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OVERSIGHT OF THE U.S. SECURITIES 

AND EXCHANGE COMMISSION 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

APRIL 25, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–119 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

ROBERT J. DOLD, Illinois 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

April 25, 2012 ................................................................................................... 1 

Appendix: 

April 25, 2012 ................................................................................................... 51 

WITNESSES 

WEDNESDAY, APRIL 25, 2012 

Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange Commission ........................................................................................................................ 8 

APPENDIX 

Prepared statements: 

Schapiro, Hon. Mary L. .................................................................................... 52 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Article by Beagan Wilcox Volz entitled, ‘‘Lawyer Skewers Boston Fed 

Chief’s Money Fund Comments,’’ dated April 24, 2102 ............................. 67 

Schapiro, Hon. Mary L.: 

Written responses to questions submitted by Representative Grimm ......... 70 

Written responses to questions submitted by Representative Hensarling .. 71 

Written responses to questions submitted by Representative Hurt ............. 72 

Written responses to questions submitted by Representative Miller ........... 75 

Written responses to questions submitted by Representative Schweikert .. 77 

Written responses to questions submitted by Representative Sherman ..... 78 

(1) 

OVERSIGHT OF THE U.S. SECURITIES 

AND EXCHANGE COMMISSION 

Wednesday, April 25, 2012 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Schweikert, Royce, 

Manzullo, Hensarling, Pearce, Fitzpatrick, Hayworth, Hurt, 

Grimm, Stivers, Dold; Waters, Sherman, Lynch, Miller of North 

Carolina, Maloney, Moore, Green, and Ellison. 

Ex officio present: Representative Bachus. 

Chairman GARRETT. Good morning. Today’s hearing of the Subcommittee on Capital Markets and Government Sponsored Enterprises entitled, ‘‘Oversight of the U.S. Securities and Exchange 

Commission’’ is called to order. I thank Chairman Schapiro for 

being with us this morning with all of her notes and preparation. 

With that, we will begin with opening statements, and I will recognize myself for about 3 minutes. And again, welcome. 

The intention of today’s hearing is to conduct appropriate oversight of the operations of the SEC, and there is no shortage of 

issues that we will be hearing about. 

The SEC’s current workload touches on almost every facet of the 

Nation’s financial markets: money market funds; conflict minerals; 

the implementation of the JOBS Act; the oversight of broker-dealers and investment advisers; Title 7 rulemaking; credit rating 

agencies; market structure; accounting and auditing oversight; 

community advisers; and many more. 

It is because of this breadth and scope that all new market regulations coming out of the agencies must go through a rigorous review of costs and benefits associated with each rule. I want to 

thank the Chairman for her recent focus on the importance of this 

concept with the new formal Guidance on Economic Analysis issued 

last month to agency divisions and offices. This guidance and its 

newfound consensus of cost-benefit analysis will hopefully rebut 

some of our colleagues on the other side of the aisle who continue 

to demagogue a cost-benefit analysis as simply a way to undermine 

Dodd-Frank regulation. 

This analysis is actually a good faith attempt to ensure that new 

rules being produced meet their intended goals to not add unnecesVerDate Nov 24 2008 17:46 Jan 30, 2013 Jkt 075091 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\75091.TXT TERRI
2 

sary and overly burdensome costs to the private sector. So I look 

forward to continuing to work with the Chairman to ensure that 

this new guidance is binding on the agencies and the new standard 

in this document is applied to all rules under consideration. I also 

hope that the Chairman will be more supportive of my SEC costbenefit legislation so that we can ensure that our future Chairmen 

are subject to the same appropriate standards. 

Another broader issue that needs to be addressed is the fundamental restructuring of the agency. Section 967 of the Dodd-Frank 

Act required an independent study to be done and recommendations to be made as to how the SEC should reorganize itself to be 

more efficient and achieve better results with the taxpayers’ 

money. Section 976 also required periodic reports to the SEC on 

the status. 

The exploratory note to the SEC’s March 30, 2012, report states, 

‘‘The Commission was not consulted on the decision to hire the consultants advising to the MAP Project or the cost of the scope thereof.’’ I do find that statement troubling. 

Nowhere in Dodd-Frank are you required actually to spend literally millions of dollars for an outside consultant to help the agency implement the recommendations of the study. I have heard estimates of up to $10 million, something which could have been done 

internally through the Office of the Chief Operating Officer. This 

is a very blatant example of millions of dollars that people say are 

being wasted. And I find it difficult to sympathize with requests 

then that we hear from the agency for additional taxpayer money 

year after year when we are spending in this manner. 

Finally, I am dismayed that back in February when you gave a 

speech on the state of the SEC, you specifically omitted facilitating 

capital formation as a primary component of the SEC’s mission. It 

is hard to imagine that this was just some sort of casual oversight, 

given the depth of the ongoing congressional negotiations at that 

time of the JOBS Act. Furthermore, in your testimony today, once 

again that area is omitted. Fortunately, there is a bipartisan and 

bicameral majority of Congress that recognizes the importance of 

capital formation on job creation, even if the agency and yourself 

do not. 

Too many times, the idea of protecting investors is only framed 

under the umbrella of protecting them from fraud. Protecting investors is also about assuring investors that they have a place to 

invest their capital and make a return. It is about providing investors with choices and cost-effective ways to conduct their business. 

Capital formation is a vital and equally important part of that mission. And hopefully, you will remember that in future testimony 

and remarks. 

With that, I yield back my time, and I recognize the gentlelady 

from New York for 3 minutes. 

Mrs. MALONEY. Thank you so much. I would like to welcome you, 

Chairman Schapiro, and thank you for your service. It is nice to 

see you again. I believe I saw you last the week before the OGR 

Committee and that was hearing number 48. Is that correct? 

Forty-two? So now, it is 43—43 hearings you have attended. And 

at that hearing last week, I asked you about the progress the SEC 

is making in terms of implementing the many rules in Dodd-Frank, 

3 

and I want to reiterate how important it is that these rules be done 

and finalized as soon as possible. Because in many ways I think 

it is the lack of certainty, not the rules themselves, that are concerning. And I know the SEC is working overtime to get these 

rules done and I am sure these issues concerning cost-benefit analysis will be firmly covered today and I believe that cost-benefit 

analysis is a very important part of making decisions going forward. I know that you do, too. 

I do want to mention that I am very concerned about the clearinghouse rules. It is very important, going forward, to make sure 

that these clearinghouses are rock solid strong. And your decisions 

that you made recently on high-frequency trading and the consolidated tape throughout this process is a very important one. And I 

also wanted to mention the swap definition. I know that is a rule 

you are working on jointly with the CFTC and it seems like that 

needs to be put in place before many other rules can be addressed. 

So I hope that you will be telling us where that is going forward. 

And the extraterritorial guidelines of exactly how far it goes and 

the oversight that you have, I hope is an area you will be discussing. As you know, the ranking member put forward an amendment in one of our bills that would have increased the oversight 

of the SEC in the territorial area. I also wanted to take a minute 

to raise the issue about real estate investment trusts which are a 

very important industry in my district. 

Last August, the SEC published a concept release to revisit the 

scope and application of the statutory exemption of mortgage 

REITs from regulation under the Investment Company Act of 1940. 

You well know the important role that REITs play in terms of providing liquidity in the housing market, and given the fragility of 

that particular sector, it has been the hardest one to bounce back. 

And the fact that significant holders of mortgage credit are backing away or deleveraging. We are always looking for ways to encourage increased participation of private capital. I know that you 

and your staff are giving due deference to these considerations. 

And I hope you will be mindful of this as you decide whether to 

move forward. And I look forward, as always, to your testimony, 

and I welcome you to your 43rd testimony before Congress this session. 

Thank you. 

Chairman GARRETT. The gentlelady yields back. 

The gentleman from Alabama, the chairman of the full Financial 

Services Committee, is recognized for 3 minutes. 

Chairman BACHUS. Thank you, Chairman Garrett, for holding 

this hearing. 

And thank you, Chairman Schapiro, for being here this morning. 

The Dodd-Frank Act expanded the SEC’s authorities and responsibilities, requiring the Commission to promulgate 123 rules, conduct 32 studies, and establish 7 new offices or committees. That 

makes today’s hearing particularly urgent, as this committee has 

the responsibility to conduct oversight of the SEC’s activities and 

initiatives and budget requests. The SEC’s budget has increased by roughly $1 billion over the past decade, and the Administration is requesting $245 million 

more for the agency than it requested in 2012. How the SEC 

4 

spends its money is a reflection of the Commission’s priorities, and 

this hearing will help us better understand what those priorities 

are, and how the SEC is prioritizing its resources. 

One of those priorities appears to be further money market fund 

reforms, yet, as Vice Chairman Hensarling and I noted in a recent 

letter to you, Chairman Schapiro, the SEC has missed numerous 

deadlines for mandatory rulemaking. So the suggestion that the 

agency is now devoting time and resources to a discretionary rule, 

without providing Congress or the public with empirical data and 

economic analysis to justify such a rulemaking, raises questions 

about the SEC’s priorities and abilities to manage its resources. 

We believe the Commission should first determine whether more 

reforms are needed before choosing among the proposals that are 

reportedly under consideration. In past hearings, I have commended Chairman Schapiro for pursuing reforms designed to avoid 

future debacles such as the SEC’s failure to detect or prevent the 

Bernie Madoff or Allen Stanford Ponzi schemes. 

However, I do want to point out—and this is not to diminish the 

fact that you have made a lot of needed reforms—that one regulatory gap remains unaddressed—and you acknowledge this—relating to the Commission’s oversight of investment advisers. 

Last year, only 8 percent of investment advisers were examined 

by the SEC. This lack of oversight, particularly in the aftermath 

of the Madoff scandal, is perilous and risky. Retail investors are at 

risk if their investment professional is examined only once every 

decade. 

All investment professionals should be subject to consistent examination and oversight, which is why bipartisan legislation I am 

introducing this week establishes one or more self-regulatory organizations to oversee retail investment advisers. This will dramatically increase the examination rate for investment advisers with 

retail customers. 

A responsive SEC that is wisely prioritizing its use of resources 

is the goal for all of us to share. 

I know you share that goal, Chairman Schapiro. 

I thank Chairman Garrett for calling this important hearing, and 

I yield back the balance of my time. 

Chairman GARRETT. I thank the gentleman. 

Ms. Waters is now recognized for 3 minutes. 

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

you holding this hearing today. And I would like to thank Chairman Schapiro of the Securities and Exchange Commission for coming before us to testify today. I appreciate that this subcommittee 

has conducted rigorous oversight of the SEC. By my count, this is 

the 16th time that the SEC has been before the Financial Services 

Committee during the 112th Congress. And of course, the Commission also makes frequent appearances before other committees in 

this Congress. 

There are several topics I hope we can explore with Chairman 

Schapiro today, including the SEC’s budget request, implementation of the JOBS Act, potential money market fund reforms, and 

of course, the continued work to finalize rules related to the DoddFrank Act. I hope that we can productively explore these topics, 

but I also hope that we can recognize attempts to weaken or underVerDate Nov 24 2008 17:46 Jan 30, 2013 Jkt 075091 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\75091.TXT TERRI
5 

mine the SEC, by either underfunding it, or imposing upon it much 

more onerous cost-benefit rules. 

I would like to believe, and I must believe, that we are all interested in an SEC that can perform the task and the mission that 

it is charged with. And that while there is need for clarification 

and definition, none of us on either side of the aisle would like to 

weaken the SEC and not have it do its job. 

The Commission has made a good faith effort to be responsive to 

some of the criticism of their cost-benefit analysis, and I am curious to hear more about the recently issued guidance on this topic. 

However, there has been a lot of work done by this committee that 

can be identified as legislative efforts that may tie the hands of the 

SEC as it attempts to protect investors. 

Some legislation that moved through this committee had perhaps 

laden the Commission with additional litigation expenses and could 

make it very difficult for the SEC to do the job that Congress asked 

it to do under the Dodd-Frank Act. There is no better effort or job 

that can be done by this committee than for both sides of the aisle 

to get together again and ensure that the SEC is not hampered in 

doing its job, and that all of the attempts that are being made in 

this committee are attempts to clarify, to define, and to clear up, 

rather than undermine. 

Under this backdrop, I think it is important to keep fresh in our 

minds what has happened, the damage that has taken place to our 

capital markets and our great economy just 4 years ago. We cannot 

forget the many foreclosures that have taken place, and all of the 

dollars of household wealth that has been wiped out; it must be 

kept fresh in our minds. Although the financial services industry 

has rebounded, American households still struggle from the fallout 

from this recession. 

Having said that, I hope that we can have a productive hearing 

today, and I certainly look forward to testimony from our witness. 

And I thank you again, Mr. Chairman, for holding this hearing. 

Chairman GARRETT. I thank the gentlelady. 

Mr. Hensarling is recognized for 2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

And welcome, Madam Chairman. I guess you took note that this 

is, I think, your 42nd appearance before the committee. Given that 

you have been in office for a little over 3 years, and given the provisions of the Dodd-Frank Act and a number of questions about the 

committee, my guess is we can get you up to 50 appearances in relatively short order. 

As you well know, there are a number of members of this committee who are concerned about the lack of fundamental economic 

analysis that has historically taken place at the SEC. And I certainly want to commend Chairman Garrett for his legislation. 

At a time when our Nation is still suffering from roughly 37 to 

38 straight months of 8 percent-plus unemployment, with the 

underemployment being almost twice that, the worst record since 

the Great Depression, knowing how invaluable the efficiency and 

vibrancy of our capital markets is to job creation, it is a good and 

proper and important topic that we deal with on ensuring that 

there is meaningful economic analysis. 

6 

In addition, there have been questions concerning the relative 

priorities of the Securities and Exchange Commission, and the 

seeming misallocation of resources as well. I do want to commend 

you for the steps that you have taken in issuing staff guidance regarding economic analysis. I will look forward to hearing more in 

this hearing about that. 

But I do want to also echo what Chairman Bachus said about— 

if my figures are right—the SEC having missed approximately 62 

percent of its mandatory deadlines under Dodd-Frank. And in this 

case, that might not necessarily be a bad thing, but it does question certain discretionary rules that are being considered, particularly the money market fund regulations where we are still looking 

for the rationale and the empirical evidence that the 2010 administrative rule 2A-7 has not proven sufficient. 

So that is an open question in our minds. But I look forward to 

your testimony. 

And I yield back the balance of my time. 

Chairman GARRETT. The gentleman yields back. 

Is there a request for time? Yes? Yes, there is. 

The gentlelady is recognized for 3 minutes. 

Ms. MOORE. Thank you so much, Mr. Chairman. I didn’t prepare 

an opening statement, but I couldn’t resist the opportunity to congratulate the Chairman of the SEC for the diligent hard work that 

they have done under very stressful situations with the tremendous numbers of additional responsibilities that have come to the 

agency upon the advent of Dodd-Frank. 

It has occurred to me that there are many criticisms that are levied against the SEC about your increased spending authority, but 

you have tremendous increased responsibilities. And I just wanted 

to make note of the tremendous breadth and depth of reforms that 

you have already put into place. 

I look forward to hearing your testimony and asking some very 

specific questions about some things I think are concerning to me. 

And with that, Mr. Chairman, I would like to yield back the balance of my time. 

Chairman GARRETT. Thank you. The gentlelady yields back. 

Mr. Royce is recognized for 1 minute. 

Mr. ROYCE. Thank you, Mr. Chairman. 

There are some concerns. There have been many failures at the 

SEC over the last several years, and despite our hearing testimony 

from people like Harry Markopolos about the over-lawyered culture 

at the SEC and the ‘‘investigative ineptitude’’—in his words—last 

Congress, Dodd-Frank rewarded the SEC with additional authority 

without looking at the fundamental problems within the agency. 

And that is one of our concerns. 

And Chairman Schapiro, I do not envy you. You have a lot on 

your plate as you display in your testimony today; you do. And I 

appreciate also the work you are doing with this idea of taking a 

slow-to-act bureaucracy head on with the idea that we are going to 

take people with expertise in these critical areas from the market 

and put them into important positions, hire them to these positions 

because they have a background. Addressing the over-lawyered nature of the SEC is important because there is a perception of regulatory competence throughout the financial sector. There is this 

7 

perception that people do not have to do due diligence because, 

after all, the SEC is going to do that. 

And that leads, frankly, to an erosion of market discipline, in my 

opinion. That is one of the things that happened. Like it or not, 

that perception is out there. 

So it is in everyone’s interest that we get this right to the extent 

possible following the crisis. And that is why these moves to bring 

people in with that type of expertise that you are undertaking, I 

think, is very important. 

I yield back, Mr. Chairman. 

Chairman GARRETT. The gentleman yields back. 

Mr. Fitzpatrick for 1 minute. 

Mr. FITZPATRICK. Thank you. 

Chairman Schapiro, good morning. 

You have made a number of speeches recently about your intention to propose rules later this spring to further limit the use of 

money market funds. And one element in the proposal would be to 

force money funds to float their net asset value so they could no 

longer be offered at a dollar per share. 

Another would be to impose capital requirements on money 

funds which would essentially make them more like a bank product. 

As a former county official from Pennsylvania whose county benefited from the use of money funds for cash management, I would 

like to hear about whether the SEC has done an analysis as to how 

many entities may not be able to use money funds under the proposed rules that are being considered at the SEC. 

With that I yield back. 

Chairman GARRETT. And the gentleman yields back. 

Mr. Dold is recognized for 1 minute. 

Mr. DOLD. Thank you, Mr. Chairman. 

Chairman Schapiro, welcome back. As always, we appreciate 

your time and testimony here today. 

These oversight hearings are critical. They are a critical congressional responsibility, and also critical for the Executive Branch 

agencies because they have a responsibility to help improve government transparency, accountability, and effectiveness. 

So I want to thank you for your participation. I guess we are 

going on 42 or 43—depending on how you count it—but certainly, 

we appreciate it. 

Obviously, the SEC is facing some significant changes, issues, 

and challenges. And these include conducting and completing multiple studies and reports, as well as writing and implementing 

many new and complicated and consequential rules, all dictated by 

Dodd-Frank. 

I am certainly pleased that this committee has worked frequently 

on a bipartisan basis to try to clarify congressional intent and try 

to identify and avoid unintended consequences, which necessarily 

come from a complicated Dodd-Frank process. 

I know that we will get into many of these issues today, but for 

now I want to specifically highlight the municipal advisers rulemaking as one of the clearest, most important examples of the need 

to clarify congressional intent to avoid serious unintended negative 

consequences. 

8 

So I look forward to your testimony today, and I look forward to 

digging into some of these issues. 

Thank you so much. 

I yield back, Mr. Chairman. 

Chairman GARRETT. The gentleman yields back. 

And finally, Mr. Grimm is recognized for 1 minute. 

Mr. GRIMM. I thank the chairman. 

And welcome back, Chairman Schapiro. 

As I am sure most of us here would agree, in order to have 

strong financial markets in the United States, we must have clear 

rules that are fairly and uniformly enforced by regulators such as 

the SEC. And, unfortunately, if the crisis of 2008 showed us anything, it showed that a lack of enforcement of existing rules did 

help to bring our financial system to the brink of disaster. 

Therefore, today, if possible, I have particular interest in hearing 

what steps the SEC has taken thus far to implement the reform 

and modernization recommendation presented by the Boston Consulting Group, as well as which steps the Commission plans on 

taking in this area in the near future. 

With that, I yield back. And I thank you. 

Chairman GARRETT. The gentleman yields back. 

And that, I believe, concludes all of the opening statements. 

We will now recognize our witness, the Honorable Mary L. 

Schapiro, Chairman of the U.S. Securities and Exchange Commission. 

Chairman Schapiro, you are recognized. And thank you again for 

being with us for many, many meetings. 

STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, 

CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION 

Ms. SCHAPIRO. Thank you. 

Chairman Garrett, Ranking Member Waters, and members of 

the subcommittee, I appreciate the opportunity to testify regarding 

the recent activities of the United States Securities and Exchange 

Commission. 

In the past 3 years, the SEC has experienced enormous change, 

substantial challenges, and significant progress. The aftermath of 

the financial crisis, the extensive new responsibilities placed upon 

the agency, and the rapid growth of the financial markets have together obliged the SEC to become more efficient, creative, and productive to achieve its mission, which of course includes capital formation as well as investor protection. 

I am pleased by our record. To cite just a few highlights, the 

Commission filed more enforcement actions in the last fiscal year 

than it has ever filed, and it obtained orders for more than $2.8 

billion in penalties and disgorgement. 

We brought actions arising out of the financial crisis against 

more than 100 individuals and entities, naming 55 CEOs, CFOs, 

and other senior corporate officers. 

We implemented a risk-focused examinations program, and in 

2011 completed more than 1,600 oversight exams. The exam program has resulted in both improved guidance to the financial industry about risky practices and in actionable information for our 

enforcement unit. 

9 

We implemented a new whistleblower program that is already 

providing high-quality information regarding difficult-to-detect 

wrongdoing and permitting the investigators to focus resources 

more efficiently. 

We improved our internal financial controls, which resulted in a 

GAO audit opinion for Fiscal Year 2011 with no material weaknesses. We implemented a host of internal reforms designed to improve the agency’s structure, strengthen capabilities, upgrade internal controls, and enhance workforce competencies. 

And we have used external hiring opportunities to obtain specialized industry expertise in areas as diverse as quantitative analysis, 

computerized trading, and structured products. 

While we have made significant progress in many areas, we realize that we must constantly evolve to keep pace with those we regulate. In addition to improving our core operations, we are working 

to implement the significant new responsibilities assigned to the 

agency under the Dodd-Frank Act and the JOBS Act. 

Already the SEC has proposed or adopted rules for over threefourths of the more than 90 Dodd-Frank provisions that require 

SEC rulemaking. And we have issued 14 of the required studies 

and reports. 

While the agency’s budget has grown in recent years, so have our 

responsibilities in the size and complexity of the markets we oversee. For example, during the past decade, trading volume in the equity markets has more than doubled, as have assets under management by investment advisers now totaling $48 trillion—trends that 

are likely to continue for the foreseeable future. 

In addition to the growth of the market, the new requirement of 

the JOBS Act will also call for significant commitment of agency 

resources. There, too, we have made progress. We have formed 

rulemaking teams comprised of economists, attorneys, and experts. 

We have sought public comment earlier than the rulemaking process requires. 

And in the days immediately following enactment, the staff prepared and posted practical guidance on, among other things, how 

emerging growth companies can file their confidential IPO submissions and on the new requirements and thresholds on Exchange 

Act registration and de-registration. 

With respect to our budget request for Fiscal Year 2013, our request would allow the Commission to achieve four high-priority initiatives. First, it would allow us to enhance our investor protection 

activities by bolstering staff resources and our enforcement in our 

examinations units and by continuing to develop and implement robust analytical models that identify regulated entities with highrisk profiles. 

Second, it would allow us to speed capital formation by eliminating regulatory bottlenecks, to improve economic analysis, and to 

efficiently consider authorizations to businesses engaged in new 

lines of business. 

Third, it would allow us to strengthen the market stability effort. 

Currently, the SEC has fewer than 25 staff persons to monitor the 

8 clearing entities that clear and settle an average of $6.6 trillion 

in transactions every day. We believe a greater presence is needed. 

10 

In addition, there is a need for agency attention to important 

issues such as market structure improvements, high-frequency 

trading, exchange-traded funds, and enhanced efforts against cyber 

security threats. 

Finally, it would allow us to make IT investments in data management, disclosure review, internal accounting and financial reporting, electronic discovery, and to modernize the EDGAR system 

and sec.gov. 

I believe that our past efforts and our future priorities will help 

us fashion an ever-better equipped, more expert, and effective 

agency. I look forward to working with you to build on this 

progress. 

And, of course, I am happy to answer any questions. 

[The prepared statement of Chairman Schapiro can be found on 

page 52 of the appendix.] 

Chairman GARRETT. Great. Thank you very much for your statement. 

We will now begin with questions. And I will recognize myself 

first. We are limited for time, obviously, with all these questions, 

so what I thought I would do is run through half a dozen sort of 

yes-or-no questions, and then come back to elaborate on that, okay? 

Starting, first and foremost, with cost-benefit analysis—I understand that a memorandum was issued regarding current guidance 

on economic analysis. Is that correct? 

Ms. SCHAPIRO. Yes. 

Chairman GARRETT. And that was done back in the spring of this 

year, in March? 

Ms. SCHAPIRO. It was, I believe, distributed in March. It had 

been in the works for a while. 

Chairman GARRETT. Yes. 

This guidance is binding, then, on the agency? 

Ms. SCHAPIRO. Yes, the staff is following the guidance. 

Chairman GARRETT. Right. 

Have you as Chairman put in writing, then, to each of the divisions that it is binding on them? 

Ms. SCHAPIRO. The guidance has been distributed and everybody 

is following it, and everybody understands the expectation is that 

they will follow it. 

And, of course, the Commission is the ultimate arbiter of whether the staff has followed the guidance. The staff understands that 

they are to follow the guidance. 

Chairman GARRETT. Okay, so the staff understands. I guess the 

question, then, is out of—because the memorandum comes out of 

the OGC and the RSFI? 

Ms. SCHAPIRO. It comes from the Chief Economist and the General Counsel. 

Chairman GARRETT. Okay. 

Should a directive come from your office? 

Ms. SCHAPIRO. It certainly could. We have professional staff at 

the SEC, and they understand that this is the expectation and this 

is the requirement. I haven’t sent out an e-mail that says, ‘‘You 

must follow this guidance.’’ They will and are following it. 

Chairman GARRETT. Will you instruct them? 

Ms. SCHAPIRO. I certainly could. 

11 

Chairman GARRETT. Okay. Is this guidance publicly available? 

Ms. SCHAPIRO. It is not publicly available, in part because it has 

been circulated to the Commissioners and we are awaiting input 

from the Commissioners to see if there is any further enhancements or evolution to the guidance based on their input. 

At that point, I am comfortable having it circulated. And of 

course, a number of committees of Congress or Members of Congress have it, as it was provided for a cost-benefit analysis hearing 

last week. 

Chairman GARRETT. So it is mandatory? I am going to go back, 

contrary to what I was going to do, yes or no. So it is mandatory 

on the agency, but it hasn’t been—the Commissioners have not 

signed off on it? 

Ms. SCHAPIRO. They have not formally voted on it. They are 

aware of it. They have been briefed on it. My understanding is 

most of them think it is excellent, and the staff is following it. If 

the Commission has edits to it or changes or enhancements, we 

will as a Commission work through those. And at that point, we 

can vote on it as a formal document. 

Chairman GARRETT. Is it normal, the practice that something becomes mandatory on the agency before the Commission signs off on 

it? 

Ms. SCHAPIRO. In fact, most policies like this, the Commission 

probably doesn’t sign off on most internal procedural policies. But 

this one, because of its importance and because we think the Commission will have valuable input to the process, we wanted to make 

sure they all had it and were comfortable with it. 

Chairman GARRETT. And since you just say because of its importance and because that it is now, as you say, binding on the agency, does the SEC need now then to what, to re-propose the rules 

that it had previously proposed but are not yet done in the process, 

that in other words are not yet final, in order to go through this 

process and to give the public notice of that? 

Ms. SCHAPIRO. The staff is going through a process right now of 

looking at all of the rules that have been proposed but not yet finalized to see if, in light of the new guidance, additional economic 

analysis will be necessary. And where it is necessary, we will supplement with additional analysis. 

It is important to note that this guidance, while it puts everybody on the same page and it communicates very clearly what the 

requirements are for economic analysis in SEC rulemaking, many 

of these things were being done in many rulemakings already. So 

I don’t have a final count on whether it will be necessary to re-propose anything. 

I can give you an example from 2 weeks ago. We actually reopened a comment period based on the receipt of additional data 

and were able to make that part of the file before we went final 

on a rulemaking. So we are looking at whether we need to do more 

with rules that have been proposed but not finalized. 

Chairman GARRETT. Right, because they would have to—if this 

is the new way where you are going forward, that the public would 

want to be able to—the public should be able to have the ability 

to comment on the economic analysis, that in essence was not part 

of the process under this memorandum previously. 

12 

Ms. SCHAPIRO. Although for some rules, there was a complete 

economic analysis already done at the proposing stage, but if there 

is additional data, we can always open the comment period for 

comment on that data. But as I said, the staff is doing an analysis 

of all the existing rules proposals. 

Chairman GARRETT. And so you will do that for each particular 

rule, say whether or not it will happen then? Is that what you are 

saying? 

Ms. SCHAPIRO. On a case-by-case basis with each rule as it comes 

to the Commission for final approval, we will make a determination 

whether the prior economic analysis was sufficient and meets the 

standards of the guidance. 

Chairman GARRETT. And just one last question. Normally when 

you come before this body, you do not give your opinion on legislation. That is sort of your policy I guess, which is fine. But I know 

that with regard to the JOBS Act, you did actually send your position in opposition to the legislation. Was there anything that 

prompted you to do that on that legislation? Is there anyone from 

the Senate or Senate staff who prompted either you or your staff 

to engage in that conduct? 

Ms. SCHAPIRO. No. And, Mr. Chairman, I do give my opinion 

from time to time in fact. As you may recall, I have commented on 

H.R. 2308 in the past and some of the additional requirements in 

your bill on economic cost-benefit analysis for the SEC to do. 

And, as I testified on a number of capital formation initiatives 

over the course of the last year, I stressed some of the issues that 

were in my letter about the need to balance investor protection. 

Chairman GARRETT. But will this affect your ability to implement the JOBS Act because you have— 

Ms. SCHAPIRO. Absolutely not. 

Chairman GARRETT. And will you continue to prioritize it even 

though your limited resources over such a prioritization of DoddFrank? 

Ms. SCHAPIRO. We have many Dodd-Frank rules to complete. As 

was pointed out, we have missed a number of deadlines already. 

Those are a high priority. The JOBS Act is a high priority. It is 

the law of the land. We will absolutely faithfully implement it as 

Congress intended. 

Chairman GARRETT. Thank you. I appreciate it. 

The gentlelady from California? 

Ms. WATERS. Thank you very much. 

I heard you just relate to a question relative to the JOBS Act. 

And I voted for the JOBS Act. It was a leap of faith for me. I had 

some concerns about it, but in an attempt to listen to the arguments about job creation and support for small business and all 

that, I supported it. But, I was very much desirous of having my 

amendment on research included in that. 

I offered an amendment to the provision of the research section 

that would have taken several steps, including preventing the repeal of certain aspects of the so-called Global Settlement that 

former Attorney General Spitzer negotiated almost 10 years ago. 

This settlement limited potentially damaging conflicts of interest 

between the investment banking and research departments of large 

investment firms in the United States. 

13 

The U.S. Chamber of Commerce even wrote to the House, saying 

this aspect of the JOBS Act went too far, saying there may be blurring of boundaries that could create potential conflicts of interest 

between the research and investment components of broker-dealers. And I think you even wrote to the Senate leaders expressing 

your concerns with this provision after the bill passed the House. 

And even though I did not get my amendment in, I don’t know 

what your authority is to pay attention to this area because of your 

understanding and my concerns and others about this potential 

conflict. 

Having said that, I also want—and you may have answered this 

question already about priorities. Does this in any way take priority—the JOBS Act—in the SEC over Dodd-Frank, or how do you 

view that? 

And lastly, since I am going to get all of my questions in so you 

can answer them all at once, I was the author of a proxy access. 

And I know the decision of the courts on proxy access. What are 

we doing to get it back and to be able to frame in ways that the 

court indicated it should be dealt with? 

Ms. SCHAPIRO. Congresswoman, I lived through the research analyst investment banking conflicts of interest in a very direct way 

at FINRA, and we participated in the Global Settlement. And so 

let me say that the Global Settlement remains in effect. 

The issue becomes the fact that a number of FINRA (the self-regulatory organization) rules replaced provisions in the original Global Settlement. And several of those rules are directly implicated by 

the JOBS Act. 

The JOBS Act is quite clear that those rules cannot continue to 

be maintained, nor could new rules be written in particular areas 

that sought to put a wall between research and investment banking. 

So for example, right now research analysts are prohibited from 

participating in pitches with the investment bankers to get their 

investment banking business. Under the JOBS Act, that rule may 

have to be reconsidered. 

There are also quiet periods that now operate within 40 days 

after an IPO or within 15 days of the expiration of a lock-up period 

where research can’t be issued, so-called ‘‘booster shot’’ research. 

The JOBS Act makes it clear that quiet periods’ rules cannot be 

maintained. 

So we will, again, faithfully follow the law, as will FINRA; and 

where rules cannot be maintained, they will have to be eliminated. 

Ms. WATERS. I and others will keep a close eye on this, and want 

to work with you to understand whether or not we are running into 

conflict of interest problems. And maybe we can revisit that at 

some time, but I am really worried about it. 

Ms. SCHAPIRO. That would be fine, and we would be happy to 

provide Congress at some point with our view about whether issues 

are arising again. And let us hope that that they won’t. 

On your question about priority of Dodd-Frank over the JOBS 

Act, I would say that they are both very high priorities. Whenever 

we have congressional mandates, particularly those with specific 

deadlines, we prioritize them over other things. And so we will be 

14 

working very hard on both completing our Dodd-Frank work and 

our JOBS Act work. 

And with respect to proxy access, I think that is not an issue 

that we have the capacity to take on, again, at this time. 

Ms. WATERS. I don’t understand exactly what your last answer 

was. What do you mean you don’t have the capacity to take on at 

this time? 

Ms. SCHAPIRO. In terms of re-proposing a proxy access rule and 

putting that on the Commission’s immediate agenda, we don’t have 

the capacity right now to redo that whole process in terms of the 

number of people and the hours in the day for the agency. It is 

something that we will continue to look at over time, but we are 

just not going to be able to get to it as we finish all this other work. 

Ms. WATERS. Thank you very much. I am going to have to think 

about that. 

Chairman GARRETT. I now recognize the gentleman from Alabama, the chairman of the full Financial Services Committee, 

Chairman Bachus. 

Chairman BACHUS. Thank you. 

Chairman Schapiro, you are hearing questions about economic 

analysis and capital formation. We have expressed concerns about 

the derivative rule, about the Volcker Rule, about the Federal Reserve’s (Fed’s) proposal to enact single counterparty credit limits, 

and all these questions concerning the JOBS Act. And you have expressed that the crowd funding could pose some risk. 

Let me tell you what our motivation is. And I think I speak for 

most Members. My grandfather was a railroad engineer, and that 

was part of his identity. That is what he did. My dad was a contractor. My other grandfather was a farmer. That is really our concern. It is about jobs. And the jobs just aren’t there today. 

People talk about how homeownership is the American dream, 

but even to have homeownership, you have to have a job. And 

today we have unemployment. We have underemployment. We 

have part-time employment. We have temporary workers. We have 

2 million Americans who have even given up looking for a job because they are so discouraged. And the reason we are concerned 

about the Volcker Rule’s impact on jobs, and we passed the JOBS 

Act, which I think was a bipartisan effort, is we want to put America back to work. And I know you do too. 

I can tell you that the institutions you supervise are not based 

on safety and soundness regulation; it is about disclosure and ensuring that investors have all of the information they need, and 

you should not be trying to take the risk out. You are charged with 

promoting capital formation and job creation. 

You know, what does your uncle do? Well, he is unemployed. You 

have seen those lines during the Great Depression, and boy are 

those sad images. And that is why we keep saying, has there been 

an economic analysis on this proposal? What we are really asking 

is, is this going to eliminate jobs? Is this going to put people out 

of work? My question to you would be, do you know of any of the 

agencies that have undertaken a comprehensive economic analysis 

on what Dodd-Frank will do? 

And I won’t pose it as far as capital formation or availability of 

credit, but has anyone done a study on its impact on job creation? 

15 

Because we have had employer after employer that has come in 

and said, this is going to eliminate 2,000 jobs. This is going to 

eliminate 1,000 jobs. And this is somebody’s father. This is somebody’s son who is going to lose their job if we don’t get this balance 

right. So I would ask you, do you know if there has been any study 

done on the cumulative economic impact of Dodd-Frank on job creation, or capital formation, or economic growth? 

Ms. SCHAPIRO. Mr. Chairman, I am not sure that any agencies 

have done that. I have, I think, seen some private sector studies 

that talk about the potential cumulative impact and costs, although 

I don’t know that they have translated it into the number of jobs. 

I would say that we care deeply about job creation, although we 

come at it from a slightly different angle, which is that we must 

have markets in this country that operate with integrity so that investors have confidence to invest in companies that can create jobs, 

that can build factories, and that can create the economic growth 

that we are all striving for. 

And it is getting that balance right with regulation that helps to 

ensure the integrity of the marketplace, that allows a company to 

trade freely and actively on the stock exchanges, and that gives investors sufficient information to make reasoned judgments about, 

‘‘I will put my money here, but not here.’’ To balance the regulation 

necessary for that to happen with a need to not have unnecessary 

and overly burdensome regulation and not to regulate to the nth 

degree because we won’t take all the risk out. 

Investing is risky. And it should be risky. But it should be risky 

not based on a lack of information or a market structure that 

doesn’t work as it didn’t on May 6th. Or because there is fraud or 

Ponzi schemes or other market abuses. So, I actually think we very 

much share the same goal and have slightly different perspectives 

about how to get there. Part of this rule-writing process has been 

about bringing so many perspectives through thousands of comment letters and hundreds of meetings together to help inform us 

about how to get that balance right. 

Chairman BACHUS. Sure. And I appreciate that. I think your job 

is to prevent fraud and misrepresentation; to have markets that operate with integrity but not to take the risk out. Because with risk, 

can come reward. And if you try to take that out, it is an impossible venture. 

Ms. SCHAPIRO. I absolutely agree. 

Chairman BACHUS. Thank you. 

Chairman GARRETT. The gentleman yields back. 

Mrs. Maloney? 

Mrs. MALONEY. Thank you, Mr. Chairman. 

And welcome, Madam Chairman. I really agree very much with 

the gentleman from Alabama that we need to make it a priority to 

put Americans back to work. That is the priority. But we have to 

understand that this financial crisis which by all accounts and 

from every economist points to the cause as coming from huge 

swaths of the financial industry not being regulated at all, or deregulated. And this crisis has cost this country $18 trillion. 

After the Great Depression, Congress put in place three major 

reforms: the FDIC; Glass-Steagall; and the SEC. It was after GlassSteagall was dismantled and when huge swaths of areas that the 

16 

SEC regulated were deregulated principally in energy derivatives, 

that we got this financial crisis. 

So I would argue that balanced and fair regulation can preserve 

jobs, grow our economy, and is very, very important. So I feel that 

we need to implement Dodd-Frank in order to preserve economic 

growth. I think every American would be pleased to have 60 years 

of economic growth, which is what we had after the crisis of the 

Depression and the reforms we have put in place. 

I would like to ask you—you mentioned the equity market structures; and I know that you came out with proposed rules roughly 

2 years ago. But I haven’t seen any activity in the market structure 

since then. And this may be an issue on which we will hold hearings. It is certainly an area that many of my constituents are concerned about and some feel that our current market structure is 

outdated. So, what are your plans for moving forward on market 

structure proposals? 

Ms. SCHAPIRO. Since the Flash Crash of May 6th which heightened everybody’s awareness of the fact that market structure is actually an important issue for capital formation as well as investor 

protection, we have done a number of really important things. We 

put in place single stock circuit breakers so that trading in a stock 

is paused for 5 minutes if a stock moves more than 10 percent over 

a 5-minute period, as a way to prevent the kind of dramatic decline 

we saw in good stocks on that day for no apparent economic reason. 

We also are working on market-wide circuit breakers that would 

halt trading across all the equity and derivatives markets based on 

certain price moves. We also banned naked access to the marketplace, which now requires that customers go through a broker-dealer’s risk management before they can put orders into the market. 

We eliminated stub quotes. We put out clear rules about when 

trades would be broken, and a number of other— 

Mrs. MALONEY. Since my time is limited, I would like to go to 

the statement that you made on the Flash Crash in May of 2010, 

that it took the SEC 5 months to figure out exactly what happened 

and everyone involved agreed that 5 months is just too long. 

So I was concerned about your walking away from your determination to get real-time data in market tracking and I would like 

to put several articles in the record concerning this, and I would 

like to find out exactly where you stand on this: the idea for a database. Do you still support the database? And is your database part 

of the Office of Research that was part of Dodd-Frank? 

Did you just drop the real-time element of it, or the entire idea? 

And did you ever do an RFI to see if the technology was out there 

to be able to do it in real-time and get real comparative costs? 

Ms. SCHAPIRO. We are going forward with the consolidated audit 

trail. As you point out, there is no single comprehensive audit trail 

that exists today. That is why, with heroics, it took 5 months for 

the SEC and CFTC staff to reconstruct trading from May 6th. That 

is just not acceptable, from my perspective, for the world’s largest 

capital markets. 

I hope the consolidated audit trail proposal will go to the Commission for a vote in the near future. We are likely to not require 

real-time reporting. The costs of that are extraordinary, and the 

benefit is limited. 

17 

Mrs. MALONEY. Madam Chairman, would this just be for the 

SEC or is this part of the total research project for— 

Ms. SCHAPIRO. No, this is— 

Mrs. MALONEY. —Office of Research? 

Ms. SCHAPIRO. This is the SEC undertaking to reconstruct trading in the equity and options markets. We would hope eventually 

it would cover the futures markets as well. 

Mrs. MALONEY. I think my time has expired. Thank you. 

Chairman GARRETT. Thank you. The gentlelady yields back. 

The gentleman from Arizona is recognized. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

Madam Chairman, why don’t I do a broad-breadth question instead of, as I touched base with you before, where I was going over 

lots of microissues. 

First, in the JOBS Act that now is in front of you, there are a 

number of implementing mechanics with which you must deal. Can 

you give me a top line of what is moving and any timelines you 

know of? 

Ms. SCHAPIRO. I will be happy to try. 

It is in its early days. I will say the on-ramp provisions were all 

effective upon enactment, but that still required that the SEC staff 

publish guidance and answer lots of the questions we have been 

getting. We did all of that within the first week of the bill being 

signed. And we have received two confidential IPO filings already 

and one bank is already coming to de-register. 

With respect to Title II, the general solicitation, we are required 

to do rulemaking there. The deadline is 90 days. With respect to 

general solicitation, we are required to do rulemaking within 90 

days. That is going to be very, very challenging because the requirement that purchasers be verified as being accredited will raise 

a lot of difficult issues about, ‘‘What does that verification process 

look like?’’ 

Crowd-funding rulemaking is required within 270 days. And I 

will say for general solicitation, crowd funding, regulation A and 

12G, we have two rulemaking teams already assembled. We were 

already doing some of this work on our own initiative to try to facilitate some capital formation issues before the JOBS Act was 

passed. So we have just slipped those people into these new roles. 

In crowd funding, we have to deal with an intermediary registration system if a funding portal, not a broker-dealer, is going to be 

utilized and there are issuer disclosure requirements that we will 

have to develop. 

Mr. SCHWEIKERT. And to that point—and I don’t want to stop 

you—but to that point, any window of timeline there? 

Ms. SCHAPIRO. As I said, the rulemaking is due in 270 days. I 

don’t know what the staff’s best estimate is, but I would be happy 

to try to provide that for the record. 

Mr. SCHWEIKERT. If part of it is—I literally have dozens of folks, 

particularly from Arizona, who are just giddy about both the onramp and also some of the crowd funding and some of the opportunities here. And I keep ginning them up that, ‘‘Hey, it is coming; 

continue to do your work and get your mechanics laid out.’’ So— 

Ms. SCHAPIRO. We have already opened e-mail comment mailboxes, so we are actually already getting comments on what people 

18 

think are important features of these rulemakings. And I think 

that is going to be informative to us. Reg. A, which extends the offerings up to $50 million in a 12- 

month period, will also require rulemaking, although I think that 

is a much easier lift and the thresholds of shareholders for reporting under the 34 Act also requires rulemaking; but again, I think, 

not nearly as complicated as potentially crowd funding and general 

solicitation are. 

Mr. SCHWEIKERT. Any discussions from counsel or around you in 

regards to—I guess the proper term is decimalization moving to— 

for lightly traded securities? 

Ms. SCHAPIRO. My recollection is that the statute requires us to 

study that issue and so our economists are setting out the terms 

of that study now. 

Mr. SCHWEIKERT. Okay. 

To sort of leap to one of our favorite subjects here—and I know 

you have already actually touched on this a bit—give me a top line 

where you see us moving right now in the discussions on money 

market funds. 

Ms. SCHAPIRO. I would be happy to. 

And I just want to add on the JOBS Act, within a day after it 

was enacted, our staff did a Web cast for 1,000 people to explain 

the terms of the Act and how we expected it to operate and interact 

with existing SEC systems. 

Money market funds—we could talk for a long time about that 

issue, and I know it is of interest to a number of Members. The 

staff is working on some proposals for the Commission to consider 

that would seek to try to bolster the resiliency of money market 

funds and finish the job that effectively was begun in 2010 when 

we did a lot of reforms. They were important reforms. I think they 

are judged to have been successful with what they were designed 

to do, which was to ensure that money market funds had sufficient 

liquidity to meet redemption requests. And we saw in the summer, 

with all the volatility in Europe, that they in fact did have sufficient liquidity. 

What those rules did not do is protect against a default by money 

market—defaults on paper held by a money market fund as we saw 

in the Reserve Fund breaking the buck. 

Mr. SCHWEIKERT. Mr. Chairman, I know we are out of time, but 

this is one of those occasions where my great concern is, we did 

have, what was it, two funds that ultimately broke the buck? 

My fear is we do something that damages rates of return in 

those funds for so many investors, so many communities, so many 

pensions. So it is trying to find the rational balance of where we 

stay safe, where we don’t also create a cascade of lower returns for 

lots of folks for decades to come. 

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

Chairman GARRETT. Thank you. The gentleman yields back. 

Ms. Moore is recognized for 5 minutes. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

And you know, I, of course, would like to pursue the same line 

of questioning as my colleague, Mr. Garrett, on the money market 

funds. I do want to commend you, Madam Chairman, for the reforms that you have made in the money market funds, these reVerDate Nov 24 2008 17:46 Jan 30, 2013 Jkt 075091 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\75091.TXT TERRI
19 

forms. But I am concerned that the proposals that your staff may 

be reviewing now; I am just sort of perplexed as to how you came 

to the conclusion that this might be the most expedient thing to do? 

I don’t see how floating the net asset value will continue to retain the liquidity for the customers. And I fear that municipalities, 

for example, will really rely on this instrument—won’t even be able 

to use it if you float it. 

It certainly has been a very valuable instrument for liquidity for 

many companies and municipalities and I don’t understand how 

sort of a pseudo margin requirement would operate and more importantly, I guess I am wondering that if there were customers who 

sort of fled money market funds because they would not be as attractive as a short-term investment, a place to just sort of park 

maybe your payroll or something. 

What would happen with the $2.5 trillion in funds that might 

make their way into banks? Wouldn’t that increase some of the systemic risk that banks might have? I think a lot of banks don’t even 

want the flood of $2.5 trillion in the banking system. 

So I am concerned about the rationale for these new proposals. 

Ms. SCHAPIRO. Congresswoman, let me answer that. Maybe I can 

explain and bring multiple answers to your many questions by 

doing this. 

But at the end of the day, what motivates this is a desire that 

the taxpayer never be on the hook again for these instruments as 

they were in 2008. 

The Reserve Fund— 

Ms. MOORE. But the taxpayers weren’t on the hook. 

Ms. SCHAPIRO. Oh, they absolutely were on the hook. The Treasury had to step in with a guarantee program; the Fed had to step 

in with a liquidity facility. There was a $62 billion fund called the 

Reserve Fund that held just $785 million of Lehman Brothers 

paper. 

On the day that Lehman went into bankruptcy, Reserve experienced a run, $40 billion of shares were— 

Ms. MOORE. Right. 

Ms. SCHAPIRO. —in 2 days. 

They quickly depleted their cash and they began selling securities, further depressing prices in the market. That run quickly 

spread to other money market funds and during that week, investors withdrew $310 billion or 15 percent of all money market fund 

assets. 

Those money market funds depleted their cash and they sought 

to sell portfolio securities into, again, an illiquid market. 

Ms. MOORE. We paid out like $0.99 on the dollar to— 

Ms. SCHAPIRO. On Reserve, after years of litigation. 

But the point is the run spread quickly to the rest of—we call 

it neighborhood risk—the money market fund community— 

Ms. MOORE. I keep— 

Ms. SCHAPIRO. —and it only stopped when the— 

Ms. MOORE. Madam Chairman, I am just afraid of my time— 

Ms. SCHAPIRO. Okay. 

Ms. MOORE. I just still want to make sure that you carry this in 

a direction that I want. 

20 

I do understand it. I think that the reforms that you have made 

really did address that. With respect to requiring greater capital 

requirements and I am just concerned—so go on. 

Ms. SCHAPIRO. The run was only stopped because the Treasury 

stepped in and put a guarantee program in place. But the collateral 

consequences were not just the run on money market funds, but 

the short-term credit markets froze up completely, commercial 

paper issuers had to draw down on their backup lines of credit, and 

that put additional pressure on bank balance sheets. 

Ms. MOORE. Madam Chairman, I just want to make sure—I understand that. I want you get to the question that I asked about 

the—what impact will this have when the money market funds no 

longer serve—for example, if we can’t serve municipalities, they 

may not even be able to use a fund that is structured the way it 

is currently being proposed. 

Ms. SCHAPIRO. There are certainly alternatives to money market 

funds and whether or not the Commission adopts a capital requirement or a floating net asset value, money market funds will continue to exist and will be an option for many, many investors. 

Other options include bank accounts, CDs, direct Treasury or 

other government obligation investments, and direct commercial 

paper investments. But I think what is important here is that we 

will do analysis accompanying any proposal that we might put out 

that will talk about the range of alternative investment products 

that could be considered: What are the tradeoffs in terms of risk 

and yield and liquidity? The extent to which any reforms we propose could shift money market fund investments into alternative 

products; what the impact of those shifts will be. 

We will estimate the best we can the operational costs and competitive impacts of anything we do. We will discuss the tax implications. 

We will have a full-blown analysis. My guess is that this will 

have a very vigorous comment and debate process follow it, then 

we will make a decision about whether this protection of the system from a destabilizing and potentially devastating run is worth 

the cost of changing what the money market industry currently 

looks like. Those are hard, hard questions and I am not belittling 

them in any way. We recognize them, but I also think that they 

are important issues that we, as a regulator and with responsibility 

for the economic system and systemic risk, have to be willing to at 

least talk about. 

Chairman GARRETT. Thank you. 

Ms. MOORE. And thank you for you indulgence, Mr. Chairman. 

Chairman GARRETT. I recognize the gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

After listening to one of my colleagues earlier, I am again reminded of Santayana’s famous admonition that, ‘‘Those who do not 

learn from history are doomed to repeat it.’’ And until we learn the 

lesson of history that when Washington, D.C., decides to lower underwriting standards and effectively mandates, cajoles, incents and 

arm-twists financial institutions into loaning money to people to 

buy homes they cannot afford to keep, then I fear for future financial crises. 

21 

I would also note that, with the possible exception of the practice 

of medicine, I am not sure there was a more regulated industry 

prior to 2008 than the financial services industry; piling on more 

regulation on top of old is not necessarily a solution to the challenges that are before us. 

Madam Chairman, I want to follow up on comments that our full 

committee chairman made, Chairman Bachus. I believe you know 

this, and I am heartened by things that I have heard you say today 

about balance, about the purpose of our capital markets. But I also 

recall that I find myself agreeing with about 80 percent of what our 

President says. I just end up disagreeing with about 80 percent of 

what he does. 

And this goes to the whole question of economic analysis, which 

is really having a cogent defensible jobs impact statement to rulemaking. I have to tell you, whether I am talking to Fortune 50 

CEOs in Dallas, Texas, where I reside, or good, honest, hardworking small business people in the rural areas of the Fifth District of Texas, they cite the red tape and regulatory burden coming 

out of Washington as the number one impediment to job creation, 

at a time when you know our economy is hugely underperforming. 

And so, the first question I have—and there is not much in 

Dodd-Frank I am fond of, but it is the law of the land. Much of 

it you have to implement. So my question is this: Since the passage 

of Dodd-Frank, how many additional employees have been added 

to the SEC? And what is the breakdown between attorneys and 

economists? 

Ms. SCHAPIRO. I don’t have an exact number on the breakdown 

between attorneys and economists. I would be happy to try to get 

that information for you. I think it is important to remember that 

we are also a law enforcement agency. And that requires that we 

have people who can go to court and try cases and conduct investigations. 

I will also say that we have had the largest ramp up in economist staff under my tenure, and, I think, of almost any time in the 

agency’s history. We have 24 economists just working on rule-writing, and we have many more economists who do litigation support, 

risk analysis, quantitative modeling, and so forth. We are hiring 20 

more economists right now, and have offers outstanding to 17 recent Ph.D. candidates, and we have asked for 20 more in Fiscal 

Year 2013— 

Mr. HENSARLING. My time is limited. I appreciate that. So if you 

could get the exact number in specific detail— 

Ms. SCHAPIRO. I would be happy to provide you with that. 

Mr. HENSARLING. —if you could relay that to me, I would be appreciative. 

In the remaining time I have—there has been a lot of discussion 

obviously about money market funds, so I don’t want to belabor the 

point. Clearly, there is concern here. And I guess, Madam Chairman, there may be something to what you are doing. Many of us 

have open minds. 

But at the same time, we are not sure, given the recent changes 

that have been made, that there has been a really thorough study 

on what the impact is going to be on the investment community, 

whether or not the new additions to the rules have had a chance 

22 

to really be assessed. And so, there continues to be great concern 

here on a product that, again, many Americans rely on. And so, I 

would hope that you would be very careful in your deliberations 

there. 

There continues to be a debate with regards to the request for 

funding of your agency. Now, I think we have had something like 

a six- to eight-fold increase in the last decade. Clearly, you have 

outlined a number of challenges. As you are aware, an independent 

management study was part of the Dodd-Frank Act. 

And as I understand it, on March 30th, the SEC issued a report 

of the implementation of the SEC organizational reform recommendations, where it said, ‘‘Staff and management time to devote to this initiative will continue to be in short supply, and in future phases of implementation are likely to require levels of funding that must be directed at other agency priorities at this time.’’ 

Again, given some of the criticisms of the U.S. Court of Appeals 

with respect to the proxy access rules, certain management challenges with respect to leasing and other matters, I guess I have the 

question—I don’t know if you are pushing back on the conclusions 

of the management study, or you just simply don’t see it as a priority, whether I am interpreting this correctly? But many of us 

have great problems in simply putting more money into a vehicle 

that in many respects may not be working. 

Ms. SCHAPIRO. Congressman, I am not arguing with the recommendations at all. In fact, we have made a lot of progress. A 

number of them have been, in fact, implemented, and we are continuing to do so. All we are trying to say there is that BCG estimated it would cost $45 million to $55 million to implement all of 

those recommendations over a 2-year period. We don’t have that 

kind of money to spend on this. We don’t think that is an appropriate amount of money to spend on this. So we are going to take 

these recommendations in chunks. 

And so, we have done a number of things. We have redesigned 

our information technology group. We have implemented a continuous improvement program that is identifying cost savings. In fact, 

over $8 million in cost savings was identified very recently. We are 

restructuring different operations. We have recalibrated the relationship with SROs so that our reliance on them is a leverage point 

for us. We have implemented a new performance management system. We are doing strategic hiring, as Congressman Royce mentioned. 

But we are going to focus on these in increments while work continues on all 17 groups of recommendations that came out of BCG. 

And we are only going to put supplemental contractor dollars to 

workforce planning initiatives and data governance initiatives until 

those are completed. And then, we will do more of them while we 

continue to do things like look at our regional office strategy and 

some of the other ongoing work streams. 

So we are moving ahead on multiple fronts, but we also have an 

enormous amount of work that Congress has asked us to do, 

whether it is Dodd-Frank or the JOBS Act, and management attention is in a bit short supply. 

Mr. HENSARLING. I yield back. 

Chairman GARRETT. The gentleman yields back. 

23 

I believe Mr. Green actually has been here since the beginning. 

So— 

Mr. GREEN. Thank you, Mr. Chairman. 

And I thank Chairman Schapiro for appearing here today as 

well. 

My intelligence indicates that in 2005, you had approximately 19 examiners for each $1 trillion managed by investment advisers. 

And today, you have approximately 10. Is this correct, Madam 

Chairman? 

Ms. SCHAPIRO. The magnitude is about right. I am not sure of 

the exact numbers. But, yes, we are only now back at our 2005 

staffing levels overall for the agency. 

Mr. GREEN. There is also an indication that broker-dealers have 

increased from 95,000 in 2005 to 160,000 today. Is this generally 

in the ballpark as well? 

Ms. SCHAPIRO. That would be broker-dealer branch offices? 

Mr. GREEN. Yes. 

Ms. SCHAPIRO. The actual number of broker-dealer firms is about 

4,500, I believe. 

Mr. GREEN. 4,500? 

Ms. SCHAPIRO. But 160,000 branch offices. 

Mr. GREEN. Yes. Is it fair to say that with these increases, you 

do need additional cops on the beat? 

Ms. SCHAPIRO. We do. The markets are not only extraordinarily 

more complex, but they are growing rapidly. New products are devised and introduced all the time. We have new responsibilities 

with respect to over-the-counter derivatives, with respect to municipal advisers, private funds and hedge funds and so forth that have 

registered, and new credit rating agency responsibilities. 

We are trying to deploy the best technology in the SEC’s history 

to help us manage all of this burden. But, we do need more examiners and we do need more enforcement staff. 

Mr. GREEN. Much has been said, and I agree with much of what 

has been said, about overregulation. But I do think that you should 

take just a moment and give us some indication of what can happen if we have underfunding such that you cannot properly police 

the consequences of underfunding. Would you speak briefly on the 

consequences, please, of underfunding? 

Ms. SCHAPIRO. Sure. I think there are four broad categories of 

problems. One is that we won’t adequately staff our mission-essential functions, like going into brokerage firms, mutual funds or investment advisers and examining their activities to ensure that 

they are treating customers fairly. And we won’t have the resources 

to bring all of the fraud cases and stop the Ponzi schemes that we 

should. 

Mr. GREEN. For just a moment, do this. Elaborate on what happens to market integrity and investor confidence when there is a 

failure in the system because of underfunding. 

Ms. SCHAPIRO. I can give you a very specific example. 

After May 6th, the Flash Crash, when we saw that our market 

structure failed very badly, there were net outflows from equity 

mutual funds by investors for about every single week for about 6 

or 8 months after that period. Investors had lost confidence in the 

integrity of the marketplace and its ability to function fairly. 

24 

We see investors harmed by an enormous number of frauds to 

very devastating consequences. And that stops them from ever investing again, and that takes that capital out of the system and 

away from companies that can use it to create jobs and to grow 

their businesses. So, a failure to enforce the securities laws has 

real concrete, on-the-ground ramifications for investors who are 

cheated or defrauded. It has real consequences for our ability to 

oversee the marketplace when we don’t have adequate funding. 

And also, it has real consequences for businesses that don’t want 

to face regulatory bottlenecks. If they come to the SEC and say, ‘‘I 

want an exemptive order in order to be able to offer a new exchange-traded fund,’’ and we don’t have the staff and the resources 

to devote attention to that exemptive order, businesses are held up 

from doing what they want to do as well. 

Mr. GREEN. As I close, it is a difficult position that you are in, 

because you have a big job to do. It is huge. 

If you are not properly funded and we have some sort of breakdown—and I am trying to be polite with my language—you will be 

accused of not doing your job. And many times the reason that 

things can’t get done is because you don’t have the resources to do 

these things. 

So it puts you in a very difficult position. You, on one hand, have 

to politely ask for the funding, understanding that if you don’t get 

it, there can be consequences. But it is difficult for you to talk 

about the consequences, because you don’t want to insult the people that you have to ask to fund the agency. 

And I have great sympathy for the position that you are in. I do 

hope that you can continue to make the case for the need for funding and the consequences of underfunding. I think overregulation 

is without question a matter to be considered. But underfunding is 

also of paramount importance and I thank you for making the case. 

Chairman GARRETT. The gentleman yields back. 

Mr. Pearce is recognized for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

And thank you, Madam Chairman, for being here and answering 

the questions. On page 11 in your testimony, you talk about investor confidence and the fairness of the financial markets. And so I 

kind of want to pursue the information on MF Global. 

Coming down into the decision on the bankruptcy there was an 

option to go one direction to Chapter 11, which there are nuances 

that seem to favor creditors. And then the other option was to go 

to Chapter 7, which seemed to have nuances that favored customers. 

So who made the decision that it—I previously questioned Mr. 

Harbeck with SIPC, the CEO, and he told me that he was notified 

by a member of the SEC Trading and Market Division at 5:20 a.m. 

that, ‘‘Things are really rapidly deteriorating at MF Global.’’ So at 

5:20 in the morning, Mr. Harbeck was informed that the decision 

had already been made. Who made that decision? 

Ms. SCHAPIRO. Congressman, my understanding, and I will be 

happy to verify this for you, is that with respect to the holding 

company, the decision to go into bankruptcy was made by them 

and their management. The SEC staff made a— 

25 

Mr. PEARCE. Who decided that it was going to be selected as a 

security firm rather than a commodity trading firm? That was a 

pretty key little point. 

Ms. SCHAPIRO. The SEC staff made a recommendation to the 

CFTC Chairman and to me that the broker-dealer, the dually registered Futures Commission merchant broker-dealer be put into 

SIPC. 

Mr. PEARCE. Which would mean that—so that we are going to go 

and we are going to favor the creditors rather than the customers, 

right? 

Ms. SCHAPIRO. Not under SIPC, no. And SIPC is required, when 

it becomes clear that a brokerage firm is not capable of meeting its 

obligations to its customers— 

Mr. PEARCE. Yes, but— 

Ms. SCHAPIRO. —and SIPC— 

Mr. PEARCE. —proceeding as a Chapter 11, if I could interrupt— 

proceeding as a Chapter 11 allows them to continue to try, doesn’t 

it? 

Ms. SCHAPIRO. But that is not at the broker-dealer level. That 

may have been at the holding company level. At the broker-dealer 

level, once it is clear they can’t meet their obligations to their brokerage customers under SIPA, the appropriate course is the institution of a SIPC proceeding. 

Mr. PEARCE. So that decision was again made by whom? 

Ms. SCHAPIRO. It was a recommendation by the SEC staff to— 

Mr. PEARCE. You all were in the room watching the progression 

of MF Global. When they began to dip down and use those customers’ segregated funds, did that qualify as misconduct? 

Because I am reading in the second paragraph on page 11 there 

that you were to act quickly to halt misconduct. Is that misconduct 

when MF Global began to reach down and use that money? 

Ms. SCHAPIRO. I have to say that I don’t want to prejudge any 

potential enforcement action by opining upon whether they violated 

the law. 

Mr. PEARCE. So you think that it is okay for— 

Ms. SCHAPIRO. No, it is never okay to utilize customer assets for 

the— 

Mr. PEARCE. Okay, so they were doing it. It says here that you 

are to act quickly. That is your testimony. It says, ‘‘We are going 

to act quickly to halt misconduct.’’ And you are saying it is never 

appropriate. Why didn’t you step in and stop that? 

Ms. SCHAPIRO. Congressman, if I could just point out, there were 

only 318 securities accounts at this firm. There were 30,000 futures 

accounts. We were not the regulator or primarily looking at—or 

looking at all at—what was happening with respect to the futures 

segregated accounts. That would have been— 

Mr. PEARCE. But you have an input into the room; so you have 

the guy who worked for Goldman Sachs sitting there in the room, 

Mr. Gensler, who later recuses himself. Did you as the SEC express 

concern about who the CFTC had in the room; that you had a guy 

who was really deeply embedded with the people who are in the 

process? 

I think that on October 27th—I think Goldman Sachs actually 

made a large purchase. So you have Mr. Gensler sitting in here, 

26 

who previously worked for Goldman. They make a large purchase 

of securities. They didn’t even bother giving the money to them. 

So MF Global is starving for cash and surely—you said your law 

enforcement agency—surely law enforcement doesn’t stop and say, 

‘‘I am only in charge of law enforcement for my 318 firms?’’ Somebody has to be blowing the whistle here. 

Ms. SCHAPIRO. Of course, I agree with you. And the SEC, the 

CFTC, the FBI, and the U.K. Financial Services Authority are all 

heavily engaged, along with the trustee in bankruptcy and the 

trustee in SIPC, with investigating exactly what happened and 

what went wrong in this firm. 

I raise the point about there only being 318 securities accounts 

because it is a very tiny part of what happened here as compared 

to the futures side. 

So the primary regulator there was the Chicago Mercantile Exchange— 

Mr. PEARCE. If I can take back my time, I need to make one 

more comment. 

From this perspective, I see all the regulators sitting in a room 

watching the thing turn upside down. You have 36,000 hog farmers 

and dairy farmers and people out here who have their money at 

stake. They would be the 99 percent. 

I see regulators which allowed Goldman Sachs to come in and 

buy assets; George Soros to buy assets at deeply discounted prices 

all the while saying that, ‘‘We are there to stop misconduct.’’ 

Watching people dip into the customer trading accounts without 

securitizing it on the other end. For 4 or 5 days, the regulators sat 

there. 

We talk every day in this Administration about fairness to the 

99 percent. But when I see the actions, I see things that look desperately like the 1 percent got much more fair treatment than the 

99 percent. 

Ms. SCHAPIRO. Congressman, let me just say that if there are 

violations of the law here, we will pursue them with as much vigor 

and force as we possibly— 

Mr. PEARCE. I hear that, but the last time we asked, nobody had 

even bothered talking to Mr. Corzine. Mr. Corzine was the one at 

the helm. Nobody had even bothered talking to him. 

I yield back, Mr. Chairman. 

Chairman GARRETT. The gentleman yields back. 

Mr. Lynch is recognized for 5 minutes. 

Mr. LYNCH. Thank you Mr. Chairman. 

And Madam Chairman, thank you very much for coming to this 

committee and helping us with our work. 

I do want to follow up on the line of questioning that was being 

conducted by Ms. Moore previously regarding the possibility of the 

proposal of the SEC going to a net asset value standard for shortterm money market funds. 

And I understand that about 57 percent of the short-term municipal debt is currently being held in these short-term money market 

funds. 

As you well know, in many of our districts, State and local governments are in difficult straits. And I am wondering how you see 

the proposal to go to a NAV standard? What that will do to municVerDate Nov 24 2008 17:46 Jan 30, 2013 Jkt 075091 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\75091.TXT TERRI
27 

ipal markets? I am very concerned about that. And I just wanted 

to follow through your thinking on that? 

Ms. SCHAPIRO. Absolutely. This is an area of concern for us. 

And— 

Mr. LYNCH. I would be happy to hear that. 

Ms. SCHAPIRO. And I should say—and you may not have been in 

the room when we began this conversation—we do not take this on 

lightly, this whole area of money market fund reform. 

We did a set of changes in 2010 we think were very important and very helpful to bolster the resiliency of this market. It is a $2.5 

trillion market. We understand it is important. We understand why 

people love it. The risk isn’t priced into the product. 

But, I also believe it creates real systemic risk and the potential 

for the taxpayer to be on the hook again as they were in 2008 when 

the Reserve Fund broke the buck. That said, there are lots of important issues to explore here. One is the use by municipalities of 

money market funds and what kind of cost-benefit analysis we can 

do around that issue to understand what their alternatives are and 

whether or not just having a floating net asset value or perhaps 

a capital requirement would in any way dissuade them from continuing to utilize this product. And we are having those conversations. 

Mr. LYNCH. Let me just jump in there because I don’t want all 

my time to be—I have another question. But, if you look at the whole market, it is probably closer to $6 trillion. I know that you know the very short-term is probably $2.5 

trillion to $3 trillion, but if we move that money out of short-term 

money market funds, it is like to go into banks that we are trying 

not to get bigger. 

We don’t want these banks to get even bigger. But I think that 

might be the perhaps unintended consequences of what you are 

proposing here. Or going to hedge funds or some other alternative, 

as you—that really presents another set of risks that I think we 

may not be anticipating. 

Ms. SCHAPIRO. There no question that each alternative involves 

tradeoffs, whether it is less yield or more risk. And, we are currently evaluating survey data from corporate treasurers, including 

those who actually don’t use money market funds, to look at how 

they currently allocate their portfolios. 

I will say for the corporate treasurers who don’t use money market funds for cash management, the bulk of their assets are actually in government securities; although a significant amount are in 

bank accounts. 

But, these are important issues and they are issues we will be 

pursuing as we try to formulate a potential approach here. 

Mr. LYNCH. I just ask for caution; that is all. 

Ms. SCHAPIRO. Absolutely. 

Mr. LYNCH. I really am concerned about this, especially with respect to the municipal markets here. 

Ms. SCHAPIRO. We have heard the concern, believe me. 

Mr. LYNCH. Okay. 

Ms. SCHAPIRO. I have been the subject of lots of vitriol about 

even raising this issue. We have done a President’s Working Group 

report that laid out a series of options. We have held a roundtable. 

28 

We have had hundreds of meetings and comment letters. And we 

haven’t even put out a proposal yet. So— 

Mr. LYNCH. Okay. 

Ms. SCHAPIRO. —we will proceed with great deliberation, I assure 

you. 

Mr. LYNCH. All right. Thank you for that. 

The other question I had is, back in January 2010, the SEC 

issued a concept release on restructuring U.S. equity markets. 

Mr. Capuano and I recently asked for some response to that. I 

know you have moved to put into effect the proposals and the concept release and you have not done that yet. And we are still dealing with a fair amount of volatility in market structure, such as 

opaqueness and a high percentage of canceled orders. 

I guess what I am asking you is, do you foresee the SEC putting 

out a proposal on the concept release any time soon? 

Ms. SCHAPIRO. We have done quite a few things in the market 

structure area already—single stock circuit breakers; banning 

naked access to the markets. 

We will shortly, I hope, approve a new proposal for a limit up, 

limit down that will not allow orders outside a specified range to 

even be entered into the marketplace, hopefully helping to stem 

some of the volatility. And I hope that we will shortly propose and 

adopt market-wide circuit breakers that will be keyed across the 

equity options and futures markets, and if we have very dramatic 

moves in the marketplace. 

That said, there is unfinished work in the market structure area, 

particularly with respect to high frequency trading. 

Mr. LYNCH. I just want to add that I know you are working at 

2005 funding levels. And that is absolutely wrong. So I am not 

blaming you. I don’t think you have the resources you need. But 

this is an incredibly important issue. And, we have to get this 

done. So— 

Ms. SCHAPIRO. I couldn’t agree with you more. To me, one of the 

most important things the SEC needs to be focused on is market 

quality and what is contributing to or detracting from market quality. 

Mr. LYNCH. All right. 

Thank you, Mr. Chairman. I thank you for your indulgence. 

Chairman GARRETT. Thank you. 

Mr. Royce is recognized for 5 minutes. 

Mr. ROYCE. Thank you. 

Chairman Schapiro, it is nice to see you today. 

As you know, the Department of Labor is currently working on 

a proposal to revise the definition of fiduciary as it relates to the 

provision of individualized investment advice for a fee, which the 

Department might release this summer. 

And officials at the Department have made a number of public 

comments about how they are working with the Commission and 

how they are working with other Federal agencies, I assume Treasury and the CFTC and so forth, to mitigate the impact that the revised definition will have on the regulations being enforced by the 

other agencies. 

29 

Is there a concern at the Commission that the next proposed rule 

issued by the DOL will have implications beyond fair jurisdiction 

and implications for your jurisdiction? 

Ms. SCHAPIRO. It is a great question. And we have had a number 

of conversations with the Department of Labor. Our economists 

have been, in fact, sharing literature reviews and so forth. And I 

think there are three primary issues. 

One has been resolved, fortunately. And that is whether the disclosures that would be required by swap dealers and swap market 

participants under Dodd-Frank could turn those entities into fiduciaries under ERISA. And DOL has given us clear guidance in a 

letter to us and to the CFTC that that will not be the case. 

But it leaves the second issue, which is whether there should be 

a fiduciary duty for investment advisers and broker-dealers when 

they are giving advice to retail customers about securities, a standard that exists on the adviser side but not the broker-dealer side 

currently, and whether there is a potential for the DOL fiduciary 

rule to conflict with that. 

We will work very hard to make sure that conflict doesn’t occur. 

Our fiduciary duties are more disclosure-oriented. DOL’s are more 

toward prohibiting certain kinds of transactions by fiduciaries. 

The third issue—and I think the one the securities industry is 

most concerned about—is whether broker-dealers who provide advice on IRA accounts, which I think account for about 40 percent 

of broker-dealer accounts, would be fiduciaries under ERISA. Today 

they are not, and I think that is probably the major point of contention in the DOL rulemaking from the perspective of the securities industry. 

Mr. ROYCE. Let me ask you—the letter that you received—that 

is not binding from the DOL. Am I correct, or how do you interpret 

that? 

Ms. SCHAPIRO. I haven’t looked lately. It came last fall. I would 

have to go back and look at the exact wording of it. But, I took it 

as an official declaration that they do not believe compliance with 

the business conduct standards under Dodd-Frank rulemaking 

would turn those dealers into fiduciaries. 

Mr. ROYCE. Let me ask you another quick question. The issue I 

wanted to talk to you about again was the liquidation of Lehman. 

In your response previously, you mentioned the Commission staff 

is implementing the recommendations regarding the trustees’ fees. 

What progress can you share with us? Because the data I have is 

as follows, and this is on the progress report by LBI. And so here are the highlights: Unresolved customer claims, $41 billion; claims that moved from disputed to closed, $300 million— 

so that is 0.7 percent of unresolved claims; claims allowed in the 

period, 0.1 percent of unresolved claims, or $40 million; fees in the 

6-month period for the trustee, the fees are $92 million; total fees 

to date, $733 million. So for every $1 of claims resolved in the last 

6 months, the trustee spent $0.27. 

To get back to a point that I have raised before—at what point 

do we look at the progress being made, which after those initial 

back office customer account transfers appears to be minimal, and 

at what point do we look at this huge bill being run up and question the reasonableness of these fees? 

30 

Ms. SCHAPIRO. I think it is a very fair question. And there has 

clearly never been a more complex liquidation proceeding than the 

Lehman one under SIPA. As you pointed out, we are looking very 

closely at recommendations from our Inspector General about our 

oversight of SIPC. And he put forth, I think, 12 recommendations. 

Ten of those have already been implemented. The last two are 

in the process of being implemented. They required consultation 

with the Commission. And we are working hard to do closer oversight of SIPC and the trustee’s fees. As you know, we don’t select 

the trustee. And in fact, under SIPA, it is required. 

Mr. ROYCE. I know, but that brings up another point. And that 

is why I would like you to monitor this case; because, as you know, 

this was the trustee that was assigned to the MF Global case as 

well. To me, it seems that a critical function of a trustee is to manage disputes and settle claims, and I watch the progress on this 

and it really calls that into question in my mind. 

Ms. SCHAPIRO. All I can really say is that we are redoubling our 

efforts for oversight in this regard, but there are contingencies in 

this liquidation that are going to take a significant amount of time 

to resolve. As you know, there are multiple entities involved, multiple jurisdictions involved, and it is enormously complex. 

I do think that the litigation with Barclays over the transfer of 

funds under the Asset Purchase Agreement having been resolved 

on one level could amount to a substantial payout. The problem is 

that decision has been appealed to the courts. And again, that will 

take time. 

Mr. ROYCE. Thank you, Chairman Schapiro. 

Thank you, Mr. Chairman. 

Chairman GARRETT. Thank you. 

The gentleman from California is recognized. 

Mr. SHERMAN. Thank you. 

Madam Chairman, thanks for being here; so many questions, so 

little time. Many of the questions I raise I will ask you to respond 

to for the record. 

The first concerns REITs. Let me mention that the SEC published—your concept released to revisit the—Congress has provided 

a carve-out in the Investment Company Act of 1940. 

We need REITs to be involved, especially in the California economy. Investor protection is paramount, but I know you will give 

due consideration to the congressional carve-out of mortgage REITs 

and the role they play in capital formation. 

Now let me shift over to Iran. Companies that do business with 

Iran—particularly with the Iranian government, particularly in 

areas of strategic significance—undermine American foreign policy, 

but also expose their shareholders to risks, namely sanctions. 

And, in fact, inside word here from Congress—don’t want to provide insider information—those risks are going to increase as Congress imposes new sanctions on those companies, both U.S.- and 

foreign-based, that do business with Iran and its government. 

By a vote of 410 Members of the House, we adopted the Iran 

Threat Reduction Act. And I would like you to tell us for the record 

what the SEC has done to further the disclosure requirements of 

that Act. 

31 

I think investors deserve to know which companies are engaged 

in what kinds of activities with Iran, both to protect themselves financially, but also investors have a right to make investment decisions based on foreign policy concerns as well. 

Chairman Schapiro, you were here back in July 2010, and you 

told us that you would be taking steps to educate investors. And 

I would like to know what steps the SEC has taken to educate investors about the risks companies face from doing business in Iran 

and the potential impact of sanctions. 

Of particular concern is that the SEC established 4 years ago a 

Web-based tool to allow investors access to a list of companies 

which in their public filings with the Commission disclosed that 

they conduct business in countries that sponsor terrorism. 

Now the greatest problem with is that it was effective, and the 

companies wanted to deny potential investors information about 

what they were doing. They didn’t want to have to face investor 

pressure. So they pressured the Commission, and they said, ‘‘Aha! 

Your tool is imperfect.’’ 

The response of the SEC was to pull the tool and to try to make 

it even more perfect. And now it is 4 years later and nothing has 

been done and the tool still isn’t up. So I would like to ask what 

efforts the SEC is making to reestablish this tool so that investors 

can easily identify those companies that do business in countries 

designated as state sponsors of terrorism. 

Why don’t I give you a minute to make some more comments 

about Iran? And then I will have one other question I need to 

squeeze in. 

Ms. SCHAPIRO. Congressman, I am going to have to get back to 

you on the tool, specifically. I remember reading about it. It was 

discontinued by my predecessor. I remember there were lots of 

issues around it. But I would like to supplement the record— 

Mr. SHERMAN. The real issue was that it was effective. 

Ms. SCHAPIRO. That may well be the case. I will say— 

Mr. SHERMAN. And we did have a promise that it would be restored, and it has been 4 years. 

Ms. SCHAPIRO. I will get right on it. I will also say that the staff 

had been working on a disclosure rule for companies that face material risks from possible violation of sanctions legislation. And that 

is circulating with the Commission. 

But I will say that the Senate appropriations report for this year 

actually directs us to require disclosure by companies of activities 

that may subject them to sanctions under the Iran Sanctions Act 

and the staff is in the process of developing that rule. It is very 

similar to what the House passed in December, so I can get you 

an exact timeframe for that, but it is well under way. 

Mr. SHERMAN. I look forward to reading that timeframe in your 

written response. And I hope that you will be moving forward as 

you promised us in 2010 with an education program. 

Finally, I would like to shift to the FASB standards dealing with 

leases. This could balloon the liabilities reported on the balance 

sheets of almost every American company. 

There are economic studies that show that this rule could do real 

harm to the U.S. economy. And I would like you to explain what 

steps the SEC will take to work with the FASB to make sure that 

32 

the economic impact of rule changes is reviewed and that the SEC 

takes a broad policy view as to this possible change in FASB standards. 

Ms. SCHAPIRO. As you know, we oversee the FASB, and I am not 

intimately familiar with all the requirements of the proposed 

standard, but I will be happy to provide you with information 

about exactly where it stands and what the Commission’s approach 

will be to that. 

Mr. SHERMAN. You come here for 5 minutes and you end up with 

a lot of work, but thank you very much for your future steps. 

Thank you. 

Ms. SCHAPIRO. Thank you. 

Chairman GARRETT. Great. 

The gentleman yields back. 

Mr. Fitzpatrick is recognized for 5 minutes. 

Mr. FITZPATRICK. Thank you. 

Chairman Schapiro, a couple of weeks ago, we had a hearing in 

this subcommittee on the issue of mandatory audit-firm rotation. 

And at that hearing the chairman of the PCAOB—his name is Mr. 

James Doty—stated that conducting a cost-benefit analysis related 

to the PCAOB concept release on mandatory audit firm rotation 

would be, what he called, ‘‘putting the cart before the horse.’’ And 

I was wondering if you agreed with that sentiment? 

Ms. SCHAPIRO. I didn’t hear that statement. I know that under 

the JOBS Act, the PCAOB will be required to do an analysis and 

that would be important for the SEC to see in reviewing any proposed PCAOB standard. 

Mr. FITZPATRICK. I also, at that hearing—I brought with me a 

stack of comment letters which would been submitted to the 

PCAOB, and a vast majority of those comment letters were opposed 

to the idea of mandatory audit firm rotations so it sounds like you 

can commit to the committee that the SEC will require—you are 

saying the JOBS Act requires— 

Ms. SCHAPIRO. I believe it does— 

Mr. FITZPATRICK. —financial analysis? 

Ms. SCHAPIRO. —that it requires some kind of an economic impact analysis. 

And, of course, the comment period I think has just ended, 

maybe this week, on this proposal and the PCAOB has held some 

public hearings and roundtables. So there will be a lot of information available for the SEC staff in reviewing this potential rule as 

well as for the PCAOB staff. 

Mr. FITZPATRICK. But the Commission had, in the event that the 

JOBS Act doesn’t require they take the position, it is not required 

by the Act, had the SEC step in and say, we want to see an economic analysis? 

Ms. SCHAPIRO. We will certainly want to see an analysis. This is 

a very major undertaking. This is an issue that has been debated 

for years—was debated in Sarbanes-Oxley. The alternative that 

was adopted then was a lead partner rotation and that happens 

every 5 years and I think that has actually had a positive effect. 

So this is not a new issue to us and one which we will be very 

closely involved in. 

Mr. FITZPATRICK. Okay. 

33 

And I wanted to follow up on Congresswoman Moore’s questions. 

In 2008, was it only the second time in over 40 years that a fund 

broke the buck, this is on money markets. As a result, in 2010, the 

Commission adopted reforms for the money market industry and 

the reforms seem to be working. So I was wondering, what is the 

purpose of proposing rule changes at this point? 

Ms. SCHAPIRO. Sure. But it is important to note that while the 

Reserve Fund was one of only two that actually broke the buck, 

just in the period of I think 2008 to 2009, it might have been 2007 

to 2008, over 100 money market fund sponsors had to step in and 

provide capital or other support so that their money market funds 

wouldn’t break the buck. Now that is implicit; it is not explicit. Investors expected it to happen, but there is no source of capital that 

is committed or dedicated to money market funds that had to necessarily be there. 

And of course in the Reserve Fund’s case, they didn’t have any 

capital. Their parent or their sponsor was not in a position to buy 

out that Lehman paper that caused them to break the buck. The 

result was obviously a devastating run stopped only by the American taxpayer in the form of a Treasury guarantee program. 

We still believe that even though the reforms that we put forward in 2010 have had a very positive impact on money market 

fund resiliency, it doesn’t protect against a credit event that could 

cause a money market fund to break the buck. Investors don’t appreciate that these are investments—these are not cash instruments, they are investments, and when they break the buck, the 

impetus to run is enormous, and institutions get out first, leaving 

retail investors in the fund and the losses are concentrated with 

those remaining investors. 

And again, from my perspective, the fact that the American taxpayer had to be on the hook for this $2.5 trillion industry, at that 

time it was even larger, is just not an acceptable place for us to 

be. We have to explore whether there are other things we can do 

to ensure that that doesn’t happen. 

We will be very deliberate. We will try to be very thoughtful and 

very careful about how we go forward with this. 

We appreciate that these are valuable instruments for corporate 

treasurers, for municipalities, for individual investors, but the reality is they have a structural weakness that makes them susceptible to runs that can devastate our entire economy. 

Mr. FITZPATRICK. So is this a proposed rule at this point or are 

you actually— 

Ms. SCHAPIRO. It is not even— 

Mr. FITZPATRICK. —in the process? 

Ms. SCHAPIRO. —it is not even a proposed rule. 

The staff is working on a proposal. And it has largely taken the 

form of either floating net asset value, meaning the price would reflect the actual value of the instrument, or in the alternative, capital requirements so that if one does get into trouble, there is a 

capital buffer there to absorb the losses, or a capital requirement 

in conjunction with some kind of minimum account balance for 

some short term of time. 

Mr. FITZPATRICK. Where do the other Commissioners stand? 

34 

Ms. SCHAPIRO. You would really need to ask them. Some of them 

have spoken publicly about it and expressed reluctance. I think 

they all would say right now they still have an open mind. But we 

will see and, of course, it will require three votes to become a proposal. 

Mr. FITZPATRICK. Thank you. 

Chairman GARRETT. The gentleman yields back. 

Mr. Miller is recognized. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

I will have questions for the record or a question for the record 

about the conflict minerals regulation to sort of certification that 

conflict minerals were not used in manufactured products. 

But the questions I have today are about the valuation of second 

liens in the biggest banks financial statements. 

Obviously, the biggest banks are enormous and they do everything and they operate everywhere. Chase’s balance sheet, for instance, is $2.3 trillion. It is apparent from the fact that several of 

the biggest banks are trading well below book value that investors 

are skeptical about the valuation of some of their assets and their 

liabilities. And one of those appears to be second liens. 

They have enormous portfolios of second liens and apparently do 

not—they continue to buy those at par as long the second liens are 

performing, but a good many of those second liens are behind firsts 

that are not performing or behind firsts that are underwater. So 

those are second liens that may have trouble in their future. 

And if a first mortgage ends up defaulting and going into foreclosure, the second lien loses everything, they lose out completely. 

Is that something the SEC is looking at as an investor protection 

the valuation of second liens? 

Ms. SCHAPIRO. It certainly would be and our concern obviously 

would be for the quality and the truthfulness of the disclosure and 

the disclosure by the banks. I have a recollection, but I would like 

to clarify it for the record, that we have given guidance in this area 

in the last 6 months or so to the large banks. 

But if I could supplement the record with that information, that 

would be great. 

Mr. MILLER OF NORTH CAROLINA. Okay. You will provide that 

additional information in— 

Ms. SCHAPIRO. Absolutely. 

Mr. MILLER OF NORTH CAROLINA. —in a supplemental? Okay. 

Ms. SCHAPIRO. But whether we have given guidance, we are seeing in our review of the largest financial institutions—public disclosure on this issue. 

Mr. MILLER OF NORTH CAROLINA. And you do agree that second 

liens are behind even if a second lien is performing if it is behind 

either a nonperforming first, a delinquent first, or an underwater 

first, which is essentially unsecured debt, that it should be valued 

at much less than par? 

Ms. SCHAPIRO. I am not an expert so I probably should not say 

whether I agree, but that seems to make sense to me. 

Mr. MILLER OF NORTH CAROLINA. All right. 

Mr. Chairman, I will yield back. 

Chairman GARRETT. Thank you. 

The gentleman yields back. 

35 

Mr. Stivers is recognized for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. 

Welcome Ms. Schapiro, and thanks for taking a lot of your time 

today to talk with us about a few things. 

I wanted to follow up a little bit on a few things that have already been asked. 

One question that has not been asked is sort of a structural 

question; a question about harmonization between the SEC and the 

CFTC which will lead to a bigger structural question in a second. 

But how are you doing at harmonizing the derivatives rules? 

Ms. SCHAPIRO. I think we are actually doing very well. 

Last week, we were able to finalize a really important 

foundational rule which is the definition of security-based swap 

dealers, major swap market participant, major security-based swap 

market participant. And for all those dry words, those are really 

important rules. We were able to do that jointly and get that done. 

The next big joint rulemaking will be to define the products: 

what is a security-based swap and a swap? 

Once those are done, the two agencies can go forward with finalizing other rule requirements, some of which will not be identical 

because there are differences in the markets we each regulate. We 

are just 5 percent of this multi-hundreds of trillions of dollar market. The CFTC has the bulk of it and with commodity swaps and 

energy swaps and interest rates, it is a very diverse market for 

them. For us, it is a much narrower market. 

Mr. STIVERS. And do these new agreed-upon definitions conform 

with the Securities and Exchange Act, because I know that your 

rules originally did and the CFTC’s did not. So I would like it when 

you conform with the law—let me go ahead and be clear there. 

Ms. SCHAPIRO. Yes, I think what we relied on a lot in our security-based swap dealer definition is the trader-dealer distinction 

that exists, and has existed for many, many years under the securities laws. And I think what the CFTC ultimately adopted as this 

process went along was much more of that thinking. So I think 

they are consistent with the Federal securities laws. 

Mr. STIVERS. Great. 

And I don’t know if you have paying attention to what has happened here in the House. The House has passed a couple of bills, 

one of which is mine, H.R. 2779; and another, H.R. 2682, which we 

passed with overwhelming majorities. 

I know mine got 357 votes, and I think Mr. Grimm’s got more 

votes, so congratulations to him. 

My bill deals with their affiliate swaps and how they are treated; 

and H.R. 2682 deals with end-user exemptions. 

Have you come to any agreement with the CFTC with regard to 

those things? Obviously, the Senate has not moved either one of 

those bills yet. But with the overwhelming bipartisan majorities in 

the House, have you come to agreements that will make either of 

those bills unnecessary? 

Ms. SCHAPIRO. I don’t know the answer to that with respect to 

the inter-affiliate transactions, and I would be happy to come back 

to you on that one specifically. With respect to the end-user margin, that is generally a CFTC issue, because it is the non-financial 

end-users commodity—producers, agricultural, co-ops, and others— 

36 

that are the kind of end-users we have all been most concerned 

about in this regard. So since we are only regulating security-based 

swaps, we see this as much less of an issue on our side. 

Mr. STIVERS. Sure, okay. 

I am certain to run out of time. I do want to ask you—follow up 

on the questions that the chairman raised earlier about the regulatory system. You came to my office a few months ago, and we 

talked about the SRO model. Can you give us a few sentences of 

your opinion on the SRO model and whether it works or not? 

Ms. SCHAPIRO. Sure. 

With full disclosure, I spent 12 years at an SRO, FINRA, and its 

predecessor, NASD, so you will understand where I am coming 

from. But I think in a time when there are constrained resources 

within the Federal Government, the ability to leverage a self-regulatory organization is really critical. And if you just look at our 

numbers, we examine about 8 or 9 percent of investment advisers 

every year. 

Mr. STIVERS. I need to cut you off, but I do know you have three 

models for investment adviser oversight. I hope you will choose the 

one that includes authorizing self-regulatory organizations, because 

I think it works. 

Ms. SCHAPIRO. You will have to choose that. We don’t have the 

authority. 

Mr. STIVERS. Okay. We will get on that. The other thing that you 

just talked with, I think Mr. Fitzpatrick, about was the floating net 

asset value and you talked about some options that you have come 

up with. Have you looked at some illiquid investments in these 

money market mutual funds? 

Have you looked at a regulator choosing a capital requirement 

that closely conforms with the illiquid investments, because frankly, that is the real issue? And I didn’t see that as one of your 

choices of your three options that you explained to Mr. Fitzpatrick. 

Ms. SCHAPIRO. I think the economic analysis that we do will actually look at how big a capital buffer you need under different rate 

and redemption scenarios, for example. And so, we will try to do 

some analysis of how you might calibrate appropriately the capital 

buffer. 

Mr. STIVERS. Thank you. 

And I yield back my nonexistent time. Thank you. 

Chairman GARRETT. I appreciate that. 

Mr. Ellison is now recognized for 5 minutes. 

Mr. ELLISON. Thank you, Mr. Chairman. 

Just a few questions—can you share with us the status of the 

salary ratio and the rule process? How is it coming? Are we going 

to make it on track? I appreciate you responding to my letter of 

March 8th on this topic. 

Ms. SCHAPIRO. I am happy to do that. This is not a rulemaking 

I believe that had a specific deadline, although there is obviously 

a lot of interest in it. This is the calculation of the median of employees’ compensation compared with the total compensation of the 

CEO. 

Our staff is working very hard on that rule. I will tell you that 

it is a very, very difficult rulemaking. If it was a matter of adding 

up all the W–2s of employees and comparing that to the CEO, we 

37 

could have done it quickly. It is quite a prescriptive provision in 

the law, and there are very extensive record-keeping requirements 

in order to come to a total compensation calculation. 

For example, right now, companies have to give that total compensation calculation for five named executive officers. They actually compute that manually. That can’t be done manually when you 

have 60,000 or 70,000 or 80,000 employees around the world. There 

are a lot of questions about, ‘‘How do we treat part-time employees 

in this calculation; what about joint venture employees; what about 

employees overseas?’’ 

And as I said, the definition of total compensation is quite complex, and includes the necessity of calculating pension benefits and 

so forth. This is a long way of saying we are working on it. We 

have had lots of meetings with interested investors as well as public companies and we are working hard to try to get it right in a 

reasonable way. 

Mr. ELLISON. I want to urge you to continue that effort, because 

it seems to me that one of the problems we get into in this committee, and probably in others, is that we start with a simple idea: 

What is the ratio of CEO pay to other average employees? It 

sounds like a simple idea like you said; the W–2 thing versus CEO 

pay. 

And then, people who really don’t want to do it, never wanted 

to do it, and are fundamentally against doing it because they don’t 

want to disclose, come up with an inordinate number of ways to 

just make it complicated and therefore impossible. And so, I just 

hope you don’t let the complexity of the situation overcome you, 

and that you keep on soldiering on, because it is important. 

And if there is any doubt about that, there was a recent report 

about how shareholders at Citigroup came out and said, on CEO 

pay, ‘‘We have a problem with this compensation.’’ It is about empowering shareholders. Some people think, why are you interfering? At the end of the day, shareholders and the public want to 

get a better handle on this issue of compensation for a lot of reasons. And I don’t have time to go into all of them. 

Let me ask you this question: Will you be able to continue aggressive action to protect investors in capital markets without the 

budget increase you requested? 

Ms. SCHAPIRO. We think the budget increase is really essential, 

given the additional responsibilities that the agency is taking on 

under Dodd-Frank and under the JOBS Act. And so, with whatever 

resources we have, we will work our hearts out to protect investors, 

to facilitate capital formation, and to make sure our markets operate with integrity. 

But we are underresourced to the task that we have been given, 

and while we are becoming ever more efficient and innovative in 

leveraging alternatives to do our job, I think it is really critical for 

this country, and for this economy to have a strong Securities and 

Exchange Commission. 

Mr. ELLISON. And if I may also add, we underfund an agency, 

and then when a Madoff situation comes up we blame the agency, 

and then use that catastrophe as proof that the agency is not doing 

a good job; therefore, a justification to cut it even more. And it is 

disappointing when that happens. And so I do hope that your budgVerDate Nov 24 2008 17:46 Jan 30, 2013 Jkt 075091 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\75091.TXT TERRI
38 

et is fully supported, because of course it is essential that the work 

you do goes forward. 

I did want to ask you a question about the cost-benefit analysis 

you are required to do with regard to rules. How is that affecting 

your ability to promulgate rules? Is it undermining, is it helping, 

is it an aid, is it a hindrance, is it mixed? What are your thoughts? 

Ms. SCHAPIRO. We firmly believe a good cost-benefit analysis, an 

economic analysis, is important to us in informing the policy 

choices that we need to make in order to do rules that will accomplish what Congress has asked us to do in the legislation. So we 

are very committed to doing it. 

I will say it has probably slowed us down in some cases, that we 

are doing a more robust, more analytical cost-benefit analysis, although we have always done cost-benefit analyses. We have done 

Paperwork Reduction Act, Reg Flexibility Act, efficiency, competition and capital formation analysis, burdens on competition analysis. 

Of all the Federal financial regulators, we do the most cost-benefit analysis and we are used to doing that. But we appreciate that 

we need to do it even better, and our new guidance I think will enable us to have everybody working from the same page and do an 

even better job. 

Mr. ELLISON. Yes. 

Mr. Chairman, I ask unanimous consent to submit for the record 

a Bloomberg article, entitled, ‘‘Dimon Widens Gap with JPMorgan 

as Wall Street Pay Slides.’’ 

Chairman GARRETT. Without objection, it is so ordered. 

Ms. SCHAPIRO. I would add that it is a key reason we need more 

resources. We are hiring many more economists to do our rulemaking. 

Mr. ELLISON. Right. We hear you. 

Thank you. 

Chairman GARRETT. Thank you. 

The gentleman yields back. 

Mr. Dold is recognized for 5 minutes. 

Mr. DOLD. Thank you, Mr. Chairman. 

Chairman Schapiro, in May of 2009 Martha Haines, the head of 

the Office of Municipal Securities, told this committee that establishing an effective registration and examination program for municipal advisers would be easy, because there were only about 260 

non-broker-dealer municipal advisers. Clearly, her estimate was inaccurate, as the proposed rule I believe could force thousands of individuals to register with the SEC. 

Is Dodd-Frank Section 975 written so broadly that the SEC has 

no other choice but to capture thousands of unsuspecting individuals as municipal advisers? 

Ms. SCHAPIRO. I don’t think so. The statute is written broadly, 

but I think the SEC has the ability to tailor the rulemaking. And 

as you and I have discussed, I think we cast the net too widely in 

our proposing release. And when we get to final rules, I think that 

you will see that we have tailored it quite a bit more. 

We have received 1,000 comment letters, so we know that there 

is deep interest in this issue from a wide range of the community; 

from engineers and geologists, to accountants, bank employees, and 

39 

volunteer appointed officials in municipal entities. There are a lot 

of people who have weighed in with very good comments on how 

to tailor the rule more appropriately. And I am hoping that we will 

be able, at the end of the day, to strike the right balance. 

Mr. DOLD. I certainly hope so. And I know that you have told 

this committee before that you believe, as you just did, that the 

rule as proposed is far too broad and that the Commission plans 

to scale back the rule before it is finalized. But can you at least 

give us some more specific areas where you would like to see it 

scaled back? 

Ms. SCHAPIRO. Sure. For example, the definition of investment 

strategies is probably too broad and includes activities that don’t 

necessarily need to be regulated by the SEC, such as whether the 

proceeds of a municipal offering ought to go into a bank account; 

and whether or not traditional banking and trust activities really 

need to be covered since those are otherwise regulated entities. 

We have received comments. I don’t know that I have a view yet 

on whether the underwriter exemption needs to be broader, because it doesn’t include enough activities that are related to underwriting. 

I do think that the exclusion for employees of municipal entities 

should be expanded to include those who are appointed officials. 

We do not want to dissuade citizen volunteers from serving and the 

definition excluded those who are elected, but not those who are 

appointed. 

Again, that is an area where I think we can make some reasonable carvebacks, and not do any damage to the goal behind a municipal adviser registration, but also not layer on unnecessary burdens. 

Mr. DOLD. I certainly appreciate that. And that was actually 

going to be in my next question. As we look at 975, it did go 

through the process of exempting elected officials out, but didn’t go 

through the process of actually exempting out those that were appointed. 

And you can just imagine school boards, all these different individuals who are out there across our Nation who are giving of their 

time to make the communities a better place, and I know you have 

heard from literally thousands of commenters that this would be a 

significant disincentive for these citizens to get engaged and get involved, because you would be forcing them to in essence register 

with the SEC, which you know is a fairly significant process. 

Ms. SCHAPIRO. Absolutely. 

And it wasn’t as though we wanted to capture them. We assumed that they would not be performing the functions that the 

rule dictates require registration. So it was really a lack of clarity 

on our part, not making a conscious distinction that elected is out, 

but appointed is in. 

We didn’t think appointed would be engaged in the activities that 

would require registration. We clearly need to fix that. 

Mr. DOLD. I think as we take a look through on a number of the 

different rulemakings—I certainly hope that this can provide some 

additional clarity, which I think is one of the important things for 

why we are having this hearing today; is so that we can provide 

additional clarity. 

40 

I certainly hope that you take this back. Because we want to 

make sure that this is narrowly tailored and that we are not casting that wide net as you talked about before. 

Ms. SCHAPIRO. Absolutely. And this is why the comment process 

is so valuable to us, too. 

Mr. DOLD. Chairman Schapiro, thank you so much for your time. 

I appreciate your being here. 

Mr. Chairman, I yield back. 

Chairman GARRETT. The gentleman yields back. 

Mr. Hurt is now recognized for— 

Mr. HURT. Thank you, Mr. Chairman. 

And Chairman Schapiro, I want to also join in my thanks to you 

for appearing before our committee. 

I was reminded by the opening statements by some of our colleagues this morning about how funny I think people back home 

think it is when we congratulate ourselves for doing our job. 

With respect to the number of times that you have appeared on 

Capitol Hill, I think it is worth noting that whatever the failures 

may or may not have been of the SEC over the years, I think that 

we can all agree that a lack of congressional oversight has probably 

contributed to that. 

And we in Congress are as responsible for those failures as anybody I think in the executive agency. And I know, based on my observations of you in your job, that you fully understand that. 

Again, I appreciate your appearance. I appreciate the time that 

you spent with me and my colleagues I know on an individual basis 

coming to make sure that we understand what the issues are, because, good gracious, we need to. 

And so I thank you for that commitment. I know you have a 

tough job and it seems almost perhaps even impossible on some 

days considering the fact that we are borrowing $0.40 on every $1 

we spend in this country. 

We have diminished resources to be able to do the important 

work or to provide funding for the important work that you do at 

the SEC. I was interested particularly during your comments with 

your hat tipped to capital formation and how we can reduce the 

regulatory bottleneck that can free up more resources in the private sector for capital formation. 

With that said, I would been thinking about the JOBS Act and 

I know that at least certainly an important portion of trying to reduce some of the red tape so that we can have more resources to 

create jobs, has to do with the registration process for banks and 

the deregistration process, and those certain thresholds. 

We have banks in my district in Merle, Virginia, the Fifth District, that now will be affected by these new thresholds. And with 

respect to the deregistration process, it is my understanding that 

once certain paperwork has been filed, they are immediately terminated from registration but have been informed by the SEC that 

they will have to continue to file periodic reports with the SEC for 

a certain period of time, maybe 90 days. 

I wonder if you could speak to that, the purpose of that and why 

that is necessary, and if there is anything that can be done to 

make it easier for these banks to have that certainty and get 

through that process more quickly? 

41 

Ms. SCHAPIRO. Congressman, I would like to get back to you further on that, but my recollection is that the reason the staff made 

that judgment was because there are people who are receiving public disclosure about these registered reporting companies that 

would no longer get any disclosure; therefore, there ought to be a 

time period where they get some final disclosure so they can make 

decisions about whether they want to continue to own the stock, in 

light of the fact that there will not be public reporting anymore. 

So yes, they will have the burden a little bit longer after they 

deregister, but the investors who own their shares will also have 

the loss of information as a result of the deregistration. So I think 

it goes to that, but I would be happy to get you more information. 

Mr. HURT. It does seem to me that some sort of final report 

might be in order. But it seems to me to make the periodic reports 

for the time going forward, for 90 days or whatever, it is seems not 

to be consistent, frankly, with the law— 

Ms. SCHAPIRO. I believe it may also be the current requirement 

pre-JOBS Act. For companies, of course, that go dark before two— 

just at much lower numbers. But let me come back to you— 

Mr. HURT. Thank you. 

Ms. SCHAPIRO. —if I could on that. 

Mr. HURT. And then the other question I wanted to ask has to 

do with the registration of private equity companies that you have 

been very kind to discuss with us, and whether or not your exemptive authority would apply in exempting P.E. companies of any 

size, certain sizes, from registration. But in particular I wanted to 

ask you about whether or not the interpretive guidance that I 

think that you have indicated that you all will be providing. 

What is the status of providing that interpretive guidance for the 

registered advisers that deal with these private equity funds that 

would make clear that there are differences between private equity 

and other financial services products? 

Ms. SCHAPIRO. Again, I know the staff has been working very 

closely with the P.E. industry to try to answer their questions and 

provide whatever relief would be appropriate under the statute and 

I would be happy to get back to you on that specifically. 

I think you also know that we have tried very hard to scale the 

requirements. For example, the systemic risk reporting for P.E. is 

only for firms with over $2 billion under management. And they 

only file very, very basic information annually. 

So we have tried to be very sensitive to the fact that a P.E. fund 

is different than a hedge fund and we understand that. And P.E. 

is different than a liquidity fund and different, frankly, than a venture capital fund and our requirements are sealed to the potential 

risks that they might pose. But I would like to come back to you, 

if I could, on where they are exactly with the relief. 

Mr. HURT. I would appreciate that. Thank you very much. 

Chairman GARRETT. The gentleman yields back? 

Mr. HURT. I yield back. Thank you. 

Chairman GARRETT. I now recognize the gentleman from New 

York, Mr. Grimm. 

Mr. GRIMM. Thank you, Mr. Chairman. 

And thank you, Chairman Schapiro. You have been very gracious 

with your time. 

42 

Trying to bring a little continuity—we were just speaking about 

the JOBS Act. One of the provisions of the JOBS Act I believe 

brings shareholder limits from $500 to $2,000. Just for clarification, is that going to be implemented—is that effective immediately 

or is that after all the rulemaking when the rest of the JOBS Act 

is done? 

Ms. SCHAPIRO. I believe this requires some rulemaking. But I 

don’t think it is very much rulemaking in this regard, unlike crowd 

funding which requires much more extensive rulemaking. I am 

sorry—I am just not recalling the details. 

Mr. GRIMM. I will take that as, ‘‘After the rulemaking, it will become effective?’’ 

Ms. SCHAPIRO. I— 

Mr. GRIMM. Do you want to get back to me on that one? 

Ms. SCHAPIRO. Yes, I would like to get back to you because in 

fact we have had one bank already come in to deregister and we 

obviously haven’t done rulemaking. So it may be that it is immediately effective. 

Mr. GRIMM. Okay. 

Ms. SCHAPIRO. I am just not remembering exactly. 

Mr. GRIMM. That is fine. 

In that same vein, my understanding is that it was drafted in a 

way that it may not include savings and loans. But my understanding is you have the authority within your purview to fix that. 

Can you or will you fix that? 

Ms. SCHAPIRO. We are looking at that. I received a letter about 

a week ago from a number of savings-and-loans asking us specifically about that issue, so the staff is looking at that. 

Mr. GRIMM. Okay. Great. 

Let me switch to the Volcker Rule for a second. As written in the 

Volcker Rule proposal—could treat a mutual fund as a banking entity in limited cases? For example, I think a bank sponsor that has 

just launched a mutual fund and owns nearly all the shares of the 

new fund. As a result, the mutual fund itself would have to comply 

with trading and investment restrictions of the Volcker Rule? Yet 

that fund, like all mutual funds, will eventually become wholly 

shareholder owned. 

The proposed rule also states that a banking entity is prohibited 

from having an ownership interest interacting as a sponsor to a 

hedge fund, private equity fund or similar fund as the agency determines collectively. The proposed rule is called a covered fund. 

That term is defined so broadly that it could sweep in a range 

of investment vehicles, even highly regulated mutual funds. So my 

question is this: Do you agree that the Volcker Rule should not 

limit a bank’s ability to sponsor, invest, and register investment 

companies? 

Ms. SCHAPIRO. I will say that these are issues that have been 

raised in the course of the Volcker rulemaking. We have gotten 

18,000 comment letters. It is a joint rulemaking among all the financial regulators. We are looking at it very closely, including the 

prohibitions and the extent to which we have any flexibility with 

respect to sponsoring funds. I don’t have an answer right— 

43 

Mr. GRIMM. All right. I will broaden that. Congress’ intent, I 

don’t think, was restricting a mutual funds trading and investment 

activities. 

Ms. SCHAPIRO. I think that is probably right. 

Mr. GRIMM. Okay. Fair enough. 

If we could go back for a second—my colleague asked about MF 

Global. And you threw out some stats. I think it was 318 securities 

accounts, I suppose the vast majority being CFTC-segregated customer funds. 

Ms. SCHAPIRO. Right. I believe there are 36,000 futures accounts, 

and only 318 active securities accounts. 

Mr. GRIMM. Okay. That is what is bothering me. 

That begs the question—when the SEC staff recommended going 

with SIPC, Chapter 11; when you look at the disproportionate 

number of accounts, this firm mostly was covered by the CFTC. 

The vast, vast majority was covered by the CFTC, which would 

make me lead that the suggestion should have been to let the 

CFTC have the bankruptcy under Chapter 7. 

Ms. SCHAPIRO. SIPC handles the bankruptcy of the combined entity, which was a broker-dealer as well as an FCM. 

Mr. GRIMM. Actually, my understanding is that the law says that 

they have the ability to do so. It is discretionary, which is why you 

had the conversation in the first place. You wouldn’t have needed 

a recommendation if the law said it has to go under SIPC. 

Ms. SCHAPIRO. I don’t recall that there was any discussion 

about—and I could be wrong, and I certainly wasn’t in on every 

conversation—about whether or not to somehow try to separate the 

broker-dealer piece of this from the FCM piece of it. And of course, 

the trustee is working mostly to try to— 

Mr. GRIMM. No, but here is the problem. 

Madam Chairman, here is the problem. Now that it has gone 

Chapter 11, the segregated fund, the customers have become creditors. They were never creditors. Had it been under Chapter 7, they 

would have been protected. 

Because now they are going to be in U.K. foreign courts, which 

you have seen with Bear Sterns, you have seen with Lehman 

Brothers, years and years of litigation. But if you are a creditor, 

that is fine. You have taken on that risk; but as someone that has 

the protection of a segregated account—and that goes back to your 

statement before that part of your mandate is ensuring the integrity and consumer confidence of the markets. 

If I am a foreign investor and I am putting my money in an 

FCM, I am told that money cannot be touched. It is protected. 

Guess what? The decision that the SEC and CFTC made just 

turned that upside down because that is not true anymore. Because 

the monies that were taken out of those segregated funds, unlawfully, however it was done, shouldn’t have been done. We understand it shouldn’t have been done, but we know it does happen. 

That is why we have criminal statutes in place. But it does happen. 

People break the law. 

The bankruptcy decision took away my rights as a customer and 

made me a creditor. Why would I ever invest in the U.S. markets 

again under those circumstances if regulators can decide by bankruptcy law that now you are a creditor? And that is why I think 

44 

that in light of Bear Sterns, in light of Lehman Brothers, we 

should really be looking at that. 

Because those decisions matter, especially when it is 318 securities accounts, which means they really weren’t doing much securities business; over 36,000 customer accounts. They were mostly an 

FCM, and, therefore, the CFTC should have put it under Chapter 

7, in my opinion. 

I thank you, and I yield back. 

Chairman GARRETT. The gentleman yields back. 

The gentlelady from New York is recognized. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

Thank you, Chairman Schapiro. And I hope that your day will 

get easier from here. 

With all that we have been talking about, it is clear that one of 

the themes becomes management of limited resources, not only 

from the standpoint of the broad economy, but also from the standpoint of you as head of the SEC. 

Even if you were to be granted the entirety of your request, you 

would still probably be sorely challenged to get accomplished the 

full slate of things that you have to do just in terms of Dodd-Frank 

implementation. The Volcker Rule alone strikes me as something 

that could consume all of your time. 

So in light of that, I want to get your broader perspective just 

on how you are prioritizing. Because it strikes me, respectfully submitted, that you would want to prioritize your tasks really, and 

guide us accordingly, as those who advise or authorize the funding 

market impact of the rulemaking that you have to promulgate; the 

rules that you have to promulgate, including a cost-benefit analysis. 

Obviously we have talked a lot about that, recognizing that market participants also have limited resources to bring to bear; the 

material fulfillment of your prudential role, which Representative 

Grimm was just referring to obviously in terms of MF Global, 

which is a prominent case that does shake investor confidence; preventing overt fraud; having the resource allocation to do those 

things that really were antecedent to Dodd-Frank, that prudential 

regulatory role. 

So I would submit to you that—and I know just about all of us 

have chimed in about money market funds, but I do submit, with 

all due respect, that given the reforms that were put into place in 

2010, the additional protections, it is not broke at this point. 

I haven’t devoted any additional resources to that kind of task 

at this moment, nor would I to the CEO compensation calculations 

required by Dodd-Frank, which as you note are arcane and abstruse at best, byzantine almost, and take resources away from 

where we need them to be deployed without any additional information, because clearly those discussions about compensation ratios can be had within existing rules and regulations. 

So within that context, how would you propose really prioritizing 

your menu of tasks over the next several months? 

Ms. SCHAPIRO. It is a great question. 

I think from where I sit, our number one obligation is to fulfill 

the mandates that Congress has given to us. And that is DoddFrank and the JOBS Act right now. Those are high priority, and 

45 

they have been. We have been running at full speed since DoddFrank was passed. Now we have the JOBS Act work to do. And 

those would be two very high priorities. 

I have a personal deep interest, and I think it is incredibly important for the future of our country, frankly, that we get market 

structure issues well in hand. We have done a lot, but there is 

more to do. There is more to understand about our market structure and whether the rules that govern how our markets operate 

are still effective and still work, given technology, given 

globalization, given complexity. 

I think we have to continue to prioritize the internal reforms, 

hiring the new skill sets, bringing in different ways of thinking and 

doing things, and building our technology. We have four incredibly 

important technology projects that we are working on right now. 

Those have to continue to be a priority. 

I also think we have to prioritize issues coming out of the financial crisis—and I will disagree with you—like money market fund 

reform, where a really devastating run was only stopped because 

the taxpayers stepped in and guaranteed an industry that should 

never have to be guaranteed by the taxpayer. 

So we have to explore those issues. How long that takes us and 

where we land at the end of the day, I don’t know. But I think we 

have to be willing to have the debate and the discussion. And so, 

I think those are all important areas for us to be dealing with. 

I will also put in the category of financial crisis areas, a new look 

at our capital rules and our broker-dealer custody requirements 

coming out of events like Madoff. We try to learn from the bad experiences the agency has had and make sure that we are doing 

what we can internally to make sure they don’t happen again, and 

where the regulatory regime needs to be bolstered to do that as 

well. 

So that is basically how I had prioritized them. And of course 

there are a thousand decisions under those broad categories. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

And I know our time has expired. I yield back. 

Chairman GARRETT. Yes, the gentlelady’s time has expired. 

The gentlelady yields back. 

If the Chairman is amenable to staying for another 10 or 12 minutes for just the Members who are here or in the back room, I will 

go through a proverbial lightning round for about—if we do 21⁄2

minutes each, that is another 15 minutes; because I know you have 

been sitting there for some period of time. 

So very quickly, I recognize myself. The MAP program, Section 

967, required of course that an outside look at the SEC, as far as 

management and proposals for corrections, administratively be 

done. Two reports have been submitted by the SEC. These basically have been focusing on administrative actions, and this is to 

my opening statements. 

The SEC has spent approximately, from what I see in the report on page 60, around $16.5 million for outside consulting and staffing. This goes to your question about you all, I am sure you are, 

working your hearts out here. Isn’t this an area where you all— 

basically you are chief operating officer, should be working their 

hearts out and not putting this into outside consultants? 

46 

Ms. SCHAPIRO. I think they are working their hearts out, but I 

don’t think we necessarily had all the internal skills that were necessary. 

Chairman GARRETT. But this is just administrative at this level 

that they are trying to do. 

Ms. SCHAPIRO. Oh, no, but it is not. 

For example, it is not administrative to redesign the Office of Information Technology, create an Office of the Chief Data Officer, 

and implement a continuous improvement program where we have 

identified savings as much as we can. 

Chairman GARRETT. So how much money has been spent and 

will be spent on outside consultants in these areas? 

Ms. SCHAPIRO. My understanding is that to date, we have spent 

$8.5 million for implementation plan development, modeling, risk 

management, and creation of the program office to support the 17 

work streams. 

Chairman GARRETT. And have the Commissioners—all the Commissioners have not been involved. Only the chairman has. Is that 

correct? 

Ms. SCHAPIRO. I have administrative responsibility for running 

the agency. The Commissioners have all been briefed on the work 

streams by the senior staff of the SEC who lead those work 

streams. That is not led by— 

Chairman GARRETT. So you don’t think that they should be involved? 

Ms. SCHAPIRO. I am happy for them to be—I have a very open 

door. I am happy for the Commissioners to be involved to whatever 

extent they would like to be. And I think they have all been 

briefed. They have all been asked for their input. 

Chairman GARRETT. Okay. 

And one last question on another area, on ETF and ETF backlog. 

This goes to the issue about—as far as money needed for this. 

I understand you are saying the suggestion is that it is an issue 

of dollars and cents. They need more money. But Eileen Rominger 

was I guess giving testimony or information over in the Senate indicating that is not the case, that money is really not the issue, 

that there are other issues here. 

And part of the proof of the fact is that a backlog of ETFs go 

back over all the way, 4 or 5 years, to 2007. So that would say it 

is not a money issue. That is another issue. Maybe that is a decision orientation of the department or the agency instead. 

Ms. SCHAPIRO. No. 

Look, sometimes there are money issues in terms of backlogs 

being created where industry wants relief and we don’t have the 

people that we can throw at them. For example, we get about 2,000 

self-regulatory organizations, including exchange, filings, every 

year that have to be processed under Dodd-Frank on a very short 

timeframe. We move resources from other places to do that. 

There are a lot of very complex issues with respect to ETFs, particularly highly leveraged— 

Chairman GARRETT. In 4 of 5 years, there is some of these— 

this— 

Ms. SCHAPIRO. I would have to go and look at what those specific 

ones were. I am guessing that the staff does not believe they can 

47 

make the public interest finding to approve those. But I would be 

happy to get back to you on the specifics of those applications. 

Chairman GARRETT. Okay. So that may be an issue there as far 

as what they are finding, as far as the public interest as opposed 

to a lack of funding, particularly or actually coming up and doing. 

Ms. SCHAPIRO. It is possible and it is possible it is a combination. 

Chairman GARRETT. Thank you. 

Mr. Stivers is eagerly writing down— 

Mr. STIVERS. Yes, I am dutifully writing down—before I get to 

a question, I did want to associate myself with the remarks from 

Mr. Dold on the municipal advisors rule; hopefully you will redo 

that to avoid inadvertently capturing a bunch of extra folks. 

I also want to strongly associate myself with the question Mr. 

Grimm asked about savings and loans. Clearly there was no intent 

in this Congress to allow bank holding companies to move to 2,000 

shareholders, but not allow savings and loans. And there may have 

been some inadvertent drafting that may or may not limit it, but 

I know that you have the ability, as you actually had the ability, 

you raised the capital limits from $1 million to $10 million over the 

years but left the shareholders alone. 

You actually had the ability as we have talked in my office, to 

raise the shareholder limit and I hope you will use your discretion 

to ensure that there is a seamless transition for both banks and 

savings and loans to that 2,000 limit, the 1,200 to deregister because I think it is really important that we don’t change the competitive landscape between banks and savings and loans on capital 

formations. 

But my larger question is something that has not come up much 

today and that is on conflict minerals. I know that you have 

worked on some rules and you were talking about—the rumor is 

that sometime mid this year there will be a final rule and the problem that I know a lot of companies have is that they are forced to 

prove a negative, which is really hard. And even on trace amounts 

of minerals, they are potentially forced to go through this. 

I know there was at some point some discussion about maybe 

trying to get some flexibility and latitude on really small, almost 

minimal amounts of minerals. Do you know if you have come to 

any conclusion on that, or is there anything that we can do to help 

you on that? 

Ms. SCHAPIRO. I think it is the staff’s view that there is not really the flexibility to have a de minimis exception, in fact, because 

most products that contain these minerals do contain a very de 

minimis amount. 

That said, we are working through an awful lot of issues here; 

another enormous anxiety, I think, on both sides is whether you 

believe in the conflict minerals rule as a good thing or not. 

We know there is a lot of interest in it and a lot of anxiety and 

we are trying to work through to achieve the congressional intent, 

but also to make it as workable as we possibly can. 

Mr. STIVERS. I will say before my time runs out—actually, I 

guess after my time runs out—we all want you to get it right as 

opposed to do it fast. 

Ms. SCHAPIRO. ‘‘Fast’’ is out of the question, I would say— 

Mr. STIVERS. Okay. 

48 

Ms. SCHAPIRO. —but we are working on ‘‘right.’’ 

Mr. STIVERS. Thank you. 

I yield back the balance of my time. 

Chairman GARRETT. The gentleman yields back. 

By the way, I don’t know if you saw the 60 Minutes piece this 

past weekend on Sunday—60 Minutes is on Sundays here—on Lehman’s. 

I know whenever programs are on Sunday, we will get a call on 

Monday about them. And the calls in general, with regard to you 

all, the SEC, were all the folks who were at Lehman who were 

from the SEC today. 

The idea being, ‘‘Should they have caught something and 

didn’t’’—this was all Repo 105, and we have had some hearings on 

that issue. 

And so, the question is, ‘‘Where are the regulators who were actually inside Lehman’s, not just the days before, but for months before, and—’’ 

Ms. SCHAPIRO. That was all before my time— 

Chairman GARRETT. Yes. 

Ms. SCHAPIRO. —so I would have to go back and see who was 

there and where they are now. I am sure some of them are still 

with the agency, some of them are really talented people, but they 

were part of— 

Chairman GARRETT. The piece on 60 Minutes—and 60 Minutes 

is good for it, of course, as you know how 60 Minutes is— 

Ms. SCHAPIRO. Yes. 

Chairman GARRETT. —raises a question all across. And that was 

a question—is, ‘‘If they missed then, are they missing it someplace 

else? Are they over at the Federal Reserve today missing someplace 

else?’’ 

Ms. SCHAPIRO. What I will say is that they were part of a program, the consolidated supervised entity program, which I have 

testified— 

Chairman GARRETT. Yes. 

Ms. SCHAPIRO. —about before. It was started and ended under 

my predecessor. 

Chairman GARRETT. Right. 

Ms. SCHAPIRO. It was wholly inadequately funded and supported 

by the agency. They were a small handful of people, I believe less 

than a dozen, responsible for the five largest investment banks. 

And it was a voluntary program. So— 

Chairman GARRETT. Yes. 

Ms. SCHAPIRO. I think one of the lessons of that is that voluntary 

programs don’t work very well and if you are going to take on the 

regulation of the largest banks in the world, you need more than 

a dozen people to do it and they need to be adequately trained and 

have authority. 

Chairman GARRETT. The other takeaway that—we get calls from 

districts on that after the program—was the lack of civil actions either by the SEC or by Justice. And I guess the report that came 

out was the 2-year—a couple of years ago indicated that perhaps 

that would have been appropriate. 

Would you be able to say whether there is any— 

Ms. SCHAPIRO. I— 

49 

Chairman GARRETT. —likelihood? Yes? 

Ms. SCHAPIRO. No, it would be inappropriate for me to comment 

on matters that remain under investigation and analysis. But I can 

tell you that our staff has conducted an independent and extremely 

extensive investigation of all these issues. They have searched 

through millions of pages of documents. We have taken testimony 

of all the key people including members of Lehman senior management, outside accountants. We— 

Chairman GARRETT. The fact that you can’t testify, does that 

mean the fact that it is still under review? 

Ms. SCHAPIRO. It is still under review, I would say. But I would 

also add that I saw 60 Minutes. I actually went out right after the 

examiner’s report was issued with the senior team from the SEC 

and met with Mr. Valukas for several hours to go through all of 

his findings and details so we would be sure that we had a road 

map. 

Chairman GARRETT. Right. 

Ms. SCHAPIRO. But it is clear that, at least in my experience, the 

illegality of conduct is something not quite as clear cut as it seems 

to be or is reported to be. And it makes bringing cases extremely 

difficult. 

Chairman GARRETT. Did you ever make a recommendation to 

Justice, then, on something like this? 

Ms. SCHAPIRO. I think on this matter, we talked quite extensively with Justice, as we do on many matters. 

Chairman GARRETT. Do you make recommendations to them like 

go ahead with criminal charges? 

Ms. SCHAPIRO. Again, not speaking to this particular matter— 

Chairman GARRETT. No to this— 

Ms. SCHAPIRO. —but there are certainly cases where we call Justice and say, this is criminal conduct, do you need to bring the case 

at the same time we are? 

Chairman GARRETT. And can you say whether you did that in 

this case? 

Ms. SCHAPIRO. I can’t say. 

Chairman GARRETT. Okay. 

And will you be able to say on—are you able to say on this case 

or any other case, or any other case when—like made up of all the 

cases that we talked about here—are you able to say when you finish an investigation— 

Ms. SCHAPIRO. Sure. 

Chairman GARRETT. —and when we come to you and then you 

would say— 

Ms. SCHAPIRO. Sure. 

Chairman GARRETT. —‘‘Our investigation is done and we are either going to investigate or either going to recommend or not recommend’’—are you able to say at that point? 

Ms. SCHAPIRO. Once we have closed a matter and are not bringing in an enforcement case, we have done that and clearly we have 

done it with Madoff. I personally have spoken extensively about the 

issues surrounding the Madoff matter and we have done so in 

other cases. 

Once the case is resolved— 

Chairman GARRETT. Yes. 

50 

Ms. SCHAPIRO. —there is nothing that prohibits us— 

Chairman GARRETT. So it is not— 

Ms. SCHAPIRO. —from talking about it. 

Chairman GARRETT. —so it is not like sometimes with maybe— 

I may be mistaken on this, over in criminal area and FBI, they will 

say they will never tell you what the outcome is if they complete 

their investigation, they just sort of end them or something like 

that. You never know whether you are done being investigated by 

them or something like that is my understanding, at least that is 

what I hear. 

Ms. SCHAPIRO. I think we tend to, too. 

Chairman GARRETT. You draw a line— 

Ms. SCHAPIRO. I think we do. I couldn’t tell you if we do it 100 

percent— 

Chairman GARRETT. Yes. 

Ms. SCHAPIRO. —of the time, but I think we do. 

Chairman GARRETT. Okay, I appreciate that. 

Ms. SCHAPIRO. Thanks. 

Chairman GARRETT. And with that, I only have one item to put 

into the record, which is an April 24th article entitled, ‘‘Lawyer 

Skewers Boston Fed Chief’s Money Fund Comments,’’ by Beagan 

Wilcox Volz. And without objection, that is entered into the record. 

At this time, I appreciate the time and attention and questioning 

and the answers from our witness, Ms. Schapiro. And I thank you 

for being here on the 40— 

Ms. SCHAPIRO. I don’t—42nd, 43rd— 

Chairman GARRETT. It all blurs together at this point. I look forward to seeing you here again. 

Ms. SCHAPIRO. Thank you. 

Chairman GARRETT. Thank you. 

The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to this witness and to 

place her responses in the record. 

This committee is adjourned. 

[Whereupon, at 12:46 p.m., the hearing was adjourned.] 

(51) 

A P P E N D I X 

April 25, 2012 

52 


75091.001

Testimony on "SEC Oversight" 

by 

Chairman Mary L. Schapiro 

U.S. Securities and Exchange Commission 

Before the Capital Markets and Government Sponsored Enterprises Subcommittee and 

Financial Institution and Consumer Credit Subcommittee of the U.S. House of 

Representatives Committee on Financial Services 

April 25, 2012 

Chairman Garrett, Ranking Member Waters and members of the Subcommittee: I appreciate the 

opportunity to testify regarding the recent activities of U.S. Securities and Exchange 

Commission (SEC). J 

The past three years have been a period of enormous change and challenge for the SEC. The 

aftermath of the financial crisis, the passage oflegislation that imposes extensive new 

responsibilities on the agency, and the growth in the size and complexity of the financial markets 

have demanded that the SEC become more efficient, creative and productive to achieve its 

mission. While we have made significant progress in many areas, much work remains to be 

done. My testimony today will highlight a number of the actions we have taken over the past 

three years to reform and improve SEC operations. In addition, I will describe our progress on 

implementation of financial reform legislation, upcoming challenges, and the agency's FY13 

appropriations request. 

Operational Improvements and Recent Accomplishments 

As you know, the SEC has responsibility for approximately 35,000 entities, including direct 

oversight of about 12,600 investment advisers, 9,900 mutual funds and exchange traded funds 

(ETFs), and over 4,500 broker-dealers with more than 160,000 branch offices. We have 

responsibility for reviewing the disclosures and financial statements of more than 9,100 reporting 

companies and also oversee approximately 450 transfer agents, 15 national securities exchanges, 

eight active clearing agencies, and nine nationally recognized statistical rating organizations 

(NRSROs), as well as the Public Company Accounting Oversight Board (PCAOB), Financial 

Industry Regulatory Authority (FINRA), Municipal Securities Rulemaking Board (MSRB), and 

the Securities Investor Protection Corporation (SIPC). Due to recent changes in the law, smaller 

investment advisers will transition from SEC to state oversight during 2012, but with the 

corresponding addition of advisers to private funds, we estimate that the agency will still oversee 

approximately 10,000 investment advisers with about $48 trillion in assets under management. 

During FY 2012 and FY 2013, we also expect to fully implement our new oversight 

responsibilities with respect to municipal advisors and entities registering with us in connection 

with the security-based swap regulatory regime. 

1 The views expressed in this testimony are those ofthe Chairman of the Securities and Exchange Commission and 

do not necessarily represent the views of the full Commission. 
53 


75091.002

The SEC continues to make significant progress in improving core operations. Over the past 

three years, we have focused on revitalizing and restructuring the enforcement and examination 

functions. We also have taken steps to enhance safeguards for invcstor assets, improve internal 

collaboration within the agency, and improve our risk assessment capacity. These efforts are 

producing demonstrable results. For example, during FY 2011, the SEC: 

• Filed 735 enforcement actions more than the SEC has ever filed in a single year - with 

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 101 individuals and entities, naming 55 

CEOs, CFOs, and other senior corporate officers. In FY 2011, the nwnber of 

enforcement actions related to investment advisers and broker-dealers also grew, with a 

total of 146 enforcement actions 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 increa~e over the 

prior fiscal year. 

• Implemented a more risk-focused examinations program and completed over 1,600 

oversight exams designed to detect and prevent fraud, strengthen industry compliance, 

monitor new and emerging risks, and inform policy. This risk-focused examination 

strategy resulted in improved guidance to the financial industry about risky practices and 

actionable information for enforcement investigations. 

• In light of concerns about the risks of exposures to holdings of European sovereign debt 

by a number of large financial institutions, issued staff disclosure guidance in January 

2012 for the purpose of providing investors with enhanced information about the 

potential impact on financial condition or results of operations as a result of these 

holdings. Following the issuance of the guidance, the staff has noted clearer and more 

transparent disclosures made by the various financial institutions about the risks and 

consequences of these holdings to investors. 

• Created the Cross-Border Working Group, an inter-divisional, proactive, risk-based 

initiative formed by the Division of Enforcement focusing on U.S. issuers with operations 

primarily overseas. The efforts of this group have resulted in a wide array of actions to 

protect U.S. investors, including suspending trading in at least twenty foreign-based 

entities because of deficiencies in information about the companies, instituting stop 

orders against foreign-based entities to prevent further stock sales under materially 

misleading and deficient offering docwnents, revoking the securities registration of at 

least a dozen foreign-based issuers, and instituting administrative proceedings to 

determine whether to suspend or revoke the registrations of approximately thirty more. 

Importantly, once we have revoked the registration, no broker-dealer or national 

securities exchange can execute a trade in the stock unless the company files to reregister the stock. Most of these actions have involved companies based in China, as the 

majority of issuers whose securities are registered in the United States whose operations 

are primarily overseas are located in the PRC region. 

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• Developed detailed staff guidance for rulewriting to further improve the economic 

analysis the SEC employs in rulemaking. 

• Implemented a completely revamped system for handling the huge volume of tips, 

complaints, and referrals (TCR) that the SEC receives each year. The new TCR system 

is fully operational, and includes search capabilities, robust tracking and audit trails, as 

well as a comprehensive workflow system with the ability to annotate records and upload 

additional documents and materials. The TCR system can be accessed by authorized 

personnel across the Commission and acts as the central repository for the agency. 

• Improved our internal financial controls, which resulted in a GAO audit opinion for FY 

2011 with no material weaknesses. 

• Developed and began deployment of TRENDS, a web-based tool that combines 

workt1ow, document and data management to help make our national exam program 

more uniform, focused, efficient and effective. 

• Established the Office of Minority and Women Inclusion as mandated by the Dodd-Frank 

Wall Strect Reform and Consumer Protection Act (Dodd-Frank Act). In FY 2012, we are 

also establishing three other offices required by the Dodd-Frank Act, specifically the 

Office of Credit Ratings, Office ofInvestor Advocate, and Office of Municipal 

Securities. 

• Implemented, with the assistance of targeted contracted expertise, a number of internal 

reforms designed to improve the agency's organizational structure, strengthen 

capabilities, improve controls and efficiencies, and enhance workforce competencies and 

talent. 

• Focused external hiring opportunities on filling strategic vacancies and obtaining 

specialized industry expertise in areas as diverse as quantitative algorithms, computerized 

trading, securitization, structured products transactions, risk management, derivatives 

valuation, financial forensics, value-at-risk analysis and stress testing, building predictive 

models of equity return and risk, underwriting municipal transactions, and exchangetraded funds. 

• Implemented a new rule establishing large trader reporting requirements to enhance the 

agency's ability to identify large market participants, collect information on their trading, 

and analyze their trading activity. 

• Implemented a new rule to require broker-dealers to have risk controls in place before 

providing a customer with access to the market and to prohibit broker-dealers from 

providing "unfiltered" or "naked" access. 

Financial Reform Implementation 

In addition to improving our core operations, the SEC has worked to implement significant new 

responsibilities assigned to the agency under the Dodd-Frank Act. The SEC was tasked with 

writing a large number of new rules and issuing over twenty studies and reports. Over the past 

21 months since passage of the Act, wc have made significant progress towards completing those 

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tasks. Of the more than 90 provisions that require SEC rulemaking, the SEC already has 

proposed or adopted rules for over three-fourths of them. Additionally, the SEC has finalized 

fourteen of the more than twenty studies and reports that the Dodd-Frank Act directs us to 

complete. 

While we have had much success, we are continuing our work to implement all provisions of the 

Dodd-Frank 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 

particular, I would highlight the following rulemakings: 

Hedge Fund and Other Private Fund Adviser 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 Financial Stability Oversight Council (FSOC) 

assessing systemic risk. On October 31, 20 II, in a joint release with the Commodity Futures 

Trading Commission (CFTC) and based on SEC 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 rule, Commission registered investment advisers 

managing at least $150 million in private fund assets will be requircd to periodically file Form 

PF. 

The Form PF reporting requirements are scaled to the size of the adviser. Advisers with lcss than 

specified amounts of hedge fund, liquidity fund or private equity fund assets 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. Private equity advisers will only 

report annually. 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 a particular investment strategy. The Dodd-Frank Act provides special 

confidentiality protections for this data. 

Whistleblower Program 

Pursuant to the Dodd-Frank Act, the SEC has established a whistleblower program to pay awards 

to eligible whistleblowers who voluntarily provide the agency with original information about a 

violation of the federal securities laws that leads to a successful enforcement action. In May 

2 See 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/rulcs/final/201Ilia-3308.pdf. 

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2011, the Commission adopted final rules to implement the whistle blower program. Since the 

rules went into effect in August 2011, the Commission has received hundreds oftips through the 

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 oftips, complaints, and referrals the agency receives every 

ycar. Our new Office of the Whistleblower is reviewing these submissions and working with 

whistleblowers. The office has filed two annual reports to Congress detailing its activities since 

its creation. 3 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 whistlcblower information, some of which we expect to 

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. 

GTe Derivatives 

The SEC also is engaged in rulemaking to establish a new oversight regime for the OTC 

derivatives marketplace. To date, the Commission has proposed rules in thirteen areas required 

by Title VII of the Dodd-Frank Act. In addition, earlier this month, we adopted joint rules with 

the CFTC to define key terms under this new regime, including "security-based swap dealer" and 

"major security-based swap participant", a foundational step in the implementation of Title VII. 

The Commission also 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 statutory effective date of Title VII. Specifically, we have: 

• Provided guidance regarding which provisions in Title VII governing security-based 

swaps became operable as of the effective date and provided temporary relief from 

several of these provisions;4 

• Provided guidance regarding - and where appropriate, interim exemptions from - the 

various pre-Dodd-Frank provisions that would otherwise have applied to security-based 

swaps;5 and 

3 See http://www.sec.gov/aboutloffices/owb!whistleblower-annual-report-2011.pdf; 

http://www.sec.gov/news/studies/2010/whistleblower report to congress. pdf. 

4 See Release No. 34-64678, Temporary Exemptions and Other Temporary Relief Together with Information on 

Compliance Datesfor New Provisions o.fthe Securities Exchange Act of 1934 Applicable to Security-Based Swaps 

(June 15,2011), http://www.sec.gov/rules/exorders/?011l34-64678.pdf. 

5 See 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 

Requestfor 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. 

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• Taken other aetions 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 and adopting exemptions 

for security-based swaps that are issued by registered or exempt clearing agencies 

functioning as central counterparties. 6 

While the Commission has made significant progress to date, much remains to be done to fully 

implement Title VII. In particular, we need to complete the core elements of our proposal phase, 

notably rules related to the financial responsibility of security-based swap dealers and major 

security-based swap partieipants. Concurrent with that process, we intend to seek public 

comment on an implementation plan that will facilitate a roll-out of the new securities-based 

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 compliance with Title VII's requirements 

would be sequenced in some manncr. Commission staff is actively engaged in developing an 

implementation plan that takes into consideration market participants' recommendations with 

regard to such sequencing. 

Additionally, the Commission intends to address the international implieations of the securitybased swap rules arising undcr Title VII in a single proposal in order to give interested parties, 

including investors, market participants, and foreign regulators, an opportunity to consider as an 

integrated whole our approach to the registration and regulation of foreign entities engaged in 

cross-border security-based swap transactions involving U.S. parties. We understand that our 

approach to the cross-border application of Title VII must strike a balance between sufficient 

domestic regulatory oversight and the global nature of the derivatives market. As a result, the 

development of our cross-border approach is informed by our discussions with counterparts in 

other jurisdictions. For example, Commission staff, along "'lith the staff of the CFTC, has been 

working closely with counterparts from Canada, the European Union, Hong Kong, Japan, 

Singapore, and other jurisdictions to coordinate technical issucs that arise as each jurisdiction 

develops derivatives regulation that have cross-border impact. These efforts not only aid the 

development of our approach to the cross-border application of Title VlJ, but also help promote 

consistency among approaches to derivatives regulation globally. 

6 See 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 Security-Based Swaps (July I, 20 II), 

http://sec.gov/rules/exorders/2011134-64796.pdf; and Release No. 33-9308, Exemptionsfor Security-Based Swaps 

Issued by Certain Clearing Agencies (March 30, 2012) http://www.sec.gov/ruleslfinaI!2012/33-9308.pdf. The 

Commission also had extended certain existing temporary rules to facilitate clearing of certain credit default swaps. 

See Release No. 33-9232 Extension of Temporary Exemptionsfor Eligible Credit Default Swaps to Facilitate 

Operation of Central Counter parties to Clear and Settle Credit Default Swaps (July I, 201 I), 

http://www.sec.gov/rules/interimI2011133-9232.pdf. Those temporary rules expired on April 16,2012 and were 

superseded by the exemptions adopted in March 2012. 

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Credit Rating Agencies 

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/ and we are continuing to work to finalize a 

series of proposed rules intended to strengthen the integrity of credit ratings. 

The SEC also is required to conduct three studies relating to credit rating agencies, including a 

study about alternative compensation models for rating structured finance products. 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, the Commission requested public comment on the feasibility of such a system, 

asking interested parties to provide comments, proposals, data, and analysis. 8 

Voleker 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.,,9 

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 consistent with the language and purpose of this 

complex statute. 

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 ccrtain exceptions to these general 

prohibitions, consistent with the statute. For example, the proposal permits a banking entity to 

engage in underwTiting, market making-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 ofthe United States. The proposal 

defines "material conflict of interest," "high-risk asset," and "high-risk trading strategy" for these 

7 See Release No. 33-9175, Disclosure/or Asset-Backed Securities Required by Section 943 o/the Dodd-Frank 

Wall Street Reform and Consumer Protection Act (January 20,2011), http://www.sec.gov/rules/finaIl2011/33-

9175.pdf. 

S See Release No. 34-64456, Solicitation o/Comment to Assist in Study on Assigned Credit Ratings (May 10,2011), 

http://www.sec.gov/rules/other/2011/34-64456.pdf. 

9 See 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/2011/34-65545.pdf. 

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75091.008

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 requested 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 

ended on February 13,2012. We received thousands of comment letters on the joint proposal 

and we are reviewing them carefully. We are continuing to work with the other regulators 

through the rulemaking process. 

In addition to the rules highlighted above, the SEC has adopted or proposed rules on a wide 

variety of topics including municipal advisors, asset-backed securities, payments to governments 

by resource extraction issuers, sourcing of conflict minerals, mine safety information, 

disqualifying "bad actors", accredited investor status, and corporate governance and 

compensation. We also are considering the recommendations in the staffs Study on Investment 

Advisers and Broker-Dealers 10 and preparing a request for data and economic analysis related to 

standards of conduct and enhanced regulatory harmonization to help inform any follow-on 

rulemaking. 

JOBS Aet Implementation 

The Jumpstart Our Business Startups Act (JOBS Act), enacted on April 5,2012, makes 

significant changes to the federal securities laws, including: 

• altering the initial public offering process for securities of a new category of issuercalled an "emerging growth company" and providing exemptions for such companies 

from various disclosure and other requirements generally for up to five years following 

their initial public offerings. 

• requiring the Commission to modify the prohibition against general solicitation and 

general advertising in Rule 506 of Regulation D and Rule 144A under thc Securities Act 

of 1933 (Securities Act). 

• requiring the Commission to provide exemptions under the Securities Act for 

"crowdfunding" offerings and umegistered public offerings up to $50 million. 

• increasing the number of shareholders a company can have before it must register under 

the Securities Exchange Act of 1934 (Exchange Act), and changing the Exchange Act 

thresholds for registration and deregistration for banks and bank holding companies. 

The JOBS Act also requires several SEC studies and reports to Congress. 

Some of the JOBS Act's provisions became effective immediately upon enactment, while others 

require extensive Commission rulemaking, in some eases under very tight deadlines. 

Commission staff have been working to analyze the legislation and provide information to 

companies and practitioners about the provisions currently in effect. For example, immediately 

10 See http://www.sec.gov/news/studies/2011l913studyfinal.pdf. 

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following enactment of the JOBS Act, staff in the Division of Corporation Finance posted 

procedures on the Commission's website to assist emerging growth companies that wished to 

submit draft registration statements for confidential non-public review, as permitted by Title I of 

the JOBS Act. In the days following enactment, the staff also prepared and posted practical 

guidance, addressing frequently asked questions by companies and practitioners on the 

confidential submission process for emerging growth companies and other matters under Title I, 

and on changes to the requirements for Exchange Act registration and deregistration. 

We have formed rulemaking teams, which include staff from across the agency, including 

economists from the Division of Risk, Strategy and Financial Innovation. These teams are 

beginning to prepare proposed rules with economic analyses to recommend to the Commission 

to implement the various provisions of the JOBS Act. To aid the rulemaking process and 

increase the opportunity for public comment, we have made available to the public a series of email boxes on the SEC website through which interested parties can send preliminary comments 

on each of the parts of the JOBS Act before any rules are proposed and the official comment 

periods begin. 

Section 967 Response 

To fulfill the requirements of Section 967 of the Dodd-Frank Act, the SEC engaged the services 

of The Boston Consulting Group (BCG), an organizational consulting firm with significant 

capital markets expertise, to conduct a broad and independent assessment of SEC organization 

and operations. The SEC retained BCG for the express purpose of carrying out the assessment 

required by Section 967 of the Dodd-Frank Act, which required, among other things, an 

independent assessment of the SEC's internal operations, structure, funding, and need for 

comprehensive reform. Specific topics of study included: the possible elimination of lower 

priority or redundant units at the SEC; improvement of internal communications and 

organizational chain-of-command; the effect of new market technologies such as high-frequency 

trading; hiring authorities and personnel practices; and oversight and reliance on self-regulatory 

organizations (SROs). 

On March 10,2011, BCG delivered the results of its assessment to the SEC and to Congress in a 

263-page final report titled Us. Securities and Exchange Commission: Organizational Study and 

Reform. 11 The final report, which was submitted within the I 50-day deadline specified in 

Section 967, identifies initiatives for the SEC to pursue to improve efficiency and effectiveness 

of operations. 

Over the last year, SEC staff have conducted in-depth assessments of the BCG recommendations 

for potential organizational improvement opportunities across the agency. This initiative, known 

as the SEC Mission Advancement Program (MAP), has recognized operational improvements in 

three key areas: 

• Reorganizing critical internal infrastructure. Following the 2010-2011 reorganizations of 

the Division of Enforcement and the Office of Compliance Inspections and Examinations 

11 See http://www.sec.gov/news/studies/20 11 Isecorcreformreport-df967 .pdf. 

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(OCIE), the SEC is restructuring the offices of Financial Management (OFM), 

Administrative Services (OAS), Information Technology (OlT), and Human Resources 

(OHR) to align the organizations; better define roles, accountabilities and decision rights; 

and provide improved services to the program offices. 

• Reviewing key processes for efficiency and effectiveness. Agency working groups have 

analyzed a broad array of agency activities in an effort to reduce unnecessary steps, 

improve the distribution of resources to key activities, insert stronger internal controls, 

and improve responsiveness within the agency and to the pUblic. 

• Locating cost savings opportunities. A Continuous Improvement Program (CIP) has been 

created to identify potential program savings and pay constant attention to costs, to date 

resulting in the identification of opportunities that are projected to save more than $8.3 

million over the next two years. 

The SEC's actions with regard to the BCG recommendations are detailed in our most recent 

semi-annual report. 12 

Having completed the initial stages of review and analysis, it is anticipated that the level of 

activity related to MAP projects will be reduced in FY 2012. Staff and management time to 

devote to this initiative will continue to be in short supply, and future phases of implementation 

are likely to require levels offunding that must be directed at other agency priorities at this time. 

For this reason, future activity will be focused on a limited number of projects based on an 

assessment of their relative potential for operational impact or cost savings. In the coming 

months, the working groups will continue to assess the ehanges suggested by BCG to refine and 

identify those that would provide the most benefit to the SEC and the public. 

The SEC's FY 2013 Budget Request and Future Priorities 

The SEC is requesting $1.566 billion for FY 2013, an increase of$245 million over the agency's 

FY 2012 appropriation. n If enacted, this request would permit us to add approximately 676 

positions (196 FTE) for both improvements to core operations and implementation of the 

agency's new responsibilities. 

The FY 2013 funding request would be fully offset by the matching collections of fees on 

securities transactions. Currently, the fee rate is equal to approximately two cents per every 

$1,000 of transactions. Under this mechanism, the SEC is deficit-neutral, as any increase or 

decrease in the SEC's budget would result in a corresponding rise or fall in offsetting fee 

collections. 

The resources requested for FY 2013 would allow us to achieve four high-priority initiatives: (1) 

adequately staff mission-essential activities to protect investors; (2) prevent regulatory 

bottlenecks as new oversight regimes become operational and existing ones are streamlined; (3) 

12 See http://sec.gov/news/studiesI20 12/secorgreforrnrepo!1-20 12-df967.pdf. 

13 A copy ofthe SEC's FY2013 Budget Congressional Justification can be found on our website at 

http://www.sec.gov/about/secfyI3congbudgjust.pdf. 

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strengthen oversight of market stability; and (4) expand the agency's information technology 

systems to better fulfill our mission. 

Protecting Investors 

Investor confidence in the fairness of financial markets is a critical element in capital formation. 

The SEC intends to continue its efforts to enhance its investor protection activities by directing 

significant additional staff resources to our enforcement and examinations programs. 

Enforcing the Securities Laws: In FY 2013, we hope to increase the resources dedicated 

to the enforcement program to help improve our ability to identify hidden or emerging threats to 

the markets and act quickly to halt misconduct, minimize investor harm, and maximize the 

deterrent impact of our efforts. 

Inspection and Examination Program: The investment industry is rapidly evolving, with 

the development of new products posing new risks to investors and the increased complexity of 

the markets posing challenges to regulators. We have implemented, and continue to improve, a 

risk-based inspection and examination program that continually collects and analyzes a wide 

variety of data about regulatees using modem quantitative techniques. Nevertheless, only 

analyzing data offsite is not sufficient in our complex markets. There is no substitute for 

engaging directly with regulatees through on-site examinations. Examinations provide the most 

timely, accurate, and reliable information to assist us in fulfilling our mission. They also help us 

to maintain a critical presence with market participants. In FY 2011 we were only able to 

examine eight percent ofregistered investment advisers, managing about 30 percent of total 

industry assets under management. About forty percent of registered investment advisers have 

never been examined. In FY 2012 we are adding exam staff to help improve this disparity and 

we hope to add more in FY 2013 as well. Without additional resources, the increasing 

complexity of registered firms and the disparity between the number of exam staff and the firms 

could compromise the effectiveness and credibility of the Commission's iuspection and 

examination program. 

Risk Data and Analysis: As the industries we regulate usc increasingly sophisticated 

technology and high-frequency trading algorithms, our ability to use statistical and trend 

analyses to identify potentially inappropriate or risky industry praetices is essential to help 

inform our enforcement, examination, and rulemaking efforts. Our Division of Risk, Strategy 

and Financial Innovation plans to continue to develop and implement robust analytical models to 

identifY regulated entities with high-risk profiles. 

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Preventing Regulatory Bottlenecks 

As we continue to implement the Dodd-Frank Act and begin our JOBS Act rulemaking, we will 

need additional resources, including new subject matter experts, to help make the transition to 

new rule regimes as smooth as possible and to streamline existing processes for market 

participants, while still maintaining essential protections for investors. 

Over-the-Counter Derivatives: In FY 2013, the Commission's regulatory responsibilities 

will significantly expand by the addition of new categories of registered entities (including 

security-based swap execution facilities, security-based swap data repositories, security-based 

swap dealers, and major security-based swap participants); the required regulatory reporting and 

public dissemination of security-based swap data; and the mandatory clearing of security-based 

swaps. To avoid any unintended market disruptions as the new requirements become 

operational, the agency will need additional staff with technical skills and experience to process 

and review on a timely basis requests for interpretations as well as registrations or other required 

approvals. New staff also will be needed to help conduct risk-based supervision of registered 

security-based swap dealers and participants, including by using newly-available data to identify 

excessive risks or other threats to security-based swap markets and investors. 

JOBS Act: The rulemaking required for implementation of many new JOBS Act 

provisions will be complex. Additionally, the JOBS Act requires the Commission to undertake a 

number of studies and complete several reports. Because many of the rulemakings, studies, and 

reports are subject to near-term deadlines, resources will need to be shifted to these projects. 

Longer term, certain of the changes in the federal securities laws caused by the JOBS Act will 

require ongoing staff resources, including for the review of confidential draft registration 

statements submitted by emerging growth companies and supervision of intermediaries in 

crowdfunding transactions. 

SRO Rule Approvals: The Commission is responsible for reviewing and processing 

proposed rule changes of SROs to evaluate their impact on the protection of investors, the public 

interest, and the national market system. The Dodd-Frank Act's imposition of new procedural 

requirements with respect to the SEC's processing of proposed SRO rule changes has placed 

further demands on an already complex and resource-intensive process. The volume of annual 

requests has increased by over 80 percent in the last five years, with the Commission receiving 

over 2,000 requests for approval or guidance in 2011. We hope to be in a position to dedicate 

additional resources to these approvals so that market participants do not face greater 

uncertainty, costs, and delays in obtaining Commission action on new products, trading rules, 

and platforms. 

Economic Analysis: As the Commission undertakes additional rulemaking and evaluates 

existing rules, continued access to robust, data-driven economic analyses is necessary to develop 

efficient rules and evaluate the effectiveness of our existing regulations. The Division of Risk, 

Strategy and Financial Innovation will need additional economists and industry experts to 

support these efforts. 

Providing Interpretive Advice: As the Commission implements the rules required under 

the Dodd-Frank Act and the JOBS Act, there will be a need for additional staff to respond to the 

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demand from companies, investors, and their advisors for interpretive advice about the new 

rules. In FY 2013, for example, we expect a heightened number of interpretive inquiries from 

public companies on new rules relating to listing standards for executive compensation, 

disqualification of felons and other bad actors from certain exempt offerings, and specialized 

disclosure rules. In addition, we expect the need for interpretive advice for JOBS Act related 

matters will only increase, particularly as rulemakings related to a number of the more 

complicated provisions, like crowdfunding and the new $50 million offering exemption, are 

completed. 

Strengthening Oversight of Market Stability 

The rapidly expanding size and complexity of the financial markets presents enormous oversight 

challenges. For FY2013, the SEC is requesting funding for additional specialists in a number of 

areas to strengthen our oversight of the markets, protect against known risks, and best enable our 

markets to facilitate economic growth. 

Clearing: Currently, the average transaction volume cleared and settled by clearing 

agencies is approximately $6.6 trillion a day. The SEC estimates six new clearing entities will 

register with the SEC in FY 2013, totaling fourteen active registered clearing agencies. The SEC 

has approximately thirteen examiners devoted to the eigpt currently active registered clearing 

agencies, with limited on-site presence in only three of the eight entities. Additionally, the SEC 

has only approximately twelve other staff principally focused on monitoring and evaluating risk 

management systems used by existing clearing agencies. We will need to expand these efforts to 

address the expected increase in the number of clearing agencies and rule filings raising risk 

management issues. 

Market Structure Improvements: The Commission is continuing its efforts to monitor 

and respond to significant market events, such as the severe market disruption of May 6,2010. 

In response to market structure issues, the Commission is currently evaluating a proposed "limitup/limit-down" mechanism that would help enhance market stability by preventing trades in 

individual securities from occurring outside of a specified price band. The Commission also 

continues to review proposed amendments to the existing market-wide circuit breakers designed 

to address extraordinary volatility across the markets and to make the circuit breakers more 

useful in the fast-paced electronic trading dynamics of to day's markets. Importantly, the 

Commission also is likely to move forward on the establishment of a consolidated system for 

tracking trading activity in the equity markets, which will enhance the data available to securities 

regulators for a range of critical analytical and regulatory purposes. 

Money Market Funds: I have asked Commission staff to prepare recommendations on 

structural reforms to money market funds to lessen their susceptibility to runs and to enhance the 

protections afforded investors. These reforms would supplement the rules limiting the portfolio 

risk in money market funds that the Commission adopted in FY 2010. The Division of 

Investment Management plans to expand and improve its monitoring and oversight of money 

market funds and bring on additional staff with industry and data analysis expertise in this highly 

specialized area. 

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Exchange Traded Funds: Exchange Traded Funds, or ETFs, are rapidly growing, 

increasingly complex financial products whose activities raise significant disclosure, conflict of 

interest, market structure, and macro-prudential issues. The SEC plans to augment its ability to 

respond effectively to product innovation and potential market stresses in this area. Staff with 

specialized industry expertise are needed to assist in evaluating novel and complex RTF 

products, structures, trading mechanisms, and index replication methodologies. 

Cybersecurity: Financial entities are recognized as particular targets for attempted cyber 

attacks. The SEC already has a program in place that monitors cybersecurity at the various 

securities exchanges, but the growing number of trading and clearing platforms will require 

additional staff to further enhance this function. 

Leveraging Information Technology Systems 

The preceding discussion demonstrates that growth in both the size and complexity of U.S. 

markets requires that the SEC leverage technology to continuously improve its productivity, as 

well as identify and address the most significant threats to investors. The SEC's budget request 

for FY 2013 would support IT investments of approximately $100 million. This level of funding 

would enable the Office ofInformation Technology to dedicate adequate resources to new or 

ongoing projects in areas such as data management, integration and analysis; document 

management; disclosure review; and internal accounting and financial reporting. Additionally, 

the SEC plans to continue multi-year initiatives to improve the enforcement and examinations 

programs' capabilities to intake and process thousands of tips, complaints, and referrals received 

annually, as well as massive amounts of electronic evidence. The SEC also plans to make 

additional investments in electronic discovery, its forensics laboratory, and reporting tools. 

As part of our effort to improve key technology, the SEC is also using the Reserve Fund 

established by the Dodd-Frank Act to address important multi-year technology initiatives. This 

year and next we plan to use the Reserve Fund to make vital investments to modernize our 

EDGAR Filer system and external website, SEC.gov, which directly serve investors and public 

companies. The EDGAR database is used by companies and individuals to file periodic reports 

and information with the SEC and allows SEC staff and the public to search the filings. With 

approximately 20 million daily page hits, SEC.gov is one of the Federal Government's most 

viewed web sites and a critical gateway for both businesses and individuals to access massive 

amounts (13.5 terabytes) of financial filer information maintained by the SEC. However, both 

EDGAR and SEC.gov were developed in the 1990s and use outdated software design and 

scripting language. We intend to invest in overhauling EDGAR and SEC.gov to create new, 

modernized systems that would improve the agency's ability to meet Commission requirements 

and satisfy public needs; simplifY the interchange between filers and the SEC to reduce filer 

burdens; and reduce the long-term costs of operating and maintaining the systems. We will also 

be working to improve data structure and database performance, verify data, and construct a 

single data repository and central staging area for all EDGAR and other SEC data. 

In addition, in FY 2013 we plan to use the Reserve Fund to develop Market Oversight and Watch 

Systems that will provide the SEC with automated analytical tools to review and analyze market 

events, complex trading patterns, and relationships; develop fraud analysis and fraud prediction 

analytical models; and deploy natural speech, text, and word search tools to assist our fraud 

14 
66 


75091.015

detection dIorts. Additionally, we will continue to enhance our analytical tools, databases, and 

intake systems for market data, mathematical algorithms, and financial data. 

Conclusion 

I fully recognize that it is incumbent upon the SEC to maximize our efficiencies and continue our 

organizational modemization efforts. As we protect investors, we have an obligation to be good 

stewards of the resources provided to us. We are carefully reviewing our activities to identify 

ways to improve efficiency and productivity. These ongoing efforts, along with continued 

congressional support, will be essential to enable the SEC to fulfill its mission even as the 

financial markets continue to grow in size and complexity. 

Thank you for your support for the agency's mission and for allowing me to be here today to 

discuss the many initiatives and operational reforms taking place at the SEC. I am happy to 

answer any questions you may have. 

15 
67 


75091.016

Lawyer Skewers Boston Fed Chief's Money 

Fund Comments 

By Beagan Wilcox Volz April 24, 2012 

Boston Fed president Eric Rosengren's recent remarks on the need for further money market 

fund reforms have drawn fire from an industry supporter. 

Melanie Fein, a former Fed attorney now in private practice, disputes Rosengren's contentions in 

a recent speech that prime money funds are susceptible to runs and are a source of systemic risk. 

Fein says in a 21-page letter to Rosengren dated April 18 that she has been "greatly troubled" by 

Fed officials' statements that she believes "distort the facts" about money funds and their role in 

the financial system. 

"In particular, I am concerned about proposals advocated by yourself and other Fed officials that 

do not appear to be supported by the level of economic analysis that is called for given what is at 

stake ... ," writes Fein. 

"Some of the proposals and public statements seem disingenuous and have an amateurish 

'shooting from the hip' quality that I feel is beneath the dignity of the nation's central bank." 

Joan Ohlbaum Swirsky, of counsel at Stradley Ronon, says the comments about insufficient 

economic analysis are "fighting words," given that the Securities and Exchange Commission has 

lost several legal challenges on the issue of cost-benefit analysis, most recently with its rule that 

sought to expand proxy access. 

In her letter, Fein takes several of Rosengren's contentions and parses them, pointing to what she 

says are gaps in logic or insufficient facts to warrant his conclusions. 

Fein also sent the letter to the Financial Stability Oversight Council and the SEC, which filed it 

as a comment letter. 

For example, Fein calls attention to Rosengren's comments regarding more than 100 capital 

support agreements between money funds and their sponsors during 2007 and 2008 and his 

conjecture that, in the absence of this support, many of the funds would not have been able to 

maintain a stable net asset value. 

This led Rosengren to conclude that regulators should impose a capital requirement or other 

structural changes on money funds, Fein says. 

But the faets don't support this conclusion, Fein asserts, noting that bank-affiliated sponsors of 

money market funds provided the majority of these bailouts. 
68 


75091.017

She also refers to a Federal Reserve paper that found that money funds with bank-affiliated 

sponsors were "significantly" more likely to hold distressed asset-backed commercial paper than 

other money funds. 

The Fed paper said that these support arrangements for bank-affiliated money funds created 

moral hazard and systemic risk. 

"The history of sponsor support for [money market funds] suggests not that MMFs need to 

maintain capital but rather that banking organizations that provide support to their affiliated 

MMFs need to maintain capital and that the Federal Reserve should refocus its concerns about 

MMF risk-taking to risk-taking by bank-affiliated MMFs," writes Fein. 

Fein goes a step further and says that perhaps the Fed should first consider changes to rules 

within its own jurisdiction rather than suggesting changes to rules within the SEC's regulatory 

scope. 

John Hunt, partner at McLaughlin & Hunt, says that Fein turns Rosengren's statements about the 

risks of prime money funds on their head by arguing that it's likely there are more risks in bankaffiliated money funds "because the banks are on both sides - they're both buyers and sellers of 

money market fund instruments." 

Fein is challenging Rosengren and the Fed to back up the "bald statements" made about money 

market funds, he says. 

Fein's letter quotes at length from the President's Working Group Report on Money Market 

Fund Reform to bolster her argument that making money funds risk-free "is not a sound policy 

aim." 

Fein includes several sentences from the report in bold, including this one: "Making each 

individual MMF robust enough to survive a crisis of the size of that experienced in 2008 may not 

be an appropriate policy objective because it would unduly limit risk-taking." 

Fein also draws upon the President's Working Group report when making the case that neither 

reform being considered by the SEC - a floating NA V or capital buffers, along with redemptions 

restrictions is a good idea. 

She says that experience shows capital requirements are a "weak guard" against taking risk. 

"The bank capital rules actually encouraged excessive risk-taking by banks and contributed to 

the build-up of toxic assets in the financial system that ultimately caused the financial crisis, as 

pointed out in my paper. 

The idea that MMFs should maintain capital is not supported by any economic analysis that I am 

aware of," she says. 
69 


75091.018

At the beginning of her letter, Fein refers Rosengren to a §!llily she conducted that dissects Fed 

statements on money funds and concludes that the Fed is pushing for additional reforms of the 

funds to bolster the banking industry. 

She also notes that she has represented both money fund and bank clients. 

i 

Fein has previously written comment letters on SEC-proposed regulations on behalf of Federated 

Investors. 

At the end of the letter, Fein tells Rosengren that, although she has been critical of his statements 

and proposals regarding money funds, she hopes he will not take her comments personally or as 

an attack on the Fed. 

She adds that she believes the Fed acted admirably during the financial crisis. 

"I firmly believe, however, that it is unnecessary and potentially dangerous for the Fed to 

become involved in regulating an industry with which it has little regulatory experience or 

expertise, especially one that is well-regulated by another independent federal agency and that 

historically has operated with little risk to investors or the financial system," writes Fein. 

Media relations contacts at the Boston Fed did not respond to requests for comment by deadline. 
70 


75091.019

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20S49 

THE CHAIRMAN 

The Honorable Michael G. Grimm 

U.S. House of Representative 

1511 Longworth House Office Building 

Washington, DC 20515 

Dear Representative Grimm: 

June 1,2012 

At the April 25, 2012 hearing on SEC Oversight before the Capital Markets and 

Government Sponsored Enterprises Subcommittee of the Committee on Financial Services. you 

asked about the effective date of the amendment to Exchange Act Section 12(g)( 1) included in 

the Jumpstart Our Business Startups Act (P .L. 112-106) regarding an increase in the trigger 

number of holders of record at which registration is required. 

Prior to enactment of the JOBS Act. Exchange Act Section 12(g)( I) provided that an 

issuer was required to register a class of equity securities under Section 12{g) if that class was 

held of record by 500 or more persons and the issuer had more that $10 million in assets as of the 

end orits most recent fiscal year. Section 501 of the JOBS Act amended Exchange Act Section 

12{g)( I) to raise the holders of record trigger from 500 or more persons to either: (1) 2,000 

persons; or (2) 500 persons who are not accredited investors. The staff has taken the view that 

Section 50 I took effect upon enactment. 

If you have any further questions or comments, please contact me at (202) 551-2100, or 

have your staff contact Eric Spitler. Director of the Office of Legislative and Intergovernmental 

Affairs, at (202) 551-20 I O. 

Sincerely, 

~ Mary L. Schapiro 

Chairman 
71 


75091.020

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON. D.C. 20S49 

TWit CHAtRMAN 

The Honorable Jeb Hensarling 

U.S. House of Representatives 

129 Cannon House Office Building 

Washington, DC 20SIS 

Dear Representative Hensarling: 

June 27, 2012 

At the April2S, 2012 hearing on SEC Oversight before the Capital Markets and 

Government Sponsored Enterprises Subcommittee of the Committee on Financial Services, you 

asked for the breakdown between attorneys and economists on the SEC staff. 

As a law enforcement agency, we clearly have more attorneys than economists. 

Specilically, we currently have approximately 1.653 individuals classified as attorneys and 44 as 

economists. We are engaged in an ongoing etTort to hire additional economists. In Fiscal Year 

2012 we have already hired an additional 16 Ph.D. economists for our Division of Risk, Strategy 

and Financial Innovation to work on various aspects of economic analysis such as rulewriting, 

and we are continuing our efforts to recruit economists generally. In our Fiscal Year 20 t 3 

request, we are requesting 20 more economists. 

If you have any further questions or comments, please contact me at (202) 551-2100, or 

have your staff contact Eric Spitler, Director of the Office of Legislative and Intergovernmental 

Affairs, at (202) 551-20 10. 

Sincerely. 

Mary 

~~ L. Schapiro 

Chairman 
72 


75091.021

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON. D.C. 20549 

The Honorable Robert Hurt 

U.S. House of Representatives 

J 5 16 Longworth House Office BuUding 

Washington. DC 20515 

Dear Representative Hurt: 

June 6, 2012 

At the April 25. 2012 hearing on SEC Oversight before the Capital Markets and 

Government Sponsored Enterprises Subcommittee of the Committee on Financial Services, you 

asked about the status of interpretative guidance that would assist advisers 10 private equity funds in 

complying with their obligations as registered advisers under the Investment Advisers Act. In 

particular, you also inquired whether this guidance makes clear that there are differences between 

private equity and other types ofinvestment funds. You also asked about the transition 

requirements for bank holding companies whose reporting obligations to investors have been 

terminated under Section 60 I ofthe Jumpslart Our Business Startups Act (P.L. 112-106). 

I first will address your inquiries about private equity advisers. To assist in the transition to 

registration, the staff of the Division oflnvestment Management has responded to thousands of 

informal inquiries. The staff also has provided !be following written guidance for advisers to 

private equity funds and otber private funds: 

• Private equity advisers that operate a single advisory business through multiple entities - a 

common business structure in private equity - can use a streamlined application and 

registration process, thereby mitigating duplicative filings and reporting obligations. We 

estimate that over 950 private fund advisers, including private equity advisers. have elected 

this fiI ing option: 

• Private equity advisers need not amcnd pre-cxisting advisory contracts between them and 

their clients if such contracts were entered into prior to registration with the Commission 

and the adviser operates in compliance with the Advisers Act requirements. This mitigates 

disruptions to private equity advisers' businesses. but acknowledges that investors benefit 

from the protections under the Advisers Act; 

• Employees and other personnel of certain companies in which private equiry funds invest 

are not subject to reporting obligations on the adviser's registration !orm, thus simplifYing 

the reporting process for these advisers: and 
73 


75091.022

The Honorable Robert Hurt 

Page 2 

• Private fund advisers can complete new private fund reporting requirements on their 

registration fonns by looking to infonnal Commission staff guidance in the fonn .of • 

"frequently asked questions." This is readily available to the larger industry and IS deslgned 

to clarify certain reporting obligations. 

I also understand that the staff of the Division of Investrnent Management continues to 

engage in discussions with representatives of the private equity industry concerning interpretative 

and other issues that are unique to these advisers. For instance, the staff met with a leading trade 

group for private equity advisers in May to continue the dialogue regarding the requirements under 

the Advisers Act. 

With respect to your question regarding bank holding companies that become eligible to 

terminate reporting to investors, it may be helpful to recap the requirements prior to enactment of 

the JOBS Act. Exchange Act Section 12(g)(4) provided that an issuer with a class of equity 

securities registered under Section 12(g) could terminate its reporting obligations if the class of 

securities was held of record by fewer than 300 persons. Such termination would occur 90 days 

after the filing of a certification with the Commission. Until that date of termination, the issuer 

was required to file all reports required by the Exchange Act. 

To help implement Section 12(g)(4), the Commission adopted Exchange Act Rule 12g-4 

in 1976. Rule 12g-4 provides, in relevant part, that an issuer with a class of equity securities 

registered under Section 12(g) of the Exchange Act can terminate its reporting obligations 

pursuant to Rule 12g-4 if the class of securities is held ofrecord by fewer than 300 persons. An 

issuer relying on this Rule is required to file a Notice of Termination of Registration on Form 15. 

Upon filing the Form, the issuer's obligation to file future periodic and current reports is 

immediately suspended, although the Exchange Act deregistration does not take effect until 90 

days after filing of the Form. 

Section 601 of the JOBS Act atnended Exchange Act Section l2(g)(4) to provide that a 

bank holding company with a class of equity securities held of record by fewer than 1,200 

persons could terminate its reporting obligations under Section 12(g). The Act did not atnend 

Rule 12g-4, which still contains the 300 person threshold and provides for the immediate 

suspension of the requirement to file Exchange Act reports. Therefore, until such time as the 

Commission atnends Rule 12g-4 to incorporate the 1,200 person threshold, bank holding 

companies are not eligible to rely on the Rule and must instead rely on the statute to exit 

Exchange Act reporting. Section 12(g)(4) still provides that the issuer must file all reports 

required by the Exchange Act until the registration is terminated 90 days after the filing of a 

certification with the Commission. Since investors in bank holding companies that become 

eligible to terminate reporting may benefit from the 9O-day notice required under Section 

12(g)(4), until rulemaking is completed, the staffhas concluded that it would not be appropriate 

to eliminate the 9O-day notice requirement by staff action. 
74 


75091.023

The Honorable Robert Hurt 

Page 3 

If you have any further questions or comments, please contact me at (202) 551-2100, or 

have your staff contact Eric Spitler, Director of the Office of Legislative and Intergovernmental 

Affairs, at (202) 551-2010. 

Sincerely, 

fn~~~ 

Mary L. Schapiro 

Chairman 
75 


75091.024

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549 

THE CHAIRMAN 

The Honorable Brad Miller 

U.S. House of Representatives 

1127 Longworth House Office Building 

Washington, DC 20515 

Dear Representative Miller: 

July 24, 2012 

At the April 25; 2012 hearing on SEC Oversight before the Capital Markets and 

Government Sponsored Enterprises Subcommittee of the Cornmittee on Financial Serviccs, you 

asked about the valuation of second liens in banks' financial statements. 

As part of its disclosure review program, the SEC's Division of Corporation Finance staff 

devotes significant attention to the disclosures made by large financial institutions. In 

connection with our review program, in August 2009, SEC staff issued a "Dear CFO" letter to a 

number of these banks requesting enhanced disclosures in the area of higher risk loan products, 

such as junior lien mortgages, high loan-to-value mortgages and interest only mortgages. The 

purpose of the "Dear CFO" letter was to assist these hanks in providing more transparent 

disclosures to investors about the impact of their lending practices on the financial condition and 

results of operations of these institutions. In reviewing the 20 I 0 Form I O-K annual reports filed 

by the large financial institutions, the staff noted that home equity lines of credit (HELOes) and 

second lien loans continued to present potentially significant areas of exposure to those firms and 

ultimately to investors. During the review, the staff noted that the banks holding the second lien 

position were not aware of the performance status of the senior lien unless they held or serviced 

the senior lien themselves. lne stafffound that this situation presented one of the more 

significant risks in developing the allowance for loan losses for these loans because the second 

liens were performing even though the senior lien did not. In some instances, the second lien 

holder had not received notification that the senior lien loan was in default until the occurrence 

of a foreclosure sale. 

As a result, the staff issued comments requesting that the banks provide increased 

disclosure of the amount of HELOCs and loans in the second lien position. The staff asked the 

banks to provide explanations that included the extent to which, and if so, how, they tracked 

whether the first lien that sits ahead of their second lien loan was in default, regardless of 

whether they held or serviced the first lien. The staff also requested expanded disclosure about 

how the banks factored in the lack of any information about the senior lien in developing their 

allowance for loan losses and a more robust description of the methodology they used to 

determine the allowance that they reported in their financial statements. 
76 


75091.025

The Honorable Brad Miller 

Page 2 

Following the staff's comments, all of the large financial institutions have significantly 

increased their disclosures about the perfonnance and impact of second lien mortgages on their 

balance sheets. This level of increased transparency provides investors with a clearer 

understanding ofloan valuations and how the banks account for them. Additionally, following 

the SEC staff's efforts in this area, in January 2012, the U.S. Banking Regulators issued 

Interagency Supervisory Guidance on Allowance for Loan and Lease Losses Estimation 

Practices for Loans and Lines of Credit Secured by Junior Liens on 1-4 Family Residential 

Properties. Following the issuance of this guidance, several large financial institutions have 

implemented changes to their nonaccrual policies regarding how they classify certain of their 

perfonning second lien loans that reside behind a delinquent senior lien loan. 

I appreciate your interest in this issue. If you have any further questions or comments, 

please call me at (202) 551-2100, or have your staff call Timothy Henseler, Acting Director of 

the Office of Legislative and Intergovernmental Affairs, at (202) 551-2010. 

Sincerely, 

~~ Mary L. Schapiro 

Chairman 
77 


75091.026

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549 

THE CHAiRMAN 

The Honorable David Schweikert 

U.S. House of Representative 

1205 Longworth House Office Building 

Washington. DC 20515 

Dear Representative Schweikert: 

June 1,2012 

At the April 25, 2012 hearing on SEC Oversight before the Capital Markets and 

Govemment Sponsored Enterprises Subcommittee of the Committee on Financial Services, you 

asked about the timeframe for completion of crowd funding rulemaking required by the Jumpstart 

Our Business Startups Act (P.L. 112-106). 

As you are aware, Title III ofthe JOBS Act provides an exemption from Section 5 of the 

Securities Act of 1933 for crowd funding transactions that meet certain requirements, including 

the total amount that may be raised by an issuer in a twelve-month period, maximum individual 

investment amounts, and how sales of securities may be made (i.e. through a broker or a funding 

portal). The Commission is required to issue rules to implement the crowd funding exemption 

within 270 days of enactment of the JOBS Act. The rulemaking process will include 

development and issuance of rule proposals for public comment and, following careful 

consideration of the public comment, development and issuance of final rules. 

The Divisions of Corporation Finance and Trading and Markets have rulemaking teams 

in place, which are actively working to develop recommendations for proposed rules for the 

Commission's consideration. OUf priority is to develop and adopt thoughtful, workable rules 

that are faithful to the intent of the statute and that include strong investor protections. As part of 

this process, the staff and Commission also will fully consider the economic impact of the rules. 

including their costs and benefits. While it will be vcry challenging to complete the rulemaking 

process within 270 days, we are making every effort to do so. 

If you have any additional questions or comments on this matter, please contact me at 

(202) 551-2100, or have your staff contact Eric Spiller, Director of the Office of Legis\ative and 

Intergovernmental Affairs, at (202) 551·2010. 

Sincerely, 

~~.~ Mary L. Schapiro 

Chairman 
78 


75091.027

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549 

THE. CHAIRMAN 

The Honorable Brad Shennan 

U.S. House of Representatives 

2242 Rayburn House Office Building 

Washington, DC 20515 

Dear Representative Shennan: 

June 5,2012 

At the April 25, 2012 hearing on SEC Oversight before the Capital Markets and 

Government Sponsored Enterpri!!es Subcommittee of the Committee on Financial Services, you 

raised several issues about which you asked for further infonnation. First, you inquired about 

the status of the Commission's prior efforts to establish a web-based tool to allow investors to 

access a list of companies that disclose that they conduct business in countries that sponsor 

terrorism. You also asked about the development of Commission rules to require disclosure by 

companies of activities that may subject them to sanctions under the Iran Sanctions Act of 1996. 

Finally, you asked about the status of the Financial Accounting Standards Board's standards for 

lease accounting. 

As you know, in 2007, the Commission briefly provided on its website portions of 

companies' most recent annual reports that described their business activities in any of the 

countries then-designated by the State Department as state sponsors of terrorism. Because of 

concerns expressed about the web tool, including concerns that the linked reports were not 

always the companies' most recent disclosure, the tool was discontinued pending consideration 

of issues regarding access to disclosures about activities in or with state sponsors of terrorism. In 

the fall of 2007. the Commission issued a concept release requesting public comment about 

whether to develop mechanisms, including, as one alternative, an improved web-based tool, to 

facilitate greater public access to companies' disclosures about their business activities in or with 

countries designated as slate sponsors of terrorism. Comments received in response to the 

concept release did not support development of a web tool for this infonnation. and the 

Commission has not developed such a 1001. However, the infonnation continues to be publicly 

available through word searches of companies' filings in the Commission' s EDGAR database. 

The EDGAR database may be accessed through the Commission's website, www.scc.gov.As 

you may be aware, the Commission is undertaking a major etIort to modernize the EDGAR filer 

system and the sec.gov website. I expect that these modernized systems will make EDGAR 

searches of all kinds easier. and penni! interested parties to identify directly disclosures about 

business activities in state sponsors of terrorism. 

Regarding the development of Commission rules to require disclosure by companies of 

activities that may subject them to sanctions under the Iran Sanctions Act of 1996, Commission 

slaff is currently working on a disclosure rule in response to congressional direction that the 
79 


75091.028

The Honorable Brad Shennan 

Page 2 

Commission issue rules that require an issuer to disclose activities that may subject it to 

sanctions under section 5 of the Iran Sanctions Act. We have not yet detennined an expected 

completion date for this rulemaking; however, the staff is actively working to develop 

recommendations for the Commission. 

Finally, with respect to your inquiry about the FASB's current standards for lease 

accounting, although generally well understood in practice, the standards result in significantly 

different accounting treatment for economically similar transactions. In addition, many 

constituents agree that current lease accounting standards result in consistent underreporting of 

assets and liabilities, such that a number of classes of users routinely adjust reported financial 

statements for the estimated effects of uncapitalized leases. In an effort to improve lease 

accounting, the FASB, in ajoint project with the IASB, issued an exposure draft on lease 

accounting in August 2010. The FASB and the International Accounting Standards Board have 

conducted joint redeliberations on the proposals and have engaged in significant discussion on 

fundamental issues in light of comments from constituents. 

In connection with the Commission's oversight role of the FASB, CommIssion staff 

monitors whether proposed new or revised accounting standards will result in more accurate, 

transparent. and useful infonnation for investors and other users. The staff also monitors 

whether the standard setter has given appropriate consideration to comments by constituents 

about operational concerns or costs of implementing new standards, in light of the expected 

benefits. Commission staffhas been actively monitoring the FASB's redeliberation process and 

is hopefui Ihal many of the changes to the lease proposals discussed by the F ASB and the IASB 

to date will simplify the application of the proposed model while retaining benefits for investors 

and other users through improved financial reporting for leases. lbe F ASB and the IASB expect 

to issue a new joint exposure draft for public comment in the second half of20 12. 

If you have any additional questions or comments on these matters, please contact me at 

(202) 551-2100, or have your staff contact Eric Spitler, Director of the Office of Legislative and 

Intergovernmental Affairs, at (202) 551-2010. 

o 

Sincerely, 

~~~ Mary L. Schapiro 

Chainnan