regulations to be reviewed, we consider such 

factors as the length of time since the last evaluation of the regulation, our experience in 

administering the rule, the continued need for the rule, the type and number of complaints and 

suggestions received, the direct and indirect burdens imposed by the regulation, and the need to 

simplify or clarify the regulation and eliminate duplication. 

With respect to rules adopted as a result of the Dodd-Frank Act, the Federal Reserve will review 

the impact of Dodd-Frank Act regulations once they are completed and firms have had a 

reasonable opportunity to implement these provisions. As part of this review, we will consider 

ways to reduce burdens that appear Oller time in the Dodd-Frank rules. 

3. Provide details of how your agency encourages puhlic participation in the rulemaking 

process, including through administrative procedures, puhlic accessibility, and informal 

supervisory policies and procedures. 

We are committed to soliciting and considering the comments of the public in the rulemaking 

process. We believe strongly that public participation in the rulemaking process improves our 

ability to identifY and resolve issues raised by our regulatory proposals. During the proposal 

stage, we specifically seek comment ITom the public on the benefits and costs of our proposed 

approach, as well as on alternative approaches to our proposal. The Federal Reserve has long 

followed the practice of providing the public a minimum of 60 days to comment on all 

significant rulemaking proposals, with longer periods permitted for especially complex or 

significant proposals, such as our capital rules and our recent proposal on enhanced prudential 

standards. We also have extended our comment periods when it appears that the public interest 

would be served by allowing additional time for comment. Recently, for example, we extended 

the comment periods for our risk retention and Volcker rule proposals. We also favor seeking 

public comment on significant statements of regulatory guidance, and typically invite the public 
255 

- 3 -

to comment on major statements of supervisory guidance, such as our guidance regarding 

incentive compensation and stress tests. 

We also encourage public participation in the rulemaking process by making it easy for the 

public to find, review, and submit comments on any proposal that we have opened for comment 

and published in the Federal Register. All of these proposals can be found on our public website 

and at Regulations.gov. Public comments are accepted electronically and by mail. The rules and 

proposed rules that the Board expects to issue during the next six months are summarized in the 

Unified Agenda (also known as the Semiannual Regulatory Agenda), which is published twice 

each year in the Federal Register and posted on the Board's website. To ensure the public has 

sufficient notice of our rule making efforts under the Dodd-Frank Act. we also have published an 

anticipated schedule of these proposals on our website. 

Moreover, Federal Reserve staff have participated in more than 300 meetings with outside 

parties and their representatives, including community and consumer groups, in connection with 

rulemakings required by the Dodd-Frank Act. To promote transparency, we post on our website 

a memorandum describing the attendees and subjects covered in any meetings involving nongovernmental participants at which Dodd·Frank Act rulemakings are discussed. These 

summaries are posted on the Federal Reserve Board's website on a weekly basis. 

To further transparency in the rulemaking process, the Federal Reserve also posts on its website 

all comments received on each proposed rule. Comments can also be viewed in person at the 

Board between 9:00 a.m. and 5:00 p.m. weekdays and can be obtained by formal request under 

the Freedom of In formation Act. In addition, we make available to the public our examination 

manuals, supervisory letters, transaction approvals (and denials) and other matters of interest to 

the public related to our regulatory responsibilities. 

4. Provide details of how your agency addresses the unique challenges fadng smaller 

institutions when dealing with regulatory compliancc, including any related advisory 

committees your agency may have or other opportunities for small institutions to be heard 

by your agency. Please also detail bow your agency responds to concerns raised by small 

institutions. 

The Federal Reserve has paid particular attention to reducing regulatory burden on community 

banking organizations. We have taken a number of steps to remain aware of the challenges 

faced by and the burdens of our proposals on community banks. For example, the 

Federal Reserve has established a set of community dcpository institution advisory councils at 

each of the 12 Federal Reserve banks tor the purpose of gathering input from community 

depository organizations on ways to reduce regulatory burden and improve the efficiency of our 

supervision as welt as to collect information about the economy from the perspective of 

community organizations throughout the nation. A representative from each of these 12 advisory 

councils serves on a national Community Depository Institution Advisory Council that meets 

semiannually with the Board of Governors to bring together the ideas of all the advisory groups. 
256 

-4-

The Board of Governors has also established a committee of Board members for the purpose of 

reviewing all regulatory matters from the perspective of community depository organizations. 

These reviews are intended to find ways to reduce the burden on community depository 

organizations from our regulatory policies without reducing the effectiveness of those policies in 

improving the safety and soundness of depository organizations of all sizes. 

In addition, we are taking steps to reduce the burden on community depository organizations 

from our regulatory initiatives. For example, in its recent rulemaking proposals, the Federal 

Reserve has proposed and adopted streamlined approaches that reduce burden on community 

depository organizations that engage in fewer risky activities and have less complex structures. 

The Federal Reserve has also begun to separately and prominently identify which rulemakings 

apply to community depository organizations and what portions of particular rulemaking 

proposals are germane to community depository organizations, thereby reducing the attention 

community depository organizations pay to the many rulemaking proposals that are currently 

pending. 

Moreover, for every new rule, the Board conducts an assessment and takes account of the 

potential impact that the rule may have on small businesses, small governmental jurisdictions, 

and small organizations as required under the Regulatory Flexibility Act ("RFA") (5 U.S.C. 601 

et seq.). The Board prepares and makes available for public comment in the Federal Register an 

initial regulatory flexibility analysis for any rule that will have a significant economic impact on 

a substantial number of smaU entities. A final regulatory flexibility analysis is prepared for 

every rule that may have a signiiicant economic impact on a substantial number of small entities 

and published in the Federal Register. 

5. Describe how regulatory interagency coordination has improved since the creation of 

the Financial Stability Oversight Council established by the Wall Street Reform Act. 

Provide specifics of how coordination has helped. either formally or informally. in your 

rulemaking process. 

The Dodd-Frank Act requires that the financial regulatory agencies consult or coordinate action 

on rulemakings under that Act in many cases. The Federal Reserve has actively worked with the 

other agencies in these joint and consultative rulemakings, both through direct contact with other 

agencies and through the FSOC. The FSOC has provided a ready forum for interagency 

consultation on rulemakings. These consultations have helped highlight the interaction between 

rulemakings under development by the Board and the broader set of rulemakings by other 

agencies under the Dodd-Frank Act, as well as improving our understanding of the interplay 

between proposed policy alternatives and existing regulation. The interagency consultation 

process has included staff discussions during the initial policy development stage, sharing of 

draft studies and regulatory text in the interim phases, and dialogue among agency principals in 

the advanced stages of several rulemakings. 

The Federal Reserve also consults regularly with its fellow bank regulatory agencies on matters 

that might affect institutions supervised by the other bank regulatory agencies as well as on 
257 

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matters of common interest where a single regulatory approach across banking organizations of 

diflerent charters would reduce compliance burden and risk. Members of the Board as well as 

staff at senior levels have established working associations with their peers at other agencies that 

include regular meetings to discuss policies of common interest and applicability. These many 

avenues of consultation at multiple levels increase the coordination and consistency of regulation 

across a banking industry that has multiple regulators and charters. We have expanded these 

channels to include regular consultation with the SEC, CFTC, CFPB and other agencies as 

changes in law have caused our spheres ofregulatory responsibility to increasingly overlap. 
258 

January 11,2012 

FEDERAL HOUSING FINANCE AGENCY 

Office of the Director 

The Iionorable Tim Johnson 

Chairman 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

Washington, DC 20510-6075 

Dear Chairman Johnson: 

In response to your letter regarding the rulemaking process at the Federal Housing Finance 

Agency (FHF A), [ am providing the attached memorandum from our Office of General Counsel 

to address questions presented. As you know, FIIFA has a more discrect and focused mission in 

oversceing the secondary market than other financial regulators. At the same time, FHFA takes 

seriously both the content and impact of its rulcmaking activities. I would note that FHFA is 

subject to and adheres to the Administrative Procedure Act in all its rulemaking activity, The 

Act contemplates clear presentations to pcrmit robust public participation, input of data from 

varieties of sources and requires that the agency act with a reasonable basis for any 

interpretations oflaw. Additionally, FIlFA submits its regulations to Congress for congressional 

review pursuant to the Congressional Review Act. 

I hope the attached memorandum addresses fully the specifics and spirit of your inquiry. Please 

contact mc if you have any questions or your staff may contact Alfred Pollard, General Counsel, 

at 202 414 3788. 

Yours truly, 

~:1LJQ,mt~ Acting Dircctor 

1700 G Street, N,W" Washington, D.C. 20552-0003·202-414-3800·202-414-3823 (fax) 
259 

MEMORANDUM 

TO: Edward J. DeMarco )-/ 

Acting Director r)~ 

Alfred M. Pollard 

General Counsel 

FROM: 

RE: Chairman Johnson's Inquiry Regarding Regulation 

DATE: January 11,2012 

Below, please find the issues presented by Chairman Johnson's letter to the Federal Housing 

Finance Agency (FHFA) and the Agency's response. As you know, regulation at FHFA is a 

collaborative effort of examiners in the field, senior staff addressing functional areas of 

supervision and the legal department. Adherence to government wide policies guide FHFA's 

actions and FHFA addresses cost and benefit analysis in the context of the large firms under its 

regulation and goes further to seek the impact not only of regulations, but implementation by the 

regulated entities on smaller institutions. 

1. FHFA's rulemaking process; economic inputs; costs and benefits. 

The Federal Housing Finance Agency rulemaking process, as with other federal agencies, 

involves a review of existing law and regulation to determine if a regulation is needed. lfso, the 

Office of General Counsel works with appropriate offices within FHFA to determine the outlines 

and coverage of a proposal and what form of rulemaking under the Administrative Procedure Act 

(APA) would best serve the Agency's mandate and the need for public comment. Therefore, the 

Agency may undertake an Advanced Notice of Proposed Rulemaking, where greater public input 

would benefit the formulation of a rule, a Notice of Proposed Rulemaking, where the Agency has 

sufficient information- legal and economic- to make a proposal for public comment or an 

Interim Final Rule, where circumstances exisl such that the APA authorizes early action by the 

Agency in its safety and soundness role with a subsequent comment period to determine if some 

modification may be required. FHFA's statutory mandates are very clear and detailed and many 

rulemakings reflect the language of the statute on matters upon which Congress already has 

opined. Comments taken in such a case are mainly focused on implementation of the 

congressional directive. 

The economic analysis we undertake on new rules varies depending on the nature of the rule and 

our statutory requirements. As a safety and soundness regulator, FHFA is especially conscious 

of the potential effect that its rules might have on the stability of the marketplace. Indeed, many 

of the agency's rules are issued with the intent of preventing catastrophic costs that might 

accompany a financial crisis. Such rules do not lend themselves to statistical cost-benefit 

analysis, as they are targeted at low probability, high potential cost events. Estimates of the 

benefits of such regulations would be very sensitive to choices among possible assumptions and 
260 

parameters, for which the statistical basis would be nominal at bcst. Nevertheless, within the 

scope of such flexibility as thc particular statutory mandate pennits, FUFA does not move 

forward with a rule unless the perceivcd benefits clearly outweigh the perceivcd costs. Where 

comments relating to economic impact arc received, they are carefully considered by offices 

wi thin the Agency with expertisc in thcse matters. 

For the most part, FHFA has not encountered significant challenges in collecting the data needed 

to conduct economic analysis of rulemaking. The regulated cntities respond to our requests for 

data and information relating to their activitics and operations, and FHFA's statutc cmpowers it 

to rcquire such data and information by order wherc ncccssary. In addition, FHFA has ready 

access to available economic, financial and industry data that may be needed to conduct 

economic analysis. However, in some cases information is simply not available or cannot be 

obtained without imposing a significant cost on markct participants. In those cases, FIIFA 

carefully weighs those costs before proceeding with data requirements. 

2. FHF A's plans to review regulations for increased effectiveness and reduced burden. 

FHF A conducts ongoing reviews or regulations for their effectiveness or burden as part of its 

continuous supervision program. That is, the Agency has many examiners located at its 

regulated entities and they provide important input rcgarding the operation of existing laws, 

regulations or operational processes. 

FHFA is undertaking a form of review for effectiveness and burden as it consolidates and rcvises 

regulations from its predeccssor entities, the Federal Housing Finance Board and the Office of 

Fcdcral Housing Enterprise Oversight, and an officc or Department of Housing and Urban 

Developmcnt. FHF A is reviewing each of those prior regulations and is readopting some, 

modifying some and rescinding others. 

Additionally, a plan for regular future review has been developed in line with Executive Order 

13579, "Regulation and Independent Regulatory Agencies" (July 11,2011). FHFA published a 

proposed program in the Fcdcral Register (76 FR 59066, Sept. 23, 2011) and solicited public 

comment. Under the proposed plan. FHF A would review each of its regulations at least once 

every five years against a number of factors, including whether marketplace developments or 

technological cvolution have rendered existing regulations inefficient or outmoded, whether 

plain-language improvements can be made, whether consolidation or elimination of regulations 

would facilitate eompliancc or supervision, and whetiler alternatives to existing regulations 

would be less intrusive or more erricient in achieving the supervisory purposes. Having received 

no adverse comments on the proposed plan, FHFA will implement it as proposed. 

3. How FHFA encourages public participation in the rulemaking process. 

Beyond the APA provisions for public comment, FHfA makcs cxtcnsive efforts to inform our 

rulemaking by actively reaching out to stakeholders, including the public, industry participants 

and community groups. FIIFA executivcs routinely make public appearances at industry events 

and gatherings to gain insights and hear opinions from outside groups. FHFA also meets with 

these groups to encourage involvcment from various sources. As one example, this year FHFA 
261 

held its annual leadership meeting ill Washington, D.C. for the Federal Home Loan Bank 

Advisory Councils. This two-day meeting included a number ofthe advisory council chairs and 

several of the Home Loan Bank community investment officers. Attendees were encouraged to 

share ideas with FHFA concerning such issues as support by the Home Loan Banks, Fannie Mae 

and Freddie Mac for small and multifamily projects and revisions to the regulation on 

Community Investment Cash Advance programs. 

FHFA's recently enhanced website is another avenue by which the public is informed. Every 

regulatory proposal promulgated by FHF A is posted on our website and all public responses can 

be found on the website as well. Finally, pursuant to the Housing and Economic Recovery Act 

of 2008 (HERA), FHF A established an Office of Ombudsman, the mission of which is to receive 

concerns from our regulated entities and others about FHFA's supervisory activities, including 

its regulations. 

4. How FHFA addresses the challenges facing smaller institutions. 

While FHF A does not regulate smaller institutions, it does seek information about market impact 

of its regulations. All of its regulated entities are wholesale financial institutions ranging in size 

from $30 billion in consolidated total assets (the smaller Home Loan Banks) to over $3 trillion 

(Fannie Mae). Consequently, FHFA's assessments of regulatory burden and supervisory 

effectiveness are made against the background of the resources and infrastructure available to 

some of the largest financial institutions in the country. 

FHFA recognizes that many of the institutions with whom our regulated entities do business are 

smaller institutions and FHF A is mindful of Enterprise and Home Loan Bank procedures and 

processes that can affect such firms. This is not a direct product of regulation, but rather 

business practices of the regulated entities and FHF A works with the regulated entities on such 

matters. For example, HERA required FHFA to develop a system of affordable housing goals 

applicable to the mortgage purchase programs of the Federal Home Loan Banks comparable to 

the system applicable to the Enterprises. In developing that system, FHFA was cognizant that 

the Banks' smaller mortgage purchase programs are provided as a service to smaller financial 

institution members who for practical reasons have less access to other wholesale markets, such 

as the securitization markets. FHFA did not want to impose a regulatory burden that might cause 

those smaller mortgage purchase programs to be insufficiently profitable to be maintained, which 

could result in their being shut down and no longer available to those smaller members. 

Consequently, FHFA established a size threshold that a Bank's mortgage purchase program 

would have to reach before the affordable housing goals would be activated; 12 CFR 1281.11. 

5. Improvement in regulatory interagency coordination since the creation of FSOC. 

The Dodd Frank Wall Street Reform and Consumer Protection Act requires the Financial 

Stability Oversight Council (FSOC) to coordinate certain rulemakings by its member agencies 

and to be consulted on others. At other points, the Act requires federal financial supervisory 

agencies to issue rules jointly, in coordination or in consultation with other agencies. Overall, 

these various types of interagency coordination requirements have helped inform the rulemaking 

process and provide for the sharing of views from different agency perspectives. FSOC provides 
262 

a useful venue to encourage coordination and has recently undertaken an initiative to ensure that 

its member agencies are informed about rulemaking activities of other members. 

From FHFA's perspective, one area of potential improvement would be to include FHFA as an 

observer member of the Federal Financial Institutions Examination Council. 
263 

January 3, 2012 

Dear Claim.,n Johnson, 

Thank you for yoor recent Jetter concerning the importance of taking a smart approach 

to financial services regulation. The Gmsumer Financial Protection Bureau 

",t.oleheattedlyagrees that financial services regulation should take c~reful account of 

benefits and costs, involve consideration of a wide range of factors for each nile, and 

promote public participation. These ingredients help to ensure the overall goa! of 

developing federal regulations that provide robust safegwtds for consumers and clear 

guidance for financial services providers without imposing undue burdens. 

The Dodd-Frank Act specilicallyembeds these objectives into the mission of the Bureau, 

and we are committed to their execution. A, an evidence-based agency, the Bureau will 

develop and issue regulations where there is a strong justification for doing so, "M)rk with 

stakdlOlJers-inciuJing industry-.. to implement them, and monitor them to t!!1Sure their 

effectiveness over time. 

The Dodd-Frank Act ,1Od seveml other statutes give the Bureau specific guidance on 

these processes. For instance, ,,,lIutory requirem(mrs direct uS to analyze certain benefits, 

COStS, and impacts in the course of our mlernakings, take comments from the public, 

consult with small businesses on certain niles and with appropriate federal agencies at 

certain stages of tbe nllcmaking process, and conduct a thorough assessment of the 

effectiveness of significant regulations within five years of their issuance. 

The Bureau is working diligently to conduct careful evidence-based analy'Sis and solicit 

widespread public participation in Ollr mlemaking processes. We are incorporating those 

disciplines into our current mlemaking initiatives-,vhich focus both on reforming the 

mo!tb"'gc markets and implementing other statutory requirements mandated by the 

Dodd· Frank Act. We will aL~o refine these rulemaking pmcedures over time. 

N<nably. we are also working to streamline and simplify regulations that we have 

inherited from other federal agencies. We believe our effortS will enhance consumer 

protections and facilitate compliance and fair competition among financial services 

providers. 

helpful. 

requested, we have provided details on our processes and current and planned 

in the artachment. Please jet us know if additional inf onnation would be 

Raj Date 

Spech11 Adyisor to the $ecremry of the Treasury 

on ,he Consumer Financial Protection Bureau 
264 

1. Provide a detailed description of your agency's rule making process, including the variety of 

economic impact factors considered in your ndemaking. Please note to what degtee you 

consider the benefits fTOm )'our rulemaking, including providing certainty to the marketplace 

and preventing catastrophic costs from a financial crisis. Also describe any difficulties )'ou may 

have in quantifying benefits and costs, as well as any challenges you may face in collecting the 

data necessary to conduct economic analysis o(your rule making. 

Like mmt Federal Jgeneies, the CFPB is subject to the rulemaking requirements of the Administrative 

Procedure Actl (",\I'/\''). endcr the J\PA, the CIPB is required, subject to certain exceptions, to publish 

proposed and final rules in the Federal Register and give interested persons the opportunity to panicipate in 

the rulelThlking process bysubmitting written comments. The APA also requires the CFPB responcl to any 

significant issues raised cluring the public comment process. 

In addition, Section 1022(b) of the Dodd-Frank Act requires the CFPB, when prescribing cemin rules under 

the Federal consumer financial laws, to consider. (I) the potential benefits and costs to consumers ancl 

covered persons, including the potential reduction of aCcess by consumers to consumer financial products or 

services resulting !"rom such rule; (2) the impact of proposed rules on insured depository institutions or credit 

unions with toml a~sets of $10 billion or less, as described in section 1026; (3) the impact on consumers in 

rural area'. The Regulatory Flexibility Act also separately requires the Bureau to consider pOtential economic 

impacL~ on small entities, including small financial services providers. 

Uncler Section 1022 Jnd the Regulatory Flexibiliry Act, the CFPB strives to identify the significant sources of 

benefit" costs and impacts of a potential regulation to consumers and regulated entities. The types of 

benefits, costs, ancl impacts that are significant will depend on the type of regul.nion. We will gather the best, 

most reliable information avaibble about these f",lOrs consistent with smtutory deadlines, practical 

constraints, the Paperwork Reduction Act, and due consideration of the benefits and COSts of potential neW 

clara collections. We assess benefits, COSts, and impacts quantitatively where we can gather quantitative 

information consistent with these constraints. In other Cases we provide careful qualitative assessments and 

expbin why quantitative daG] arc unavailable. 

2. Provide your agency's current and future plans to regularly review and, when appropriate, 

modify regulations to improve their effectiveness while reducing compliance burdens. Please 

include a description of actions your agency has taken, or plans to take to streamline regulations; 

for example, the Consumer Financial Protection Bureau's "Know Before You Owe" effons 

drastically simplifies mortgage and student loan disclosure requirements. Also note statutory 

impediments, if any, that prevent your agency from streamlining any duplicative or inefficient 

rules under your purview. 

We are building the CFPB to be smart, effective, and bahnced. We have hired PhD economists, financial 

anal>~ts, industry cxpens, regulatOry lawyers, and examiners to help develop our expenise in consumer 

financial markets. We are constantly reaching out to industry and consumers to learn more. Our actions will 

be deliberate and cviclence-based. ancl where possible, we will work to improve the effectiveness of our 

rr~uLuions ",hile reducing unwarranted compliance burdens. 

In acldition, Section 1022 of the Dodd-Frank Act specifically requires the Bureau to a.lSess the efiectiveness 

of significant regulations within five years of ,beir lssuancc. The Bureau must publish a repan on the 

I 5 U.s.C §§ 551-559. 

Page 11 
265 

assessment, which must address, among other relevant factors, the effectiveness of the rule in meeting the 

purposes and objectives of the Act and the specific goals stated by the Bureau. In addition, the Regulatory 

Flexibility Act reguires the Bureau to review regulations that have a significant economic impact on a 

subsrantial number of small entities every ten years. 

We have taken am first step toward retrospective review through a number of targeted initiatives to 

streamline and improve the dfectiveness of existing regulations. We JUSt inherited over a dozcn regulations 

from other federal agencies, many of which have been on the books for years. Changes in technolo!,'}', 

market practices, and the legal bndscape may have caused some of thesc rules to become obsolete, 

Llllnecessary, redundant, or counterproductive. Earlier this month, the Bureau initiated a targeted review of 

these rub in search of =y; to update and streamline them.' 11,e Bureau has invited public input to propese 

specitic rules as priority candidates for streamlining. We are also inviting suggestions to make it easier for 

providers to comply with existing rules. 

As you mentioned in your letter, another effort is our Know Before You Owe (KB YO) initiative to integrate 

federal mortgag;e loan disclosures that are reguired undenhe Truth in Lending Act and Real Estate 

Settlement Procc>ciures Act. This project, which WdS mandated by the Dodd-Frank Act, provides an 

opportunity to both improve the usefulness of information provided to consumers and reduce the paperwork 

hurden on industry from having to complete multiple overlapping forms. As discussed further below, "'" 

have also used this project as an oppertunity to experiment with new forms of public ourreach to ensure 

broad-based public participatioIl and input. 

Wc have recently launched other Knll1v 13efim YOH Ow, initiatives on student loans (in partnership with the 

Dcpartmenr of Education) and credit card agreements to evaluate way; of providing to consumers and 

indust!), critical information on prices, risks, and credit terms in formats that are easy to underst.,nd and use. 

We plan to pilot a prototype credit card agreement with one or more issuers, including Pentagon Federal 

Credit Union, one of the largest credit unions in the country, to get on-the-ground feedback 

3. Provide details of how your agency encourages public participation in the rulemaking process, 

including through administrative procedures, public accessibility, and infonnai sllpclVisory 

policies and procedures. 

The CFPB uses the same APA rulemaking processes that .1pplyto most other federal agencies to ensure that 

the puhlIC h., an opportunity to comment on all proposed rules. We h,,'e ajso gone beyond the j\1'1\'s 

requirements to solicit public input in anticipation of potential rulemakings such as a rule to defme "larget 

paniopanfs ), 

Morem'CC, the (FPB is one of only three agencies subject to the small business advocacy panel requirements 

of the Small Bus"",,, Regulatory Enforcement Fairne'S Act of 1996 ("SBREFA'). Under SBRFl'A, the 

Gl'B is required to convene a panel---cons;,ting of personnel of the Bureau, the Office of Management and 

Budget, and the Chief Counsel for Advocacy of the Small Business Administration-prior to issuing certain 

proposed rules. The panel then gathers input from small emity representatives selected in consultation with 

the SBA on the potential impacts and alternatives to the anticipated regulation. The (FPB then drafts a 

report 011 behalf 01 the panel summarizing the comments of the small entity representatives and the panel's 

findings. 

'76 Fed. Reg, 7582 (Dec. 5,2011). 

rage 12 
266 

[n addition, the Bureau uses its website to facilitate public participation. For example, as part of the Know 

Ilefim You Owe mortgage initiative the Bureau posted prototype forms on its w"bsite when it began testinll the 

forms with consumers and indusrry members, rather than waiting until issuance of a formal rulemaking 

proposal. Over the last six months, we have received approximately 25.000 comments through several 

rev is ions of the protOtypes. 

We are constantly looking for ways to improve input. I'or example, at the end of the 90-day comment period 

on our streamlining initiative, commenters wil! have an additional 30 days to respond to other conmlenters. 

l'inolly, we arc engab>1ng in extensive oUlreach to stakeholders through roundtables, speeches, and other direct 

contaCt. For example, we have met with community bankers in aU SO states and with credit unions across ,he 

COUnt!)'. A5 described in more detail above, the Bureau is also preparing to consult specifically with small 

businesses on certain rule makings as required by the Small Business Re~ulatOryEnforcement Fairness ACL 

4. Provide details of how your agency addresses the unique challenges facing smaller institutions 

when dealing with regulatory compliance, including any related advisory committees your 

agency may have or other opportunities for small institutions to be heard by your agency. Please 

also detail how your agency responds to concerns raised by small institutions. 

Small financial institutions may be burdened dl,proportionately by compliance requirement" as compared to 

larger institutions. We are working to reduce existing regulatory burdens where feasible and to avoid 

imposing unwarranted new regulatory burdens. For example, we have met extensively with small community 

banks and credit unions, and have established an office of Small Business, Community Bank" and Credit 

Unions at the Bureau. Small financial institutions have also had to compete on a playing field that has tilted 

too often to'lvard less closely regulated nonbank competitoI>. Having a director in place is critical to the 

Bureau's efforts to level that playin!\ field. 

First, wt' luve ,1 large variety of tools besides regulations to fulfill our mandates-including supervision, 

guidance, enlorcement, consumer education, research, and reponing. We believe that there will likely be 

cases where one or more of these tool> would better address a problem, with fewer burdens, than would a 

new regubtion. 

Second, section 1022 of the Dodd-Frank Act requires the Bureau to consider the potential benefits and costs 

of proposed rules to consumers and covered persons, including small lenders. The statute specifically 

requires the Burealt to consider impacLs on banks and credit unions with assets of $10 billion or less, as 

described in section 1026, in addition to impacts on rural consumers and on access to consumer financial 

producL' and ,ervices. 

Third. under the Regulatory Flexibility Act (RI' A), wt: mUSt assess the potential economic impacts of 

proposed rules on small businesses, non-profits, and local governments. Unless the Bureau can certify that it 

docs not expeCt a proposed lule to have a significant economic impact on a substantial number of these slilall 

entities, the Bureau must convene a panel to consult with affected businesses. The Bureau is preparing to 

convene a panel to consult with small financial services providers regarding the KIIOW Be/orr: Y01l Owe mortgage 

project this spring. 

'IllC Bureau must also provide an impact analYSl> when proposing the rule. A second impaCt analysis is then 

required when finalizing the rule. The analyses must consider the effectiveness and compliance burden.s of a 

proposal vcrs us other alternatives and any potential impacts on the cost of credit for smalJ businesses. 

Page 13 
267 

FInally, through rhe Burcau\ ~trcamhning inmacive. the Bureau IS seeking comment on p(HCnuaJiy expanding 

exemption; for disclowre and reporting rules for entities that make very small numbers of loans. 

5. Describe how regulatory interagency coordination has improved since the creation of the 

Financial Stahility Oversight Council established by the Wall Stteet Reform Act. Provide 

specifics of how coordination has helped, either formally or informally, in your rulemaking 

process. 

Title I of the Dodd-Frank An created the Financial Stability Oversight v.uncil (FSOC) to, among other 

thini9" identify potential threats to the financial st.lbiliry of the United Stares and to make recommendations 

to primary functionary regulatory agencies to apply certain supervisory standards. Title I imposes a broad 

responsibility on the FSOC to facilitate interagency coordination by facilitating information sharing and 

coordination among its member agencies and other federal and state agencies on the devcl9pment of financial 

services policy, ruJemaking, examinations, reporting requirements, and enforcement actions. The Director of 

the Rureau will have a seat on the FSOC 

The Bureau began consultin?; with appropriate agencies in connection with various rules that it issued in July 

2011, ami has continued to consult with regard to other rulcm,king projects. Section 1022 of the Dodd· 

r rank Act requires the Bureau to consult ,,;th federal banking regulator.; and other appropriate agencies 

regarding the consistency of proposed rules with the prudential, market, or sy,;tematic objectives administered 

by such a);encies. We have found these consultations helpful as we consider the impacts of potential rules on 

Jif{erenr types of financial services provide". 

Page f 4 
268 

(61---- National Credit Union Administration -------

Office of the Chairman 

The Honorable Tim Johnson 

Chairman 

December 21, 2011 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

534 Dirksen Senate Office Building 

Washington, DC 20510 

Re: Financial Rulemaking 

Dear Chairman Johnson: 

This letter responds to your correspondence of November 9, 2011, that asks the independent 

fmancial services regulatory agencies to provide you with information about our rulemaking 

processes. As noted in your letter, I wholeheartedly agree with you that financial services 

regulators need to craft "clear, effective, and robust fmancial regulations that build a stronger 

foundation for sustainable economic growth." 

The National Credit Union Administration (NCUA) is very much committed to working with 

Congress to ensure the development of smart, strong, clear, and efficient financial services 

regulations. In fact, I believe that NCUA has an exemplary record of balancing prudent and robust 

safety-and-soundness rules with responsible regulatory relief. For example, I am pleased to report 

that under our current rulemaking process, NCUA conducts regular reviews of all of our rules on a 

rolling three-year basis, invites public participation through multiple channels, facilitates 

coordination with other agencies, and integrates financial and economic data into our safety-andsoundness rulemakings. 

Moreover, under my recently announced Regulatory Moderruzation Initiative, NCUA is 

publicizing our commitment to effective, not excessive, regulation. Where current rules are 

ineffective or overly burdensome, NCUA will eliminate or streamline those regulations. Where 

new risks arise and current rules become outdated or insufficient, NCUA will moderruze those 

regulations or draft new rules. 

The following analysis describes in greater detail NCUA's current rulemaking and regulatory 

review process, our plan to advance the Regulatory Modernization Initiative, our efforts to assist 

small credit unions, and our interagency outreach efforts. 

1775 Duke Street - Alexandria, VA 22314-3428 - 703-518-6300 - 703-518-6319-Fax 
269 

The Honorable Tim Johnson 

December 21, 2011 

Page 2 

Regulatory Review and Modernization 

NCUA's rules, policies, and procedures for promulgating regulations are set out in Part 791 of our 

regulations and Interpretive Ruling and Policy Statement (IRPS) 87-2 (as amended by IRPS 03-2), 

which the public may view on NCU A's website.! NCU A has a well-established regulatory review 

policy, a copy of which is attached. Since 1987, NCUA has adhered to this policy to ensure that, 

among other things, our regulations impose only the minimum required burdens on credit unions, 

consumers, and the public. This policy also requires us to issue final rules only after full public 

participation in the rulemaking process. 

In accordance with this policy, NCUA reviews all of our existing regulations every three years. To 

accomplish this review, our Office of General Counsel maintains a roJling review schedule that 

identifies one-third of existing regulations under review each year. We update and post this 

schedule on NCUA's website at the beginning of each year and invite the public to comment on all 

regulations proposed for review. 

Through this review process, NCUA, for the past 24 years, has regularly updated, clarified, and 

simplified existing regulations, as well as eliminated redundant and unnecessary provisions. 

Additionally, I recently announced to the credit union industry a comprehensive Regulatory 

Modernization Initiative.2 This initiative builds upon NCUA's ongoing efforts to review and 

improve our regulations. 

For rules that NCUA can control, the Regulatory Modernization Initiative will ensure that those 

rules are in sync with the modern marketplace, clearly written, and targeted to areas of risk. 

NCUA's new regulatory focus will target risky behaviors in credit unions, rather than require all 

credit unions to comply with a rule irrespective of their level of risk. 

In the last several years, we have experienced an unprecedented number of market innovations that 

have the unintended consequence of syndicating the inherent risks in financial products. At the 

same time, many credit unions have grown more complex and now engage in more sophisticated 

risk-taking ventures. While this increased sophistication is generally a positive trend for the credit 

union industry, it also presents a significant challenge to the regulator. When adopted by many 

credit unions, a new product, service, tool, or relationship can post significant risks to the National 

Credit Union Share Insurance Fund (NCUSIF). 

In order to keep credit unions safe and sound while relieving regulatory burdens, the Regulatory 

Modernization Initiative will balance two key principles: first, safety and soundness, by 

strengthening regulations necessary to protect the 91 million credit union members and the 

NCUSIF; and second, regulatory relief, by eliminating or revising regulations that limit flexibility 

and growth. 

I 12 C.F.R. §79 1.8; IRPS 87-2, 52 Fed. Reg. 35231 (Sept. 18. 1987); IRPS 03-2. 63 Fed. Reg. 31949 (May 29. 2003). NCUA 

regulations are listed section~by-section on NeUA's website at http://www.ncua.govlLegallRegsIPagesIRegulations.aspx. 

2 My speech with further details on the Regulatory Modernization Initiative is available online at 

httt>:!!www.ncu •. govlNewslDocumentslSP20110919Matz.pdf. 
270 

The Honorable Tim Johnson 

December 21, 20 II 

Page 3 

In the coming months, NCUA is planning to modernize three significant rules in an effort to 

strengthen safety and soundness by addressing marketplace practices and emerging risks: 

• Loan Participation Protection. The modernized rule will require originators of risky loans 

that sell participation interests in those loans to a widespread group of credit unions to 

retain some of the original loan risk on their balance sheets. It will also require purchasers 

of participation loans to perform due diligence on an ongoing basis. 

• Credit Union Service Organization Risk Transparency. NCUA is the only prudential 

Federal Financial Institution Examination Council (FFIEC) agency without statutory 

examination and enforcement authority over vendors of federally insured financial 

institutions. To the extent permitted by law, this modernized rule will provide a clearer 

picture to NCUA and to credit unions of the off-balance sheet risks at credit union-owned 

organizations that sell high-risk services to credit unions. 

• Interest Rate Risk Management. The modernized rule will require certain credit unions to 

have an appropriate policy to manage interest rate risk. Targeting only those credit unions 

with sufficient size and/or interest rate risk that poses a threat to the NCUSIF, the proposed 

rule applies to only 43 percent of all credit unions, yet covers more than 96 percent of all 

credit union assets. For affected credit unions, the proposed rule allows each credit union 

to customize the interest rate risk policy to the credit union's risk profile. 

Balancing these three safety-and-soundness rules is an equal number of regulatory relief measures: 

• Community Development Revolving Loan Fund Access. On October 27,2011, the NCUA 

Board approved a fmal rule to improve access to the Community Development Revolving 

Loan Fund. The rule reduces costs, eliminates outdated processes, expands transparency, 

and creates a streamlined user-friendly rule. 

• Regulatory Flexibility. On December 15,2011, the NCUA Board approved a proposed rule 

for public comment that will extend provisions ofNCUA's Regulatory Flexibility 

(RegFlex) program to all federal credit unions. It currently applies to only credit unions that 

have CAMEL codes .of I or 2. 

Derivatives as an Interest Rate Risk Hedge. To provide a new tool for credit unions subject 

to the Interest Rate Risk Management Rule, NCUA is considering a proposal to allow 

qualified credit unions to use simple derivatives as an interest rate risk hedge. 

• Zero-Risk Weights. NCUA is considering a proposed rule that would allow credit unions to 

assign a zero-risk weight to most U.S. Treasury securities. 

Finally, your letter asks whether any statutory impediments prevent NCUA from streamlining any 

duplicative or inefficient rules. At this time, we have no statutory impediments to revising or 

eliminating rules. Pending legislative proposals to impose a rulemaking moratorium could, 

however, have the unintended consequence oftemporarily preventing agencies from proceeding 
271 

The Honorable Tim Johnson 

December 21, 2011 

Page 4 

with rulemakings designed to eliminate outdated regulations, streamline existing standards, and 

make current rules more user friendly. 

Integrating Financial Data 

NCUA collects and produces volumes of publicly available data to report on the financial 

conditions of each federally insured credit union. Each quarter, NCUA aggregates this financial 

data. The NCUA Board uses this data, together with data compiled by NCUA's Chief Economist 

and other public and confidential sources, to identify current and emerging risks, and to formulate 

policy. In addition, NCUA collects and aggregates private financial data obtained through 

examinations and other confidential supervisory contacts. 

The NCUA Board carefully considers all relevant data during the rulemaking process. Wbenever 

appropriate, we also summarize and discuss available public data in the preambles to our proposed 

and final rules. 

Further, many ofNCUA's rulemakings involve improving credit union risk-management processes 

or increasing the regulatory information to facilitate identification of potential risks. These rules 

typically have limited and generally indirect impacts on lending, investment, and job growth. 

These rules also often have important-but difficult to quantify-benefits in terms of reducing 

losses to the credit union system. The cost-benefit analysis for most NCUA rules will therefore 

have a degree of uncertainty related to both effects on economic activity, which are generally very 

small, and benefits, which sometimes accrue years in the future and are generally characterized as 

avoided negative outcomes, such as failures of credit unions and losses to the NCUSIF. 

Inviting Public Participation 

NCUA encourages members of the public to contact us and recommend that the agency develop a 

regulation, or revise or repeal an existing regulation.3 

Twice each year, NCUA adopts an agenda of proposed regulations that we have issued or expect to 

issue, and currently effective regulations that we have under review. We also include information 

on regulations finalized since publication of the last agenda. NCUA voluntarily submits each 

semiannual agenda to the Office of Management and Budget for inclusion in the "Unified Agenda 

of Federal Regulations" usually published in the Federal Register in April and October of each 

year. 

Before proposing a significant regulatory change, NCUA Board members and staff personally 

discuss rulemaking plans with stakeholders, through speeches, webinars, town hall summits, and 

meetings with credit union and trade association officials. Information obtained from these public 

interactions helps determine the scope, structure, and timing ofNCUA rulemaking priorities. 

l 12 C.F.R. §79\.8(c) 
272 

The Honorable Tim Johnson 

December 21,2011 

Page 5 

Once the NCVA Board acts on a rule, to encourage public participation in the rulemaking process, 

we publish all proposed and final rules in the Federal Register and make these rulemakings 

available online at www.regulations.gov and www.ncua.gov. The public may submit comments on 

our proposed regulations via both websites, too. 

Additionally, as a matter of policy, NCUA generally gives the public at least 60 days to comment 

on a proposed regulation. lfthe comment period is less than 60 days, NCUA publishes a statement 

in the Federal Register explaining the change. 

Working with Small Credit Unions 

NCUA formed the Office of Small Credit Vnion Initiatives (OSCUI) to foster small credit union 

development and the ability of these financial institutions to deliver financial services effectively, 

facilitate expansion of credit union services through new charters and field of membership 

expansions, and coordinate efforts with third-party organizations to improve the viability and 

successful operation of credit unions. 4 OSCUl's programs for small credit unions include direct 

assistance (one-on-one consulting); online and in-person training; and partnerships with 

government, non-profit, and private organizations. 

OSCUl also administers the Community Development Revolving Loan Fund (CDRLF), which 

provides financial assistance (grants and loans) to support low-income designated credit unions 

serving low-income communities with low-interest loans or deposits. As noted above, the NCUA 

Board recently issued a final rule to improve the CDRLF Program.s The final rule- which 

represented a complete overhaul of the former regulation-removed outdated processes, enhanced 

transparency, and created a more user-friendly and streamlined regulation, in order to improve 

access to financial assistance for small credit unions. The modernized rule will provide additional 

flexibility and relief to credit unions applying for CDRLF program assistance. 

Interagency Outreach and Coordination 

To help restore integrity in the markets and strengthen the public's trust in the fmancial system, 

NCUA coordinates with the other federal financial regulators as a member of the Financial 

Stability Oversight Council (FSOC), a broad interagency body developing regulations and 

supervision strategies to ensure the safety and soundness of entities that are systemically significant 

to the U.S. financial system. During the past year, NCVA and the other FSOC regulators have, 

working together, made significant progress toward implementing the initiatives mandated by the 

Dodd-Frank Wall Street Reform and Consumer Protection Act, including issuing a number of 

important studies, proposed and final rules, as well as establishing a framework for identifying and 

analyzing emerging risks. I believe the FSOC is a critical institution that will have an important 

role in the financial system's stability for many years to come. 

4 NeUA's OSCUI recently launched the first in B. series of free videos designed to ensure sman credit unions are infonned of the 

NeVA resources available to help them succeed, This first introductory video provides an avenriew ofOSCUl's role within 

NeUA and highlights the programs available for small credit unions. The first introductory video is available online at 

http:/www.ncua.govlNewsiPageslNW201112060SCUlVideo.aspx. 

576 Fed. Reg. 67583 (Nov. 2, 2011). 
273 

The Honorable Tim Johnson 

December 21, 2011 

Page 6 

NCUA also benefits from other opportunities for interagency coordination and cooperation. To 

minimize inconsistent or overlapping regulatory requirements across agencies, NCUA coordinates 

with other federal financial regulators as a member of FFIEC, which I currently chair. FFIEC is a 

formal interagency body empowered to prescribe uniform principles, standards, and report forms 

for the federal examination of financial institutions. 6 

Additionally, NCUA's Office of Consumer Protection coordinates with the Consumer Financial 

Protection Bureau (CFPB) on a routine basis, which is essential given the respective enforcement 

roles ofNCUA and CFPB. Currently, only three federally insured credit unions exceed the $10 

billion threshold to receive consumer compliance examinations from CFPB. NCUA and/or state 

regulators continue to examine the remaining 7,176 federally insured credit unions subject to all 

CFPB regulations. 

Moreover, NCUA facilitates a unique relationship with the National Association of State Credit 

Union Supervisors (NASCUS), based on our ability to exchange confidential supervisory 

information regulator-to-regulator. NCUA's coordination with NASCUS empowers federal and 

state regulators to share examination experiences and work coUaboratively to strengthen the 

regulatory framework. 

In sum, NCUA remains committed to ensuring our regulations are reasonable, innovative, and 

cost-effective, and to encouraging full and robust public participation in the rulemaking process. 

Please feel free to contact me with any questions or comments. 

Enclosure 

DebbieMatz 

Chairman 

6 FFIEC members include NCUA, the Board of Governors ofthe Federal Reserve System (FRE), the Federal Deposit Insurance 

Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). In 2006, the State Liaison Committee (SLC) 

Chairman became a voting mernbc:r ofthe FFIEC. The SLC consists ofrepresentatives from the Conference of State Bank 

Supervisors (CSBS), the American Council of State Savings Supervisors (ACSSS). and the National Association of State Credit 

Union Supervisors (NASCUS). In 2010, the Dodd-Frank Wall Street Refonn and Consumer Protection Act (Dodd-Frank Act) 

eliminated the Office of Thrift Supervision (OTS) and added the Director of the Consumer Financial Protection Bureau (CFPB) 

as a member of the FFIEC. 
274 

INTERPRETIVE RULING AND POLICY STATEMENT NUMBER 87-2 (as amended by Interpretive Ruling 

and Policy Statement 03-2) 

DEVELOPING AND REVIEWING GOVERNMENT REGULATIONS 

I. Statement of Policy and Coverage 

It is the policy of NCUA to ensure that its regulations: 

_. impose only minimum required burdens on credit unions, conswners, and the public; 

-- are appropriate for the size of the financial institutions regulated by NCUA; 

-- are issued only after full public participation in the rule making process; and 

-- are clear and understandable. 

II. Procedures for the Development of Regulations 

1. Proposed Regulations 

The Office of General Counsel (OGC) will oversee the development of regulations. Input on regulations will be 

obtained from other NCUA offices when appropriate, OGC will prepare a draft of the proposed regulation for 

submission to the NCUA Board for approvaL The proposed regulation will then be published in the Federal Registcr 

and other appropriate publications, 

2. Initial Regulatory Flexibility Analysis 

When NCUA is required by 5 U.S.C. § 553, or any other law, to publish a general notice of proposed rule making for 

any proposed regulation, NCUA will prepare and make available for public comment an initial regulatory flexibility 

analysis for any regulation that will have a significant economic impact on a substantial nwnber of small entities. 

Credit unions having less than ten million dollars in assets will be considered to be small entities. Such analysis will 

describe the impact of the regulation upon small entities, and will be published in the Federal Register at the time of 

general notice of proposed rule making for the regulation. A copy of the analysis will be forwarded to the Chief 

Counsel for Advocacy of the Small Business Administration (SBA). The content of the initial regulatory flexibility 

analysis will be in accordance with the provisions of 5 U.S.C. § 603. In addition, NCUA staff will consult applicable 

U.S. Small Business Administration guidance, including Tbe Regulatory Flexibility Act: An Implementation Guide for 

Federal Agencies, when interpreting and implementing the requirements of the Regulatory Flexibility Act. 

3. Compliance With tbe Paperwork Reduction Act 

If a proposed regulation contains an information collection request such as a recordkeeping or reporting requirement 

that, if adopted, will be imposed upon ten or more persons (including credit unions), the proposed regulation will be 

sent to the office of Management and Budget (OMB) prior to publication in the Federal Register, OMB will then have 

60 days after publication to comment on the information collection request. If OMB thereafter disapproves of the 

information collection request, the NCUA can override this by a majority vote and certify such override to OMB in 

the manner described in 44 U.S.C. § 3507(c). 

4. Final Regulatory Flexibility Analysis 

A final regulatory flexibility analysis will be prepared for all regulations that required the publication of a general 

notice of proposed rule making and that will have a significant economic impact on a substantial nwnber of small 

entities. The content of the fmal regulatory flexibility analysis will be in conformance with 5 U.S.C. § 604. Initial and 

final regulatory flexibility analyses need not be prepared if the Board certifies that a regulation will not have a 

significant economic effect on a substantial number of small entities. The certification will be published in the Federal 
275 

Register with the final rule, along with a statement providing the factual basis for such certification. A copy of the 

certification and statement will be provided to the Chief Counsel for Advocacy of the SBA. 

S. Final Rule 

OGC will prepare a draft final regulation to be presented to the NCUA Board for approval. Following Board approval, 

the final regulation will be published in the Federal Register and other appropriate publications. 

III. Opportunity for Public Participation 

A member of the public may recommend that NCUA develop a regulation or revise an existing regulation. A number 

of methods will be used by NCUA to encourage public participation in the development and review of regulations, 

including: notifying the public of the status of regulations being reviewed and developed through publication of the 

semiannual agenda; publication of advance notices of proposed rule making with requests for public comment; tbe use 

of questiormaires to solicit information; publication of articles; and by making copies of proposed regulations available 

to the public. 

When any regulation is promulgated whicb will have a significant economic impact on a substantial number of small 

entities, the NCUA will assure that small entities have been given an opportunity to participate in the rule making 

process through the types of methods listed in 5 U.S.C. § 609. 

NCUA will continue to solicit public comment on proposed regulations as required by 5 U.S.C. § 553. As a matter of 

policy, NCUA believes that the public should be given at least 60 days to comment on a proposed regulation. If the 

comment period is less than 60 days, or is extended beyond 60 days, NCUA will publish a statement in the Federal 

Register explaining the change. 

IV. Review of Existing Regulations 

NCUA shall periodically update, clarify and simplify existing regulations and eliminate redundant and unnecessary 

provisions. 5 U.S.C. § 610 requires that regulations having a significant economic impact on a substantial number of 

small entities will be reviewed every ten years, As a matter of policy, NCUA will continue with its efforts to review all 

its' existing regulations every three years. To accomplish a review every three years of all regulations, the Office of 

General Counsel will maintain a rolling review schedule that identifies one-third of existing regulations for review 

each year and will provide notice to the public of that portion of the regulations under review each year so the public 

may have an opportunity to comment. 

V. Semiannual Agenda 

Twice each year, NCUA will adopt an agenda of proposed regulations that the Agency has issued or expects to issue 

and currently effective regulations that are under NCUA review, Incorporated into the agenda, when necessary, will be 

the regulatory flexibility agenda required by 5 U.S.C. § 602, Each semiannual agenda will be voluntarily submitted to 

the Office of Management and Budget for inclusion in the "Unified Agenda of Federal Regulations" published in the 

Federal Register in April and October of each year. 

The semiannual agenda will contain the following; a brief description of the subject area being considered and a 

summary of the nature of any regulation which NCUA expects to propose or promUlgate; the objectives and legal basis 

for the issuance of the regulation; an approximate schedule for completing action On any regulation for which NCUA 

has issued a general notice of proposed rulemaking; and the name and number of an NCUA official knowledgeable 

with respect to each agenda item. The agenda will identify any regulation that the NCUA expects to have a significant 

economic impact on a substantial number of small entities. When there are proposed regulations listed in the agenda 

that will have such an impact on small entities, NCUA will endeavor to provide notice of the agenda to small entities 

in the marmer set forth io 5 U.S.C. § 602(c). Where the regulatory flexibility agenda is iocorporated into the 

semiannual agenda, the latter will be transmitted to the Chief Counsel for Advocacy of the SBA for comment. 
276 

e-CFR Data is current as of December 20, 2011 

Title 12: Banks and Banking 

PART 79i-RULES OF NCUA BOARD PROCEDURE' PROMULGATION OF NCUA RULES AND REGULATIONS; 

PUBLIC OBSERVATION OF NCUA BOARD MEETINGS 

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Subpart B-Promulgation of NCUA Rules and Regulations 

§ 791.7 Scope. 

The rules contained in this subpart B pertain to the promulgation of NCUA rules and regulations. 

§ 791.8 Promulgation of NCUA rules and regulations. 

(al NCUA's procedures for developing regulations are governed by the Administretive Procedure Act (5 U.S.C. 551 et 

seq. ), the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ), and NCUA's policies for the promulgation of rules and 

regulations as set forth in its Interpretive Ruling and Policy Statement 87-2 as amended by Interpretive Ruling and 

Policy Statement 03-2. 

(b) Proposed rulemaking. Notices of proposed rulemaking are published in the Federel Register except as specified 

in paragraph (d) of this section or as otherwise provided by law. A notice of proposed rulemaking may also be 

identified as a "request for comments" or as a "proposed rule." The notice will include: 

(1) A statement of the nature of the rulemaking proceedings; 

(2) Reference to the authority under which the rule is proposed; 

(3) Either the terms or substance of the proposed rule or a description of the subjects and issues involved; and 

(4) A statement of the effect of the proposed rule on state-chartered federally-Insured credit unions. 

(c) Public participation. After publication of notice of proposed rulemaking, interested persons will be afforded the 

opportunity to participate in the making of the rule through the submission of written data, views, or arguments, 

delivered within the time prescribed in the notice of proposed rulemaking, to the Secretary, NCUA Board, 1775 Duke 

Street, Alexandria, VA 22314-3428. Interested persons may also petUion the Board for the issuance, amendment, or 

repeal of any rule by mailing such petition to the Secretary of the Board at the address given in this section. 

(d) Exceptions to notice. The following are not subject to the notice requirement contained in paragraph (b) of this 

section: 

(1) Matters relating to agency management or personnel or to public property, loens, grants, benefits, or contracts; 

(2) When persons subject to the proposed rule are named and either personally served or otherwise have actual 

notice thereof in accordance with law; 

(3) Interpretive rules, general statements of policy, or rules of agency organization, procedure or practice. unless 

notice or hearing is required by statute; and 

(4) If the Board, for good ceuse, finds (and incorporates the finding and a brief statement therefor in the rules issued) 

that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest, unless 

notice or hearing is required by statute. 
277 

(e) Effective dates. No substantive rule issued by NeUA shalf be effeclive less than 30 days after its publication In 

theFederal Register,except that this requirement may not apply to: 

(1) Rules which grant or recognize an exemption or relieve a restriction; 

(2) Interpretive rules and statements of policy; or 

(3) Any substantive rule which the Board makes effective al an earlier date upon good cause found and published 

with such rule. 

(I) NeUA has an Office of Management and Budget (OMB) control number for rulemakings containing an Information 

collection within the meaning of the Paperwork Reduction Act (44 U.S.C. 3501). A list of OMB control numbers Is 

available to the public for review online at http://wwwReglnfo.gov. 

[53 FR 29647, Aug. a, 19a8, as amended at 59 FR 36041, July 15, 1994; 68 FR 31952, May 29,2003; 75 FR 34623, 

June la, 2010] 

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For questions or comments regarding e·CFR editorial content, features, or design, email ecfr@nara.gov.