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25–286 PDF 2006

S. HRG. 109–253

NOMINATIONS OF: CHRISTOPHER COX

ROEL C. CAMPOS, ANNETTE L. NAZARETH

MARTIN J. GRUENBERG, JOHN C. DUGAN

AND JOHN M. REICH

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

ON

NOMINATIONS OF:

CHRISTOPHER COX, OF CALIFORNIA, TO BE CHAIRMAN OF THE

U.S. SECURITIES AND EXCHANGE COMMISSION

ROEL C. CAMPOS, OF TEXAS, TO BE A MEMBER OF THE

U.S. SECURITIES AND EXCHANGE COMMISSION

ANNETTE L. NAZARETH, OF THE DISTRICT OF COLUMBIA, TO BE A MEMBER OF THE

U.S. SECURITIES AND COMMISSION

MARTIN J. GRUENBERG, OF MARYLAND, TO BE A MEMBER

AND VICE CHAIRMAN OF THE

FEDERAL DEPOSIT INSURANCE CORPORATION

JOHN C. DUGAN, OF MARYLAND, TO BE COMPTROLLER OF THE

OFFICE OF THE COMPTROLLER OF THE CURRENCY

JOHN M. REICH, OF VIRGINIA, TO BE DIRECTOR OF THE

OFFICE OF THRIFT SUPERVISION

JULY 26, 2005

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

(

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN E. SUNUNU, New Hampshire

ELIZABETH DOLE, North Carolina

MEL MARTINEZ, Florida

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel

BRYAN N. CORBETT, Counsel

MARK F. OESTERLE, Counsel

PEGGY R. KUHN, Senior Financial Economist

DEAN V. SHAHINIAN, Democratic Counsel

PATIENCE R. SINGLETON, Democratic Counsel

LYNSEY GRAHAM REA, Democratic Counsel

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

(III)

CONTENTS

TUESDAY, JULY 26, 2005

Page

Opening statement of Chairman Shelby ................................................................ 1

Opening statements, comments, or prepared statements of:

Senator Sarbanes .............................................................................................. 2

Senator Dole ...................................................................................................... 4

Senator Dodd .................................................................................................... 5

Senator Allard ................................................................................................... 5

Senator Carper ................................................................................................. 6

Senator Enzi ..................................................................................................... 6

Senator Schumer .............................................................................................. 9

Senator Bunning ............................................................................................... 11

Prepared statement ................................................................................... 50

Senator Stabenow ............................................................................................. 11

Prepared statement ................................................................................... 50

Senator Crapo ................................................................................................... 39

WITNESSES

Ted Stevens, a U.S. Senator from the State of Alaska ......................................... 6

Prepared statement .......................................................................................... 51

Dianne Feinstein, a U.S. Senator from the State of California ........................... 7

Barbara Boxer, a U.S. Senator from the State of California ............................... 8

NOMINEES

Christopher Cox, of California, a U.S. Representative in Congress from the

State of California, to be Chairman of the U.S. Securities and Exchange

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

Biographical sketch of nominee ....................................................................... 52

Response to written questions of:

Senator Carper .......................................................................................... 105

Senator Bunning ....................................................................................... 107

Senator Corzine ......................................................................................... 109

Roel C. Campos, of Texas, to be a member of the U.S. Securities and

Exchange Commission ......................................................................................... 14

Biographical sketch of nominee ....................................................................... 68

Response to a written question of Senator Carper ........................................ 105

Annette L. Nazareth, of Texas, to be a Member of the U.S. Securities and

Exchange Commission ......................................................................................... 16

Biographical sketch of nominee ....................................................................... 75

Response to written questions of:

Senator Carper .......................................................................................... 107

Senator Bunning ....................................................................................... 108

Page

IV

Martin J. Gruenberg, to Maryland, to be a Member and Vice Chairman

of the Federal Deposit Insurance Corporation .................................................. 34

Biographical sketch of nominee ....................................................................... 83

John C. Dugan, to Maryland, to be Comptroller of the Office of the

Comptroller of the Currency ............................................................................... 35

Biographical sketch of nominee ....................................................................... 88

John M. Reich, of Virginia, to be Director of the Office of Thrift Supervision 36

Biographical sketch of nominee ....................................................................... 95

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter to Senator Richard C. Shelby from Norma Alexander Hart, President,

National Bankers Association ............................................................................. 112

(1)

NOMINATIONS OF:

CHRISTOPHER COX, OF CALIFORNIA

TO BE CHAIRMAN OF THE

ROEL C. CAMPOS, OF TEXAS

TO BE A MEMBER OF THE

ANNETTE L. NAZARETH, OF THE

DISTRICT OF COLUMBIA

TO BE A MEMBER OF THE

U.S. SECURITIES AND EXCHANGE COMMISSION;

MARTIN J. GRUENBERG, OF MARYLAND

TO BE MEMBER AND VICE CHAIRMAN OF THE

FEDERAL DEPOSIT INSURANCE CORPORATION

JOHN C. DUGAN, OF MARYLAND

TO BE COMPTROLLER OF THE

OFFICE OF THE COMPTROLLER OF THE CURRENCY

JOHN M. REICH, OF VIRGINIA

TO BE DIRECTOR OF THE

OFFICE OF THRIFT SUPERVISION

TUESDAY, JULY 26, 2005

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC.

The Committee met at 10:03 a.m., in room SD–538, Dirksen Senate Office Building, Senator Richard C. Shelby (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

Chairman SHELBY. The hearing will come to order.

This morning, we will hear from the President’s nominees for the

Securities and Exchange Commission, Congressman Christopher

Cox, Commissioner Roel Campos, and Annette Nazareth. I appreciate the willingness of the nominees to appear before the Committee today.

Congressman Cox has been nominated to serve as the Chairman

of the Securities and Exchange Commission. Since being elected to

the House of Representatives in 1988, Congressman Cox has estabVerDate 11-MAY-2000 18:39 Feb 01, 2006 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 25286.TXT SBANK4 PsN: SBANK4
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lished an impressive record as a legislator and leader on securities

regulation. He currently serves as Chairman of the Committee on

Homeland Security in the House of Representatives and was also

a Member of the Energy and Commerce Committee, which at the

time had jurisdiction over securities law, and the Financial Services Committee for 7 years. Prior to his election, Congressman Cox

served as a senior counsel in the Reagan administration and was

an attorney in private practice specializing in corporate finance and

securities. Congressman Cox graduated from the University of

Southern California and received his law degree and MBA from

Harvard University. Congressman Cox brings a wealth of experience to this position, and I believe that the SEC and the securities

markets will benefit from his leadership. Congressman, I congratulate you on your nomination and look forward to seeing you again

many times before this Committee and probably in the not too distant future.

I would like to also welcome Commissioner Campos back to the

Committee for his second nomination hearing. He is no stranger to

this Committee. Commissioner Campos was first confirmed as the

SEC Commissioner in the summer of 2002. During his tenure at

the SEC, Commissioner Campos has led efforts to promote convergence with respect to international securities regulations and has

worked to streamline the SEC’s administrative proceedings process.

Prior to joining the Commission, Commissioner Campos was one of

the two principal owners of El Dorado Communications and served

as an executive with the radio broadcasting company. Commissioner Campos began his career as an officer in the U.S. Air Force

and has also spent significant time as a Federal prosecutor and as

a lawyer in private practice, focusing on corporate law and litigation. Commissioner Campos graduated from the Air Force Academy

and earned his law degree from Harvard Law School and his MBA

from UCLA.

I also welcome Ms. Nazareth back to the Committee. She has testified before this Committee on other occasions regarding issues

pending before the SEC. Since 1999, she has served as the Director

of the Division of Market Regulation at the Securities and Exchange Commission. She has previously served as Senior Counsel

to Chairman Arthur Levitt and Interim Director of the Division of

Investment Management. Prior to joining the SEC, she was a Managing Director of Salomon Smith Barney and a Senior Vice President of Lehman Brothers, Inc. She graduated from Brown University and earned her law degree from Columbia University.

I thank each of the nominees for their willingness to serve, and

I look forward to your testimony here today.

Senator Sarbanes.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Well, thank you, Mr. Chairman. I know we

are going to confront a difficult situation this morning. I think

there are votes scheduled.

Chairman SHELBY. Five, five votes.

Senator SARBANES. Five votes.

Chairman SHELBY. Five back to back votes. We are going to give

them a break.

3

Senator SARBANES. We will have to work around that.

I want to welcome the nominees before us, Congressman Cox,

Commissioner Campos and Ms. Nazareth, and I want to express

my appreciation to the Chairman for moving promptly to schedule

this hearing once all of the nominees had been sent here to the

Senate for us to consider for their confirmation.

Mr. Chairman, I am going to shorten my statement considerably,

but I do want to make some comments about the work of the Commission and its importance to our capital markets and the millions

of Americans who rely on the integrity of those markets. The Commission itself has defined its primary mission in succinct and forthright terms: ‘‘To protect investors and maintain the integrity of the

securities markets.’’ And the Commission has noted that, ‘‘As more

and more first-time investors turn to the markets to help secure

their future, pay for homes, and send their children to college,

these goals are more compelling than ever.’’

Now, more than one out of every two U.S. households is invested

directly or indirectly in the markets. The U.S. markets play a critical role in the world capital markets. And it is the integrity, the

transparency and the efficiency of our capital markets that have

made them the envy of the world.

In order to carry out its mission, the SEC must provide vigorous

oversight of the markets, and vigorous enforcement of our securities laws. The Chairman, of course, is in a sense functions as the

chief administrative officer of a rather large organization. We are

going to put that Harvard Business School education of Congressman Cox’s to the test here, and the Commission has a strategic

plan which adheres to the highest standards of integrity, fairness,

accountability, teamwork, and excellence.

We have passed through a difficult period recently in the securities markets. The Wall Street Journal said, ‘‘The scope and scale

of the corporate transgressions of the late 1990’s exceeded anything

the U.S. has witnessed since the years preceding the Great Depression.’’ These have involved problems of accounting, disclosure, governance, Enron, WorldCom, and other major public companies; the

issuance by 10 major financial institutions of misleading and fraudulent stock analysts’ reports, which led to the Global Settlement;

systemic problems of the functioning of the stock exchanges, which

has led to strong sanctions and reform of exchange regulation; and

mutual fund scandals involving late trading and market timing

which has also led to extensive regulatory reform and enforcement

actions.

I think the SEC has emerged stronger from this period with a

stronger regulatory framework, a reinvigorated enforcement function, and with the expanded budget resources with which it can

carry out its responsibilities. In addition, the SEC has introduced

risk-assessment procedures, to anticipate problems before they

cause harm, and it has taken steps to raise the morale of the staff

and reduce the staff turnover that had seriously undermined the

Commission’s ability to carry out its responsibilities.

My own view is that at this time, we need effective leadership

at the Commission to maintain the momentum which Chairman

Donaldson and his fellow Commissioners established. The challenges ahead are many. The effective implementation and oversight

4

Commission actions, registration of hedge fund advisers, the administration of Regulation NMS and FASB is moving on the expensing of stock options. There are other initiatives pending at the

Commission: Proposals to give shareholders limited access to the

proxy solicitation process, the question of the credit rating agencies, completion of mutual fund reform and evaluation of the selfregulatory organizations.

Mr. Chairman, I look forward to this hearing. We have a number

of questions to put to the nominees. The Commission will be facing

a formidable agenda and the resolution of that agenda in a positive, constructive, and satisfactory manner is fundamental to the

effective workings of our economy and the protection of our investor citizens.

Thank you very much.

Chairman SHELBY. Senator Dole.

STATEMENT OF SENATOR ELIZABETH DOLE

Senator DOLE. Yes, thank you, Chairman Shelby.

Today, the Committee has the privilege of considering an outstanding nominee to be the next Chairman of the Securities and

Exchange Commission. Congressman Chris Cox has a stellar reputation as a leader on many important issues for consumers and

the securities industry, and he has a long and impressive list of accomplishments from his nearly two decades in the Congress. He is

known for his intellect. He is known to be innovative, diligent, and

extremely hardworking—qualities that will certainly serve him

well as head of the SEC.

I am also certain that one of Congressman Cox’s greatest accomplishments was convincing Rebecca to marry him, and I want to

take this opportunity to recognize her. You see, Rebecca Cox played

an invaluable role, for which I am deeply appreciative, at the Department of Transportation when I served as Secretary there;

whether it was the new National Airport or the renovation of

Union Station, the sale of Conrail or safety belts and air bags, Rebecca was right there working so very hard. Chris is indeed blessed

with such an intelligent, talented, and devoted wife. And welcome

to Charles, Kathryn, and Kevin. They have many reasons to be

very proud of their parents, and I continue to wish them all my

very best.

We are all aware of the considerable challenges that await the

next Chairman of the SEC. In light of the single-vote margins on

a number of high profile, controversial decisions recently made by

the Commission, Congressman Cox is uniquely qualified for this

position. He has a strong reputation as a consensus builder, even

on the most sensitive of issues. The responsibilities of the next SEC

Chairman will be great, and I am certain that Chris Cox is the

right man for the job.

I also want to extend a warm welcome to Commissioner Campos

and Ms. Nazareth. It is my hope that this Committee will consider

these nominations with due speed and be ready to approve them

this week.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Dodd.

5

STATEMENT OF SENATOR CHRISTOPHER J. DODD

Senator DODD. Well, Mr. Chairman, I will ask unanimous consent that some opening comments be included in the record.

Chairman SHELBY. Without objection, so ordered.

Senator DODD. I would just like to underscore the comments

made by Senator Sarbanes. We have three of our colleagues here

to introduce these witnesses, and I know the clock is going to be

running, so I will move along and make sure they get an opportunity to make their presentations before the votes start.

I just would note, there is a new SEC building going up, Mr.

Chairman, as you know, only a few blocks from here. In fact, I

gather the staff is moving in as we speak. And I guess the symbolism here about getting closer to this epicenter of politics is

something that in my meeting with Chris Cox I cautioned about.

I think it is so important that the Commissioners of the SEC not

become embroiled in the day-to-day machinations of Washington

politics. I suppose the symbolism of Union Station, where literally

millions of people every day transgress here back and forth from

the transit systems there, those average investors that Senator

Sarbanes talked about is the critical issue.

And I also would not want to let pass the moment to say thank

you to Bill Donaldson and to Harvey Goldschmid for the tremendous job they have done as Commissioners. We welcome all three

of you and look forward to working with you.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Allard.

STATEMENT OF SENATOR WAYNE ALLARD

Senator ALLARD. Thank you, Mr. Chairman, and I want to express my appreciation for your holding this hearing so that we can

hear from the three nominees to the Securities and Exchange Commission, particularly Congressman Cox, Mr. Campos, and Ms.

Nazareth.

I am not that familiar with Mr. Campos and Ms. Nazareth, but

I have had the opportunity to serve with Congressman Cox in the

House and more than just served with him, I actually worked with

him on a number of issues. I would certainly second many of the

comments that were made by my colleague from North Carolina

and I am glad to see him before this Committee. I am especially

pleased that he has been selected to serve as Chairman. I am very

hopeful that things will go well under his leadership at the SEC.

He brings capability and a lot of leadership qualities that are

needed during these trying times, and I think that his 17 years’ experience in the House of Representatives will serve him very well.

I feel that the prime role of the Commission is to help facilitate

a free market system that promotes security and safety in our Nation’s financial markets. Recent scandals and possible future terrorist attacks on our financial industry are attempts to break down

America’s faith and trust in investing in our future. At a time

when retirement security is a major focus, the SEC should assist

in instilling confidence in our financial investment decisions as best

it can.

So, I look forward to hearing your ideas, and thank you, Mr.

Chairman.

6

Chairman SHELBY. Senator Carper, do you have an opening

statement?

STATEMENT OF SENATOR THOMAS R. CARPER

Senator CARPER. Not a statement, just to say to all of our guests,

welcome here this morning. I am withholding my opinion on Mr.

Cox until I have heard from Senator Boxer and Senator Feinstein.

We will see what they have to say. And I will decide where to go

with my old colleague, Mr. Cox.

Mr. Campos, we appreciate your service, and Ms. Nazareth, if

you are half as good as I have heard, you are a real addition to

the SEC.

Thank you very much.

Chairman SHELBY. Senator Enzi.

STATEMENT OF SENATOR MICHAEL B. ENZI

Senator ENZI. Mr. Chairman, I want to thank you for holding

this hearing on these nominees and look to their speedy confirmation.

I would particularly comment that I have been working with Mr.

Cox since I got to the Congress. He was the foremost expert on export administration, and I got to work with him on that for years,

but my greatest adventures have been working on some small business issues with him, and he has a fond heart for small business,

and I think that he is actually the right person at the right time

for the right job, and I look forward to his confirmation. I ask for

my full statement to be included in the record.

Chairman SHELBY. Thank you. Without objection, it will be ordered.

Senator Stevens, we will call on you; then, Senator Feinstein,

Senator Boxer, and then Senator Schumer, our colleague, for any

introductions you want.

STATEMENT OF TED STEVENS

A U.S. SENATOR FROM THE STATE OF ALASKA

Senator STEVENS. Mr. Chairman and Members of the Committee,

in view of the upcoming vote, I think I would just ask you to put

my statement in the record.

Chairman SHELBY. Without objection, it is so ordered.

Senator STEVENS. I will say that Senator Dole has preceded me

and made the comments I would have made about Rebecca

Gernhardt Cox and her children. I am sure that the Senators here

will remember that she was part of the Senate staff and really was

a very distinguished member of my office when I was the Whip for

many years.

But Senator Dodd, you will remember that you cosponsored with

Chris Cox the 1995 legislation to protect investors from fraudulent

lawsuits. I think that Congressman Cox, as a graduate of Harvard

Law School, a former Editor of the Harvard Law Review, is, as

many of you said, the right man for the right job at the right time.

I am delighted to have the opportunity to be here to tell you that

I urge you to bring out his name as quickly as possible so we can

confirm him and the rest of these other members, and they can get

about their business.

7

Thank you very much.

Chairman SHELBY. Thank you, Senator Stevens.

Senator Feinstein.

STATEMENT OF DIANNE FEINSTEIN

A U.S. SENATOR FROM THE STATE OF CALIFORNIA

Senator FEINSTEIN. Thanks very much, Mr. Chairman, Ranking

Member Sarbanes, and Members of the Committee.

In response to Senator Carper’s comment, I would like to make

this comment in return: I think the fact that both Senator Boxer

and I, two Democrats from Chris Cox’s home State, are here today

is in itself testimony to the credentials that he brings to this office.

I think I will not speak on behalf of my colleague. She will speak

for herself. But I think both of us believe that the Securities and

Exchange Commission is an extraordinary Commission and that

Representative Cox has the qualifications and the experience necessary to manage regulation and enforcement and to improve investor confidence in the Nation’s securities markets. One of the

things that I did not know about him was the fact that he is really

academically very smart.

[Laughter.]

Yes, right. Not only, of course, does he come from California, as

was pointed out, but he also attended the University of Southern

California. What was not pointed out was that he graduated magna

cum laude in just 3 years with a bachelor’s degree in political

science and English. He went on to Harvard Business School and

Harvard Law School and graduated with honors in 1977.

At Harvard, as was said, he was Editor of the Harvard Law Review, and he followed that by clerking for the Hon. Herbert Choi,

our Nation’s first Asian-American Federal judge. He then began his

career as a private sector securities attorney at a California-based

international law firm, well-known, Latham and Watkins. After 2

years, he was invited to become a lecturer at Harvard Business

School on business administration.

In 1986, he entered public service as a Senior Associate Counsel

to President Reagan. Against a whole host of competitors, he then

won the seat of California’s 48th District in Orange County, a district he has well represented for 17 years. And he recently became

the first Chairman of the House Committee on Homeland Security.

Now in the wake of corporate major accounting scandals, his

nomination comes at an important time for the Securities and Exchange Commission. More recently, through the Sarbanes-Oxley

Act and other enforcement actions, the Securities and Exchange

Commission has strengthened investor protections and restored

faith in corporate America by tightening regulation and increasing

enforcement. The next Chairman will have the difficult task of

managing these recent changes in the industry that will require

even more scrutiny.

In closing, let me say that Representative Cox accomplished a

major background in academia, in business, in law as well as his

experience working in Government. This well equips him to provide

the leadership that is necessary for these new days in the SEC. I

want to just conclude by quoting Representative Cox’s statement

during the Sarbanes-Oxley hearings. ‘‘Fraud and unfair dealing are

8

the enemies of the free enterprise system. We have tough laws on

the books to deal with all matters of crime, including corporate

crime. But just as bacteria mutate to avoid the latest antibiotics,

those who cook the books are constantly changing the recipes, and

we have to keep our laws and our remedies up-to-date.’’ We look

to him to do just that.

Thank you very much, Mr. Chairman

Chairman SHELBY. Senator Boxer.

STATEMENT OF BARBARA BOXER

A U.S. SENATOR FROM THE STATE OF CALIFORNIA

Senator BOXER. Thank you, and it is a pleasure to be here with

my colleague, Senator Feinstein, and with my colleague, Chris Cox

and the other Members, and I see Chuck Schumer has joined us.

Because of the press of the clock, I would ask unanimous consent

that my full statement be placed in the record.

Chairman SHELBY. Without objection, so ordered.

Senator BOXER. And what I will try to do is just say what has

not been said before, so we can just get all the facts on the table.

I agree that Chris Cox has represented his district with great

distinction, and I was fortunate enough to work with Chris while

I was in the House. I had the privilege of chairing the Government

Operations Subcommittee on Government Activities and Transportation at the same time that Chris was Ranking Member, and as

you know, Senators Shelby and Sarbanes, the importance of these

relationships cannot be overstated.

And we did address very difficult problems. We held a lot of oversight hearings, including one on the bombing of Pan Am Flight

103. And throughout that particular session of Congress, we maintained a very strong and collegial relationship. We worked very

well together, and we found the common ground. We did not agree

on everything, but we found the common ground, and we moved

forward.

And in the years since, I have gone on to the Senate, I have continued to work with Chris on a number of issues. For example, we

fought for the interests of children when we co-authored the Child

Support Enforcement Act, and we have been working together with

Senator Feinstein and others to assure a more equitable distribution of homeland security grants—an issue that I am sure we all

have different views depending on the size of our States.

Now, I have found Congressman Cox easy to work with, a pleasure to work with. And, you know, we do not agree on some very

basic issues, and we are very open about that. But we have in the

past definitely set aside those differences to make progress for the

people. And now, the rest of my statement will be very brief, and

I want to address it to you and my Democratic colleagues.

As you review this important nomination to the post of Chairman

of the SEC, I ask that you keep in mind that this position impacts

the financial security and well-being of every person in the country.

Chris and I have talked about this. More Americans invest in the

stock market either directly or through vehicles like their pension

or retirement funds than ever before.

In a former life, many years ago, I was a stock broker. And I

knew what happened when the stock market crashed after the asVerDate 11-MAY-2000 18:39 Feb 01, 2006 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 25286.TXT SBANK4 PsN: SBANK4
9

sassination of JFK all those many years ago. I will never forget the

looks on the faces of the clients that I was trying to help at that

time. They count on us. They will count on Chris. So, I think what

is very important in the wake of Enron, WorldCom, and the

Adelphia scandals is that we make sure that Congressman Cox

takes his considerable talents, and he puts them to work on behalf

of the people of this country—not the special interests but the people of this country.

Now, he and I have talked about that, and he has told me with

great, I think, emotion that he will, in fact, do that. And since Senator Feinstein had a really important quote, I will also quote Chris

when he spoke in favor of the Sarbanes-Oxley Act: ‘‘Fraud and unfair dealings are the enemies of the free enterprise system. And as

we see from the turmoil in our markets, our country is paying a

very high price because those in power have broken faith with their

employees and their investors.’’

So, I am looking forward to learning from today’s hearings how

Congressman Cox, as head of the SEC, would achieve three goals

by using his considerable talents, and keeping that, I think, strong

statement right in the front of his mind that he is, in this position

along with our other good colleagues, going to protect the interests

of the people of this country.

Thank you very much.

Chairman SHELBY. Thank you, Senator Boxer.

Senator Schumer.

STATEMENT OF SENATOR CHARLES E. SCHUMER

Senator SCHUMER. Thank you, Mr. Chairman. It is a pleasure to

be here sitting before my colleagues on this side of the table, and

I want to welcome——

Chairman SHELBY. We ask you questions now.

[Laughter.]

Senator SCHUMER. You know, when you sit down here, you see

how high up you guys are, and you are down here, and it is a different experience altogether. I think I like it better on that side.

But in any case, I want to thank you for holding this hearing,

and by the way, Mr. Chairman, the bipartisan group we have here

is an example of how you and Senator Sarbanes have always attempted to run this Committee, and I think it is one of the reasons

we have had a great record of success as you have been Chairman

and as well when Senator Sarbanes was Chairman.

I am here to introduce, of course, Annette Nazareth, but I wanted to say a few words to welcome first Chris Cox to the hearing.

I used to joke that Chairman Donaldson visited us so often that he

became an honorary Member of the Committee. My guess is you

will be in the same position, and we look forward to your many visits here. And let me say, frankly, that I am in support of your nomination. And the reason is this. I have always described myself as

both pro-business and pro-regulation, and I do not think the two

conflict, as the statements that Senator Feinstein and Senator

Boxer mentioned.

Strong, good businesses and particularly financial businesses

have to be sure that there is good regulation so the public trusts

them. And I do not think there is a conflict. Everyone knew when

10

you were nominated that you were pro-business, but I think an examination of your record and certainly our discussions indicate

that you are pro-regulation as well, and I was heartened to see

that you had stated publicly what you had told me privately, that

there is not going to be a big rollback of all of the things that have

been done; the Sarbanes-Oxley bill, which has done so much good,

and many of the other things that Chairman Donaldson did. So, I

really look forward to your being Chairman of the Commission, and

I think we are going to have a very good time at that.

I want to thank Commissioner Campos for being here. Your

record speaks for yourself, sir. You have done a great job on the

Commission, and that is why I think your renomination is going

to go through without a hitch.

And it is my job here to introduce Annette Nazareth to my colleagues here on the Senate Banking Committee. Before introducing

her, I would like to introduce and welcome her husband, Roger Ferguson, who has also sat on this side of this table. Roger Ferguson

is a great public servant. He is now the Vice Chairman of the Federal Reserve Board, and I know, Roger, you are proud to be here

to support your wife, another amazing public servant in the financial world. Thank you for being here, and I want to welcome your

daughter, Caroline. The last time I saw Caroline, we just bumped

into each other in Yellowstone Park, it was. We were on separate

family vacations and just happened to see each other, and I know

your son is away, but he wanted to be here today, too.

Mr. Chairman, I take great pride in submitting the name of Annette Nazareth to be a nominee for the Securities and Exchange

Commission. I have had the pleasure of working closely with Annette in her role as Director of Market Regulation for the past several years, and if I was allowed only three words to describe her

today, I would say she is thoughtful, pragmatic, and balanced. She

understands the need for business innovation with a strong regulatory framework to protect U.S. investors.

In short, she is probably much like the description I gave to

Chris Cox. She is both pro-business and pro-regulation. They might

have different emphases, but the two will work well together.

Annette Nazareth led the Market Regulation Division since 1999,

supervising and regulating the U.S. securities market by establishing priorities and guiding the resolution of a number of securities market and broker-dealer issues, including equity market

structure issues, internalization and fragmentation concerns, market data issues, intermarket links, and options market issues.

And let me just say, as we know on this Committee, with new

technology, these were very, very difficult times. To keep our markets preeminent—as a New Yorker, I obviously care about that—

bring in the new technology but keep the openness and depth and

liquidity of our markets that we have come to prize. And the strong

and yet subtle hand of Annette Nazareth was behind all of this,

and I think one of the reasons that our markets can anticipate the

21st century with great success, and I think no one doubts that

they will continue to lead the world, is because of the work that

she did while working for the Commission.

And now, as a Commissioner, I think she can do even more. She

is known on Wall Street and in Washington as being open-minded

11

and fair. She is always willing to discuss issues in an in-depth

manner, and frankly, we have had a few differences, and she has

done as well with those as with the ones where we have agreed.

I think her diverse background will be invaluable to the Commission, and I would ask unanimous consent my entire statement be

read into the record.

Chairman SHELBY. Without objection, your statement will be

made part of the record

Senator SCHUMER. Oh, one other thing, Mr. Chairman. Our colleague, Jack Reed, had wished to be here. Annette was raised in

Rhode Island, attended Brown, and then had her career in New

York, and he could not be here today but wanted to——

Chairman SHELBY. Any statement he would have will be made

part of the record.

Senator SCHUMER. Thanks.

Chairman SHELBY. Senator Bunning, do you have any comments?

STATEMENT OF SENATOR JIM BUNNING

Senator BUNNING. I just have an opening statement, and I will

give it to the record.

Chairman SHELBY. Without objection, so ordered.

Senator Stabenow.

STATEMENT OF SENATOR DEBBIE STABENOW

Senator STABENOW. Thank you, Mr. Chairman. I would submit

an opening statement for the record and welcome the nominees.

Chairman SHELBY. Without objection, it is so ordered.

Congressman Cox, do you have any family? They have been introduced. Do you want to introduce them again before we call on

you? And then, I will call on you? And then, we will call on the others, and then, we will start. I know Rebecca is here.

Representative COX. Mr. Chairman, I am very pleased that I am

joined, and I appreciate the Committee’s willingness to let my family be here, by my wife, Rebecca. Seated immediately to her right

is my son, Kevin, who is 6 years old; my son, Charles, who is 12;

and my daughter Katie, who is 11. They are a source of continuing

support, inspiration, encouragement, and advice.

[Laughter.]

Chairman SHELBY. Mr. Campos, Commissioner Campos, do you

have any family or any comments you want to make about somebody here?

Mr. CAMPOS. Yes, I do, Senator. Thank you very much for offering that. I would like to introduce my wife and life partner, Minnie.

She is a practicing physician and my son, Daniel, who is a sophomore at a local school. And that is all I have with me today.

[Laughter.]

There are a lot more in Texas and California, but they could not

be here.

Chairman SHELBY. Ms. Nazareth, do you want to acknowledge

your husband again? Go ahead.

Ms. NAZARETH. I certainly always like to acknowledge my husband.

Chairman SHELBY. He is no stranger to this Committee.

12

Ms. NAZARETH. I know that, but I will take the opportunity to

acknowledge my husband, Roger Ferguson, who is also my life

partner and my inspiration as a public servant and my daughter,

Caroline Ferguson, who is 10, and like, I guess, the Cox children,

is a very honest and wise adviser. And our son, Roger III, is unable

to be here today. He is at camp, but he is 14 years old.

Chairman SHELBY. Would all three of you stand and raise your

right hand and be sworn?

[Witnesses sworn.]

Chairman SHELBY. All of your written testimony will be made

part of the record. Our votes have been delayed a few minutes, so

we will start with you, Congressman Cox, any comments you want

to make with regard to your nomination.

STATEMENT OF CHRISTOPHER COX

A U.S. REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA AND

CHAIRMAN-DESIGNATE

U.S. SECURITIES AND EXCHANGE COMMISSION

Representative COX. Mr. Chairman, Senator Sarbanes, and Members of the Committee, it is a pleasure to appear before you today.

I am deeply honored that President Bush has nominated me for the

very important task of ensuring the integrity and efficiency of the

Nation’s capital markets. I want particularly to thank Senator

Boxer, Senator Feinstein, and Senator Stevens for their very generous comments and introductions. It has been a pleasure to have

had the opportunity to work with them over a period of very many

years. And likewise, thank you, Mr. Chairman, Senator Sarbanes,

and each of the Members of this Committee, for the time and the

advice that you have given me during the course of this confirmation process.

It is a special honor to be nominated to follow in the footsteps

of Bill Donaldson. His advice and guidance over the past 2 months

have been invaluable as well. He has served the Securities and Exchange Commission, and our country, with honor and distinction.

Today, I am very pleased to be sharing this hearing with Commissioner Roel Campos and Commissioner-designate Annette Nazareth, both of whom have played such important and distinguished

roles at the Commission.

With your permission, Mr. Chairman, I would like to just briefly

describe some of the priorities that I would address as Chairman

if confirmed by this Committee.

I want to begin by noting that this Congress—and in particular

this Committee—plays the defining role in charting the course and

the overall mission of the Securities and Exchange Commission. As

you noted, Mr. Chairman, through my years of service on the Energy and Commerce Committee and the Financial Services Committee, I have had the privilege of working with Members of this

Committee and the staff of this Committee to give the SEC the

tools that it needs to ensure the integrity of America’s capital markets. Our most recent accomplishment was the historic SarbanesOxley Act, which was absolutely necessary to bolster confidence in

the integrity of our markets. Sarbanes-Oxley is now a pillar of our

securities regulatory charter.

13

Mr. Chairman, this is only a brief statement. But I think it is

important, in these opening comments, to describe some of the priorities that, if I am confirmed, would be the focus of my service as

Chairman of the Securities and Exchange Commission.

First, my top priority will be the vigorous enforcement of our securities laws. The Commission must be vigilant on behalf of investors, and stalwart against fraud and unfair dealing. This Committee and the Congress have given the Commission the legal tools

that it needs to protect investors and the health of our financial

markets. If confirmed, I will carry out that mandate, through the

aggressive use of the tools that Congress has provided.

Second, I will cultivate respect for the rule of law in our capital

markets. There is no better means to this end than continuity, clarity, and consistency in the Commission’s rulemaking and enforcement.

Third, I will strongly support the Commission’s ongoing work to

ensure that the rules governing our financial markets keep pace

with advancing technology. The rapid globalization of securities

markets, and the amazing development of the Internet as a medium for commerce and information have occurred at the same

time that the number of Americans who are directly invested in securities has reached record levels. These developments offer both

investors and issuers extraordinary new opportunities, but they

also bring unprecedented risks. As a result, the work of the SEC

is now more important than ever.

Fourth and finally, I will work to ensure the continuity of critical

operations in the financial sector in the event of another terrorist

attack. As the Chairman of the Homeland Security Committee, I

know how much work has already been done in this area, but as

the tragic events of this July in London have shown, the threat of

terrorism has not abated, and the September 11 attacks on Wall

Street have put us on fair notice.

If I am confirmed as Chairman, the SEC will continue to play a

key role in the President’s Working Group on Financial Markets,

and the SEC will continue to work closely with the Department of

the Treasury, the Justice Department, the intelligence community,

State and local law enforcement, and our partners around the

world to see to it that the American men and women whose savings

and jobs depend on the security of our capital markets are as safe

and as protected as they can be.

Chairman Shelby, Senator Sarbanes, and Members, I am grateful for the opportunity to serve as Chairman of what Senator Sarbanes has rightly called the crown jewel of Federal regulatory

agencies. From my early days as a securities practitioner to my

most recent years in Congress, I have been consistently impressed

by the high caliber of professionals at the Securities and Exchange

Commission. For 70 years, the SEC has set the standard of regulatory excellence for the Federal Government and for governments

around the world. It will be an honor, if confirmed, to join this exceptional team.

In closing, may I say that it has been an equally profound honor

to work for nearly two decades with each of you as colleagues in

this Congress, and if you confirm me, it will, of course, mark the

end of that extraordinary experience. But I welcome the opporVerDate 11-MAY-2000 18:39 Feb 01, 2006 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 25286.TXT SBANK4 PsN: SBANK4
14

tunity to continue to work with each of you for the protection of

investors and the efficiency of our financial markets.

Mr. Chairman, I would be happy to answer any questions you

may have.

Chairman SHELBY. Thank you.

Mr. Campos.

STATEMENT OF ROEL C. CAMPOS

MEMBER-DESIGNATE

U.S. SECURITIES AND EXCHANGE COMMISSION

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

I again am very appreciative of being here for the second time,

and I greatly value and appreciate the opportunity I have had to

work with this particular Committee and various Members at various times regarding the issues with securities regulation over the

last 3 years.

Mr. Chairman, almost exactly 3 years ago, I had the privilege of

coming before this Committee for confirmation hearings as today to

be a member of the Securities and Exchange Commission. At that

time, I shared with this Committee that my life’s journey had

begun in a humble household of Mexican-American parents in the

southernmost part of Texas. I explained that my father served in

World War II, was wounded in action in Germany, and worked

many jobs during his working life to support my mother and five

children.

Three years ago, my father, a retiree, and millions of other

Americans were dismayed and outraged as they learned of one corporate fraud after another. These words have become household

names: Enron, Adelphia, Tyco, and WorldCom. In response to the

concerns of investors and retirees like my father, who wondered

whether their investments were safe and whether they should have

confidence in the American markets, Congress guided by this Committee led by then-Chairman Sarbanes, did the Nation a historic

service by passing the Sarbanes-Oxley Act of 2002.

In the 3 years of my service, the Commission has fulfilled Congress’ mandate, met the deadlines, and implemented, through often

complicated rulemakings, the requirements of Sarbanes-Oxley. Unfortunately, in those 3 years, many other threats to investor confidence and the stability of the markets have erupted. Securities

analysts were discovered to be recommending companies that they

believed were ‘‘dogs,’’ in their own words, to promote banking business. A disturbing number of mutual fund executives were found

to be placing self interest above fiduciary duties and were found to

have allowed market timing and late trading privileges to large

customers at the expense of fund investors. Significant trading violations were found to have occurred on the floors of our major exchanges. Full and accurate financial disclosures by listed companies continued to be a problem, and many schemes were revealed

that were inflating financial numbers.

With these challenges, the SEC found itself in the busiest and

most crucial time since its creation, when Congress first dealt with

massive fraud and flight from the markets following the Great Depression. In the 3 years of my service, the Agency has conducted

over 200 rulemakings, interpretations, proposals, and the like. In

15

that time frame, the Agency has brought nearly 2,000 enforcement

proceedings. In fiscal year 2003, over $1.1 billion and in fiscal year

2004 over $1.21 billion in disgorgement and penalties were assessed to help restore investor losses from securities fraud.

I continue to believe that in America, the vast majority of

businesspersons, broker-dealers, investment advisers, and professionals are honest and scrupulous. However, my days as a Federal

prosecutor and businessman teach me that a significant few will

succumb to temptation and thereby cheat. It is true that no

amount of regulation will ever totally prevent fraud. However, wise

regulation and proper sanctions will deter and reduce the odds of

success and reduce the damage that occurs before the discovery of

fraud in the marketplace. The challenge of all regulation is to protect fully investors and their capital without unduly burdening the

conduct of business. The sad fact is that a few cheaters can cause

capital to stampede to the sidelines, cause huge reputation damage

to an industry, and diminish the liquidity of our markets.

During the past 3 years, I believe that the SEC has contributed

mightily with Congress in helping restore much of the lost confidence of investors in our markets. There is still a long way to go.

Most of the rules involving Sarbanes-Oxley have been in effect less

than 2 years, and their positive impact is just beginning to be evident. While nothing in life is perfect, I believe that the SEC has

implemented Sarbanes-Oxley and other rules in a very moderate

and practical matter, allowing honest business and the regulated

financial community to flourish and has protected investors. I believe that an important key to the future is that the Agency continue to listen to industry and, where appropriate, smooth out the

‘‘rough edges’’ of regulation. However, wise and fundamental principles, such as those in Sarbanes-Oxley and those that seek greater

transparency and the elimination of conflicts must never be compromised.

Recently, I have supported and been privileged to be active in the

Agency’s effort to understand and apply industry suggestions in the

areas of hedge fund adviser registration, the application of Section

404, involving the attestation of internal controls of public companies, and the constant improvement of our examination process.

The SEC’s enforcement program must continue to be vigorous and

act in real time to protect investors’ capital and minimize losses.

Where egregious violations of securities laws occur, strong sanctions must be imposed to create deterrence and provide appropriate

punishment. On the other hand, where possible, the Agency must

continue to reduce and eliminate antiquated rules, such as with the

Securities Act Reform, which will simplify and greatly reduce the

cost of raising capital in America.

If the Senate grants me this huge honor of confirming me a second time as a Member of this Commission, I vow to continue to

bring all of my energies to work diligently with my fellow Commissioners and Chairman to continue to accomplish the noble mission

that Congress has given this Agency: to protect investors, as Senator Sarbanes said, and to maintain the integrity of the markets.

Thank you for your kind attention.

Chairman SHELBY. Thank you.

Ms. Nazareth.

16

STATEMENT OF ANNETTE L. NAZARETH

MEMBER-DESIGNATE

U.S. SECURITIES AND EXCHANGE COMMISSION

Ms. NAZARETH. Thank you, Chairman Shelby, Ranking Member

Sarbanes, and Members of the Committee.

I am deeply honored to appear before this Committee today, and

I am deeply grateful to President Bush for nominating me to serve

on the Securities and Exchange Commission.

I am a passionate believer in the United States capital markets

and the benefits to our Nation and its citizens that come from a

well functioning, appropriately regulated financial system.

I have spent all of my professional life working in, for, and with

the financial services sector. My career has been primarily based

in the securities industry, where for 12 years, I worked in various

investment banks and commercial bank affiliates. I have hands on

experience helping businesses navigate the legal and regulatory requirements that industry faces. I have also gained an appreciation

of the issues and challenges facing the securities markets and

those who participate in them, whether they are brokerage firms,

professional traders, or retail investors. I believe that this firsthand experience helps me identify sensible and pragmatic selections to issues. I am keenly aware of the cost of regulation and the

importance of balancing these costs with the benefits that regulation seeks to achieve. Most recently, I have served as Director of

the Division of Market Regulation at the SEC, and I have had the

opportunity to work closely with Members of this Committee and

the House Financial Services Committee on a multitude of securities related issues. I have also represented the Commission as a

member of the Financial Stability Forum, which is comprised of

central banks, finance ministry officials, and other regulatory authorities. The Financial Stability Forum has the mandate to assess

vulnerabilities affecting the global financial system and identify actions to address those vulnerabilities.

Finally, I must share with you the reverence that I have for the

Commission and its Chairman. As William O. Douglas so aptly put

it, we are the investors’ advocate. In the United States, we have

the deepest and most liquid securities markets in the world. We

also have the highest level of retail investor participation in the

world. We are indeed an ownership society, and this is due in no

small part to the confidence that investors rightly place in our markets. Integrity and transparency are the hallmarks of our financial

system. I believe that working together in a thoughtful manner, we

can continue to maintain this preeminence and meet new challenges. I look forward to working with Chairman Cox, and I would

hope to help forge consensus on many of the issues that the Commission will face. I would be honored if you would permit me to be

a Commissioner of the Securities and Exchange Commission.

Thank you.

Chairman SHELBY. Thank you.

I will ask each one of you this question, and I will ask you to

respond to this question. Some of us on the Committee remain

troubled by the recent trend of split votes at the SEC. The SEC’s

quick reconsideration of the independent chairman requirement for

mutual funds following the recent DC Circuit ruling adds addiVerDate 11-MAY-2000 18:39 Feb 01, 2006 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 25286.TXT SBANK4 PsN: SBANK4
17

tional hesitation. I think some Members of the Committee are concerned that the lack of consensus on fundamental policy changes

to some extent perhaps undermines the SEC’s credibility and established an unfortunate precedent.

Are any of you troubled by the lack of consensus on major regulation here, and what does this mean for the SEC going forward. I

know you cannot always agree on everything; that is common

sense, but Commissioner Cox?

Representative COX. Thank you very much, Mr. Chairman.

Let me begin by noting that as a Chairman in the House of Representatives—I have been given the gavel three times—and in each

case, all of the legislation and all of the official reports produced

by the Committees that I have chaired have been unanimous and

bipartisan.

I have been a Member of a number of Committees in Congress,

and I know that unanimity and bipartisanship is not always possible, because people genuinely disagree. By statute, as you know,

no more than three Members of the Securities and Exchange Commission can be of one political party. So by design, Congress has

ensured that there be different points of view represented on the

Commission.

I will undertake, Mr. Chairman, if you confirm me as Chairman

of the Securities and Exchange Commission, to do my level best to

seek the common ground, build bipartisanship and, in fact, strip

partisanship of any kind from all of the deliberations and decisions

of the Securities and Exchange Commission, because I agree with

the premise of your question that wherever possible, unanimity of

purpose, of rulemaking, speaking with one voice strengthens the

Commission and strengthens its role in the capital markets.

Chairman SHELBY. Commissioner Campos, of course, you have

been on the Commission.

Mr. CAMPOS. I have been part of those split decisions.

Chairman SHELBY. Sure.

Mr. CAMPOS. I do believe, as Congressman Cox has indicated,

that it is desirable to try to reach consensus in all of the work that

is attendant to that, all of the background work and discussions

and understanding the views of the different Commissioners and

the staff should be taken into account.

However, in life, I think we all know, difficult decisions and honest brokers and honest and reasonable minds will differ, and I

think that with the numbers of tough issues that the Commission

has had to deal with, it is not terribly surprising that there have

been split decisions.

And I, for one, do not believe it takes away from the credibility

of the Commission so long as the Commission has done its utmost

to reach consensus and to get there, and I believe that our process

must continue to be very open, in which all of our deliberations are

out there for the public; the various considerations that went into

each particular Commissioner’s decision when the final vote is out

there and available.

And when that happens, I believe that the public, the professionals, and Congress can see that the process was appropriate and

was proper, and there was nothing illegitimate about it. After all,

the Supreme Court splits 5–4 very regularly, and no one says that

18

their particular decisions are illegitimate because they have a split

decision.

Chairman SHELBY. Ms. Nazareth.

Ms. NAZARETH. I agree with much of what has been said. Obviously, consensus is highly preferable, and I think as in many situations, there are a number of ways to skin a cat, a number of means

to achieve the desired goals, and it should certainly be our strong

preference to find a path that we can all agree on for the maximum

number of issues.

Chairman SHELBY. Congressman Cox, several months ago, the

SEC issued guidance on stock option expensing and provided

issuers with additional time to comply with the new FASB rule. I

support FASB’s rule and the SEC’s efforts to provide issuers with

technical guidance on valuation. In light of your prior position on

this issue, what assurances can you give this Committee that you

will continue to support the SEC’s efforts in this area?

Representative COX. Mr. Chairman, both the FASB deliberations

and the SEC guidance have essentially concluded at this point.

That process is going forward. Issuers are expected in the next fiscal year to comply with this rule. In my view, as a result, these

questions have been asked, answered, and deliberated upon. What

is most important going forward is that we have clarity.

This has been an issue of some discussion legislatively. That is

highly unusual. In my view, the independence of FASB is of vital

importance, as is the independence of the Securities and Exchange

Commission. The interests of Congress are different than the interests of the FASB and of the SEC, and Congress, of course, is concerned with big picture questions of the economy and so on.

All of those issues, to my way of thinking, have been addressed.

The process has gone forward, and if you confirm me as Chairman

of the Securities and Exchange Commission, I will ensure that the

Securities and Exchange Commission builds upon the record already established and that the rule is implemented as the markets

expect.

Chairman SHELBY. Senator Sarbanes.

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

First of all, let me say I strongly associate myself with the Chairman’s, the question he has just asked with respect to the issue of

expensing of stock options, and I appreciate your response, which

obviously reflects, I think, an appropriate sensitivity to the necessity of having independence in the standardsetters. That is how

FASB was established, and that is the precedent we have tried to

stick to, although on occasion, it is difficult.

I will just tell you this story, which underscores what you said.

When the Committee did Sarbanes-Oxley, there were Members

who wanted to include in it statutorily a provision that stock options should be expensed. I opposed that amendment not on the

substance but because it was my view that FASB had been set up

to make this decision, and therefore, it should be left to FASB to

decide.

A number of my colleagues agreed with that in opposing that

amendment. They said no, we do not want to pass this amendment.

This is a decision for FASB. Subsequently, after considerable study,

hearings, proposed rules, modified rules, and so forth, FASB put

19

out that the options should be expensed, which, of course, is the

treatment that is taking place in Europe, for example, in the EU

and has been advocated by many observers for many years.

Some of these colleagues who earlier had said well, no, no, this

should be left to FASB at that point decided no, no, now, we have

to interfere with FASB’s independent judgment and try to enact

legislation. Fortunately, that did not take place, but it does underscore the question of the role of FASB and how the SEC relates to

that role.

Now, the SEC has, as it were, a supervisory role, but it seems

to me it traditionally and in my view should continue to recognize

FASB’s preeminent role as the standardsetter and the necessity of

taking those standards, those very complex accounting issues out

of the political context and putting them more into a context in

which careful analysis and expert decisionmaking takes place.

Is it fair to say you perceive the relationship the same? I ask

that, actually, of all three of the nominees. Do you see the relationship that way?

Representative COX. Senator Sarbanes, the answer to that question is ‘‘yes.’’ I know that this issue is of great importance to you,

and I have had the opportunity to discuss it previously before this

hearing. I do not think that there is any question but that the Securities and Exchange Commission’s role in supervising the FASB

is designed to ensure such general and important, ‘‘big picture’’

things as the protection of investors, ensure the integrity of the

process, and ensure that all of the issues are taken into account.

But in terms of accounting expertise and technical questions, the

judgment of the FASB is to be respected. That is what it is there

for. I also agree with your sense that standardsetting on accounting

matters in the Congress is unwise. The very rare occasions where

bills have been introduced have been, in my view, legislative efforts

to make sure that issues are taken into account as much as there

have been very serious efforts to actually write the standards in

the Congress, which I think would be a mistake.

Chairman SHELBY. Mr. Campos.

Mr. CAMPOS. Senator, I strongly believe in the principle of independent standardsetters, which the FASB situation symbolizes.

The SEC has a very specific statutory role to oversee the FASB,

and we have to handle that very carefully, where we do not take

away their autonomy and their independent judgments.

But it is important for us at times to make sure that the process

seems open and that business interests are heard but that the

independence, above all, is protected. And I think keeping politics

and political bodies away from standardsetting is a very wise

course, and that is being followed all over the world, I might add.

Senator SARBANES. Ms. Nazareth.

Ms. NAZARETH. I agree with you very much, Senator Sarbanes.

I support the independent role of FASB, and I think it is vitally

important that we defer to their expertise on standardsetting.

Senator SARBANES. The same issue arises, to some extent, with

respect to the Public Company Accounting Oversight Board, and I

have been struck by the ability of the SEC and Chairman

McDonough of the PCAOB to work out that relationship in a very,

I think, positive and constructive way. And once again, I would ask

20

how sensitive each one of you is to the necessity of preserving the

appropriate role for the PCAOB as it carries out the functions it

has been charged with under the recently enacted legislation.

Why do we not just go right across again real quickly?

Representative COX. Thank you, Senator Sarbanes. The Sarbanes-Oxley Act vests the Securities and Exchange Commission

with responsibility for oversight of the PCAOB and creates this

very important body. Its Chairman, Bill McDonough, in my view,

has done an outstanding job. I have recently met with him and

look very much forward to working with him in a collaborative and

cooperative way. I think that is the appropriate way for the SEC

and the PCAOB to work going forward.

Mr. CAMPOS. Senator Sarbanes, I agree as well, and we have

been learning as we go but being very respectful of, I think, the

PCAOB and its leadership, certainly, under Chairman McDonough.

And I foresee that continuing, and we will discharge our oversight

but in a way that obviously allows the PCAOB to promote its autonomy and its standardsetting.

Ms. NAZARETH. In my current role, I have not had too many dealings with the PCAOB. But I certainly have a lot of experience dealing with self regulatory organizations, which is really what the

PCAOB is akin to for the accounting industry, and I strongly support the role that they provide.

Chairman SHELBY. Senator Carper, do you have—do you want to

briefly——

Senator CARPER. Yes, I will make it real short.

Mr. Campos, when we look back at this series of 3–2 votes that

we are talking about, we are going to have a new swing vote here,

I think, in all likelihood, and this is a question I guess as much

for Mr. Cox as it is for you, maybe more for Mr. Cox than it is for

you, but how would the SEC be different if you had been sitting

in the Chairman’s seat, Congressman Cox, for the last 2 years than

where you have been sitting as these 3–2 votes came along on

these key issues?

Representative COX. Senator, I do not know. It is an excellent

question. It is one I have certainly given a lot of thought to, but

Mr. Campos and Ms. Nazareth have actually been part of these deliberations.

I have no reason to think that Chairman Donaldson and each of

the Commissioners did not give their level best to try to achieve

consensus and tackled some very, very difficult issues that, in my

view, needed tackling because of the circumstances. So, I cannot

say that things would have turned out differently had I been at the

Commission. I do not know.

What I can say is going forward, I agree with the statements

made earlier by Ms. Nazareth and Mr. Campos in response to earlier questions. I will give my level best to working collegially with

the other Commissioners and seeking common ground and seeking

consensus if it is possible to achieve. If consensus means that each

of the Commissioners must compromise their important principles

or do something that in their view would injure investors and investor protections in America, then, you cannot very well expect

them to change their votes.

21

Senator CARPER. I am going to interrupt you. I do not mean to

be rude, but we have a vote underway, and you know how that

works.

Representative COX. Yes, I hope you understand——

Senator CARPER. You have had a chance to talk with Chairman

Donaldson, and I expect you have a good relationship with him.

What are some areas where—I know there are a lot of areas where

you agree with them. What might be some areas where you think

you might disagree?

Representative COX. I have not known Chairman Donaldson before President Bush nominated me for this position, but I have gotten to know him over the past 2 months. I have found his guidance

to be extraordinarily helpful, and in my view, he has been a very

standup guy in some very tough times.

I think that jumping into the breach, as he did, when markets

were lacking in confidence, when investors were reeling from all of

the news and the financial dislocation of these huge scandals reflects great credit upon him but most importantly, he brought great

credit to not only the SEC but also to the enterprise of building

confidence in our markets.

And so, I look at his record as one of great achievement, and I

would hope to build on that and extend it if I am confirmed as

Chairman of the SEC.

Senator CARPER. A question I am going to ask each of the witnesses to answer for the record, if you would, not at this moment,

but we have all heard assertions of problems with the so-called

Section 404 rules of Sarbanes-Oxley, and as you know, that Section

is designed to require the SEC to develop and adopt rules that require companies to report to the management of the companies’ internal controls of their financial reporting. And some of us have

heard, I am sure we have all heard from time-to-time, that these

reporting requirements are cumbersome and that the audits are expensive, at least the initial ones are.

I would just like to ask each of our nominees to comment on this

issue and to give us a sense of whether you think there is a problem or not and what the steps are you think should be taken as

we go forward so that we can have robust, vibrant markets and

also strong investor protections.

Chairman SHELBY. For the record.

Senator CARPER. On a lighter note, ask one last question of the

Chairman, because at Southern California University, were you a

member of a fraternity?

Representative COX. Yes, I think it is the same well-known organization of which you, Senator, are a member.

Senator CARPER. Keeping in mind that Congressman Cox——

Chairman SHELBY. Is that a——

Senator CARPER. No, it is not. Congressman Cox’s wife and his

children are sitting behind him, if your fraternity brothers were sitting here right before us today to speak on your behalf, maybe we

could get them to answer for the record what they, too, would say.

[Laughter.]

So that is a question for another day.

[Laughter.]

Chairman SHELBY. Thank you, Senator.

22

We are having our first vote. Our time is up. We have four more

consecutive votes. We are going to recess, I will say, for about 45

or 50 minutes, give you a chance for a long coffee break. We will

be back.

We are in recess.

Senator SARBANES. Mr. Chairman.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Since we have to respond to the vote, and

that shows you how we lead our lives here, both in the Senate and

in the House, of course, I just am curious whether Charlie, Kathryn, and Kevin, Congressman Cox’s children, are aware that if he

is the Chairman of the Commission, he can set the times the Commission meets.

[Laughter.]

And therefore, if there is a Little League game or something of

that sort, the Chairman should be able to make provision for it. I

just want to note that for the record.

[Laughter.]

Chairman SHELBY. If any of you want to take a break for your

children for the rest of the day, we are in recess.

[Recess.]

Chairman SHELBY. The hearing will finally come back to order.

We are sorry. One hour became two.

Congressman Cox, several press accounts have described your involvement in a lawsuit arising from your time when you were in

the private practice of law. I think the outcome, if I recall, of that

lawsuit was in your favor. But would you just for the record clarify

your role in that litigation, how it was resolved, and so forth?

Representative COX. Thank you, Senator. I appreciate the opportunity to discuss this matter.

Chairman SHELBY. Sure.

Representative COX. Ten years ago, when I had already been a

Member of Congress for 10 years, I was added to a class action

lawsuit in California State court. The purported basis of including

me as a defendant was work that I and my law firm did for a man

who 10 years thereafter was exposed as a criminal.

I did preliminary work on a small SEC-registered public offering.

However, that public offering was not the basis for the criminal indictment and ultimate guilty plea and conviction of this individual.

Chairman SHELBY. You had been in the Congress 10 years, had

you not?

Representative COX. That is correct.

Chairman SHELBY. Okay.

Representative COX. But I also did not work at the law firm at

the time that the one small limited partnership offering, which was

not the subject of the fraud indictment, took place. And for those

reasons, the Court dismissed all of the counts against me.

Chairman SHELBY. Well, basically it was terminated in your

favor; is that the bottom line?

Representative COX. Yes, I had the entirety of the complaint dismissed against me. And there was no settlement of the claim, either. I prevailed in court.

Chairman SHELBY. Thank you.

23

Commissioner Campos, I have been particularly interested in the

ongoing convergence efforts by our international counterparts with

respect to financial reporting and corporate governance. Senator

Sarbanes and I have followed this. We have traveled and met with

a lot of the regulators, as you well know.

During your tenure at the Commission, you have played a significant role in promoting this process. Would you take a few minutes and highlight some of the important accomplishments and remaining challenges relating to the convergence process? In other

words, where are we and where do we need to go? What are the

impediments?

Mr. CAMPOS. Senator, thank you for bringing that up. It is a very

important process in that several things are in play here. We believe at the Agency that the U.S. markets should welcome outside

capital when it seeks to come into the U.S. markets, and so, there

is an ongoing dialogue about how, consistent with protecting investors, we can also attract and keep foreign companies coming to the

United States, enlisting in our markets.

The convergence process is very interesting in that what I have

seen in my representation of the Agency is that other jurisdictions

in Europe and in Asia are coming toward the principles of Sarbanes-Oxley, the principles that we use in the United States, and

the convergence is occurring at a high level.

What this means is that over time, there will not be the ability

for companies to essentially play one jurisdiction off the other and

seek the lowest denominator of regulation, which is not a good

thing. And so, in other words, there will not be what we call a regulatory arbitrage, because the other regulators in the world see the

importance of having markets that are safe, that protect capital,

and that the rule of law applies.

Those jurisdictions that do not protect capital are not going to be

attracting companies and investments over time, so we have all of

this working together in the world of globalization to converge

standards. One of those things that is ongoing right now is the idea

of the reporting standards being IFRS, International Financial Reporting Standards, which are based on international accounting

standards.

Europe will require their companies to use IFRS this next year.

At some point in the near future, we at the Agency and through

our chief accountant are interested in reaching the point where it

will no longer be necessary for those companies that use IFRS to

reconcile to U.S. GAAP. That will promote transatlantic commerce

and industry.

But we want to make very sure that occurs when the convergence is sufficient, and an investor here in the United States, then,

could look at a company that is based on U.S. GAAP, whose financials are based on U.S. GAAP and look at a company in Europe

whose financials are based on IFRS and have comparability and

understand where they want to make their investment. But those

are the things that are going on in that area.

Chairman SHELBY. Thank you.

Ms. Nazareth, with the adoption of Regulation NMS and the recently announced transactions involving the NYSE and Nasdaq,

our national equity markets are at a crossroads. After the mergers

24

are finalized, there will essentially be two dominant players in the

equities markets controlling most of the liquidity.

How do you think the changing regulatory environments and the

announced transactions would impact investors and broader markets? What does it mean for the self-regulatory function here?

Ms. NAZARETH. You raise an excellent question about the selfregulatory function. As you know, our current self-regulatory structure has been in place almost since the inception of our markets.

Chairman SHELBY. That is right.

Ms. NAZARETH. Indeed, the structure precedes the Securities and

Exchange Commission itself, and it certainly is an opportune time,

an important time, to analyze, whether it is the most effective

structure, particularly in light of the changes that are occurring

today in our markets.

And we are at the relatively early stages at the Commission of

analyzing those issues, and I look forward to considering those

issues with my fellow Commissioners. The Commission today has

outstanding two different proposals. One is a proposal to enhance

the governance and transparency of our SRO operations, and that

is a pending rule proposal the Commission will need to consider,

and another is a concept release that raises broader questions

about self-regulatory structure, and again, it is a very important

issue for our markets. The integrity of the markets is absolutely

key, and I look forward to analyzing those issues with others.

Chairman SHELBY. Congressman Cox, in light of the Global Settlement, mutual fund investigation, and recent investigations into

accounting and the insurance industry, many people have questioned the appropriate role of our State attorneys general in the

area of securities regulations, in other words, the State role.

It seems that State attorneys general often initially discover financial wrongdoing. Would you comment on the appropriate role,

from your perspective, of the State and Federal regulators in securities regulation and enforcement?

Representative COX. Thank you, Senator.

Of course, the blue sky regimes of our 50 States antedate the Securities and Exchange Commission. There is a substantial and vital

role played by the blue sky laws, the antifraud laws, and the investor protection laws of the 50 States, our territories, and jurisdictions.

The enforcement and the regulatory regimes of the State and

Federal jurisdictions should be complementary. One hopes that the

work is in no way jealous or competitive; that there are no turf

competitions, but rather, there is a constructive effort to work together. In important respects, there are different spheres and responsibilities, but in other respects, they are overlapping, so it is

also important to ensure that there is not a waste of resources or

doubling up or tripling up on the same thing to the neglect of other

priorities.

Chairman SHELBY. Okay.

Senator Sarbanes, do you have any other questions?

Senator SARBANES. Yes; thank you very much, Mr. Chairman.

The SEC has considerable power, both formal and informal, over

our corporate governance system, and investors depend on that system to make sure that companies are run in the interests of their

25

investors and that the public is given full, fair, accurate disclosure

about their companies. I want to ask each of you whether investors

can count on you to maintain the rights investors enjoy today, including the rights to communicate with fellow investors, to bring

proposals before annual meetings, and to withhold votes from directors who are not performing up to their expectations.

I see you all have rearranged yourself at the table.

[Laughter.]

It shows the imprint of——

Chairman SHELBY. They are already working together.

Representative COX. Senator Sarbanes, I will be pleased to answer your question first, and of course, the considerable expertise

of Ms. Nazareth and Mr. Campos is something that I can benefit

from as well.

Shareholders are owners, and the rights of owners and the rights

of investors have to be protected in our system if our markets are

going to work.

Senator SARBANES. I have heard Chairman Shelby say that

often, that it is the shareholders who own the company.

Chairman SHELBY. I thought the shareholders did own the company.

Senator SARBANES. They do in fact.

Chairman SHELBY. I think we may get Senator Sarbanes to stipulate that.

[Laughter.]

Representative COX. Protecting shareholder rights as owners is,

I think, a derivative way of protecting the liquidity of the markets,

enhancing the value of share ownership, and so, of course, I would

strongly support enforcement and protection of all of the rights of

shareholders that they presently have, and I would also be more

than willing to look at ways of using, for example, new technology

to expand the opportunities that shareholders have to learn about

and benefit from information about and participate in using such

information about the company.

Chairman SHELBY. Mr. Campos.

Mr. CAMPOS. Senator, I certainly support protecting the existing

rights of shareholders, and the SEC, of course, has the Federal

mandate, the Federal laws, and we have been studying, as you all

know, the proxy system as to whether the proxies should allow

shareholders with certain percentages the right to put a minority

slate on their slates. And we studied that issue very hard and unfortunately did not come to a consensus on it or even a majority

on it, and it was not brought to a vote.

And I think it is an area that is going to need fresh looking and

is important to protect the rights of shareholders. The value of

stock does depend on it. And I think there are other entities besides institutional investors, who do most of the lobbying for this,

who will be interested in this area as well.

Capital is forming together in pools and funds, and they are interested in making improvements to performance, also to governance. So, I believe we will be looking at these issues quite a bit

over the next short period of time, and I support maintaining

those. We have to be careful with the States. Delaware is a jealous

26

regulator, as well they should be, but I think we can do all that

very well.

Senator SARBANES. Ms. Nazareth.

Ms. NAZARETH. I agree. I certainly support protecting the rights

of shareholders and welcome the opportunity to continue to review

these issues. We must ensure that we do achieve the proper balance between shareholders rights—ensuring that the corporate governance improvements that have been achieved largely through

Sarbanes-Oxley and other initiatives are effective by virtue of

shareholders being able to voice their——

Senator SARBANES. Well, now, I realize it is a complicated issue,

and the Commission was not able to reach a consensus, but it does

seem to me the issue of how shareholders can impact on the board

of directors, particularly if there is a substantial dissident group,

is an important issue.

And Congressman Cox, do you think that is an issue worth exploring and for the Commission to examine?

Representative COX. Yes, indeed, Senator. I am well aware that

this issue has been under study by the professional staff of the Securities and Exchange Commission and the subject of deliberations

by the Commission itself over a period of time and that at least

thusfar, the Commission has been unable to forward a proposal

that is acceptable to a majority.

Nonetheless, these issues are fundamental, and there is no reason that we cannot constantly improve opportunities that shareholders have to participate through better disclosure and I believe

by taking advantage of technologies which are making the distribution of, in and communication among large numbers of people

much less expensive.

Senator SARBANES. I am interested in, as the New York Stock

Exchange moves toward becoming a for-profit institution, what are

your respective views on separating the regulatory function from

the business of the stock market itself, along the lines of the NASD

and the Nasdaq split?

Representative COX. Senator, again, I should begin by deferring

to the considerable expertise of the two individuals seated at my

right and left. Ms. Nazareth, in particular, has spent a great deal

of time and study on this in her current capacity, and Mr. Campos,

as a Commissioner, has worked very carefully with the rest of the

Commission to forward new rules by which these issues are going

to be addressed in the future.

In the event that we have for profit entities operating markets,

it is vitally important that the regulation of those markets remain

arms length. Assuring that that is so is going to be one of the abiding interests of the Securities and Exchange Commission if you approve me as Chairman.

Senator SARBANES. Mr. Campos.

Mr. CAMPOS. Senator, that is a very important issue, and certainly, we have not had a great experience in terms of some of the

enforcement and some of the regulations in our particular markets.

The proposal right now, as you know, from the NYSE, for one,

would have a parent company, and they would have some separation, but they would ultimately report to that parent company.

27

And I have raised this issue with the NYSE and with our staff

as to whether we should not have a complete separation. For one

thing, it would certainly help the optics, and we have a lot to be

able to do to satisfy the public that regulation is strong, and regulation will not be influenced by the profit motive and the commercial motive.

And I am going to look at that issue as a very serious issue and

one in which, you know, we need to look at the input from all the

players to make sure that we get it right. But as a fundamental

matter, the separation is a question that needs to be answered as

to why not.

Ms. NAZARETH. I know this is a topic of great interest to you,

Senator, and it is something that I have spent a lot of time thinking about. Having said that, I am still not quite sure that I have

the silver bullet on this issue. I think that it is absolutely an appropriate time to consider whether the current model is the optimal

model for self regulation, particularly as the markets are moving

more toward for-profit exchanges and away from the mutual model

that they previously operated under.

As you know, in the concept release that the Commission issued,

there were a number of alternative models that were discussed,

each of which has benefits and costs associated with them, and I

do think that we will have to spend a good deal more time analyzing the issue to determine what the optimal model would be,

and if as a Commission we determine that the model should be

changed, the Commission, may have to come to Congress and ask

for legislation to effect those changes.

Senator SARBANES. Of course, the other model, NASD and

Nasdaq, is different, but that does raise right off the bat a question

as the stock exchange moves toward a for-profit mentality, and I

do think it is an issue that the Commission needs to examine very

carefully.

The Chairman is the one who comes to Congress or goes to the

Executive to try to get the budget for the Agency. And I am interested in how you, Congressman Cox, perceive the adequacy of the

current funding for the SEC, what more you think is needed and

what, if, as yet, you have any views on this, what needs to be done

internally to improve recruiting, improve retention, and boost the

morale of the employees at the SEC, if you have had any chance

to form some views on that, and I guess they would all be interested in hearing——

[Laughter.]

—how strong a champion you intend to be on budget questions.

Representative COX. Senator, I know that this issue is important

to you, because you and I have discussed it. I have a good deal of

familiarity with the overall budget picture at the Securities and

Exchange Commission as a Member of the Congress. What I am

not prepared, as you might imagine, to do today is to present you

with a budget request, since I appear before you as a nominee, but

if confirmed as Chairman, I assure you that I will fight for all of

the resources that the SEC needs in order to discharge its mission,

and you have heard me say here today and on other occasions that

I am enormously impressed with the professional caliber of the

28

men and women who work at the Securities and Exchange Commission and that I would be very honored to join that team.

Ensuring that such professionals can be recruited on a continuing basis and want to stay at the SEC and make their career

there is one of the important jobs of the Chairman, and obviously,

issues such as pay parity play into that. That is not the only reason, of course, that people are in public service and work at the

SEC. These are in the main people who are public servants with

public spirit animating them more than anything else.

But at the same time, there are very strong competitive pressures for the Federal Government, as we have recognized when we

created, in Sarbanes-Oxley, the PCAOB. And so, fighting for both

the people, the men and women who work at the SEC and the

overall needs of the Commission in order for it to discharge its enforcement and regulatory responsibilities will be a top priority for

me as Chairman.

Senator SARBANES. Let me just elaborate on the phrase you used,

pay parity. Pay and benefits parity; and what happened is, of

course, the SEC first in the pay area and then perhaps even more

importantly in the benefits area did not have parity with the other

regulatory agencies. We know they are not going to have parity

with the private sector given the way our system works, but they

did not even have it with the other agencies and were losing people

to the other financial regulatory agencies, and they moved pretty

well on that. I am not certain yet whether all of the benefit package has been worked out on a parity basis, and you would hope

that the Commission would address that in the near future.

But we received correspondence from a number of groups raising

the issue of executive compensation. What changes, if any, do you

believe are warranted to the current disclosure rules for executive

pay?

Representative COX. Senator, the touchstone of disclosure when

it comes to executive compensation should be transparency, clarity.

This has to be understandable to investors. Executive compensation is a moving target. There are compensation experts, a lot of

different ways to track and retain people, just as we were discussing in the context of the SEC, and rules have to keep up with

that.

More importantly, once there is compliance with the disclosure

rules, it has to be presented in a format that people can appreciate

and understand so that if things are out of line, they can do something about it. I do believe that market pressures on compensation

that is out of line can be very effective and powerful, but only if

that information is there, clearly, understandably presented in the

first place.

Senator SARBANES. I gather that the Chairman asked you a

question on this subject before I was able to get back to hearing,

but it has gotten so much press coverage that I think I should address it to you again, and that involves the lawsuit when you were

in private practice at Latham and Watkins that accused you and

the firm and two former colleagues of misleading regulators and investors with respect to filings at the California Department of Corporations. This involved the First Pension Corporation back in the

29

mid-1980’s, who I think was a client of your firm. Could you recount for us that situation and how it was resolved?

Representative COX. Indeed, Senator, and as I just described a

moment ago, it was 10 years ago when I had been a Member of

Congress already for 10 years that I was added as a defendant in

a large securities class action in State court in California.

The basis for adding me as a defendant is work that I and the

law firm did on behalf of a client who, 10 years later, was exposed

as a criminal. The law firm’s work on behalf of this client and the

work that I was involved with concerned a single SEC registered

public offering. That public offering was not the basis for this individual’s indictment, guilty plea, and fraud conviction.

Furthermore, I did not work at the law firm at the time that the

one offering that they handled actually took place. I had left a year

and a half before that. And as a result, the Court dismissed all of

the claims against me in that lawsuit.

Senator SARBANES. We have received a letter from the Council

of Institutional Investors, which I think each of you have received,

dated July 21, setting out a number of their concerns, and given

what has happened on us in terms of these constant interruptions,

I have touched on some of them. I am not going to be able to touch

on all of them.

I want to ask a process question, though, of each of you, and that

is what is your attitude in terms of engaging in a continuous dialogue or interchange with such organizations as the Council of Institutional Investors, which, after all, represents well over 100 public, corporate, and union pension funds and, you know, well over

100 money managers and investment and securities professionals.

I want to get some sense of how open and accessible and transparent you think the Chairman and the Members of the Commission should be in listening to people and engaging in a dialogue,

and of course, they are not the only such group or organization that

exists.

I will take Mr. Cox and then go to the others.

Representative COX. Senator, with respect to stakeholders such

as the Council of Institutional Investors and many others, I look

forward to the opportunity to hearing, formally and informally,

their views, suggestions, opinions, concerns, and comments. It has

been a little bit unnatural for me, as a Member of Congress, simultaneously a nominee of the President preparing to appear before

your Committee, to essentially be monklike and out of touch for

well-known procedural reasons—with people who otherwise I would

be communicating with routinely, including, I might add, the press.

I understand the reasons for these rules and these constraints,

but to the maximum extent possible, both the Chairman and the

other Commissioners, it seems to me, should operate in the light

of day as transparently as possible. The Sunshine Act, which applies to the Commission, has this purpose in mind.

At the same time, I want to add that I am well aware of concerns

that have been raised in the past about inappropriate meetings,

and as a result, I would take great care to follow, at all times, the

ethical guidance of the professional staff and the General Counsel

at the Securities and Exchange Commission concerning with whom

30

and under what circumstances it is possible for the Chairman to

meet.

Senator SARBANES. Mr. Campos.

Mr. CAMPOS. Senator, I agree with you that Commissioners

should make themselves available I believe to as wide a group of

interests as possible. With the CII in particular, I recently met

with Anne Yerger, and, you know, before her, Sara Teslik, who

used to lead that particular organization, and I make it a point to,

if they have not come to see me, I generally call them: The SIA,

the STA, and the various industry groups. I want to know their

issues and what it is they are lobbying the Agency for, and I think

that is appropriate.

Obviously, there are things ethically, investigations, ongoing

things that are verboten, but we have procedures to make sure that

we keep everybody out of trouble, and in those areas, usually, our

counsel attends. And in listening to the issues, we learn what the

industry is worried about, what investors are worried about, and

how our rules may be made better, and that is important to do.

Ms. NAZARETH. I think the Commissioners and the Commission

staff has had a long history of an open door policy with interested

groups, and I think that the input that we receive is invaluable in

being able to do our jobs effectively. So, I would certainly be in

favor of continuing that process.

Senator SARBANES. Mr. Cox, I wanted to see how you square

your statement today about being an investor’s advocate and the

importance of that in terms of the Chairman of the Commission

with all of these comments that greeted your nomination, suggesting just the contrary, and I have, you know, pages of them

here. I mean, everyone knew what you thought, I guess, or seemed

to think they knew, seemed to think what you thought and wasted

no time in placing on your nomination a certain interpretation that

there was going to be a marked diminution in regulation; the pendulum is swinging back, quotes the U.S. Chamber of Commerce

Chair. I will not state her name just for the sake of gentleness here

and similar quotes of that sort.

Now, were they all anticipating something we need to know? Are

they reading the tea leaves improperly? Or I go back to the admonition, you know, that the Commission from the beginning has had

its charge to be the investors’ advocate, so how do we reconcile

those two things?

Representative COX. Senator, I appreciate the opportunity not

only to answer this question but actually to speak to some of these

things.

Senator SARBANES. Even had some of your colleagues in the

House who figured out everything you were going to do. I noticed

that.

Representative COX. I actually appreciate the support of so many

of my colleagues in the House, in particular the Ranking Members

on the Committees that I have chaired and chaired as recently as

yesterday and the support that they have offered to this nomination. I think at least to that extent, there is not much question that

I will bring not only a bipartisan spirit but I also hope a nonpartisan spirit to this enterprise.

31

I think that the reason that there has been so much surmise is

that, unlike Ms. Nazareth and unlike Mr. Campos, I have not been

on the Commission or working in the securities industry, and so,

there is a lot of inference and extrapolation and interpolation on

the basis of things that might or might not even be relevant in my

view.

There has been, I think, stated opposition by some groups to legislation that I was a moving force behind in 1995, and I view that

legislation today, as I did then, and as Senator Stevens described

it in his introduction of me, as a vital part of an overall regime of

shareholder protection. It is just as important to protect shareholders from shakedowns by extortionate lawsuits as it is to protect

them from other kinds of fraud. But there are different views about

that, as you know.

At the same time, I think that some people’s guesses of what I

might do as Chairman which I have read in the newspaper are just

wrong, particularly to the extent that they have a view that somehow I would be in any way lax when it comes to enforcement or

that I would in any way not pursue appropriate regulation, because

I have a deregulatory mentality or that I am for free enterprise to

such a degree that I would want to miss an opportunity to use the

tools that Congress has provided to the SEC to accomplish the mission of building integrity and confidence in the markets.

Those will be my aims, and I look forward to that opportunity

should you grant it to me.

Senator SARBANES. In comments on the House floor, when the

House dealt with the conference report on the Sarbanes-Oxley Act,

you stated, ‘‘As we raise the legal standard here today, we should

bear in mind our obligations to do still more to raise ethical standards so that the best and the brightest will continue to want to join

the accounting profession so that our most experienced citizens possessed of good just are willing to undertake the significant oversight responsibilities on corporate boards of directors.’’

Bill Donaldson, in his speech at the National Press Club, spoke

about the necessity for corporate management, as he put it, to just

do the right thing and that this message would then be passed

right down the line to all of the people who work for the company.

He says it needs to be put right into the DNA of the company. And

I was struck by your reference in that comment about the obligation to raise ethical standards, because that, of course, goes beyond

legal standards. Legal standards do not usually catch up to the ethical standards.

How important a part do you see that, if you were to be confirmed as Chairman of the Commission in terms of carrying out

your responsibilities?

Representative COX. A big part, Senator. I was impressed with,

and in strong agreement with, remarks made earlier by Mr.

Campos.

It is true that no amount of regulation will stop all fraud. I

mean, people that are intent on lying and cheating their fellow citizens will presumably still find reason to undertake it from time to

time, but there is a great deal, first, through the formal regulation

of the SEC that the Government can do to deter and certainly to

32

punish this kind of behavior and thus to increase investor confidence in the markets.

But it is also possible for public figures to constantly talk about

the importance of ethics and solid values, treating employees, customers, and all other stakeholders properly. That is the American

way. And so, the Securities and Exchange Commission has that

leadership role to play as well.

I think that business schools have found this to be the case, and

they are trying to put it into the early training now of potential

managers and companies and managers in the financial services

industry, and certainly, this is not something that the Government

should abjure; rather, this should be our bread and butter. We constantly talk about this. Both are necessary. Both the law, the regulation, the enforcement, and the constant appeal to what is right

and what is good so that we do not have more Enrons.

And with regard to Enron, I saw in hearings in the Financial

Services Committee and in the Energy and Commerce Committee,

that there were constantly areas where people would punctiliously

follow a rule and claim to have gotten away with something, but

they were missing the big picture, which is that it was wrong.

And so, Senator, I could not agree more strongly with the

premise behind your question.

Senator SARBANES. Good. Thank you very much.

Thank you, Mr. Chairman.

Chairman SHELBY. I want to thank all of you for your appearance here today, and I apologize again for something we could not

stop, and that is the interruption of the hearing. We will have a

Committee hearing Thursday. I am sure we will have a quorum

then. We will try to move all three of you out, and hopefully, we

can get you to work as soon as possible. Thank you for your appearance.

The hearing is in recess until 2:30.

[Whereupon, at 1:42 p.m., the hearing stood in recess until 2:31

p.m.]

Chairman SHELBY. The hearing will come to order.

This afternoon, the Committee is considering the nominees for

three very important positions at the bank and thrift regulatory

agencies. The nominees are John Dugan, to be Comptroller of the

Currency; John Reich, to be Director of the Office of Thrift Supervision; and Martin Gruenberg to be a Member and Vice Chairman

of the Federal Deposit Insurance Corporation.

The Comptroller of the Currency, the Director of the Office of

Thrift Supervision and the Vice Chairman of the Federal Deposit

Insurance Corporation all play very important roles in overseeing

the safe and sound operation of our banking system and ensuring

that the institutions within their jurisdiction maintain compliance

with money laundering, consumer protection, and a whole host of

other important laws. Each of these individuals will also have an

important role to play in protecting the integrity of the Bank Insurance Fund and the Savings Association Insurance Fund.

Additionally, these positions are responsible for a diverse group

of institutions which have a broad range and size and all of whom

operate in a global marketplace where the pace of change grows

faster everyday.

33

In light of these considerable challenges, I commend the President for nominating these three highly qualified individuals for

these positions. Each has a longstanding record of distinguished

service in the financial services sector. Each, I might also add,

served in staff positions in one form or another right here in the

Senate. Mr. Dugan and Mr. Gruenberg worked directly for this

Committee. Mr. Reich worked for Senator Mack, a very important

former Member of this Committee.

I would also like to take a moment to specifically recognize the

contributions of Marty Gruenberg. Marty has worked here for my

colleague, Senator Sarbanes, for nearly 20 years. He has been part

of the consideration of every major piece of legislation that has

come before the Committee during my tenure in the Senate. His

loyalty, dedication, and able service are to be commended. And

Marty, I offer you all my best regards and hope to move your nomination along with the others as soon as possible.

I look forward to hearing from the witnesses, and do any of you

have some family you would like to recognize at this time? Do you

want to start with you, Marty?

Mr. GRUENBERG. Thank you, Mr. Chairman. My wife, Donna, is

here, and my son, Paul.

Chairman SHELBY. Okay.

Mr. GRUENBERG. And also, my cousin, Matthew Gruenberg, and

my cousin, Arnold Schwarzbard, and his wife, Marilinda.

Chairman SHELBY. Mr. Dugan, do you have any members that

you want to recognize?

Mr. DUGAN. I sure do. My wife, Beth, is here, and my son, Jack,

and my mother, Frances Dugan, who, by the way, is a 55-year resident of the State of Maryland. I know Senator Sarbanes is not

here, but I wanted to make sure——

[Laughter.]

—I got that in. My brother, Chris, is here, and my cousin, John

Michael, is here as well.

Chairman SHELBY. Great.

Mr. Reich.

Mr. REICH. My family is watching on the Internet from a cabin

in the Smoky Mountains.

Chairman SHELBY. Pretty smart.

[Laughter.]

Mr. REICH. On vacation this week.

Chairman SHELBY. When are you going to join them?

Mr. REICH. I will be rejoining them this evening.

Chairman SHELBY. Rejoining them. That is good.

At this time, would all of you stand and raise your right hand

and be sworn?

[Witnesses sworn.]

Chairman SHELBY. Marty, we will start with you. Your written

testimony, all of yours, will be made a part of the hearing record,

and if you will sum up briefly what you want to say, we will try

to move the Committee.

34

STATEMENT OF MARTIN J. GRUENBERG

MEMBER AND VICE CHAIRMAN-DESIGNATE

FEDERAL DEPOSIT INSURANCE CORPORATION

Mr. GRUENBERG. Thank you, Mr. Chairman.

Chairman Shelby, Ranking Member Sarbanes, and Members of

the Committee, it is my great honor to appear before the Committee today as the nominee to be a Member and Vice Chairman

of the Board of Directors of the Federal Deposit Insurance Corporation.

I would like to begin by thanking President Bush for nominating

me and Senate Democratic Leader Harry Reid for recommending

me for this position. I would also like to thank Chairman Shelby

for scheduling this hearing so expeditiously, and Senator Sarbanes

for his guidance and unfailing support. I would also like to thank

the staff of the Banking Committee for their friendship and for the

very high professional standard they set under the exceptional

leadership of the Committee Staff Director, Kathy Casey and the

Democratic Staff Director, Steve Harris.

I have been a member of the staff of the Senate Committee on

Banking, Housing, and Urban Affairs since 1987. I have served as

both Staff Director of the Subcommittee on International Finance

and Monetary Policy and Senior Democratic Counsel. In those capacities, as Chairman Shelby pointed out, I have had the opportunity to work on all of the major financial services legislation enacted by the Banking Committee during that period. In the course

of working on those pieces of legislation, I have had the chance to

interact with the leadership and staff of the Federal financial services regulatory agencies, administrations of both political parties,

the financial services industry groups, and the consumer and community advocacy organizations. That experience has given me a

valuable perspective on the safety and soundness, national security, and consumer protection issues confronting the FDIC. It has

also given me a familiarity with the FDIC as an institution, an appreciation of its relationship with the other financial services regulators, and an understanding of the industry and consumer groups

with which it works. I believe I would come well prepared to make

a constructive contribution to the work of the FDIC.

The FDIC was established by Congress in 1933 in response to

the banking crisis brought on by the Depression. The purpose was

to restore confidence in the banking system and provide protection

to depositors.

The FDIC has been remarkably effective in maintaining public

confidence in our banking system, even during difficult economic

times. As one who worked on the staff of the Banking Committee

during the savings and loan crisis in the 1980’s, I am acutely

aware of the critical role the FDIC plays in preserving the safety

and soundness of our banking system, and of the enormous costs

that can be imposed on taxpayers and our economy when unsafe

and unsound practices take place. Protection of depositors and the

preservation of the safety and soundness of our banking system is

clearly the central mission for which the FDIC was created.

I was also working on the staff of the Banking Committee on

September 11, 2001, and during the following weeks when this

Committee drafted and enacted the antimoney laundering title of

35

the USA PATRIOT Act. It is clear that Federal financial regulators

today have a responsibility not envisioned when our Federal regulatory agencies were created—to prevent the use of our financial

system to finance acts of terror. It is a responsibility equal to or

even exceeding the responsibility to preserve the safety and soundness of our financial system, and one to which I will give my full

attention if confirmed by the Senate.

Finally, I come from an immigrant family. My parents came to

the United States in 1951 after having survived the Holocaust in

Europe. I keenly appreciate the economic opportunities this country

makes possible for its citizens, as well as the challenge to taking

advantage of those opportunities for those who are outside of the

financial mainstream. Several studies have indicated that as many

as 10 million American families do not have an account with a federally insured financial institution. The FDIC, as well as the other

Federal bank regulatory agencies, have an important role to play

in expanding access to the financial mainstream to all Americans,

and ensuring that all Americans are treated fairly in our increasingly complex financial system. That is another area to which I

would hope to devote attention if confirmed by the Senate.

Mr. Chairman, let me conclude by thanking you and Senator

Sarbanes again for the privilege of working on the extraordinary

staff of this Committee, where I have spent most of my professional

life. It has been a remarkably satisfying and rewarding experience.

I believe that it has prepared me well to carry out the responsibilities of FDIC Board Member and Vice Chairman if confirmed by

the Senate.

Thank you, and I look forward to answering any questions.

Chairman SHELBY. Thank you. Mr. Dugan.

STATEMENT OF JOHN C. DUGAN

COMPTROLLER-DESIGNATE

OFFICE OF THE COMPTROLLER OF THE CURRENCY

Mr. DUGAN. Mr. Chairman, Senator Sarbanes, Senator Crapo,

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

appear before you today. I am honored that President Bush has

nominated me to serve as Comptroller of the Currency, and I am

grateful to Treasury Secretary Snow for his confidence and support.

As a former staff member, I am especially proud to be here before

this Committee and in this room. I have spent many hours here

with able colleagues and good friends on some of the most important issues confronting the banking industry over the last 20 years.

I have already mentioned my family. I did want to add that my

daughter is out of town. She would be very unhappy if I did not

mention her today. She is at camp, but she is with me in spirit.

Chairman SHELBY. Maybe she is watching on TV.

Mr. DUGAN. That is exactly right.

Chairman SHELBY. You might want to call her name.

[Laughter.]

Mr. DUGAN. Claire.

[Laughter.]

The Comptroller of the Currency supervises about 1,900 national

banks and about 50 Federal branches and agencies of foreign banks

in the United States, comprising more than half of the assets of the

36

commercial banking system. The Comptroller also serves as a Director of the Federal Deposit Insurance Corporation, the Federal

Financial Institutions Examination Council, the Basel Committee

on Banking Supervision, and the Neighborhood Reinvestment Corporation. In these roles, the Comptroller addresses a broad range

of issues that are fundamentally important to the banking system,

and, if confirmed for this post, I would look forward to working on

them with this Committee and with Congress as a whole.

For the last 20 years, my career in both the Government and private practice has focused primarily on banking issues. As Minority

General Counsel for this Committee during the late 1980’s, which

was a very active period, as you remember, I worked extensively

on legislative and regulatory proposals involving bank powers,

bank failures, safety and soundness supervision, and consumer protection, among many others. As Assistant Secretary and Deputy

Assistant Secretary of Treasury during the Administration of the

first President Bush, that work expanded into financial modernization, interstate banking and branching, deposit insurance reform,

regulatory burden relief, oversight of OCC regulations and legislative proposals, and many other related issues. During my 12 years

of private law practice at Covington and Burling, I have continued

to work and advise on a wide range of banking matters, including

the Gramm-Leach-Bliley Act, financial privacy and amendments to

the Fair Credit Reporting Act, financial derivatives regulation, enforcement matters, and national bank powers generally.

At many points in my career, I have worked closely with many

of the officials and staff of the OCC. I believe that I have developed

a strong understanding of the key challenges that confront the

Agency. I have also had frequent contact with officials and staff at

the Federal Reserve, the Federal Deposit Insurance Corporation,

the Office of Thrift Supervision, the Securities and Exchange Commission, the Treasury Department, the National Economic Council,

and the Office of Management and Budget. These are virtually all

the Executive Branch agencies that have a significant impact on

regulatory and policy issues affecting banks. Given our unique,

some would say peculiar, banking system with its many overlapping functions, I believe the Comptroller must have a fundamental

understanding of how different regulators approach their jobs and

work best together, and I believe my experience has helped provide

that understanding.

In sum, I believe that my experience and education are a strong

foundation for this position. If confirmed by the Senate, I would be

honored to serve as the 29th Comptroller of the Currency. I would

be pleased to answer any questions you may have.

Chairman SHELBY. Thank you.

Mr. Reich.

STATEMENT OF JOHN M. REICH

DIRECTOR-DESIGNATE, OFFICE OF THRIFT SUPERVISION

Mr. REICH. Thank you very much, Mr. Chairman. I want to

thank you for scheduling this hearing. I know that time is limited

before the August recess. Chairman Shelby, Ranking Member Sarbanes, Senator Crapo, I am honored by the President’s nomination

and the support of the Secretary of the Treasury to be the Director

37

of the Office of Thrift Supervision. I am privileged to be sitting at

this table with these gentlemen.

In the almost four and a half years that I have served as a member of the FDIC Board of Directors, we have witnessed significant

change in the economy and the banking industry. In fact, Mr.

Chairman and Senator Sarbanes, you may recall that I was about

to testify at this very table on September 11, 2001, on the failure

of Superior Bank when the events of that day stopped the hearing

and triggered a number of challenges and changes to our country’s

financial system that no one could have foreseen.

My nearly 25 years of experience as a community banker before

I came to Washington to work with my good friend, former Senator

Connie Mack, have given me a perspective that recognizes the vital

role banks and thrifts, and their customers play in the economic

success of their communities. Before my life in Washington, I was

active for many years in a variety of community service organizations, and the effect of all of these private, nonprofit and public

service experiences causes me to evaluate issues in a manner that

balances the issues of financial institutions, consumers, and our

economy.

Under the leadership of Chairman Donald Powell, the FDIC has

been, and is, at the forefront of many of the issues facing the financial industry today. We have brought together leading thinkers on

such key issues as corporate transparency, financial institutions

disclosure, and risk management and, of course, our work on deposit insurance reform. We have launched a major financial literacy effort called Money Smart, with the stated goal of establishing partnerships with 1,000 organizations and institutions, in

all 50 States, to distribute 100,000 copies of Money Smart in three

languages and expose a million consumers to our financial literacy

program over the next few years.

In addition, I have been privileged to lead a major interagency

effort to reduce unnecessary regulatory burden and to tap the tremendous potential of technology to streamline bank supervision,

while not sacrificing our primary goals of ensuring safety and

soundness and consumer compliance with the banking system.

While the FDIC has been aggressively moving forward on these

developing issues, we have not neglected our primary mission of

protecting depositors in the event of bank failures. In fact, I believe

that the lessons that I learned in the failure of a large savings

bank provide me with a unique credential to serve as the Director

of the Office of Thrift Supervision.

Following the resignation of former FDIC Chairman Donna

Tanoue in July 2001, I was serving as the Acting Chairman of the

FDIC when Superior Bank, FSB, failed on July 27, 2001. It was

not just the size of the failure, more than $2 billion in assets, that

was instructive. As this Committee knows from its oversight, this

failure raised a number of issues, ranging from subprime lending,

residuals and accounting opinions, to regulator cooperation and access, and management liability which challenged the leadership

and staff of the FDIC to modify established methods of handling

bank failures and to create some innovative new approaches.

This experience, along with other experiences gained during the

nearly 4 and a half years that I have served on the board, 3 years

38

as Vice Chairman, combined with my duties chairing all of the

standing committees of the FDIC Board should help to enable me

to effectively serve as the Director of the OTS.

Mr. Chairman, as the primary Federal regulator of all savings

associations and savings and loan holding companies, the OTS

oversees a vital segment of the American economy. As of mid-May

2005, there were 886 savings associations with approximately $1.4

trillion in assets. As of the end of 2004, there were 492 savings and

loan holding company structures with consolidated assets of approximately $6.9 trillion. Savings associations originated over $600

billion in single-family mortgages last year, or approximately one

out of every four mortgages made in the United States. The industry serviced $1.3 trillion in loans for others. Savings associations

operate over 9,000 branches throughout the United States and employed 217,000 people as of the end of 2004.

Mr. Chairman, if I am confirmed, my main goals as Director of

OTS would be to assure the continued safety and soundness of the

industry, faithful adherence to consumer protection laws and the

most efficient operation of OTS as an organization.

I am honored that the President nominated me to this important

position. I look forward to the challenges that lie ahead. I look forward to working with this Committee, and I wish to thank you

again for holding the hearing.

I will be happy to address any questions.

Chairman SHELBY. Thank you.

Senator Sarbanes.

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

I am pleased to welcome our three nominees before us this afternoon. They are all well known to the Committee, either having

served on the Committee staff or on the staff of the Committee. All

are extremely well qualified for the positions for which they are

being considered.

John Dugan was, of course, the Republican Counsel and then

General Counsel of the Banking Committee and served with great

distinction, including the period when we were addressing, among

other issues, the savings and loan crisis. Subsequently, he went to

the Treasury, where he served first as Deputy Assistant Secretary

for Financial Institutions Policy and later Assistant Secretary for

Domestic Finance at the Treasury. And since leaving Treasury, he

has had a very distinguished career at Covington & Burling, where

he is currently a partner. He has appeared here many times before

the Committee in his public capacity representing the Treasury

and in his private capacity representing a variety of clients.

John Reich worked in the Senate for over 10 years, from 1989

to 2000. Four of those years, he was Chief of Staff to Senator

Connie Mack, a very distinguished Member of this Committee. He

came to this work from 23 years in the banking industry, including

President and Chief Executive Officer of the National Bank of

Sarasota, and since January of 2001, Mr. Reich has served as Vice

Chairman of the Board of Directors of the Federal Deposit Insurance Corporation.

Marty Gruenberg, who has been nominated to serve as a member

and Vice Chairman of the Federal Deposit Insurance Corporation,

has been a member of the Committee’s staff since 1987, after workVerDate 11-MAY-2000 18:39 Feb 01, 2006 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 25286.TXT SBANK4 PsN: SBANK4
39

ing for several years on banking issues in the House. I must say,

Mr. Chairman, it is an odd feeling to see him at the witness table

there when we have worked so closely together for nearly two decades. I am accustomed to turning around and getting his counsel.

Marty has been involved in virtually every issue that the Committee has dealt with in those years. Indeed, he has played a major

role in every banking bill that has been enacted into law since

1987, and I could go through the list, but for the sake of time, I

will ask that they be included in the record, but every major bill

on banking that has come out of this Committee, he has been part

of that process.

His experience and expertise are hardly limited to matters involving financial services. His work is equally impressive in other

areas of the Committee’s jurisdiction, notably monetary policy, export, and foreign trade promotion, export controls and defense production.

It is not only his background and experience that make Marty

Gruenberg so well qualified to serve at the FDIC. On the strength

of having worked closely with him for nearly 20 years, I personally

know him to be superbly qualified by virtue of his intellectual capacity, and his personal integrity and character. Of course, we

shall all miss him greatly, but I know Marty to be a dedicated public servant who, in his new position, will work to the same high

standards that he has always brought to his responsibilities at the

Committee.

Mr. Chairman, I very much appreciate your holding this hearing,

and I hope we can move these nominees expeditiously.

Chairman SHELBY. Senator Crapo, do you have an opening statement?

STATEMENT OF SENATOR MIKE CRAPO

Senator CRAPO. No, I just have a question or two when we have

a chance.

Chairman SHELBY. Senator Dodd, do you have an opening statement?

Senator DODD. Well, very briefly; I do not have a prepared statement, Mr. Chairman, but let me first of all congratulate our three

nominees. John Dugan, of course, we have known for many, many

years here; worked together on this Committee a long time, so we

congratulate you, John, on your nomination.

Mr. DUGAN. Thank you, Senator.

Senator DODD. And Marty, this is a bittersweet moment for those

of us who have worked with you up here for so long. I was teasing

this morning and turning around to our friends right behind Senator Sarbanes, and I said where is Marty this morning? He should

be here to help us with these questions. And they said you are out

preparing for your grueling grilling this afternoon, not that I expect

a grilling.

And on a personal note, I just got off the phone with my wife on

the phone, and Jackie worked with Marty for almost 20 years on

this Committee and other matters as well and wanted me to

express——

Chairman SHELBY. And she worked on this side of the aisle.

Senator DODD. She did. She worked on that side of the aisle.

40

[Laughter.]

Converts make the best Catholics.

[Laughter.]

Not that she has converted yet. We are working on it. But Marty,

she wishes you well, and I do, as well. We are going to miss you

terribly up here, and we wish you the same kind of success that

John has had, going off and doing good things. And so, we thank

you. Thank you for accepting this position. I have great confidence

you are going to bring great expertise, stability, and dignity to the

FDIC as well and John at the Comptroller of the Currency. Mr.

Reich, we wish you our best wishes, too, in all of this.

So congratulations to you. We look forward to working with you

for many years to come as well, but we will miss you up here. You

have done a great job for this Committee. You have served all of

us tremendously well, and this Committee’s success over the years

is a tribute not only to the Chairman and the Ranking Member but

also to the people who sit behind us up here, who help us prepare

every single day. You do not get to make the statements; your

names do not necessarily appear in the press, but to the extent we

are successful up here in getting the job done, on most occasions,

I think all of us would say it is because of the quality of the people

who sit behind us.

And Marty, you have been behind us for years up here, and to

the extent that we have done good things, in no small measure, it

has been because of your contribution. So thank you immensely for

that.

Mr. GRUENBERG. Thank you, Senator.

Chairman SHELBY. I think we would all associate ourselves with

the remarks of Senator Dodd in that—regarding the staff and what

you contribute.

Mr. Dugan, the OCC’s Quality Management Division has finally

released its long awaited review of the Office of the Comptroller of

the Currency’s Bank Secrecy Act and the antimoney laundering supervision that went with it. The review is highly critical of OCC’s

performance, a conclusion that came as no surprise to a lot of us

here familiar with the Riggs and the Arab Bank cases.

I know you are not over there yet, but outline for the Committee

briefly the concrete steps that you would intend to make to rectify

the shortcomings at OCC’s supervision of the Bank Secrecy Act. We

think that is very important.

Mr. DUGAN. That is very important, Mr. Chairman. I do not

think you can look at the history of what has happened here without acknowledging, as the Agency has, that there have been real

lapses in the Bank Secrecy Act area. As you have said, I have not

had the benefit of access to the information that is nonpublic. Of

course, I have been dutifully reading up on all the public information. And so, I think the first task is to determine what the situation is.

I was both concerned and somewhat encouraged by the report

that came out last week. It was quite critical. But at the same

time, it did acknowledge that there had been improvements made

and that the Agency was at least moving in the right direction. The

report laid out a number of concrete steps to continue in the right

direction, particularly in the area of large bank supervision, which

41

seemed to require the most attention. Those are the areas that I

most certainly will focus on.

I want to emphasize that I think this is a quite difficult area because like some of the other problems that this Committee has

dealt with, it is easy to go too far and to do things that have counterproductive consequences. We have seen some of those issues in

the case of money transmitters and of defensive suspicious activity

report filings. It reminds me a little bit of the credit crunch issue

that we dealt with many years ago where there were quite lax

lending standards at one point, and then standards were tightened

to the point where people were very much worried about whether

banks were performing their job. Striking that right balance of

cleaning up and improving Bank Secrecy Act supervision but doing

it in a way that calibrates the measures taken, I think, is quite important. That will be my number one priority.

Chairman SHELBY. Mr. Dugan, as troubling as the Riggs case is

to those of us on the Committee concerned about money laundering

and terror financing issues, the Arab Bank case seems to be more

troubling. At least with Riggs, there was a history of admonishments with respect to that institution’s repeated failures to comply

with the Bank Secrecy Act.

But in the case of the New York branch of the Arab Bank, we

do not even have that. We have an institution that had repeatedly

received the highest grades, only to precipitously become the recipient of a consent order that effectively shut it down. Equally troubling is the fact that most of what became known about Arab

Bank’s New York branch was due to civil suits against the bank

and the publication on the Internet of documents seized by the

Israeli Army when it raided West Bank branches of the bank, not

by the supervisor’s regulators.

I understand none of this happened on your watch, and I would

not expect it to happen on your watch, you know? But I further understand that this remains a pending enforcement matter that is

also under criminal investigation by the Justice Department. Could

you provide the Committee, if you could, your assessment of the severity of the Arab Bank case and assure us that a meaningful review of that case will occur on your watch if you are confirmed,

which you will be? And what are the implications of this case for

one of the largest banks in the Arab world? How important is this?

Mr. DUGAN. Mr. Chairman, I would like to, but I am not sure I

can answer the first part of your question because——

Chairman SHELBY. No, no, you cannot get into everything.

Mr. DUGAN. There is quite a lot of confidential information in

this ongoing matter.

Chairman SHELBY. We understand that.

Mr. DUGAN. I only have what is in the public record.

I can commit, however, to the second part of your question, to assess the situation to learn why it occurred, and to try to figure out

the best way possible to correct it so it does not happen again.

Chairman SHELBY. Mr. Dugan, there are a number of recent stories in the press concerning the OCC’s supervision of Wells Fargo.

And for the record, I want to state again, you have not been in the

OCC yet.

Mr. DUGAN. Right.

42

Chairman SHELBY. A number of disturbing accusations have

been levied against the OCC, including preferential treatment of

big bank CEO’s, slow follow up on cited bank program weaknesses,

even the loss of the examiner’s in charge computer.

Very rarely is the public privy to a national banking regulator’s

recommendations on the selection of an enforcement action against

a bank with antimoney laundering and Bank Secrecy Act deficiencies. Two sets of questions come to my mind: What lessons can

you take away or would you take away from this disclosure of the

Comptroller’s regulatory review process, and of that process itself,

does anything need to be changed, in your opinion, or would you

wait until you get over there and see what is really going on?

Mr. DUGAN. Mr. Chairman, really, the latter. The enforcement

process is always one that invovles discretion. I do not know the

facts in this instance. There is an ongoing investigation by the IG.

I would like to be in a position to tell you more. I certainly will

follow up and assess this very carefully.

Chairman SHELBY. We believe you will.

Mr. DUGAN. But, at this point, I just do not know enough to comment on it.

Chairman SHELBY. Senator Sarbanes.

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

Mr. Reich, I wanted to ask a couple of questions. The total assets

in the thrift industry at the end of March of this year stood at $1.3

trillion. It is my understanding that the largest thrift has over

$300 billion in assets. And the OTS is funded by assessments on

the thrifts it regulates. Some have raised the question of the ability

of the regulator that is so dependent upon one institution’s assessments to be completely objective in carrying out its responsibilities.

What is your take on that?

Mr. REICH. For one, I have every intention of being objective,

Senator Sarbanes, but I am very concerned about the point that

you raise. I think there is every reason to be concerned about the

method of funding, in my opinion, for both the OCC and the Office

of Thrift Supervision. I think it is a subject that needs attention,

needs to be addressed, and a resolution found for a different method of funding.

I have been willing, as a member of the Board of the FDIC, to

engage in conversation about creative funding possibilities, and I

look forward to the possibility of engaging in that dialogue with my

colleagues on the Board of the FDIC and the other Federal regulators.

Senator SARBANES. The prior Director of the OTS embarked on

a reduction in force to significantly reduce the number of personnel

in the field offices of the OTS. There is considerable concern because a very large percentage of the OTS examination staff is approaching retirement age in the next few years. Furthermore, since

its creation over 15 years ago, the OTS has been consistently reducing the number of its employees and has taken several internal

administrative reorganizations. This has placed significant stress

on the OTS staff who have remained, as each employee has taken

on more areas of responsibility and faces an uncertain future in the

organization.

43

Of course, many of these employees have a significant amount of

expertise and institutional history important to the mission of the

Agency. What is your view on these questions of staff morale at the

OTS, and how do we get more stability at the Agency?

Mr. REICH. I think what the OTS has gone through over the last

few years is not unlike what the FDIC has also experienced. Ten

years ago, the FDIC was the primary supervisor of almost 9,000

State-chartered banks. Today, the FDIC is the primary supervisor

of about 5,000 State-chartered banks. And, over the years, as that

reduction in the number of institutions that they supervise has

taken place, it has, I think, caused the members of the Board of

the FDIC to feel a fiduciary responsibility to be financially responsible in managing our resources, and as the industry has

downsized, both the FDIC and the Office of Thrift Supervision have

downsized along with it. I am concerned about staff morale in any

organization, and I will do the best I can to address the issues

which staff is concerned about.

Senator SARBANES. I hope you well. I think you have a staff problem over there, and I am encouraged by your indication of your intention to address it.

Mr. Dugan, I want to ask you about preemption. We talked about

it when we met. The OCC’s action in preempting the application

of State laws to national banks and their State-chartered operating

subsidiaries as well has drawn a tremendous amount of criticism.

The National Governors Association, all 50 State attorneys general,

the National Conference of State Bank Supervisors, and there is a

perception that we are fundamentally altering the Federal-State

enforcement relationship.

And it is a departure from where we were before. I mean, there

was some tension on occasion, but essentially, a relationship had

been worked out, and State governments were able to, you know,

seek to protect their citizens from abusive lending practices and

other areas of consumer protection. Many of us here feel that it is

really contrary to previous governing practice.

In the Riegel-Neal Act, we stated that host State laws regarding

community reinvestment, consumer protection, and fair lending

apply to national banks unless those laws discriminate against the

national bank or are preempted, and we are quite concerned about

what appears to be a wholesale carve-out from State law for national banks and for their operating subsidiaries. What is your

view on this question?

Mr. DUGAN. Senator, as we discussed in your office, I do not personally believe it is a wholesale departure. I know that the OCC

has received a great deal of criticism, in part because many of the

practices that had been going on were codified in a very visible regulation.

But to me, the issue gets down to this: What did Congress intend

when it established a national banking system with a Federal charter subject to a uniform set of laws? If you look at the cases, and

there have been over 50 cases over 100 years, many of them in the

Supreme Court and some of them decided quite recently, the clear

consensus rule is that if a State law interferes with or significantly

regulates a banking activity of a national bank, it is preempted.

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That is the general rule. There are exceptions, and Congress can

change that rule, but that is the premise that national banks have

been operating under for a very long time. In the last 10 years or

so since the Riegle-Neal Act, in particular, with a great deal of consolidation in the industry and much more in the way of interstate

banking and branching, nationally chartered institutions operating

in many different States have bumped into more and more State

laws. Once that situation started engendering more and more requests for preemption opinions, the OCC codified their practice in

their regulation. It was not too dissimilar from what the OTS had

done a number of years back.

It prompted a great deal of criticism, and I understand that. I

think more can be done to share information with the States on a

timely basis, but I think the basic rule about State laws being preempted if they interfere with a national bank power is what the

law is.

Senator SARBANES. The Barnett Bank standard we think is a

higher threshold for preemption than the one that the OCC is

using now. That is the problem.

Mr. DUGAN. Senator, I do not think that the OCC has tried in

any way to say that the Barnett standard is not the right standard.

I think there is a difference of opinion on what that standard

means in practice. There are various words in that case. People

have focused on the ‘‘prevent or significantly interfere’’ language as

one formulation, but there are citations to a number of other cases

and standards in that very same paragraph where the Court talks

about that particular test. I think the question is, in the end,

whether a State law creates the Constitutional conflict where it obstructs the basic purpose that Congress had in mind in setting up

the national banking system.

Senator SARBANES. Are you prepared to meet with the State

banking and enforcement officials in order to enter into an intense

dialogue with them on this issue?

Mr. DUGAN. I would be happy to meet with the State officials to

discuss this issue at great length.

Senator SARBANES. All right; let me ask one final question.

I wanted to follow up on the Chairman’s questions about the

Bank Secrecy Act. Assuming you are confirmed and take office in

the very near future, what do you think is a reasonable period of

time for you to have to address these problems at the OCC that

were identified by the study with respect to improvements in how

it does business? When would it be reasonable for the

Committee——

[Laughter.]

—to bring you back in for an oversight hearing in terms of what

has been done about enforcement of the Bank Secrecy Act at the

OCC?

Mr. DUGAN. That, of course, is in the Committee’s discretion. It

is a little bit hard for me to say without actually having gotten over

there. I will say a couple of things. Regarding the part of the report

that focused on the lack of adequate policy guidance, I think a tremendous step was made on June 30 when the agencies collectively

released quite detailed policy guidance on what is expected in this

area. At the other end of the spectrum, the report’s focus on hiring

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and maintaining the right staff, particularly for large bank supervision, is going to take some time to address. But I would be happy

to come back to the Committee to give you an assessment of where

things stand before the end of the year, if that makes sense.

Senator SARBANES. It is my understanding that the four largest dealers of the $37 trillion interest rate swaps market account for

over 40 percent of the supply in that market, and the concentration

of the dealers is even greater in the interest rate options market.

What priority do you think the OCC should put on monitoring and

supervising the national banks that are the most significant dealers in the over-the-counter derivatives market, and do you believe

the agency has all the resources it needs to adequately monitor and

supervise the derivative dealer community?

Mr. DUGAN. Senator, I think the kinds of risks that you are talking about in the derivatives market are not just interest rate risk

but credit risk, as well, which is why the market has ended up in

the larger banks. I think supervision in this area has been a tremendous focus of the OCC and the other bank regulators, but particularly for the OCC in the wake of the derivatives issues that this

Committee focused on, quite rightly, in the 1990’s and in the wake

of a number of other significant issues that arose at that time.

My sense is that the Agency does have the resources and does

focus quite a bit of effort in the derivatives area. I think part of

the whole Basel process is trying to reinforce that and to capture

some of the risks that have not been as well captured in the past.

But that will be an area of concern when I get there, if and when

confirmed.

Chairman SHELBY. In the near future, the banking regulators, as

all of you know, are supposed to issue a final rule that is intended

to implement the changes contained in the Basel II proposal. We

intend to hold a hearing on the progress of the Basel II proposal

in September when we get back.

I recognize that more testing of these new standards is scheduled

and that there may still be changes made to the rules. That said,

I am not yet fully confident that the so-called ‘‘right standards’’

have been proposed. What are you going to do after you are confirmed to make sure that prior to the finalization of the new rules

we have developed the best rules to make it work? Because there

are still some outstanding questions there.

Mr. Gruenberg, we will start with you.

Mr. GRUENBERG. Mr. Chairman, I think there is good reason to

proceed cautiously with the implementation of the Basel agreement. The most recent quantitative impact study that was released

indicated that on the banks that would participate, half of them

would have a 26 percent or more reduction of capital. In fact, one

of those institutions would have a 50 percent reduction of capital.

Chairman SHELBY. Is that a concern for you?

Mr. GRUENBERG. Yes, it is a serious concern, Senator. And I

think there was a great effort to bring this agreement about, and

there was a lot of investment of effort in it, but I think until we

are truly satisfied about is consequences for the banking system,

it is very important for the regulatory agencies to move very cautiously and frankly be in no rush to bring it to a conclusion until

they are quite confident about its impact.

46

Chairman SHELBY. But as a new member, will be, of a very important banking regulatory agency that is charged with safety and

soundness, this should, in your background here, be a double concern for you.

Mr. GRUENBERG. Very much so, Senator, and the FDIC, to its

credit, I think, under Chairman Powell has been very forceful——

Chairman SHELBY. Outspoken right here at the Committee.

—among the regulatory agencies on this issue, both on the overall reduction of capital and also preserving the minimum capital requirement, and that would certainly be a very significant priority

for me if confirmed by the Senate.

Chairman SHELBY. Senator Sarbanes, when he was Chairman,

even before he was Chairman of the Committee, he has always

voiced a strong feeling that the capitalization, the strong banks,

whether they are large or small, are the ones that stick around and

do not visit you and visit the taxpayers.

Mr. Dugan, do you have any comments on this? This will be right

in your lap, too. I want to comment that Comptroller Hawke, right

here at this table, he has some concerns, as you probably know,

about Basel II, the implementation, what it would do and so forth.

Mr. DUGAN. Yes, Mr. Chairman. I agree largely with everything

Marty just said. This is a situation where there has yet to be a proposed rule, and I think it is very important to have the full notice

and comment process to take comments from a lot of different

sources about this before we move forward to any kind of final rule.

There has to be a better understanding of the quantitative effects

on capital, and I do not think anybody who has read about the results from the QIS–4 study would not be concerned about it. I

think we have to proceed with conservatism as we move forward

for that very reason.

I will say I do think it is important to try to move away from

the existing Basel standard and try to move down a path to something that is more risk-sensitive. I support the Basel process, but

for the reasons I have outlined, I think we have to be very careful

in what we do.

Chairman SHELBY. Mr. Reich.

Mr. REICH. I am supportive of the Basel process, too, but I think

that it is too complicated. The results are disappointing and of concern. I have listened to former Comptroller Hawke for 2 or 3 years

talk about how complex it was and how complex it was going to

be to implement. I am concerned about its implementation, and I

think that it should be deferred until we are confident that it is

pretty accurate.

Further, I am concerned about any change that would have a

material reduction in bank capital.

Chairman SHELBY. Thank you.

Mr. Reich, as you may be aware, this Committee was very critical over the several years of the failure of the regulatory agencies

to properly examine for Bank Secrecy Act deficiencies with the

same zeal with which safety and soundness exams have been conducted. Can you give the Committee your assurance that under

your directorship, after you are confirmed, that the Office of Thrift

Supervision would treat BSA compliance with the level of diligence

this Committee and the Congress expects?

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Mr. REICH. Yes, Mr. Chairman, I commit to do that. As Mr.

Dugan indicated, the Federal banking agencies joined together on

June 30 to issue joint guidance to all of our Federal banking examiners. We should all be on the same page in our examination processes. All examiners will each be receiving identical information

about the processes that they are to follow. We have set a schedule

of joint examiner training for our agencies and joint banker education of the new guidelines as of June 30, and I will do all that

I can to see that OTS implements these guidelines and places a

high priority on the BSA examination process.

Chairman SHELBY. I want to direct this to all three of you. Over

the last year or so, there have been numerous incidents involving

the unauthorized disclosure of sensitive personal financial information. In some but not all of these situations, financial institutions

have been involved. The Committee held a hearing earlier this year

to review the framework of GLB and the new ID theft provision recently added to FCRA.

Could you comment on what additional measures you feel may

be necessary to complement the banking agencies’ guidance on

breach of notification? Mr. Dugan, do you want to start, Marty? Go

ahead, Mr. Dugan.

Mr. GRUENBERG. Sure.

Mr. DUGAN. Mr. Chairman, I would say that financial institutions already have a structure in place. I do think it should be kept

separate. I do not think this is an area where they should be treated like other institutions. There are different concerns; they hold

information; they hold, in some cases, quite sensitive information.

Chairman SHELBY. But they should protect that information,

should they not?

Mr. DUGAN. Sure, absolutely, and that is why, the GrammLeach-Bliley Act—and you and Senator Sarbanes were both great

proponents of this—imposed standards for maintaining security

and imposing safeguards for customer information, and why the

bank regulators have issued guidance on security breaches.

Whether that needs to be tweaked somewhat to take account of

some more particular issues that have come up with some of the

types of information is, I think, worthy of consideration by the

Committee. It could be done either directly through legislation or

some combination of legislation and having the regulators reexamine their existing authority and take measures with the authority

they already have.

Chairman SHELBY. Marty. Excuse me; Mr. Gruenberg.

Mr. GRUENBERG. Mr. Chairman, it is clear that there is a very

serious problem here that is not being fully addressed. We established in the Gramm-Leach-Bliley Act the obligation on financial

institutions to protect non-public personally identifiable information, and with the number of problems we have had with a variety

of institutions, it would appear that either the guidance being provided is not sufficient, or the compliance is not sufficient.

I would not presume at this point to say which, but I think there

is a very serious concern, and I also think there is a very serious

issue as relates to the nonbank institutions that are trusted with

a lot of personal information of people, and that seems to me great

48

attention needs to be paid to that area as well, and it may require

additional legislation to address some of the concerns here.

Chairman SHELBY. In light of the participation of nonfinancial

institutions in the payment system, what else might be necessary

to address the protection of financial information as it moves

through the entirety of the payment system? Mr. Dugan, do you

have any comments on that? In other words, we have nonfinancial

institutions involved in the payment system.

Mr. DUGAN. Mr. Chairman, the Gramm-Leach-Bliley Act, applies

technically to something called nonpublic personal information,

which is basically customer information of the banks.

Chairman SHELBY. Right.

Mr. DUGAN. But in some cases, the institutions handle personally

identifiable information of noncustomers. I think making sure that

information is protected, because it has some of the same kind of

sensitivity issues as some of the other information they handle, is

something that would be worth the Committee looking at.

Chairman SHELBY. Mr. Reich, do you have any comment?

Mr. REICH. There is a joint working group of all of our Federal

banking agencies addressing identity security, and hopefully, we

will be coming out with substantive guidance that will address

these issues. At the FDIC, we have been working with our IT examiners to help banks address the problem on two fronts, dealing

with it in the aftermath when breaches do take place and then trying to help them set up systems and processes to prevent it from

happening to begin with, which is what the joint working group is

addressing.

Chairman SHELBY. Mr. Dugan, what balance can we bring between enforcement and latitude? For example, the recently released internal review states that OCC’s initial supervisory actions

have not always been severe enough to ensure timely correction of

BSA/MAML program deficiencies, and the subsequent follow-up actions have not always been timely or effective.

Is it possible to have criteria that would provide sufficient guidance for examiners and higher level decisionmakers within the Office of the Comptroller of the Currency to determine when stricter

supervisory actions are warranted that would not eliminate whatever level of discretion is needed for the system to function properly? You know, there is a balance there. Both Riggs and the Arab

Bank involved high risk accounts, and in the case of the latter, the

Arab Bank, a bank serving in a very high risk region through

which funds were flowing to the West Bank.

Should these types of banks be supervised differently from banks

with lower inherent levels of risk? In other words, is that a judgment call, or what? How would you handle it?

Mr. DUGAN. Mr. Chairman, I think the Agency has to be committed to devoting more resources to institutions that are perceived

as riskier in particular areas, and I think that has been at least

the stated philosophy of the Agency for a long period of time.

There are quite a number of tools that the bank regulators have

at their disposal from examiner criticism and informal enforcement

actions all the way through very formal enforcement actions, even

removal and prohibition, civil money penalties, and the like. There

is a spectrum of remedies and there are well-articulated procedures

49

that are supposed to be adhered to to try to get balance into the

process.

There will always be discretion in the enforcement process. I

think the important thing is to make sure that the process is the

right kind of process, so that different views are being aired. I

know what the processes are. Obviously, there have been some

lapses, and looking at that is one of the very areas that I plan to

devote a considerable amount of time to if and when I get to the

Agency.

Chairman SHELBY. Senator Sarbanes, do you have anything

other questions?

Senator SARBANES. Mr. Chairman, I would like to have formally

included in the record a letter that we received from the National

Bankers Association supporting the nomination of John Reich to be

the Director of the OTS.

Chairman SHELBY. Without objection, so ordered.

Senator SARBANES. In the course of which, they say that they

have worked with him in his current capacity at the FDIC. During

his tenure with that agency, Mr. Reich and the FDIC Chairman,

Donald Powell, have shown recognition for the unique status of

women and minority-owned banks, and they go on to say that the

NBA in the past has expressed some disappointment in the inaction of the OTS in its regulatory oversight of such matters but that

they are optimistic that under the new leadership of Mr. Reich, the

OTS will administer meaningful policies and regulations that

strengthen the capacity and foster the number of minority-owned

banks, and they are looking forward to working with Mr. Reich and

the other nominees at this hearing to develop a Government-wide,

coordinated banking policy that protects the diversity of the Nation’s financial system.

Chairman SHELBY. It will be made part of the record without objection.

Senator SARBANES. And I commend that objective to our two

nominees as well.

Thank you very much.

Chairman SHELBY. Anything else?

Senator SARBANES. No.

Chairman SHELBY. Gentlemen, I thank you for your appearance

here today. We believe that you are all well-qualified for your positions, and we are going to try to move your nominations Thursday.

Thank you. The hearing is adjourned.

[Whereupon, at 3:29 p.m., the hearing was adjourned.]

[Prepared statements, biographical sketches of the nominees, response to written questions, and additional material supplied for

the record follow:]

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PREPARED STATEMENT OF SENATOR JIM BUNNING

Thank you, Mr. Chairman, for holding this hearing today, and I would like to

thank all of our nominees for coming before us today.

I would especially like to thank my good friend, Chris Cox, for coming before us

today and agreeing to be the President’s nominee for the Chairman ofthe Securities

and Exchange Commission.

Its no secret that I have disagreed with some of the decisions the SEC has made

under the last Chairman. Though I appreciate his service and think he should be

commend for righting the SEC’s ship, I believe he made of number of policy mistakes. It seemed that he was ignoring his commissioners on a number of major

issues. Also I think he was not open to advice from this Committee. I believe Chris

Cox will listen to all of his commissioners and take the advice of Congress.

There are many major issues facing the SEC. In particular, I am concerned about

the independent chairman rule that was overturned by a Federal court, then

rammed through again by the former Chairman and Regulation B, whose implementation has been delayed until September. I believe with Chris Cox’s leadership, we

can come up with a solution that everyone can live with.

I have known Chris for a long time. He has served his country well as a White

House Counsel to President Reagan, as a U.S. Representative and I believe he will

serve his Nation well as Chairman of the SEC. I urge all of my colleagues to support

the nomination of Chris Cox as Chairman of the Securities and Exchange Commission.

—————

PREPARED STATEMENT OF SENATOR DEBBIE STABENOW

Thank you, Chairman Shelby. Welcome Congressman Cox, Ms. Nazareth, and

Commissioner Campos.

These are busy times for the SEC and I want to commend the ongoing efforts of

the SEC and specifically Chairman Donaldson. Whether in handling the melt down

of Enron or the mutual fund industry scandals, the SEC is restoring public trust

in the markets—and I believe we should vigorously continue down that road. The

job that the Commission performs is absolutely vital to maintaining a robust and

vibrant economy, and providing working men and women the piece of mind they

need to become investors in the American Dream. So, hearings such as this are important.

I appreciated the time that Congressman Cox set aside to come by my office last

month. I left that meeting feeling that as Chairman he would not seek wholesale

change in the approach that the current Commission is taking with regard to oversight of our financial markets. Also, that he would work with the other commission

as a whole to generate a consensus on the difficult issues that the SEC will face

in the future. I look forward to hearing more about how he and the other nominees

will approach their roles as SEC Commissioners.

That being said, I would like to renew my concerns with the SEC’s proposed Regulation B, implementing Title II of the Gramm-Leach-Bliley Act. As the witnesses

testify today, I will listen especially close to comments on Regulation B, the so-called

‘‘Pushout’’ rule.

I am worried that too little is being done to revise the rule in order to have it

comport with Congress’ intent that certain traditional bank activities—such as trust

and custodial activities may continue to be conducted in the bank rather than being

‘‘pushed out’’ into an SEC registered broker/dealer affiliate.

The small and medium-sized banks in my home State of Michigan are very concerned about the costs and consequences of having to implement a regulation that

they feel runs counter to the intentions of the Gramm-Leach-Bliley Act.

Between now and the end of September, I look forward to working with the Commission on providing a common sense approach to the issue of securities activities

inside our small and medium-sized commercial banks.

Also, I am interested in hearing the witnesses comment on how we can better secure our financial markets and make them fair for the common investor. As we continue moving toward a future where more and more households are invested in the

market, we must do all we can to ensure that the average investor—the investor

who does not have access to levers of power on Wall Street—can invest without fear

that the mutual fund they are investing in, or the brokerage house that they hired,

are covertly working against them by gaming the system.

We saw the vivid results of this type of malfeasance in 2003 and I am glad to

see that the SEC is making a concerted effort to address many of these problems.

If we are to help our constituents secure their retirement future and encourage the

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American public to save, then we must give them the piece of mind that the playing

field is level and they are not at a disadvantage when putting their money into the

market.

I look forward to the testimony.

Thank you, Mr. Chairman.

—————

PREPARED STATEMENT OF TED STEVENS

A U.S. SENATOR FROM THE STATE OF ALASKA

JULY 26, 2005

I am pleased to join the Senators from California in recommending Chris Cox as

the next Chairman of the Securities and Exchange Commission.

Chris graduated from Harvard Law School where he was editor of the Law Review and also received an MBA. Chris has represented Orange County in Congress

for 17 years. A bipartisan consensus builder, every bill and report from the three

Congressional Committees he has chaired during his House career was unanimous

and bipartisan—No exceptions.

His 1995 legislation to protect investors from fraudulent lawsuits, and from extortion by unethical lawyers, was approved in both the House and the Senate with

overwhelming support. Its principal co-author in the Senate was Chris Dodd.

This landmark legislation, which passed with a bipartisan majority in both the

House and the Senate, imposed new responsibilities on accountants to discover

fraud, and put an end to the ethical abuse of professional plaintiffs in class actions.

Now, court-appointed representatives in securities class actions are seeing to it that

more of the recoveries go to shareholders, who were harmed instead of their lawyers.

Through a long and distinguished public career over two decades in the White

House and in Congress, Chris Cox has shown that he is independent, tough-minded,

fair, and bipartisan. He is committed to enforcing the rules of the marketplace for

the benefit of every investor, and to upholding the integrity of our capital markets.

While this Committee will review Chris’ qualifications carefully, he has already

gone through an even tougher confirmation process. He had to convince his wife,

my good friend and one of the smartest lawyers I know, Becky Gernhardt, to marry

him. Many of you know Becky from her public service in the Assistant Majority

Leader’s Office, the Reagan White House, and of course, the Base Closure Commission.

I urge this Committee to act quickly on this nomination and to report it to the

full Senate for consideration.

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RESPONSE TO A WRITTEN QUESTION OF SENATOR CARPER

FROM CHRISTOPHER COX

Q.1. We have all heard assertions about the problems with the

rules under Section 404 of Sarbanes-Oxley. As you know, that Section requires the SEC to develop and adopt rules that require companies to report on the management of companies’ internal controls

over their financial reporting. As some of us have heard, these reporting requirements are cumbersome and the audits are expensive, at least the initial ones. I would just like to ask each of our

nominees to comment on this issue, to give us a sense of whether

you think there is a problem or not, and what steps should be

taken as we go forward so that we can have robust, vibrant markets and also strong investor protections.

A.1. I strongly believe it is possible to have both robust, vibrant

markets free of unduly cumbersome and expensive regulatory requirements, and strong investor protections. I continue to strongly

support the Sarbanes-Oxley Act, and was proud to serve on the

House-Senate Conference Committee that wrote the law. I believe

it was then, and remains now, an important and necessary response to the high-profile scandals that shook corporate America

and to the subsequent crisis in investor confidence. In particular,

the internal control reporting provisions of the Sarbanes-Oxley Act

have the potential to provide significant long-term improvements in

financial reporting. But it is important to both investors and public

companies that the Commission ‘‘get it right.’’ As we go forward,

the Commission and the PCAOB must offer increasingly clear, refined, and useable guidance in order to achieve the twin objectives

of robust markets and strong investor protections.

RESPONSE TO A WRITTEN QUESTION OF SENATOR CARPER

FROM ROEL C. CAMPOS

Q.1. We have all heard assertions of the problems with the socalled Section 404 rules of Sarbanes-Oxley, and as you know, that

Section is designed to require the SEC to develop and adopt rules

that require companies to report to the management of the companies’ internal controls of their financial reporting. And some of us

have heard, I am sure we have all heard from time-to-time, that

these reporting requirements are cumbersome and that the audits

are expensive, at least the initial ones are.

I would just like to ask each of our nominees to comment on this

issue and to give us a sense of whether you think there is a problem or not and what the steps are you think should be taken as

we go forward so that we can have robust, vibrant market and also

strong investor protections.

A.1. Given the need for U.S. investors to have confidence in the internal controls of companies in which they invest and to see that

an independent auditor has attested to those internal controls, Section 404 may be compromised if an important segment of issuers

is not subject to the same disclosure standards as apply to the majority of issuers. This was a fundamental piece of the SarbanesOxley Act and to give the foreign issuers or small issuers an out

may not be in the best interest of investors. Yet, both of these

classes of issuers must be analyzed separately. Section 404 of SarVerDate 11-MAY-2000 18:39 Feb 01, 2006 Jkt 000000 PO 00000 Frm 00109 Fmt 6602 Sfmt 6602 25286.TXT SBANK4 PsN: SBANK4
106

banes-Oxley specifically focuses on mitigating the risk of improper

conduct in the areas of accounting and financial reporting by ensuring that companies’ internal controls over accounting and financial reporting are strong enough to create a safety net. Section

404’s mechanism for doing this is to require an audit of internal

controls in conjunction with the audit of financials and an attestation by corporate management and independent auditors on the effectiveness of internal controls.

The first season of the internal control audits is coming to a close

and we are seeing that 404 was an important tool in mitigating

risk. While many have complained about the costs of compliance

with 404, I believe that, in time, renewed investor confidence in

companies’ reports will pay off. One must also remember that

many of the most significant costs are one-time costs that likely

will not be repeated in subsequent years. As former Chairman Donaldson stated in a Congressional Hearing before the House Finance

Services Committee, ‘‘the time, energy, and expense that companies

are now investing in their internal controls, will earn a handsome

return in the years to come.’’

With respect to foreign issuers, I believe it is unlikely that we

will see an exodus of foreign issuers from the U.S. markets. There

are many reasons why we expect a continuing and strong presence

of foreign issuers in the United States. Nowhere in the world can

foreign issuers raise as much capital as quickly as they can in the

United States. In addition, the Commission historically has lightened the foreign issuers’ disclosure burdens. Foreign issuers’ financial statements can be prepared in accordance with home country

accounting standards, provided the registration statement discusses and any material variations from U.S. GAAP. Foreign

issuers also have certain options not to disclose certain categories

of information that are mandatory for all U.S. issuers, such as

breaking down revenues and earnings by lines of business and pension obligations. Foreign issuers have much lower burdens of disclosure regarding management compensation and related party

transactions than customarily apply to U.S. issuers by virtue of

Items 402–404 of Reg. S–K. Plus, further accommodations to foreign issuers were made when the SEC amended Form 20–F so that

it more closely mirrors the disclosure standards established by

IOSCO.

With respect to small issuers, the need for confidence, comfort,

and comparability is no less but the analysis differs because of the

particular barriers faced by new and small issuers. I am eagerly

awaiting any recommendations of the Smaller Public Company Advisory Committee tasked with examining this issue. I also understand the Commission on Fraudulent Financial Reporting, at the

staff’s suggestion, is working to provide additional guidance for

smaller companies. Any changes to Section 404, whether for small

or foreign issuers, must follow a careful risk analysis before the

Commission can conclude that such accommodations will still afford investors the necessary protections and maintain their confidence in the markets.

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RESPONSE TO A WRITTEN QUESTION OF SENATOR CARPER

FROM ANNETTE L. NAZARETH

Q.1. We have all heard assertions of the problems with the socalled Section 404 rules of Sarbanes-Oxley, and as you know, that

Section is designed to require the SEC to develop and adopt rules

that require companies to report to the management of the companies’ internal controls of their financial reporting. And some of us

have heard, I am sure we have all heard from time-to-time, that

these reporting requirements are cumbersome and that the audits

are expensive, at least the initial ones are.

I would just like to ask each of our nominees to comment on this

issue and to give us a sense of whether you think there is a problem or not and what the steps are you think should be taken as

we go forward so that we can have robust, vibrant market and also

strong investor protections.

A.1. I believe Section 404 of the Sarbanes-Oxley Act is fundamentally sound and an important tool for improving the accountability

of issuers. That having been said, I am also sensitive to the costs

issuers have incurred in the first year of implementation. Earlier

this year, the Commission and PCAOB board members hosted a

roundtable on implementation of the internal control reporting provisions under Section 404. During this dialogue, the Commission

learned about the benefits issuers experienced, including improved

focus on internal controls and the prospect of improvements in investor confidence, transparency, and financial statement quality.

The Commission also explored the reasons for the significant costs

to issuers of implementation, some of which were one-time, and

others of which were based on interpretive concerns, such as auditors undertaking a very conservative scope of testing or duplicative

testing by management and auditors. The staff has since issued interpretive guidance to focus management and auditors on implementing a risk-based approach to the rules. It is our hope such an

approach will reduce the time and expense of compliance with Section 404. I also understand the Smaller Public Company Advisory

Committee is studying possible improvements regarding implementation for small businesses and may make recommendations. I will

encourage the Commission staff to continue to request feedback on

progress, monitor costs, and consider further opportunities for improved implementation. I will also support identifying and developing best practices in this area.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING

FROM CHRISTOPHER COX

Q.1. As you know, the SEC has proposed a new Regulation B to

Section II of the Gramm-Leach-Bliley Act. The Fed, along with the

FDIC, the OTS, and the OCC wrote a very strong letter to the SEC

opposing their proposed regulation. The SEC has delayed the implementation of the rule, but it is due for review in September. Will

you consider the opinions of the banking regulators while reviewing

Regulation B?

A.1. Yes. As you might imagine, given our service together in 1999

as Members of the House-Senate Conference Committee that wrote

the Gramm-Leach-Bliley Act, I well appreciate your abiding interVerDate 11-MAY-2000 18:39 Feb 01, 2006 Jkt 000000 PO 00000 Frm 00111 Fmt 6602 Sfmt 6602 25286.TXT SBANK4 PsN: SBANK4
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est in the question of how best to ensure functional regulation of

securities activities conducted by banks. I will work diligently to

gain a full understanding of the issues surrounding the Commission’s proposed Regulation B, including listening carefully to the

opinions of banking regulators, those in the banking industry, investors, and other stakeholders.

Q.2. As you know, the Independent Chairman rule proposed by the

SEC was overturned by a Federal court. It was then revoted out

by the SEC. This proposed rule was very controversial and was

fought by Commissioners Glassman and Atkins as well as many

Members of this Committee. Will you be reviewing the Independent

Chairman rule if confirmed?

A.2. Because the Commission’s mutual fund governance rule is

again before the court, it is likely that the Commission will receive

additional, and legally binding, guidance. I will review the issues

surrounding the rule in detail, and in particular will abide by the

decision of the court in both letter and spirit.

Q.3. As you may know, the TVA has agreed to voluntarily register with the SEC. The TVA has over $25 billion in publicly traded

bonds, many of which are held by seniors in the Tennessee Valley.

I would ask you to watch over this process carefully and make sure

these bondholders have the safety and security that other investors

have enjoyed for a long time. Would you do that as Chairman?

A.3. Yes. I will ensure that the Commission carefully reviews the

TVA’s filings to ensure its disclosure to the public and to bondholders is full and transparent.

Since its creation in 1933, the Tennessee Valley Authority has

been considered an agency and instrumentality of the United

States, but the debt TVA issues is only an obligation of TVA and

is not guaranteed by the United States. Last year, the Congress enacted a law requiring TVA to file with the SEC annual, quarterly,

and current reports with the Commission beginning with its fiscal

2006 annual report.

While the law does not require TVA to register its securities with

the SEC, the SEC’s Division of Corporate Finance will be responsible for reviewing TVA’s filings for compliance with the disclosure

requirements of the securities laws and regulations. I can assure

you that I will indeed watch over this process with great care to

ensure full and fair disclosure as required by the securities laws.

RESPONSE TO A WRITTEN QUESTION OF SENATOR BUNNING

FROM ANNETTE L. NAZARETH

Q.1. You have testified before this Committee before on the Nasdaq

exchange application. As you know, this application has yet to be

approved or rejected. Can you tell me why it has taken so long to

come to a decision?

Do you think 4 1/2 years is too long to wait?

A.1. The Commission should always endeavor to respond to matters, including exchange applications, as expeditiously as possible.

Nasdaq’s application to register as a national securities exchange

has been pending with the Commission for several years. A number

of difficult policy issues were raised by the application, many of

which required significant effort by Nasdaq to resolve. For examVerDate 11-MAY-2000 18:39 Feb 01, 2006 Jkt 000000 PO 00000 Frm 00112 Fmt 6602 Sfmt 6602 25286.TXT SBANK4 PsN: SBANK4
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ple, Nasdaq currently lacks price priority rules that all of the other

exchanges have. The lack of price priority rules raises profound

market structure issues that could have implications for all of our

registered exchanges and, ultimately, investors. In an effort to

move its application forward, Nasdaq and NASD recently agreed

upon a new structure, which would separate Nasdaq’s internalization business into an entity under the regulatory control of NASD.

Also, Nasdaq has proposed to modify its rules so trades executed

on its proposed exchange would be pursuant to price/time priority

rules. The Commission has published both of these proposals for

public comment. Nasdaq will amend its Form 1 application for registration as a national securities exchange to reflect this new structure. I expect the amended Form 1 to be published for public comment shortly after its filing by Nasdaq with the Commission.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORZINE

FROM CHRISTOPHER COX

Q.1. The recent attacks in London are a horrible reminder that the

threat of terrorism is still with us nearly 4 years after the attacks

of September 11, 2001, and is likely to remain for some time. As

you know, given your background as Chairman of the House Homeland Security Committee, ensuring the stability of our economy and

the continuity of markets and business operations is an essential

component of our homeland security strategy. The SEC, along with

other financial regulators, plays a vital role in this mission. In the

wake of September 11, one of the lessons we learned was the importance of reinforcing the telecommunications infrastructure that

supports our financial markets. But the cost building in redundancies and backup capabilities can be high. Nearly everyone

agrees that the Federal Government must play some role in bearing a share of the cost. Do you think we have done enough relative

to ensuring continuity in the event of a terrorist attack, and what

further actions would you recommend? For example, would you recommend that the President exercise his authority under the Defense Production Act, which allows him to order economic activity

for national security purposes, such as the manufacture of more

bullets during a time of shortage, now that it includes critical infrastructure?

A.1. Since September 11, 2001, much has been done to ensure continuity in the event of a terrorist attack, but much more remains

to be done. Ensuring the continuity of critical operations in the financial sector in the event of another terrorist attack will remain

a top priority for the Securities and Exchange Commission. The

threat of terrorism, including terrorism directed against the financial sector, has not abated. I will work closely with the other Commissioners, Commission staff, other Federal and State agencies,

law enforcement, self-regulatory organizations, and private sector

stakeholders to see to it that market resiliency safeguards are implemented effectively and completely. With respect to the Defense

Production Act, I would concur with the premise of your question

that, despite its enactment over a half century ago in very different

circumstances, this Act is highly relevant to the war on terrorism

in the 21st century. Already, the law has enabled the Homeland

Security Department to expedite the production of communications

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systems for airports. To the extent that the President and Congress

wish to extend the use of this authority to the Nation’s financial

markets and associated infrastructure, the SEC will energetically

cooperate and offer its expertise.

Q.2. In light of the New York Stock Exchange’s proposed merger

with Archipelago—which will necessitate a number of structural

changes to the NYSE’s regulatory structure—do you agree that this

would be an opportune time to go a step further and adopt a new

approach to the regulation of broker-dealers through consolidation?

It is my understanding that the securities industry supports combining the functional regulation of broker-dealers, which is currently duplicated by both the NASD and the New York Stock

Exchange, into a ‘‘hybrid’’ SRO, while allowing each marketplace to

regulate its own trading activities and set its own listing standards? In a related area, SRO’s impose market data fees to fund

self-regulation. Do you think it is appropriate public policy for market data to generate revenues for SRO’s to subsidize their regulatory obligations or to fund competitive business activities?

A.2. The suggestion that broker-dealer regulation currently conducted by both the NASD and the NYSE be combined in a ‘‘hybrid’’

SRO is one that should be evaluated in the context of an ongoing

appraisal of the role that self-regulatory organizations play in our

securities markets as standard-setters for listed companies, operators of trading markets, and front-line regulators of securities

firms. An abiding goal of the SEC must be to see to it that SRO’s,

which can face conflicts of interest when they operate a market, remain unbiased when at the same time they fulfill their responsibility to regulate their members who trade in that market.

The Commission’s proposed minimum governance standards and

greater transparency of SRO regulatory programs are intended as

a first step to address such competitive and regulatory concerns. I

will carefully evaluate the Commission’s proposals on these matters, together with the comments received by the Commission, before reaching conclusions on how the Commission should proceed.

With regard to your further question, market data fees have

played an important role in funding the regulatory obligations of

the SRO’s. In Regulation NMS, the Commission amended the

formulas in the Market Data Plans that allocate revenues from

consolidated data to the various SRO’s. The amendments were designed to promote the wide availability of market data and to allocate revenues to SRO’s that produce the most useful data to investors. I agree with the implication in your question that the use of

market data fees to subsidize competitive business activities may

raise serious public policy concerns that merit the continuing attention of the Commission.

Q.3. In a recent GAO report entitled ‘‘Environmental Disclosure:

SEC Should Explore Ways to Improve Tracking and Transparency

of Information’’ that I, along with other Senators, commissioned,

one of the GAO’s recommendations was that the Chairman of the

SEC work with the Administrator of the EPA ‘‘to explore opportunities to take better advantage of EPA data that may be relevant

to environmental disclosure and examine ways to improve its usefulness.’’ Knowing your interest in ensuring the transparency of

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financial reports, what steps will you take as SEC Chairman to implement this and other GAO recommendations to ensure and even

improve proper enforcement of environmental reporting requirements, such as those under SEC Regulation S–K, requiring companies to report all material financial and nonfinancial information

related to their environmental activities, liabilities, trends, and uncertainties?

A.3. I will follow the GAO recommendations with a view to ensuring and improving the full and fair disclosure of material information. Specifically, with regard to environmental disclosure, I will

work to improve compliance with current requirements mandating

that public companies disclose material information relating to environmental litigation, remediation, regulatory compliance, and

other environmental issues. In addition to enforcing compliance

with these disclosure rules through its disclosure review program,

the Commission will, under my leadership, build upon the open

and cordial relationship that has existed between the SEC and the

Environmental Protection Agency for some time. It is my understanding that, in response to this GAO recommendation, the staff

of the SEC and the EPA has already met to discuss how they can

more effectively share information.

The GAO included two other recommendations in its report; I understand that each of these recommendations has already been implemented.

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