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65–674 PDF 2011

OVERSIGHT OF THE U.S. SECURITIES AND 

EXCHANGE COMMISSION’S OPERATIONS, 

ACTIVITIES, CHALLENGES, AND 

FY 2012 BUDGET REQUEST 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MARCH 10, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–14 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 10, 2011 ................................................................................................. 1 

Appendix: 

March 10, 2011 ................................................................................................. 47 

WITNESSES 

THURSDAY, MARCH 10, 2011 

Cook, Robert, Director, Division of Trading and Markets, U.S. Securities 

and Exchange Commission .................................................................................. 11 

Cross, Meredith, Director, Division of Corporation Finance, U.S. Securities 

and Exchange Commission .................................................................................. 9 

di Florio, Carlo, Director, Office of Compliance Inspections and Examinations, 

U.S. Securities and Exchange Commission ....................................................... 13 

Khuzami, Robert, Director, Division of Enforcement, U.S. Securities and Exchange Commission .............................................................................................. 7 

Rominger, Eileen, Director, Division of Investment Management, U.S. Securities and Exchange Commission .......................................................................... 14 

APPENDIX 

Prepared statements: 

Hinojosa, Hon. Ruben ....................................................................................... 48 

U.S. Securities and Exchange Commission .................................................... 49 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Written responses to questions submitted to the SEC .................................. 78 

Hinojosa, Hon. Ruben: 

Written statement of the U.S. Chamber of Commerce .................................. 86 

Written statement of the Financial Planning Coalition ................................ 88 

Written statement of the North American Securities Administrators Association, Inc. (NASAA) ................................................................................... 90 

(1) 

OVERSIGHT OF THE U.S. SECURITIES AND 

EXCHANGE COMMISSION’S OPERATIONS, 

ACTIVITIES, CHALLENGES, AND 

FY 2012 BUDGET REQUEST 

Thursday, March 10, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

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

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

Members present: Representatives Garrett, Schweikert, Royce, 

Biggert, Neugebauer, Marchant, McCotter, Pearce, Posey, 

Hayworth, Hurt, Grimm, Stivers; Waters, Sherman, Hinojosa, Miller of North Carolina, Maloney, Perlmutter, Himes, and Peters. 

Ex officio present: Representative Frank. 

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

Commission’s Operations, Activities, Challenges, and FY 2012 

Budget Request,’’ is hereby called to order. 

As we are joined now by some of our colleagues, we will begin 

with opening statements and then turn to our panel for your statements, followed by questions. Breakfast has just been served. I will 

yield myself 2 minutes for an opening statement. 

I welcome our witnesses to the committee today. I look forward 

to what I hope will be an educational hearing where members, especially some of our freshmen, have a good opportunity to hear 

what the different Divisions of the SEC are working on. At least 

some of the focus, I believe, will be focused, of course, on the SEC’s 

budget. And, of course, when you get into that, there have been 

press reports about how Republicans are trying to starve the SEC, 

so on that point, let me just examine the facts for a moment. 

Back in 2000, under the last year of the Clinton presidency, the SEC was allocated about $369 million. In Fiscal Year 2011, the 

SEC has a budget of about $1.14 billion. So in just over a decade, 

the SEC budget has, in fact, tripled. 

Especially in this day and age, when we are running deficits of 

over about $1.6 trillion, I do not think it is fair to say that the SEC 

is being starved. In fact, it is just that sort of rhetoric that you 

hear, that only comes out of Washington, D.C., that language, 

2 

which basically gets unleashed in Washington every time someone 

around here tries to do the fiscally responsible thing. So we want 

to get into that a little bit. 

I am also interested to hear from each of the witnesses about 

spending priorities that they have for each of their Divisions and 

offices. I am less interested in this area of hearing about how underfunded the agency is, especially as we wait for the study that 

is about to come out that will hopefully provide us with some 

thoughtful recommendations on how the Commission can and must 

become more efficient, reduce management overhead, and enact 

other internal reforms. 

Before we even think about giving the agency yet another funding increase, at a minimum, the agency will need to show some 

major progress in implementing some of those recommended reforms. 

So at today’s hearing, I also hope to explore the lack of economic 

analysis being done on the SEC’s proposed rules, which has led to 

some D.C. court appeals to basically rebuff Commission rules on a 

number of occasions in the last several years. 

Finally, the SEC’s union activities also need to be looked into. 

Several fundamental questions need to be asked in this area. For 

instance, is the union hampering reform efforts within the institution? Is it even appropriate for a bunch of basically highly paid government attorneys to be organized into a union, and if so, why? 

There is plenty to be discuss today, so I look forward to our witnesses’ testimony and a robust question-and-answer session. And 

with that, I will yield back my time, and yield 5 minutes to the 

ranking member. 

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

Last month, House Republicans passed H.R. 1, a continuing resolution that would slash funding for the SEC. We know that H.R. 

1 would have serious consequences for the SEC’s ability to police 

our capital markets, so I am pleased to have a representative from 

each of the SEC’s Divisions to tell us directly about SEC’s funding 

needs and how a lack of funding will impact their respective Divisions. 

I have long maintained that cutting funding to the SEC would 

take Wall Street’s cop, its only cop, off the beat. Since H.R. 1 

passed the House, we have learned of several enforcement actions 

the SEC has taken against fraudulent actors. 

On February 28th, the SEC charged a major supplier of body 

armor to the U.S. military and law enforcement agencies for engaging in a massive accounting fraud. On March 1st, the SEC announced insider-trading charges against a Westport, Connecticutbased business consultant who has served on the boards of directors at Goldman Sachs and Proctor & Gamble. 

Also on March 1st, the SEC charged a Bay Area hedge fund manager with concealing more than $12 million in investments 

proceeds that he owed to investors in his fund. On March 3rd, the 

SEC charged a former financial adviser at UBS Financial Services, 

LLC, with misappropriating $3.3 million in a scheme that included 

bilking investors in a private investment fund he established. 

So you see, Mr. Chairman, in 4 days, the SEC brought charges 

against 4 different actors for accounting fraud, insider trading, and 

3 

misappropriation of funds. These high-profile cases aside, we know 

the SEC also does other low-profile work that is just as critical to 

the functioning of our markets. I am very concerned about the 

SEC’s ability to be our cop on the beat, if it doesn’t receive the 

funding it needs. 

In 2008, we saw the consequences of an underfunded and understaffed SEC when our financial markets collapsed. To prevent another crisis, we passed the Dodd-Frank Wall Street Reform and 

Consumer Protection Act. The law authorizes the SEC to regulate 

derivatives, provide oversight of investment advisers and brokerdealers, and rein in credit rating agencies. 

Dodd-Frank gives the SEC the tools it needs to protect our financial markets. However, in order to fully implement Dodd-Frank, 

the SEC needs additional funding. If the SEC is funded at the levels in the CR, it would have to lay off hundreds of staff and cut 

its information technology budget down to 2003 levels. The result 

would be the inability of the SEC to implement the new systems 

they need to protect the Nation’s securities market. 

What does this mean for the average investor? Without adequate 

funding, the SEC won’t be able to do its job of protecting them. As 

financial markets and investments become more and more complex, 

the average inventor has confidence in making an investment because he or she knows there is a system in place to protect them. 

H.R. 1 and other attempts to reduce funding for the SEC will undermine that system. 

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

time. 

Chairman GARRETT. I thank the gentlelady. 

I yield now to the gentleman from California for 11⁄2 minutes. 

Mr. ROYCE. Thank you. A couple of quick observations, Mr. 

Chairman. First, the Democrats had the House and the Senate for 

4 years. Whatever amount of funding they wanted to give the SEC, 

they could have given them. 

But the point is that if more money necessarily meant a more effective SEC, then I would understand the concerns being raised 

here. But unfortunately, over the last decade, the opposite has been 

the case, because we have seen the SEC’s budget more than triple, 

and it has repeatedly failed to stop the most egregious cases of 

fraud. 

The agency was largely absent during the financial crisis. 

Records show that they knew about the Stanford Ponzi scheme 

since 1997 and it did nothing to stop it. Over a 16-year period, the 

SEC and other regulator bodies examined Bernie Madoff’s firm 8 

times, 3 Administrations over that period of time. Neither the examination nor the repeated attempts from industry to alert the 

SEC were enough. 

And as Mr. Markopolos told this committee, this episode was directly attributable to a lack of market experience combined with an 

investigative ineptitude within the SEC. As he has said, it is not 

monetary, it is cultural. 

The SEC is an overlawyered, overly bureaucratic agency that 

needs fundamental reform, and simply throwing money at the 

problem is not the solution, especially given our budgetary crisis. 

I yield back. 

4 

Chairman GARRETT. I thank the gentleman from California. 

I now yield to the other gentleman from California for 3 minutes. 

Oh, sure. 

The gentleman from Massachusetts, the ranking member of the 

full committee. 

Mr. FRANK. How much time? 

Chairman GARRETT. Three minutes, if that is— 

Mr. FRANK. I believe we are confronting a great piece of illogic— 

namely, that because the SEC has not performed well in the past 

for a variety of reasons, we should punish the American people by 

depriving it of the resources to do its job in the future. 

Some of those reasons were ideological, some may have been incompetence, but the notion that the SEC, which was given new duties to protect investors, to register hedge funds, to deal with unregulated derivatives, should get less money in the current year 

than it had the year before makes no sense, except if you do not 

believe in regulation, if you continue to believe, despite all the facts 

of the past few years, that the market is best left to itself. 

By the way, there is an interesting comparison here. A majority 

of this House voted during the continuing resolution. We were told 

we have to save money. We voted in this House, over my objection—I lost; a number of others voted with me—to send $1.2 billion 

to build up Iraqi security forces. 

If you were going to look at how money is spent efficiently, the 

SEC on its worst day will look a great deal better than the Iraqi 

security forces. And the question is, from what are Americans in 

greater danger? From problems in Iraq, that the Iraqi security 

forces very ineffectively, it seems to me, deal with, or from abuses 

of investors here, of financial crises here? That is the issue. 

Yes, the SEC needs expertise. They are not going to get it with 

a budget that is smaller than before. And the numbers make it 

very clear. 

By the way, the amount that we need for the SEC barely—it is 

just about equaled for it to be able to do its job a little bit less than 

the amount the majority has voted to send to Brazilian cotton 

farmers. 

Brazilian cotton farmers are going to get $150 million a year, last 

year, this year, the next couple of years, in American tax dollars 

so that we can continue, according to my Republican colleague, to 

subsidize American cotton farmers. 

So much for free enterprise. Probably if you have read—none of 

that applies to agriculture. 

So, it is hardly money. When we can send more than that to 

Iraqi security forces, when we can send that amount to Brazilian 

cotton farmers, you are in ideological opposition to the SEC taking 

on new regulatory powers. And the notion that they can do these 

new powers better than they have done in the past, with less 

money that they had in the last year, is not a serious argument. 

It is simply an effort to hide behind budgetary considerations, 

when this comes from people who are prepared to waste far more 

money in other ways to hide in ideological opposition. 

And by the way, we ought to be clear. What the Republicans 

want is for the SEC to become even more of a profit center, because 

at the budget level they are talking about, it brings in about probVerDate Nov 24 2008 16:17 Jun 03, 2011 Jkt 065674 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\65674.TXT TERRIE
5 

ably a little bit more than would be spent. And the notion that we 

would not allow the SEC to carry out the responsibilities this Congress gave it, over the objections of my Republican colleagues, but 

which we gave it, is a great mistake. 

Chairman GARRETT. I thank the gentleman. 

Moving off of international policy and agricultural policy, to the 

gentleman from Texas for 11⁄2 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

I want to read a couple of things here. One is, according to the 

SEC’s conduct regulation, ‘‘The Securities and Exchange Commission has been entrusted by Congress with protection of the public 

interest in a highly significant area of our national economy. In 

view of the effect which the Commission action frequently has on 

the general public, it is important that the employees maintain unusually high standards of honesty, integrity, impartiality, and conduct.’’ 

According to the standards of ethical conduct for employees of 

the Executive Branch: ‘‘Employees shall endeavor to avoid any action creating the appearance that they are violating the law or ethical standards set forth in this part. Where the particular circumstances create an appearance that the law or these standards 

have been violated should be determined from the perspective of a 

reasonable person with knowledge of relevant facts.’’ 

One of the concerns I have is a recent investigation by Chairman 

Baucus, Mr. Garrett, Mr. Hensarling and me into Mr. Becker’s positions at the SEC. I have called into question where an employee 

has actually admitted that they may have a potential conflict, and 

yet that was addressed very lightly. And when I look at the appearance standard in the reasonable person standard, it appears that 

possibly that was not followed in this issue. 

As an agency that is called to call others to very high standards 

of ethics and transparency, I am very concerned about the standards inside the agency and how those are being enforced. And so, 

I hope that we will have more time to discuss that today. 

I yield back. 

Chairman GARRETT. The gentleman yields back. 

The gentleman from California, for the remaining 2 minutes. 

Mr. SHERMAN. Thank you. 

Back in 1996 when I got here, and for many years, experts came 

and sat where you are sitting now and told me that we were the 

most prosperous country in the world because we had the best capital markets in the world, because we had the best securities regulators in the world. 

Now that we live with this economic catastrophe, we don’t hear 

from them. But the fact is that it is a direct result of the failures 

of the SEC, that the SEC has not failed to carry out its primary 

mission, which is to protect the titans of Wall Street, to make sure 

they are still getting our 401K money directly, but that that our 

raft is diverted. 

So we have our budget hearings. We can have a lap dog, or we 

can have an emaciated lap dog. This isn’t much of a choice for the 

American people. When you see how the Madoff situation was handled, because it is much simpler than the much more important 

handling of mortgage-backed securities, you have a hear no evil, 

6 

see no evil, protect all the folks on Wall Street who go to the right 

clubs approach. 

And then, you see no one get fired. Yes, if you watch porn, you 

will be fired, but no one gets fired for intentionally closing their 

eyes to obvious information, whether it is AAA for Alt-A, or whether it is Madoff, or whether it is Stanford. And so I hope that we 

will have hearings not just on their budget, but on the culture of 

the SEC and what we can do to turn them into the watchdogs they 

ought to be. 

I yield back. 

Chairman GARRETT. I thank the gentleman for yielding back. 

And, of course, the gentleman is free to explore those other issues 

today during your questioning period. 

Mr. SHERMAN. I thank the Chair for his decision to give me 20 

or 30 minutes to question the witnesses. 

Chairman GARRETT. There you go. And if we want to go around 

for a second time, maybe the panel is going to be here. 

But at this point, I yield 11⁄2 minutes to the gentleman from New 

Mexico. 

Mr. PEARCE. Thank you, Mr. Chairman. I appreciate the opportunity to have this hearing. I am glad at the end of the long title 

that you put that we are discussing the 2012 budget request, because I am not sure how we could ever get all of the things in. 

I, like many other members, have looked with dismay at the 

Madoff situation, but beyond that, I look at the decision models 

going down the stretch of 2008, and I remember us sitting down 

here on a Sunday night, discussing whether or not mark-to-market 

should be suspended. It was pulling capital basically off the ability 

to loan at a very desperate time when we needed to be lending 

money. 

The decision to stop short sales at the particular point that decision was made was another incongruity that made it look like you 

all work in procyclical rather than countercyclical—that is, that if 

it is going good, you try to make it go better; if it is going bad, you 

try to make it go worse. Your decision models really, I think, bear 

scrutiny, and I would love to participate in that today. 

But the final piece that I wonder about is the leveraging, why 

no one felt that the holding companies should not be leveraged 40– 

to–1. I wonder why no one raised a question about that. 

So I will be interesting to hear answers on these before we discuss the budgets because if you are going to work procyclical, I do 

see a reason of depriving you of the resources that you need to 

drive us deeper into a recession with your decisions. 

Thank you. 

Chairman GARRETT. And the gentleman yields back. 

The gentlelady from New York for a minute-and-a-half. 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

And thank you, all of our witnesses, for appearing before us 

today. 

My particular interest is your views about the implications of one 

specific provision of Dodd-Frank, namely Section 953(b), which directs you to issue regulations requiring all public companies to disclose the ratio of the median compensation of all employees, the 

median total compensation to the total compensation of the CEO. 

7 

I would submit respectfully to you, and this is why I am so eager 

to hear about what you have to say about this, that the substance 

and the language of 953(b) are problematic. As it is currently formulated, it certainly appears as though it will create far more burdens than benefits, create more heat and light and more work than 

actual useful information. And that is a significant problem in this 

era, particularly when we have to have resources dedicated with 

ever more force toward investment and job creation. 

As a Congress, we are charged with looking after the best interests of our citizens. That includes our investors, of course. And it 

includes the enterprises that create jobs. 

The SEC has a crucial providential role in assuring that we do 

have confidence in our markets. But I submit to you that Section 

953(b) is an example of how well-intentioned regulation can in fact 

create impediments and obstacles. And I would submit as well that 

it was in fact many well-intentioned actions that were very damaging, indeed contributed materially to the crisis of 2008 to begin 

with. 

So I look forward to hearing your views on how we can mitigate 

the negative consequences of Dodd-Frank, particularly that section. 

And I thank you for your testimony. 

Mr. Chairman, I yield back. 

Chairman GARRETT. And I thank the gentlelady. 

I thank the panel for being with us today. And we will begin the 

panel with Mr. Khuzami. 

I understand that there is one written statement for the panel. 

And, of course, without objection, your written statement will be 

made a part of the record. Mr. Khuzami, you will be going first, 

but you will all be recognized for 5 minutes. 

Mr. Khuzami? 

I am sorry, just pull your microphone a little closer and make 

sure—I guess the green light should be on. Is that still on? Or I 

might be losing my hearing. 

Mr. KHUZAMI. Let us try one more time. Thank you. 

Chairman GARRETT. There you go. 

STATEMENT OF ROBERT KHUZAMI, DIRECTOR, DIVISION OF 

ENFORCEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION 

Mr. KHUZAMI. Thanks for the opportunity to testify today concerning the President’s Fiscal Year 2012 budget request for the 

Commission and to report on the broad responsibilities performed 

by the SEC, the recent reforms we have undertaken under the 

leadership of Chairman Shapiro, and the challenges that lie ahead 

for the agency. 

I come to the Enforcement Division as a former Federal prosecutor with the United States Attorney’s Office in the Southern 

District of New York. In that office, I served as chief of the Securities and Commodities Broad Task Force and in the office’s counterterrorism unit, where I was a member of the prosecution team that 

convicted the ‘‘Blind Sheik,’’ Omar Ahmad Ali Abdel-Rahman and 

nine co-defendants for an international terrorism conspiracy, including the 1993 bombing of the World Trade Center. 

8 

After that and before joining the Commission, I served as general 

counsel for the Americas Deutsche Bank AG, and before that, as 

the bank’s global head of litigation and regulatory investigation. 

Since my arrival at the Commission, it has been abundantly 

clear that the SEC’s ability to successfully meet the challenges 

posed by a continuously and rapidly evolving market place is critical to restoring investor confidence and market integrity. 

At the same time, we must fulfill the significant additional responsibilities mandated by Dodd-Frank, and we are for that reason 

requesting a Fiscal Year 2012 budget of $1.407 billion. Under the 

Dodd-Frank Act, appropriations for the SEC will be fully offset by 

our industry fees, thus making our funding deficit neutral. Each of 

my colleagues here today will detail how this funding level is essential for the operations of their Divisions. 

And in the Enforcement Division, our funding needs are great, 

but we also understand that we must be efficient, innovative, and 

responsible in spending taxpayer money. As I told my staff on the 

very first day I served as Director, ‘‘We need to be as efficient as 

we can with what we have now. That means improved information 

technology, better allocation of resources, better distribution of 

lower value and high value work and more streamlined staffing. 

And it will require each of us to examine our own individual efforts, think about how we spend our day, how we allocate our time, 

and how we can be more productive.’’ 

To achieve the goals that we set out on that first day, we undertook the most significant restructuring to the Enforcement Division 

since 1972. We introduced five new national specialized investigative units dedicated to high-priority areas of asset management, 

market abuse, structured products, Foreign Corrupt Practices Act 

violations, and municipal securities and public pensions. 

We adopted a flatter, more streamlined management structure 

under which we doubled our staff-to-manager ratio and reallocated 

managers back to the frontline of conducting mission critical investigations. 

We established an Office of Market Intelligence to correct, collect, 

risk-weight, assign, and monitor the thousands of tips, complaints, 

and referrals that the SEC receives every year. 

We created a COO’s office to handle operations such as IT, 

workflow, budget and project management, tasks formerly handled 

by lawyers—and, frankly, that is not their core competency. 

And we adopted streamlined procedures to initiate formal and informal investigations and issue subpoenas. 

We are also adopting new whistleblower authority given to us 

under Dodd-Frank to compensate individuals who provide the SEC 

with useful information about securities law violations. 

And although statistics alone cannot capture the breadth of the 

Division’s efforts, we have seen significantly increased enforcement 

activity that occurred despite the dislocation that came with that 

very significant restructuring. 

In each of the past 5 years, we have filed more enforcement actions than in the previous year. In 2010, our actions resulted in 

$2.85 billion in ordered disgorgement and penalties, a more than 

176 percent increase over the amounts ordered in 2008. 

9 

We brought emergency relief in 37 actions and obtained 57 asset freezes to preserve investor funds and distributed nearly $2 billion 

to harmed investors. 

During the past year, we have brought significant actions against 

individuals and companies arising out of the financial crisis, including cases involving companies such as Countrywide Financial, Morgan Keegan, Goldman Sachs, Citigroup, State Street Bank, New 

Century Financial, Indy Bankcorp, and Colonial Bank, to name 

just a few. 

We have brought significant actions arising out of the Foreign 

Corrupt Practices Act, as well as actions involving municipal securities and accounting fraud. We filed cases alleging insider trading 

by corporate directors and by hedge funds, using technology company employees posing as consultants in expert networking firms. 

Despite this success, the enforcement program continues to face 

significant challenges. Whether it be high-frequency trading, hedge 

fund performance, asset valuation, pension liability analysis, or 

any number of other areas, we are more and more faced with the 

need to understand and identify wrongdoing in products, markets, 

transactions, and practices that are increasingly complex, fastpaced, or both. 

For those reasons, our resource needs are most acute in the 

areas of IT, data access and analysis, human expertise, and paraprofessional and administrative support. 

I look forward to working with Members of Congress on these 

issues. Thank you. 

[The joint prepared statement of Directors Khuzami, Cross, Cook, 

di Florio, and Rominger can be found on page 49 of the appendix.] 

Chairman GARRETT. Thank you. 

Ms. Cross? 

STATEMENT OF MEREDITH CROSS, DIRECTOR, DIVISION OF 

CORPORATION FINANCE, U.S. SECURITIES AND EXCHANGE 

COMMISSION 

Ms. CROSS. Good morning, Chairman Garrett, Ranking Member 

Waters, and members of the subcommittee. 

My name is Meredith Cross, and I am the Director of the SEC’s 

Division of Corporation Finance. I rejoined the Commission staff in 

June of 2009. I have been a securities lawyer for over 25 years, 

with about 18 years in private practice and 9 years of government 

service. I am pleased to testify today along with my fellow Directors. 

The Division of Corporate Finance’s core functions are reviewing 

company filings, making rulemaking recommendations to the Commission that relate to corporate finance matters, and providing interpretive advice to market participants and the public about the 

securities laws and corresponding regulations for corporate finance 

matters. 

With a staff of approximately 485, we are responsible for the review of about 10,000 reporting companies, including tens of thousands of disclosure documents each year, plus initial public offerings and other public capital markets transactions of corporate 

issuers, public asset-backed securities offerings, and proxy statements, public mergers, acquisitions, and tender offers. 

10 

Approximately 80 percent of the staff of the Division is assigned 

to this review function. The Sarbanes-Oxley Act requires the Division to review the financial statements of all companies reporting 

under the 1934 Act at least once every 3 years, and more frequently where circumstances warrant. 

This is no small task. Following enactment of the SarbanesOxley Act in 2003, the Division revised its review program to meet 

the new review mandates and hired significant numbers of new 

staff accountants, which has enabled us to meet the review mandate each year. 

In light of the lessons learned from the financial crisis, the Division recently made some targeted changes to its operations, including adding three new offices: the Office of Structured Finance, 

which will help us address some complexities and changes in the 

asset-backed securities market; the Office of Capital Markets 

Trends, which will evaluate trends in securities offerings and our 

capital markets to determine if our rules and review approach are 

adequately addressing them; and a new review group in disclosure 

operations that will focus on the largest financial institutions. 

While the Division has established these offices and will transfer 

some existing staff to them, our aim to fully staff these offices has 

been deferred until funding has been resolved. 

In addition to the review function, Corporation Finance makes 

rule recommendations to the Commission to address areas in need 

of change. The Division expects to recommend changes to existing 

rules in a number of areas in Fiscal Years 2011 and 2012, including modernizing our core disclosure requirements which haven’t 

been updated in more than 30 years, reducing burdens and facilitating capital formation for small businesses, providing disclosure 

about credit rating shopping, addressing company and investor concerns about the proxy voting system and updating our beneficial reporting rules. 

In addition, Corporation Finance is responsible for preparing a 

wide variety of rules to implement a significant number of DoddFrank Act requirements. We have temporarily reassigned a number of attorneys from throughout the Division for this rulemaking. 

Dodd-Frank topics that Corporation Finance is addressing include, among others: asset-backed securities; corporate governance 

and executive compensation rules such as say-on pay and golden 

parachutes, compensation committees and compensation consultants; clawbacks of the erroneously awarded compensation, pay 

versus performance and pay ratios disclosure, and employee and director hedging; specialized disclosures provisions relating to conflict 

minerals, coal, or other mine safety, and payments by resource extraction issuers to foreign or U.S. Government entities; and finally, 

with regard to exempt offerings, revisions to the definition of accredited investor and disqualification of offerings involving felons 

and other bad actors from relying on Rule 506 of Regulation D. 

In addition to our review and rulemaking responsibilities, the Division of Corporation Finance responds to tens of thousands of requests for interpretive advice from market participants and the 

public. 

In Fiscal Years 2011 and 2012, we expect our workload in this 

area may increase beyond that of recent years, primarily as a reVerDate Nov 24 2008 16:17 Jun 03, 2011 Jkt 065674 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\65674.TXT TERRIE
11 

sult of the Commission’s adoption and implementation of the rules 

required by the Dodd-Frank Act. 

Thank you again for inviting me to appear here before you today, 

and I look forward to answering your questions. 

[The joint prepared statement of Directors Khuzami, Cross, Cook, 

di Florio, and Rominger can be found on page 49 of the appendix.] 

Chairman GARRETT. Thank you, Ms. Cross. 

Mr. Cook? 

STATEMENT OF ROBERT COOK, DIRECTOR, DIVISION OF 

TRADING AND MARKETS, U.S. SECURITIES AND EXCHANGE 

COMMISSION 

Mr. COOK. Thank you. Good morning, Chairman Garrett. Thank 

you, Ranking Member Waters and members of the subcommittee. 

Thank you for inviting me to testify today on behalf of the Division 

of Trading and Markets for the Securities and Exchange Commission regarding the Division’s operations, activities, challenges, and 

the Fiscal Year 2012 budget request. 

It is a pleasure to appear here today with my colleagues from 

the— 

Mr. PEARCE. Mr. Chairman, can he pull the microphone closer to 

him? 

Mr. COOK. Can you hear me better now? Sorry about that. 

I joined the Division of Trading and Markets as Director in January of last year. Before coming on board, I was a lawyer in private 

practice, where I focused on derivatives and securities regulation 

and transactional matters. 

I would like to start today by briefly describing the core functions 

of the Division and then discuss some of our activities related to 

the Dodd-Frank Act. 

Broadly speaking, the Division is responsible for establishing and 

maintaining standards for fair, orderly, and efficient securities 

markets. We work to establish regulatory standards from markets 

and market intermediaries, including 15 securities exchanges, over 

60 active alternative trading systems and over 5,000 registered 

broker-dealers. We also oversee FINRA, the MSRB and the SIPC, 

and we have responsibility for rules relating to 9 active clearing 

agencies, around 500 transfer agents, and 10 credit rating agents. 

Our core functions include: processing proposed rule changes 

from exchanges, clearing agencies and other SROs, which address 

issues ranging from fee structures to trading rules; initiating 

changes to market rules to keep pace with market developments; 

establishing or approving rules governing broker-dealer activities, 

including rules pertaining to capital adequacy, protection of customer assets, anti-money laundering and sales practices; actively 

participating in international working groups to help ensure that 

international standards are consistent with Commission policy and 

in the interests of the United States; leading and administering 

Commission initiatives with respect to a wide range of trading 

practices; and supervising the capacity and resilience of our largely 

electronic exchanges to minimize potential disruptions to market 

continuity. 

The Division also leads Commission efforts to respond to significant equity market events, such as the severe market disruption of 

12 

May 6, 2010, following which we published two joint reports with 

the staff of the CFTC and led the development and implementation 

of key regulatory responses. 

The Division’s mission has become ever more challenging with 

the exponential growth in the size and complexity of the U.S. securities markets. In this fiscal year and the next, the Division plans 

to focus on several key initiatives to improve market oversight. 

First, we will continue to explore the issues raised in the Commission’s 2010 concept release and public roundtable on equity 

market structure, including high-frequency trading and 

undisplayed liquidity. 

Second, we plan to continue to work on proposals regarding large 

trader reporting and a consolidated audit trail system, both initiatives designed to enhance market surveillance. 

Third, we plan to continue to identify and, as appropriate, develop rules to respond to significant equity and options market developments. This process includes the development of a ‘‘limit-up, 

limit-down’’ functionality for equity markets and the review of proposed exchange mergers and business combinations. 

Our core functions have been substantially expanded by the 

mandates of the Dodd-Frank Act. All told, the Division is responsible for over 25 separate rulemaking initiatives, with adoption 

deadlines of 1 year or less. 

Most notably, we have been charged with responsibility for developing the registration and regulatory regime for participants in the 

security-based, over-the-counter derivatives market, namely, security-based swap execution facilities, data repositories, dealers, 

major participants, and clearing agencies. 

Going forward, this will mean that the Division will be registering these new entities, monitoring market developments, and 

promulgating new rules and guidance where necessary. 

The Division is responsible for implementing many other aspects 

of the Dodd-Frank Act, a number of which will increase the demands on the Division’s personnel, including rules related to enhanced oversight of financial market utilities, proprietary trading 

activities of broker-dealers under the Volcker Rule, certain incentive-based compensation arrangements at broker-dealers, and audit 

requirements for broker-dealers. 

Pending the creation of new offices for credit rating agencies and 

municipal securities, the Division is also continuing to carry out 

our existing functions in these areas, including the preparation of 

rules required by the Act. 

While the Division’s workload continues to be dominated by a diverse range of core functions that are vital for protecting investors 

and markets, the scope of its responsibilities has expanded tremendously. Many of these rulemakings are the first step in a new, ongoing supervisory and regulatory function for the Division that will 

extend into Fiscal Year 2012 and beyond. 

Thank you for inviting me to share with you the work of the Division of Trading and Markets. I look forward to answering your 

questions. 

[The joint prepared statement of Directors Khuzami, Cross, Cook, 

di Florio, and Rominger can be found on page 49 of the appendix.] 

Chairman GARRETT. Thank you, Mr. Cook. 

13 

Mr. di Florio? 

STATEMENT OF CARLO DI FLORIO, DIRECTOR, OFFICE OF 

COMPLIANCE INSPECTIONS AND EXAMINATIONS, U.S. SECURITIES AND EXCHANGE COMMISSION 

Mr. DI FLORIO. Good morning, Chairman Garrett, Ranking Member Waters, and members of the subcommittee. Thank you for the 

opportunity to testify today on behalf of the United States Securities and Exchange Commission. 

I joined the SEC on January 25, 2010, just over 1 year ago. Prior 

to that, I was a partner in the financial services regulatory practice 

of PricewaterhouseCoopers in New York, where my practice focused 

on corporate governance, enterprise risk management, and regulatory compliance. 

The SEC’s examination program helps protect investors and ensure market integrity by examining for fraud, monitoring risk, improving compliance, and informing policy as the eyes and the ears 

of the agency in the field. Our exams assess whether registrants 

are treating investors fairly and complying with the Federal securities laws and regulations designed to protect investors and prevent 

fraud. 

The examiners in the national exam program take a risk-based 

approach to examining over 20,000 registrants, including investment advisers, broker-dealers, mutual funds, hedge funds, derivatives dealers, credit rating agencies, SROs, national exchanges and 

transfer agents, and clearing agencies. 

Our Fiscal Year 2012 budget requests new examiner positions so 

we can fulfill our new responsibilities under the Dodd-Frank Act, 

execute our core mission, and enhance our limited coverage of registered investment advisers. 

In addition, we are also very focused on the resources we have 

been provided. Under the direction of a new leadership team over 

the past year, OCIE has undertaken a broad self-assessment of our 

strategy, our structure, our people, our processes, and our technology. This has resulted in a comprehensive restructuring and improvement plan to become stronger and more efficient. 

For example, we are building a national exam program supported by a new governance framework that breaks down silos and 

facilitates coordination, consistency, effectiveness, and accountability across the country and across Divisions. 

We have implemented a new central risk analysis and surveillance unit to enhance our ability to target those firms and practices 

that present the greatest risk to investors, markets, and capital 

formation. 

We have begun to recruit experts and launch new specialty 

groups that will bring deep technical experience and expertise to 

our exam program in such areas as derivatives, complex structured 

products, hedge funds, credit rating agencies, high-frequency trading, and risk management. 

We are working to implement a new certified examiner training 

program that will establish technical training and certification 

standards across the country. And we are streamlining the exam 

process and clearly defining new expectations, beginning to autoVerDate Nov 24 2008 16:17 Jun 03, 2011 Jkt 065674 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\65674.TXT TERRIE
14 

mate our exam tools, implementing an internal compliance program to monitor our performance and ensure our quality control. 

No matter how much we improve our current program, however, 

the fact remains that our examiners can only cover a small portion 

of the 20,000-plus registrants that we regulate. For instance, our 

examiners were only able to examine 9 percent of registered investment advisers, and over one-third of registered investment advisers 

have never been examined. 

With the addition of the positions sought in the Fiscal Year 2012 

budget, we will be able to more effectively fulfill our new responsibilities, strengthen our core mission, and expand our impact on 

investment adviser exams. 

Equally important, it will help us invest in the risk assessment 

and surveillance capabilities needed to allocate our limited resources to their highest and best use to protect investors and ensure market integrity. 

Thank you, and I welcome the opportunity to answer your questions. 

[The joint prepared statement of Directors Khuzami, Cross, Cook, 

di Florio, and Rominger can be found on page 49 of the appendix.] 

Chairman GARRETT. Thank you, Mr. di Florio. 

Ms. Rominger, please? And I would like to welcome you to the 

panel for the first time. 

STATEMENT OF EILEEN ROMINGER, DIRECTOR, DIVISION OF 

INVESTMENT MANAGEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION 

Ms. ROMINGER. Thank you. Chairman Garrett, Ranking Member 

Waters, and members of the subcommittee, thank you for the opportunity to testify today. 

My name is Eileen Rominger. Today marks my 16th day on the 

job as Director of the Division of Investment Management at the 

SEC. Although I am new in this role, I have had over 30 years of 

experience in the asset management industry, managing client 

portfolios and leading teams of portfolio managers. Most recently, 

I was chief investment officer at Goldman Sachs Asset Management, responsible for portfolio management teams that encompassed about 500 people in 8 different countries. 

I have met with hundreds of retail clients over the years, and I 

am well aware of the challenges that they face with increasing 

complexity in the investment choices available to them. I am dedicated to working with the Commission staff to address these challenges, to enhance transparency so that they can make informed 

choices, while maintaining a healthy asset management industry 

that sets the standard for the rest of the world. 

The Division of Investment Management assists the Commission 

in its mandate of investor protection and support of capital formation. The Division oversees and regulates America’s $38 trillion investment management industry. We administer the Investment 

Company Act and the Investment Advisers Act and develop regulatory policy for investment advisers, mutual funds, and other investment companies. 

The rulemaking program of the Division of Investment Management is currently focused on implementing the provisions of DoddVerDate Nov 24 2008 16:17 Jun 03, 2011 Jkt 065674 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\65674.TXT TERRIE
15 

Frank as they relate to investment companies and advisers. As the 

rules are adopted, much of the work will shift to the Division’s Disclosure, Interpretive Advice, and Exemptive Relief Programs. 

Dodd-Frank meaningfully changed the universe of regulated entities for which the Commission is responsible by increasing the 

threshold for investment adviser registration to $100 million in assets under management and by requiring advisers to hedge funds 

and other private funds to register with the Commission. 

Approximately 750 new private fund advisers will be added to 

the registrant pool, but the number of registered advisers is anticipated overall to shrink by about 28 percent. At the same time, 

their assets under management will rise, and the complexity of 

those assets will actually increase pretty substantially. 

Dodd-Frank also requires reporting by certain investment advisers that are exempt from registration. 

In November, the Commission proposed rules and rule amendments to implement these new investment adviser requirements. 

These included new exemptions from registration created by DoddFrank for advisers to certain private funds relating to venture capital funds and advisers with less than $150 million under management. We are reviewing the comments and developing our recommendations for the Commission to adopt final rules. 

Systemic risk reporting is another important area in which we 

must implement the requirements of the Dodd-Frank Act. In January, the Commission proposed reporting requirements for private 

fund investment advisers to assist the Financial Stability Oversight Council in monitoring for potential systemic risk. We will 

carefully consider the comments received and expect to prepare a 

rule adoption for the Commission to consider this year. 

The Division hopes to hire additional staff with the expertise necessary to monitor, analyze, and make good use of the information 

that will be collected. In addition to implementing the provisions 

of Dodd-Frank, the Division is working on a number of important 

initiatives in other areas. 

In January 2010, the Commission adopted important reforms in 

money market fund regulation, including a requirement for them 

to report their portfolio holdings on a monthly basis. This year, we 

plan to improve our monitoring of money market funds and our 

ability to analyze trends in their portfolio exposures, their liquidity 

levels, and their average maturity. 

We are also considering further reforms aimed at lessening the 

susceptibility of money market funds to runs, including those options that were outlined in the President’s Working Group report 

on money market funds that was released last October. 

In the last year, there have been a number of other important 

investor protection initiatives. These include Rule 12b-1, relating to 

distribution fees, which the Commission has proposed to rescind 

and replace with a new rule and regulatory framework. 

The Commission has also proposed changes to rules regarding 

target date funds specifically relating to the naming conventions 

and marketing materials. We are thoughtfully reviewing those 

comments and will evaluate whether to recommend that the Commission adopt these reforms. 

16 

In addition to our role in Commission rulemaking, a large part 

of our responsibilities also involve providing formal and informal 

legal guidance in the form of interpretative and no-action letters, 

as well as exemptive relief from the provisions of the Investment 

Company and Investment Advisers Acts. We also review filings of 

registrants in order to monitor and enhance compliance with disclosure and accounting requirements. 

Pursuant to the requirements under the Sarbanes-Oxley Act, the 

Division reviews the annual reports of all registered investment 

companies no less frequently than every 3 years. The other responsibilities of the Division include provision of technical advice and 

active participation in international groups such as IOSCO and 

also provision of legal and policy guidance to the Division of Enforcement on matters concerning investment managers. 

Again, thank you very much for the opportunity to testify today, 

and I look forward to your questions. 

[The joint prepared statement of Directors Khuzami, Cross, Cook, 

di Florio, and Rominger can be found on page 49 of the appendix.] 

Chairman GARRETT. Thank you for your testimony. 

I thank the panel as well. 

So, I will begin, and before I get into the weeds on some of the 

questions, if I bring up on the screen up here— 

After you do that, you can begin my time. 

Just to dispel the myth with regard to the first issue, regarding 

lack of funding for the agency, I know it is a little hard, but that 

chart basically shows the SEC budget obligations from the year 

2000 to 2011. And you can see it is almost a straight line up, and 

what that is, is a basic average year-over-year increase on average 

of over 10.8 percent from 2000 to 2011. 

Now, if you go to the next chart to find out— 

Next chart? Starting the next chart—how about that one? 

That chart asks the question, what was the actual rate of inflation during those years? It goes up and down, of course, but the 

average period was 2.5 percent. So that last chart showed you that 

they were getting around over 10.8 percent each year. This is the 

actual increase in inflation overall, 2.5 percent. 

So this final and third chart put these things together for you 

and shows you—there you go—what would have been their funding, had they been increased on funding level at a constant level 

of 2.5 percent year over year over year, compared to the initial 

charts. I think that sort of dispels the myth that there has been 

an agency that has been starved. 

Understandably, there has been a larger marketplace, more to 

regulation, and Dodd-Frank increases all the responsibilities, as all 

have said, but overall, it is a stark difference between where they 

would be, had they been like most other businesses, families, what 

have you, living within the means of the average increase of 2.5 

percent—instead, actually over 4 times as much of the 10.8 percent 

year-over-year. 

So, that is the funding aspect. But let us get into some of the 

things that you are actually working on right now. 

Mr. Cook, just a quick question here with regard to a consolidated audit trail, and doing so in real time. Can you tell me where 

17 

we are on that? Are you still pursing a real-time consolidated audit 

trail, briefly? 

Mr. COOK. The Commission has not yet acted on that. We are reviewing all the comments that have come in. As you are alluding 

to, part of the proposal was a real-time reporting element, and we 

are looking at the comments to determine whether that should stay 

as one of the elements and how that fits together with the rest of 

the cost of the program. 

Chairman GARRETT. Okay, because that is one of the points, obviously. It is going to be pretty expensive to do something like that, 

right? And, secondly, would real-time be absolutely necessary? Because an end-of-day aggregation would be just as adequate, because I don’t know if anyone is going to be able to just stay up on 

top of it. Is that true? 

Mr. COOK. It is a good question, Congressman. We are trying to 

strike the right balance between finding something that is very 

cost-effective that will give us the information we will actually be 

in a position to use, but also, if we are going to go through this 

process of building something out like this, and it will be a 

multiyear process to build this audit trail, that we build something 

that is not just what we need today, but will be something that we 

can use in the future. 

We have been thinking a lot and looking closely at new technologies that we weren’t aware of when the original proposal came 

out that we are hopeful will allow us to substantially reduce the 

cost. 

Chairman GARRETT. So it is something—in other words, you 

haven’t done it yet, but you are still considering going forward with 

it? 

Mr. COOK. Yes. 

Chairman GARRETT. Okay. 

Mr. Khuzami? Somewhere here I have an article that was in 

Bloomberg a little bit ago and I will just—I guess last June it 

was—and I will just ask you—I will pick through and find it—but 

what it was, it was talking about some of the efforts to try to bring 

that technology to the workforce there, to the lawyers and what 

have you, and the article was talking about giving BlackBerries, 

which every one of us up here have, to make sure that the folks 

on enforcement staff would actually be able to be in communication 

with. 

My understanding just from that article was that there was 

pushback to that from the unions and the pushback was, according 

to the piece, that ‘‘we don’t want our paid staff, the lawyers, having 

to be responsible to respond after business hours, after 5 p.m.’’ 

Is it the case that there was pushback from the unions, and that 

was part of the impediment of doing that? 

Mr. KHUZAMI. Congressman, there were some initial comments 

to that effect, but in my experience, it dissipated quickly. People 

are using them, and I certainly have never had a situation where 

I haven’t been able to reach someone or someone has told me that 

they haven’t been able to reach someone for that reason. 

Chairman GARRETT. But that was pushback from—where did the 

pushback come from? 

18 

Mr. KHUZAMI. The issue was raised by—I can’t remember whether it was the union or some other individual or group of individuals 

but, like I said, I don’t think it gained any traction. 

Chairman GARRETT. Okay. We are all here on a 24/7 process. 

You would think the folks that we are talking about, these are attorneys, are they not, in a lot of cases? 

Mr. KHUZAMI. There is a large percentage of lawyers in the Enforcement Division. That is correct. 

Chairman GARRETT. And, I guess you would agree that they are 

sort of well-paid folks, so asking them to work after 5 p.m. would 

be appropriate responsibility. 

Mr. KHUZAMI. Clearly. And I have seen no shortage of people 

willing to commit and work hard, so I don’t think that issue is any 

kind of impediment. 

Chairman GARRETT. Okay. So another that came out, Mr. di 

Florio, with regard to push back, I guess, from the unions, there 

was an attempt to implement a quality control review after each 

examination. And, basically, the idea from other members’ comments here with regards to the Madoff examination, what have 

you, right? So you know what I am talking about. 

But I understand in this case—correct me if I am wrong—again, 

there was pushback by the unions in this area. And I understand 

that the post-examination quality process—and tell me if this is not 

correct—is still not implemented due to continued union objection. 

So first of all, is that the case? 

Mr. DI FLORIO. Chairman, since I joined a year ago, I have not 

had any problem pursuing quality control in the examination process. We have implemented a number of quality control mechanisms 

as we have streamlined our exam process, and we have not had 

pushback from the union with regard to the initiatives I have implemented. I am not familiar with initiatives that may have been 

the case before I joined. 

Chairman GARRETT. So none of the things that you have tried to 

do during this time have had a pushback? 

Mr. DI FLORIO. We have a process where we engage the union 

in the recommendations and the initiatives, but we did a comprehensive review with over 25 initiatives for improvement identified, and we are moving those forward, certainly in consultation 

with the union. 

Chairman GARRETT. Okay. So were there any recommendations 

out of the report that were supposed to be implemented prior to 

you coming into your position, that were not implemented, that you 

have looked back on and said, these have still not been pursued 

and implemented because of any other impediments whatsoever? 

Mr. DI FLORIO. I don’t believe so, Mr. Chairman, but I will look 

into that when I get back and get back to you, if there were any 

issues. 

Chairman GARRETT. Okay. And, as always, the time goes faster 

than the list of questions that are before me. 

To the ranking member? 

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

Mr. Khuzami, Chairman Garrett just placed a chart for all of us 

to examine, and he basically said that the increases that you have 

19 

received over several years were far greater than the rate of inflation. 

Why is it improper to look at those increases that way? Could 

you explain that to us? What I am seeing here is that you are operating at about 2005 levels, and you make the case for erratic funding, and you talk about trading volume more than doubling, the 

number of investment advisers have grown about roughly 50 percent, and the funds that they manage have increased nearly 55 

percent, and on and on and on. 

He is comparing your increases with the rate of inflation, and it 

seems as if that is not, perhaps, the right way to do it. Could you 

talk to us about that? 

Mr. KHUZAMI. Congresswoman, as I said, let me just start by 

saying we understand the need to be as efficient and effective as 

we can, and that informed so much of the restructuring effort that 

we underwent in the Enforcement Division. 

With respect to the increases over the years, I think if you look 

below the level, the actual staff members that have increased have 

not been that significant, because some of those increases went to 

certain dedicated efforts. The IT funding has been volatile, and 

that is particularly problematic if you are talking about trying to 

secure IT systems that sometimes you have to plan for years out. 

I think our staff has actually decreased about 11 percent between 

2004 and 2008. I think you can go back and forth on that, but I 

think the biggest consideration is, as you say, the complexity of the 

market and the challenges we face. We have 38,000 regulated entities, transfer agents, broker-dealers, and investment advisers to 

regulate and oversee. And we are an agency of 3,800 people. 

Ms. WATERS. Would anybody else like to add to that explanation 

of why the rate of inflation may not be the correct way to look at 

what your needs are? 

Mr. Khuzami, the spokesman for today? 

Mr. KHUZAMI. I just want to make one other point, too. The 

banking regulators and our colleagues whom we work closely 

with—I think the rough numbers show that they have approximately one staff member for every one regulated entity. And we 

are roughly at a 1–to–10 ratio. Now, those numbers may not be 

exact, but they are close. 

And I think that underscores the extent to which, while we are 

thankful for the increases that we have gotten, there is a significant market out there, and it is getting more complex and more 

fast-paced, and that is the basis for funding requests above and beyond the new Dodd-Frank obligations. 

Ms. WATERS. So let me ask Mr. Carlo di Florio. You are the Office of Compliance Inspections and Examinations. Based on DoddFrank and the additional requirements that we are putting on the 

SEC, could you explain to us why you need the funding in order 

to carry out your function? 

Mr. DI FLORIO. Thank you, Ranking Member Waters. As I mentioned in my statement, there are 20,000-plus registrants that we 

are responsible for regulating, and we only have 859 examiners to 

be able to address those registrants. 

As Mr. Khuzami alluded to, the ratio that we have as a regulatory authority relative to what the bank regulators have or even 

20 

FINRA is drastically greater. So we are at a 1–to–23 ratio of examiners to registrants. And as a result, we have not had the ability 

to examine over one-third of investment advisers, and we have only 

been able to examine 9 percent of investment advisers in Fiscal 

Year 2010. 

So in addition to that, you introduce the new requirements regarding hedge funds and derivatives and credit rating agencies 

under Dodd-Frank. There is a significant amount of new requirements being added, and we feel that additional positions will help 

us both execute our core mission more effectively and address the 

new requirements under the Dodd-Frank Act. 

Ms. WATERS. Thank you very much. 

I yield back the balance of my time. 

Chairman GARRETT. Thank you. 

Mrs. Biggert, for 5 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

I have a question, I believe, for Ms. Cross. I introduced a bill, 

H.R. 33, a clarification bill to allow church plans to invest in collective trusts so that, like corporate and other secular pension plans, 

church pension plans for clergy can have the benefits of collective 

buying power, and collective trusts generally allow pension plans 

to pool their assets, diversify their investments, and share the risks 

and transaction costs of other pension plans. 

And I was informed that both staff at the SEC and my staff discussed this issue and agreed upon the language included in H.R. 

33. So, can you confirm that the SEC supports H.R. 33 and also 

would support its quick consideration and passage? 

Ms. CROSS. Thank you for your question, Congresswoman. First 

off, let me note that we wholeheartedly embrace the idea that the 

participants in the church plan should have the same opportunities 

as participants in other plans and there shouldn’t be regulatory obstacles. The Commission hasn’t taken a position on the bill, so I 

need to start there. 

From the staff’s perspective, the only thing that we want to make 

sure is that there aren’t regulatory gaps that would work to the 

detriment of the people in the church plans, compared to other people in these kinds of employee benefit plans. We would like to take 

a careful look and make sure there wouldn’t be regulatory gaps, 

and if there are, work with your staff quickly to address them. 

Mrs. BIGGERT. I appreciate that. Thank you. I hope that you will 

support it. 

I have another question, and I am not sure who to address it to. 

In January, as required by Dodd-Frank, Section 914, the SEC 

staff issued a study on enhancing investment advisers examinations. And the report offered three options for Congress to consider 

to strengthen the Commission’s investment adviser examination 

program. 

I would like to know which option you see as being the most effective, efficient, and cost-effective for the SEC? But, more importantly, which option do you see as the least burdensome and least 

costly for small businesses? 

I have heard from constituents who are very concerned about 

new fees, which they see as equivalent to new taxes under any of 

21 

these proposals. Did you take into consideration the cost to advisers and small businesses? 

Mr. DI FLORIO. Congresswoman, I will initially answer that— 

Mrs. BIGGERT. Okay. 

Mr. DI FLORIO. —and share the perspective that the 914 study 

laid out the three options of first increasing examinations of investment advisers through user fees on the investment advisery industry, which would allow the exam function in the SEC to grow and 

close that gap of being able to examine further investment advisers. 

The second option was to, through dues, establish a self-regulatory organization for the investment advisory program similar to 

what you have with regard to FINRA and the broker-dealers. 

And then the third option was to enable FINRA to extend their 

authority and review of an investment adviser, where it is a dual 

registered broker-dealer investment adviser. 

All three of those options are reasonable and feasible options. As 

you mentioned, there are some investment advisers, smaller businesses, medium-sized businesses, who feel that it is more efficient 

to invest in the SEC since it already has the infrastructure, is already doing the exams, and grow that program. 

There are others who feel that it would feel that it would be 

more efficient to invest in a self-regulatory organization that is 

closer to the industry, and that would be done through dues. 

We believe that the important objective is to increase the number 

of exams done of the investment advisers, and either one of those 

options are reasonable and would be effective in achieving that objective. 

Mrs. BIGGERT. Okay. Thank you. So that would be, I guess, one 

and two? 

Mr. DI FLORIO. Correct. 

Mrs. BIGGERT. Okay. Thank you. 

And then I have one more question, if I have time. Last month 

when Chairman Shapiro testified before the committee, I asked her 

about the SEC interaction with the Department of Labor, which 

has proposed a new definition of fiduciary that would significantly 

modify 35 years of established law. 

And then I also had an opportunity to ask Secretary Solis of the 

Department of Labor about the same issue. I was concerned that 

the Department of Labor was not listening or really working with 

the SEC. So has there been further discussion about the fiduciary 

between the Department of Labor and the SEC? 

Ms. ROMINGER. Congresswoman, I will answer that. 

The Investment Management Division has a long history of very 

extensive interaction with the Department of Labor, and it has 

been actively involved with them on a number of issues, including 

recent conversations around target date funds and on other issues. 

Their definition of fiduciary as it relates to ERISA is really something that falls within their jurisdiction because of their very specific focus on retirement investing. But rest assured, we are very 

committed to working closely with them. 

Mrs. BIGGERT. Thank you. 

I yield back. 

Chairman GARRETT. Thank you. 

22 

The gentleman from California, to compress his 20 minutes of 

questions into 5 minutes? 

Mr. SHERMAN. Mr. Cook, if you allow the pitcher to select the 

umpire, at the end of the game, that pitcher would be awarded the 

Cy Young Award. The only thing that both the Democrats and Republicans on the investigatory commission of the meltdown agreed 

on was that the system of allowing those who issue bonds to pick 

their credit rating agency was at the core of the suffering that the 

American people are enduring today. 

As part of Dodd-Frank, we passed Section 939(f), which resembled an amendment I suggested in this committee that was further 

improved by Senator Franken and then kind of mashed around 

during the conference committee process. It gives you 2 years as an 

absolute maximum. For 7 or 8 months, you haven’t published a single piece of paper to even start a process, which is critical. 

I don’t think investors are going to be dumb enough to accept 

AAA on Alt-A in the future, but there are so many other bond products that could be exaggerated and form the basis of next decade’s 

meltdown. 

Are you going to take the full 2 years, the absolute maximum 

given you by the statute? And why should it take 2 years? 

Mr. COOK. Congressman, we will move forward with this study, 

which is a very important study, as quickly as we can. We are hoping to— 

Mr. SHERMAN. But you have accomplished nothing in the first 8 

months. 

Mr. COOK. Yes, we recommend to the Commission, and hopefully, 

it will be out shortly, a solicitation of comments from the industry 

so that we can take those into account in developing this study. 

There are other studies that we have to do that have a 1-year timeframe, so frankly, we have been trying to prioritize our work in 

this area, as well as our work in other areas. 

Mr. SHERMAN. Are any of those studies designed to deal with a 

problem that was more at the core of the meltdown? Eight months, 

nothing happens. Sounds like business as usual. I am not so sure 

that business as usual is what we expect from the SEC. 

Is it your interpretation of the code section that when this process is over, we are going to end the system where the bond issuer 

selects the credit rating agency? 

Mr. COOK. My understanding of the statute is that we will study 

the conflicts and alternative ways of addressing the conflict and either then pursue the version that was in the bill that had been 

passed by the committee or another version, if we find that is appropriate. 

Mr. SHERMAN. But another version to achieve the objective. 

Mr. COOK. Yes, to achieve the same objective. 

Mr. SHERMAN. Thank you. 

Mr. DI FLORIO. Congressman, I would also— 

Mr. SHERMAN. Yes? 

Mr. DI FLORIO. I was just going to say I would also add that the 

bill requires, and we have begun to execute, comprehensive exams 

of all credit rating agencies, looking at things including conflicts of 

interest. That is an extensive process. We are three-quarters of the 

way through that— 

23 

Mr. SHERMAN. That is a different process. I am really focused on 

the 939(f) process, but I do have a question or two for you. 

Let us talk about Madoff. He files financial statements year after 

year showing billions of dollars. The first thing you look at on a financial statement is the auditor’s letter. Is it an unqualified opinion? Who signed it? You look at the Madoff letter. It is signed by 

an accounting firm nobody has heard of—take 10 minutes to realize the accounting firm was too small to do the audit and to be 

independent of the client. 

So if somebody had spent even an hour in anytime in a decade, 

looking at those financial statements, they would have discovered 

the Madoff problem. Who at your organization decided not to spend 

an hour at anytime in a decade looking at Madoff’s financial statements? How much time was spent reviewing his filings year after 

year after year after year? And has anybody been fired for deciding 

not to look at his statement? 

Mr. DI FLORIO. Congressman, the process that was in place regarding looking at firms and those kinds of risks has changed significantly. 

Mr. SHERMAN. I am not asking about the changes. I am asking 

about the past. 

Mr. DI FLORIO. With regard to specific— 

Mr. SHERMAN. How much time was spent looking at the Madoff 

material in the decade prior to his catastrophe? 

Mr. DI FLORIO. In fairness, a significant amount of time was 

spent looking at Madoff and examining Madoff. 

Mr. SHERMAN. If you had spent half an hour looking at his filings—you didn’t have to go out to his office, you just had to look 

at what he filed with you for half an hour—this thing is obvious. 

Mr. DI FLORIO. And so today we have procedures specifically— 

Mr. SHERMAN. I am not asking about today. I am asking why 

your organization, whose job it is to impose accountability on the 

biggest financial institutions in this country and in the world, has 

zero accountability for its own employees. You are the accountability list accounts. 

Mr. DI FLORIO. An independent party firm was brought in to do 

an extensive investigation of the individuals involved in the Madoff 

matter. That independent third party has issued its recommendation— 

Mr. SHERMAN. How much does whitewash cost? 

Mr. DI FLORIO. I am sorry? 

Mr. SHERMAN. When buy whitewash at the hardware store, how 

much does it cost? It is 2 years. Nobody has been fired. Nobody is 

to blame. Nobody is accountable. And that is the only agency we 

have, or we have no agency at all. 

Mr. DI FLORIO. There are individuals going through the disciplinary process now, and that is reaching a conclusion. And the government rules are defining that process, but it is close to reaching 

a conclusion. 

Mr. SHERMAN. Could you submit to this committee a due process 

for dealing with employees, so that if something like this happened 

again, the responsible parties would be fired within a couple of 

weeks? That was a question. 

24 

Mr. DI FLORIO. We would be happy to work with the parties, the 

Office of Management and Budget and others, that represent the 

government rules, that define our disciplinary process, to share our 

experience on that process. We would be happy to inform any 

amendments or reforms to that process. 

Chairman GARRETT. I thank the gentleman. 

The gentleman from Texas? 

Mr. NEUGEBAUER. Sorry. I didn’t— You said in your testimony, I think, that the request for the $369 

million is deficit neutral. So I assume you are going to make up 

the $369 million by doing what? 

Mr. KHUZAMI. Congressman, what I meant by that is that there 

is also the legislation, the transaction fees and revenues that the 

Commission bring in, that our budgets were going to be tied to 

those amounts. 

Mr. NEUGEBAUER. But in reality, we are taking money out of the 

economy. Is that correct? 

Mr. KHUZAMI. It is coming from the people who engage in securities transactions and registrants. 

Mr. NEUGEBAUER. I think that is kind of the Washington mentality up here is that if the money is coming from fees, somehow 

that doesn’t count. But what we’re all working on here is trying to 

make sure we leave enough capital in the system to create jobs. 

And so, while it may be deficit neutral, it is not economic neutral 

to the economy. Would you say that? 

Mr. KHUZAMI. I would certainly agree that money is coming from 

somewhere. That is correct. My personal view is that is a good investment in contributing to sound markets and investor confidence, 

which I think aids and benefits everybody. 

Mr. NEUGEBAUER. Ms. ‘‘Rominger’’, is that correct? Yes? 

Ms. ROMINGER. ‘‘Rominger.’’ 

Mr. NEUGEBAUER. ‘‘Rominger.’’ Thank you. To people with a 

name like ‘‘Neugebauer’’, I am sure you have had to repeat that 

just a couple of times. 

You said your Division was hoping to hire folks with special expertise, and I assume those folks more than likely would come from 

the private sector. Is that correct? 

Ms. ROMINGER. They could come from a variety of different 

places. 

Mr. NEUGEBAUER. And so with some of these specialists, one of 

the concerns I have and I made in my opening testimony is that, 

making sure that there is a process in your organization for conflicts of interest. I think all of us would have been extremely disturbed that someone who had investment ties to Mr. Madoff was 

actually in working on the negotiations of settlements with some 

of the investors. 

And when we sent letters over there, the ethics approval process 

was, somebody sent an e-mail to somebody that said, ‘‘Hey, do you 

think there is a conflict of interest?’’ A few minutes later, they get 

acknowledged, ‘‘Everything seems to be fine.’’ 

For an agency that holds high standards for the people who fall 

under your purview, it appears to me within the organization, that 

same standard doesn’t hold true for the people working inside the 

organization. 

25 

And back to Mr. Khuzami’s statement about making sure there 

is integrity in the marketplace, I think it brings, as some of my colleagues have said, a little bit of question of the integrity within the 

organization; are you policing yourselves? 

You want to police these organizations, but the question is, are 

you policing yourself? What kinds of things—as you hire these new 

people, how will you assure us that these people have been vetted 

properly and that conflicts of interest are addressed, and that we 

don’t have these kinds of issues coming up in the future? 

Ms. ROMINGER. I share your expressed view that our standards 

must be held very, very high in this area. And I have not hired 

anyone yet, but certainly when I do so, I will make sure that we 

comply with every element of the enhanced ethics standards that 

are in place at the SEC. 

Mr. NEUGEBAUER. So what is the process today? If you start hiring people, what are you going—how does that work in your organization? And I will leave that open to any of you. Does anybody 

want to address that? 

Mr. DI FLORIO. I would be happy to, having had a little more experience in this matter. 

Mr. NEUGEBAUER. You have been here more than 14 days? 

Mr. DI FLORIO. Right. Under Chairman Shapiro’s leadership, 

there has been extensive review of the ethics and compliance program and process. A new Chief Compliance Officer has been 

brought on board. A new Ethics Counsel has been brought on 

board. An electronic system to log and manage any possible financial disclosure conflicts has been implemented. 

We all have to go through extensive training now regarding the 

ethics and conflicts issues, and that is repeated annually so there 

is a much more robust process and policy in place today, again, 

under Chairman Shapiro’s leadership. 

Mr. NEUGEBAUER. So when did that start? 

Mr. DI FLORIO. Our new Ethics Counsel came on board just in 

the past few months. The Chief Compliance Officer came on board 

just a few months prior to that, so much of this has happened in 

the past year. The new electronic system to document, log, and 

monitor financial disclosure conflicts has come online just in the 

past year plus. So it is all relatively new, but all very positive developments and a reflection of industry-leading practices for managing ethics conflicts. 

Mr. NEUGEBAUER. Don’t you find it a little odd that has happened in the last few months? An agency that holds other people 

to such high standards that all of a sudden you decide, hey, maybe 

that works for us, too? 

Chairman GARRETT. We will let the gentleman answer that— 

Mr. DI FLORIO. I think Chairman Shapiro, since she came on 

board, started a process of initiating a number of reforms, including taking a fresh look at the entire process, recruiting and identifying the right people to take on those leadership positions and the 

ethics function and the compliance function. 

So it is a process that has made, I think, good progress over the 

past 2 years and will need to continue in the near-term to come. 

Chairman GARRETT. I thank the gentleman— 

26 

Mr. KHUZAMI. Congressman, if I just might add, before these new 

measures were taken, my personal involvement is I dealt with the 

ethics office on conflict matters. I found them to be careful and candid and, frankly, erring on the side of caution in the circumstances 

that I dealt with them. And the rules and obligations both for individuals coming in as well as going out of the Commission, I think, 

are clear and well known. 

So I don’t want to leave the impression that the ethics world 

started only a few months ago. There were systems in place, and 

from my experience, they have worked effectively. 

Mr. NEUGEBAUER. I think there is evidence, evidently, with some 

cracks in the system. 

Chairman GARRETT. I thank the gentleman. 

The gentleman from North Carolina? 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

We have discussed in this committee a lot how to revive bank 

lending, but before the crash, roughly half of all lending was the 

securitization market. In the last couple of years, there has been 

one issue of a couple hundred million for residential mortgagebacked securities, and that is it. And that would be an asterisk 

compared to what the market was before. 

I have talked to mortgage investors, and they have said that 

there is no way that anyone is going to buy asset-backed debt, 

based upon the way the market was before. The way it worked before is they would get a call saying we are going to market in a 

couple of hours with a mortgage-backed security that has a AAA 

rating. Are you in? 

And they are not interested in doing that again, and they can 

contrast the kind of disclosures, the kind of standardization that is 

available to investors who are buying stock issues, public offerings 

of stock—the waiting periods, the opportunities potential investors 

have to do their own due diligence, the standardization of what 

they are getting—and really said that is what they need for debt 

as well. 

The SEC has recently issued a rule in this area, and there had 

been repots that the issuers of mortgage-backed securities did in 

fact have third-party review of the mortgages, and I think the 

phrase from the J.P. Morgan Chase e-mails was that some of the 

mortgages were ‘‘poo,’’ but they did not tell the rating agencies that 

the mortgages were ‘‘poo.’’ In fact they represented the mortgages 

to investor as ‘‘non-poo.’’ 

And the investors say that the SEC has not gone far enough to 

say that just that kind of due diligence by the issuer itself or by 

third parties would be made available to them. They should still— 

they aren’t going to trust that either, and the result may just be 

that there is less due diligence by the issuer, and that they want 

the chance to look at themselves to do their own due diligence to 

see what it is they are buying. And they want standardization as 

well, waiting periods, all of that. 

Do you think you have statutory authority to issue rules like 

that? Do you need Congress to act? What kind of reaction have you 

gotten to the rule that you have issued? Obviously, the 

securitization market has not exactly sprung back to life. 

27 

Ms. CROSS. I think this one is for me. We have a rule proposal 

that we put out in April 2010 that would significantly reform the 

offering process for asset-backed securities, including imposing a 5- 

business-day waiting period between the time that you have a complete prospectus, which includes asset by asset loan level data in 

structured .xml form for people to be able to look at every single 

asset and the computer program of the waterfall so they can see 

how the assets would pay out in different scenarios. 

We have full authority to adopt those rules. Those rules were out 

when Dodd-Frank was passed. And so we thought it was important 

that the reforms worked together with the Dodd-Frank ABS/MBS 

rules and regulatory reforms, including the joint project now that 

is going on with risk retention. 

The Dodd-Frank Act actually requires us to require loan level 

data, which is consistent with our rule proposal. We look forward 

to implementing that. 

There are a number of other pending projects through the DoddFrank Act that will be important to basically sync up all the requirements so that when this is all put together, there will be a 

robust regulatory environment that will be workable, because it 

doesn’t do any good to put something together and then people 

don’t use it. We are working to make it workable. 

But we have full authority to do what you are talking about, and 

I believe we have proposed this. 

Mr. MILLER OF NORTH CAROLINA. Okay. Do your proposed rules 

allow potential investors to actually examine a sampling of loan 

files? 

Ms. CROSS. I don’t think that is in our proposal. The way our 

proposal works is they get an actual data dump on every single 

loan. 

Mr. MILLER OF NORTH CAROLINA. Oh, I see. 

Ms. CROSS. And so I haven’t heard the request to see the loan 

files, but I will certainly talk with my staff about whether we have 

been getting that request and whether that is something that we 

need to address in the proposal. 

Mr. MILLER OF NORTH CAROLINA. I yield back. 

Chairman GARRETT. The gentleman from California? 

Mr. ROYCE. Thank you, Mr. Chairman. 

Let us see. Ms. Rominger, I wanted to ask you a question, and 

it would be about the oversight of private funds, of just thinking 

about the problems that the financial system went through, these 

funds did not seem to play a role in the financial crisis, and they 

certainly didn’t receive any bailouts. And they tend to be much 

smaller in size. 

And from the testimony we have gotten, they don’t have the kind 

of leverage that the other financial institutions had. And so, despite all these factors, Dodd-Frank mandates registration for them 

with the SEC. And I was going to ask what concrete steps has the 

SEC taken to ensure it has the capability to adequately oversee 

these funds? 

And I was doing so in light of some of the things we heard from 

Mr. Markopolos. What he really drove home with us was that 

many of the people within the SEC that he had encountered over 

the many years that he kept bringing this problem to the SEC, this 

28 

Bernie Madoff problem, he said they just failed to grasp a relatively simple fraud, a basic little Ponzi scheme. This is a part of 

the market that the agency has very little experience with. 

Now, when we start talking about this, the question of private 

funds, is this going to be like it was with the SEC when they didn’t 

have portfolio managers, they didn’t have people who really could 

comprehend the kinds of frauds that they were supposed to look 

into? 

The SEC has been tasked with overseeing this now, and I wanted to ask you about that. 

Ms. ROMINGER. Thank you, Congressman. That is an excellent 

question, because of course, you know in the private fund arena, 

there is a vast range both in terms of the size of those funds— 

Mr. ROYCE. Right. 

Ms. ROMINGER. —their assets under management, their investment strategies and the imbedded complexity of those strategies. 

And the way that the rules have been proposed really scale the 

requirements to acknowledge that and to acknowledge that the information that is appropriate to our request from a relatively small 

or straightforward strategy, is very different than what should be 

requested from a larger or more complex strategy that could be 

more pertinent to the issue of systemic risk. 

So that scalability, I think, is a feature that attempts to get at 

what I think is the concern about requiring something that goes 

beyond what is necessary. 

Mr. ROYCE. Thank you. I was going to ask Mr. Cook a quick 

question, too. And this goes to Section 913 of Dodd-Frank, which 

requires the SEC to study the effectiveness of current standards of 

care for broker-dealers and investment advisers. 

In January, the SEC released a study that recommended the 

adoption of a uniform fiduciary duty standard for broker-dealers 

and investment advisers that would harmonize the differing standards that are out there currently. 

Can you point to any economic research or empirical data or economic analysis that shows the need for this harmonization? And 

what benefit does a fiduciary standard provide that could not be 

provided by simply improving disclosures so all parties understand 

who they are dealing with and what they can expect from either 

their investment adviser or broker-dealer? 

Mr. COOK. Congressman, I think that there have been studies to 

show that investors are confused about the nature of the relationship that they have with a different source of providers. 

And so one of the rationales for doing this would be so that when 

an investor walks in to an investment adviser or to a broker-dealer, 

that they would not have to become an expert in those various regimes that apply. 

I think going forward we certainly will need to think about, as 

we implement this, the nature of the two regimes, how they apply 

to different types of financial intermediaries, and how we can best 

tailor this fiduciary duty and the harmonization of duties beyond 

that to different types of business models. 

Mr. ROYCE. Thank you, Mr. Chairman. I am out of time. 

Chairman GARRETT. The gentleman from Colorado, or not? 

29 

Mr. PERLMUTTER. Mr. Chairman, I would like to pass to Mr. 

Peters, and then come back to me. 

Chairman GARRETT. Then we shall do so, for 5 minutes. 

Mr. PETERS. Thank you, Mr. Perlmutter. I appreciate the passing. 

And thank you, Mr. Chairman. 

Like some of my colleagues, I have a concern about some of the 

SEC registration requirements that have been put on place for private equity firms, in particular, the smaller and medium-sized private equity firms. 

During the consideration of the Dodd-Frank Act, I worked with 

Mr. Meeks and Mr. Garrett on an amendment that would have exempted private equity firms with up to $500 million in assets. Unfortunately, we were only able to secure an exemption for those 

under $150 million. 

We did, however, include language directing the SEC to come up 

with regulations that take into account the risks posed by these 

smaller and mid-sized firms when the rules are actually issued. 

Private equity firms are not highly leveraged and are not a 

source of liquidity in the markets. And just like venture capital, 

many of these small private equity firms engage in a buy and hold 

investment strategy designed to bring about returns through longterm growth opportunities. Such funds don’t pose systemic risk to 

the financial sector and to the larger economy. I have concerns that treating a $200 million private equity fund 

the same as we are treating basically multi-billion dollar hedge 

funds doesn’t make a lot of sense. And it certainly doesn’t make 

sense for those funds to have to spend hundreds of thousands of 

dollars perhaps in compliance. And I have seen some estimates of 

anywhere from $200,000 to $600,000 of compliance for these private equity firms. 

And that certainly to me doesn’t seem to make a lot sense for the 

SEC as well, with your very limited resources, and we are hearing 

today all of the many demands on those very limited resources that 

you are going to be required to spend money to review these registration materials. 

So, Ms. Rominger, first off, congratulations on your 16 glorious 

days with the SEC. But I would like ask you whether you think 

you think small or medium-sized private firms do pose the same 

risks either investors or systemic risks that a large hedge fund may 

pose. 

Ms. ROMINGER. Thanks, Congressman. That is a great question. 

And one of the things I was surprised to learn, actually, in joining 

the SEC is that somewhere over about half of our registrants actually are below $150 million in assets under management, which 

was a figure I wasn’t familiar with, but it does seem like there are 

quite a few registrants that would fit into that size category. 

I think that the principle is that our madate is to protect investors, regardless of the type of portfolio strategy that they are considering investing in, including private equities. 

But clearly, we value input. We recognize the need to scale our 

requirements to the complexity and the size of firms and to be very 

attentive to the cost-benefit of a proposal. So we will take all of 

that into consideration. 

30 

Mr. PETERS. In listening to your answer there, if there are firms 

that may pose more risk than others, does it make sense to be 

treating them all the same way? Or will you definitely be differentiating these in you rules? 

Ms. ROMINGER. Again, ultimately it is a decision by the Commission, but about half of our registrants would fall into that category 

of having $150 million under management. The goal has been to 

give investors the information that they might need to make their 

investment choices, regardless of portfolio strategy. 

Mr. PETERS. Although you would recognize portfolio strategy does 

make a difference as to the amount of information that may be necessary for an investor? 

Ms. ROMINGER. Yes, clearly, there are differences in complexity 

and different types of funds, yes. 

Mr. PETERS. So if that is the case, do you believe it would be possible to come up with some sort of scheme where firms that don’t 

pose as much risk may file some just basic information on Form 

ADV1 this July and delay maybe the imposition of some further 

more burdensome and, as we can see, potentially very costly requirements until we can put in place a regulatory scheme that protects investors, which is first and foremost, and the economy, but 

also doesn’t waste SEC resources by requiring firms to file detailed 

information that the Commission doesn’t need and, quite frankly, 

maybe investors don’t need? 

Ms. ROMINGER. Those are very helpful comments and I look forward to incorporating those comments and others into the work 

that my team does, as I become more involved in the process under 

way for these funds. 

Mr. PETERS. Good. I look forward to working with on that in 

some future conversations. Thank you for your time. 

Ms. ROMINGER. Thank you. 

Chairman GARRETT. I thank the gentleman. 

The gentleman from Arizona, Mr. Schwiekert? 

Mr. Posey? 

Mr. POSEY. Thank you, Mr. Chairman. That microphone—we 

need to get it fixed. 

If I understand correctly, despite the fact the SEC says it is underfunded presently for its operations, the SEC is promulgating a 

rule so that you are going to branch out and regulate the environmental stewardship of companies within your purview? Is that correct? Am I correct when I hear that? 

Ms. CROSS. I am not sure what you are referring to. Under the 

Dodd-Frank Act, there are a few rules we are required to adopt: 

one relating to Congo conflict minerals; one relating to payments 

to resource extraction issuers to government; and one relating to 

mine safety. Are those what you are referring to? 

Mr. POSEY. The information that I got is program-specific. If that 

is all there is, then I am not really that concerned. 

Ms. CROSS. On the rule proposals, those are rule proposals that 

we have out now that are required by the Dodd-Frank Act, and we 

are in the process of getting comments on them. We don’t have any 

rule proposals with regard to the environment out, besides those. 

Mr. POSEY. Okay. 

31 

Since I have been here, I have been seeking some sort of accountability for the blunders of the Madoff scandal. I don’t think that is 

any secret at the SEC. And so far, to our knowledge, there has 

been no discipline in the agency for allowing Madoff to plunder all 

those victims. No one has even been lectured, to our knowledge. No 

one has had their wrist slapped. Of course, nobody has been fired 

or demoted or been given any time off. 

Most of the people that I represent think that is abhorrent. They 

are offended by that and, quite frankly, I don’t blame them. It 

doesn’t bode well for the agency that it lets just a few incompetent 

employees cast such a bad shadow over so many other employees, 

hopefully, who get up and try and do a good day’s work for their 

government every day. 

I have heard it said by those who have watched some of the 

other proceedings that it appears the agency is more concerned 

with protecting incompetent employees than protecting consumers 

on the street. And I think they arrived at that conclusion, because 

each time I have asked the Secretary or somebody from the agency 

what was happening in regard to accountability for the negligence, 

ineptitude, or whatever it was with the employees, they said, ‘‘Well, 

we are still working on that. We have a process we have to go 

through.’’ 

And the IG made a pretty clear inference of what was wrong. 

Books available in the public domain make it pretty clear the depth 

and level at which people were involved. And at this time, Madoff 

is in prison and we still can’t slap the wrist of an employee, and 

that just doesn’t seem logical. 

So when we look at going forward with a reformed agency, you 

would think that the first step of reforming the agency would be 

to establish some kind of accountability and credibility from where 

we have been and where we are. You make a plan. You say, where 

do we come from, where are we, where are we going to go? 

And I think without properly setting a foundation by admitting 

some culpability or establishing some type of accountability for the 

agency, you are just not going to get a whole lot of sympathy and 

support that you otherwise would have. I would like your comments on that. 

Mr. KHUZAMI. Certainly, Congressman. Look, the experience of 

the Madoff matter has left a deep imprint on the agency. And I 

have said it in these halls before and I will say it again. It was a 

horrible tragedy, and one for which we failed in our mission and 

one for which we are doing many things across the agency to rectify. 

Speaking narrowly about the question of discipline, let me just 

give you some numbers and some timelines just to put it in context 

and then speak to the broader question. 

The Inspector General’s report identified a total of 56 people 

mentioned in the report. Since that time, 35 people have left voluntarily. That leaves 21 persons. There are six disciplinary proposals 

working their way through the system. The reason it has taken 

some period of time, frankly, is because no proceedings began until 

after the Inspector General issued its report, which I believe was, 

give or take, September of 2009. 

32 

Chairman Shapiro then ordered an outside law firm to conduct 

an independent, full, and complete review with recommendations, 

which took a period of time. Those recommendations were then reviewed, and the process got under way. 

The process dictated by Office of Personnel Management rules 

and regulations has certain protections and certain procedures that 

have to be followed. We hope that we are close to the end of that 

process, but I want the Congress and the American people to know 

we are not turning a blind eye to this. We understand the importance of it. We understand the expectations of the American people, 

and we are prepared to address it. 

With respect to the broader issue, as I said, it has informed so 

much of what all of us here have done since we have arrived. My 

restructuring of the Enforcement Division, the biggest one since 

1972, was focused largely on the shortcomings that were identified 

as a result of that and other matters, increased expertise so that 

the people could understand complex matters. 

It wasn’t just a Ponzi scheme. We do dozens and dozens and dozens of Ponzi schemes every year. It was a complicated split-strike 

conversion strategy having to deal with options, and that is not an 

excuse. Mr. Markopolos identified the problems. But what it did reveal was that we didn’t have enough places to go in order to fully 

understand, in that case, options trading other types of expertise. 

So we have created specialized groups in order to do that. 

We understand that investment advisers who self-custody their 

own assets are a potential warning flag. Accounting firms that 

leave their engagement are potential red flags. So we are doing 

things like canvassing all hedge funds for aberrational performance. Anybody who is beating the market indexes by 3 percent and 

doing it on a steady basis, we are going to look for them. 

Mr. POSEY. Let me interrupt because they are going to call me 

out of time here in a minute. But my point is not the future, but 

what we are doing about the misdeeds of the past. If half the people no longer work there, that is not a satisfactory discipline. That 

is not an answer. 

I said one time it is like a pedophile leaving a neighborhood and 

going to another neighborhood. And my response is, they are all 

good people. I am not saying they are not good people. I am saying 

I hope, I hope the nicest thing we could say about them is they are 

incompetent. That is the nicest thing we could say about them for 

allowing to happen what did happen. And just saying they are no 

longer at the agency or we don’t know where they are, that is not 

satisfactory. 

I think we would like to know where they are. Are they investigating or examining for another agency? Or are they retired? And 

it would just be good to know what happened to the people who 

were identified and who the agency has admitted were culpable in 

all this stuff, so that we don’t— 

Chairman GARRETT. The gentleman’s time has expired. 

Mr. POSEY. —put them in place. 

Thank you, Mr. Chairman—for their failure. 

Thank you. 

Mr. KHUZAMI. Let me just—the only reason I raise this is we 

don’t have jurisdiction over people who are no longer at the agency, 

33 

with respect to disciplinary issues. But I understand your request 

for the information about where they might be, and I will see if we 

can provide it. 

Mr. POSEY. Thank you. 

Chairman GARRETT. The gentleman from Colorado? 

Mr. PERLMUTTER. I thank the Chair. Let us just kind of try to 

wrap this subject up. What disciplinary actions—in general, without naming names, so that we don’t have some kind of breech that 

gives somebody who might be culpable in some fashion or another 

something to discuss—are being taken, Mr. Khuzami? 

Mr. KHUZAMI. At this point, Congressman, they are proposed recommendations, and I think they range across sanctions from counseling through removal from Federal service. 

Mr. PERLMUTTER. Okay. 

Mr. KHUZAMI. And let me—I just want to say one other thing. 

Fifty-six people were identified in the report. The report doesn’t indicate that all 56 people engaged in wrongdoing or somehow were 

responsible for what occurred. 

Mr. PERLMUTTER. I understand that, but I guess what I want to 

know, what Mr. Posey wants to know, even though he is sort of 

editorializing a lot, is what actually is being done. And so you said 

anywhere from some kind of disciplinary action, removal from the 

SEC to some other kinds of things. 

What are the kinds of penalties that these people could suffer if 

you find that there was either gross negligence or some kind of culpable action? 

Mr. KHUZAMI. In a general matter, the disciplinary recommendations span everything from counseling to reprimands to suspensions to removal from service. 

Mr. PERLMUTTER. And potentially, if somebody was found to be 

on the take, there could be criminal actions as well, which I am not 

saying there was any indication of that, but that is a possibility 

too— 

Mr. KHUZAMI. that is. 

Mr. PERLMUTTER. —I would assume. 

Mr. KHUZAMI. I will say the Inspector General’s report, I believe 

that there was no improper motive and no failure of people to work 

long and hard— 

Mr. PERLMUTTER. Okay. 

Mr. KHUZAMI. —with respect to this matter. 

Mr. PERLMUTTER. And just for chronological sake, this all occurred in 2008 or before, right? Mr. Markopolos came to us and 

said that in a span of 2000 to 2008, he had suggested to the SEC 

on a number of occasions that there was something wrong here. 

Mr. KHUZAMI. That is correct. 

Mr. PERLMUTTER. Okay. And since 2008, you have been investigating and trying to come up with what actually happened, correct? 

Mr. KHUZAMI. Correct. 

Mr. PERLMUTTER. I would ask the chairman if he could make 

those slides available. You don’t have to put them back up, but I 

would like a copy of those, because I think they prove just the opposite point that you would like them to prove. 

34 

Based on what I saw, there was a flat—there was no increase 

2005, 2006, 2007 into 2008 at a time when there was inflation, and 

this agency did not have the cops on the beat to stop the crash in 

any way that occurred in the fall of 2008, which in my opinion 

caused millions of people to lose their jobs. 

So I would ask the chairman to make those available to all of us, 

if he could. 

Chairman GARRETT. I will be glad to provide the charts to you, 

which show, actually, a 10.8 percent year-over-year on average between 2000 and 2011. 

Mr. PERLMUTTER. That is why you have to have the bar chart 

and your little line chart. You and I have spent some time in the 

courtroom proving cases. I would like those charts. 

My question to the panel as a whole is, what is happening on 

nano-trading or high-frequency trading? What has happened with 

any kind of investigation regarding that crash back last May, with 

anybody? 

Mr. COOK. I will take that, Congressman. As you know, the SEC, 

jointly with the CFTC, studied the events around May 6th and 

issued a report, a staff report in September. That will continue to 

inform our review of high-frequency trading. It is a review that 

began in January of last year as part of the concept release that 

we had issued and it is, frankly, still under review. 

We also just received the recommendations from the Joint Advisory Committee that was formed right around the time of the May 

6th flash crash. It helped advise us on cross-agency issues and how 

to think about them. They have made a number of recommendations. Many of them have already been implemented or are well 

along the way to implementation, and others we will be studying 

very closely as we move forward. 

Mr. PERLMUTTER. Thank you. 

And then I would just sort of finish with this, that at a time 

when I feel like we are finally getting some confidence back in the 

markets, the time when you all have been getting your job done, 

my friends on the Republican side want to cut your funding, reduce 

your funding. And this country suffered so much in the last 2 years 

that that kind of effort is just the wrong way to go. 

So with that, I yield back to my friend. 

Chairman GARRETT. Your friend appreciates your yielding back, 

even though we are cutting everyone’s funding. 

The gentlelady from New York? 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

We are talking, of course, about the direct cost of administering 

the enormous job that all of you have made all the more so by 

Dodd-Frank. And I submit that another aspect of considering the 

cost of the SEC, if you will, is how much what you do requires from 

our issuers. 

That is, obviously, the other half of the equation, if you will, because for every regulation that you must promulgate and assure 

that it is carried out, obviously, there is a whole team on the other 

side, while you have been on those teams that have to invest resources in compliance and, of course, also consider the liabilities 

that are conferred by every new layer of regulation with which they 

may find one or another snag. 

35 

I introduced the topic of Section 953(b) earlier, and I would be 

eager for any of you to comment. 

And I think, Ms. Cross, you may be the first in line regarding 

the way in which it was written regarding what would seem to be 

fairly conspicuous deficiencies in the way in which it specified as 

it stand now in trying to determine— 

Ultimately, the big concept is, is this really useful to do, you 

know how do we—we can get into the weeds about specifics, but 

is it ultimately going to provide useful information? So whatever 

you can comment about the challenges of getting to those specifics 

and about whether or not it really should supplant the existing requirements regarding compensation disclosure. So, please. 

Ms. CROSS. Thank you very much, Congresswoman. I have to 

start by saying that the decision of whether this information is useful is a policy call that is included in the Dodd-Frank Act. 

Our job at the SEC is to implement the requirements of the 

Dodd-Frank Act in a manner consistent with investor protection 

and all of our other missions, including a good cost-benefit analysis 

and weighing the concerns that the registrant community, the corporate community, is raising about this particular proposal—or this 

particular requirement. 

We have not done a rule proposal on this one yet. It does not 

have a deadline under the Dodd-Frank Act, and we are doing the 

ones with deadlines first. 

We have an e-mail box where people have been putting in their 

comments in advance, and we have had many meetings with registrants. People are very concerned about this provision being costly. 

I have to say, I wish I had something else to say. It is very prescriptive how it is written in the statute. It doesn’t actually give 

us leeway. It is written so that it has to be in every filing, it has 

to be every employee, it has to be compensation as calculated under 

Rule 402 the day before the Act was signed. 

I don’t know that we have leeway. So we always want to implement the rules in a way that is workable, but we have to do what 

Congress has directed us to do. And so, I will say now I have concerns about how workable we can make them. 

Dr. HAYWORTH. And I appreciate your candid assessment. May 

I challenge you just that little bit further to ask because it is a legitimate question? Yes, we are the Congress. We can change these 

things. 

Would it make sense for us to undertake a change in that requirement, perhaps even—I am not asking you advocate for its 

elimination necessarily, but would it be reasonable to endeavor to 

change it in ways that would presumably eliminate the relative 

ratio of burden to benefit, if you will? 

Ms. CROSS. I am not speaking for the Commission. I am speaking 

for myself. I think that if Congress wants to have this pay ratio 

disclosure, the spirit of it, there are changes you could make to it 

to make it less difficult. 

I don’t know that those would be consistent with the policy behind it, but using the median employee is a complex thing. An average is not as complex. Using the 402 calculation instead of W– 

36 

2—there are a lot of things you could think about that might make 

this more workable. 

But I do want to be careful, because the policy—I don’t want to 

undermine the policy if Congress has in mind— 

Dr. HAYWORTH. I respect that, and I don’t want to put you on the 

spot in that way, but I respect all of you as experts. You have lived 

these things, and we need to heed your thoughts on these matters, 

because if we don’t, then good intentions lead to stasis at best and 

to harm at worse. 

And there is a tremendous devotion of resources that could really 

go into computing a median, assuming or determining a median, 

assuming that we could actually successfully define all the ways in 

which employees are designated, in which types of compensation 

are fit into the calculations. Just a quick reading of it— 

Ms. CROSS. It is a complex requirement, and I think that, again, 

we have been working on our Dodd-Frank rulemaking initiatives to 

balance where we can the benefits and the burdens. In this instance, it is a very clear requirement, and absent other direction, 

I believe that it is what it is. 

Dr. HAYWORTH. Yes, ma’am. I am very grateful for your guidance 

in that regard. 

And I yield back my time, Mr. Chairman. Thank you. 

Chairman GARRETT. The gentleman from Virginia, Mr. Hurt? 

Mr. HURT. Thank you Mr. Chairman. 

I want to welcome you all and thank you for being here. Obviously, as we discuss your budget, we have to take into account the 

fact that certainly the scope of your regulation necessarily reflects 

what your requirements will be. And I think that some of these discussions about the scope of your regulation will help us figure out 

where we end up in terms of funding for your agency. 

And let me also thank you for your work, the important work 

that you do. 

I come from a rural district in Virginia and we have many, many 

Main Streets all across this rural district. And the relationship of 

small banks to our business community is the lifeblood for job creation. I have places in my district that have unemployment as high 

as 25 percent, so job creation is very important, getting capital on 

the street is very important, and you all know how important that 

is to job creation. 

With respect to the derivative regulation under Dodd-Frank, obviously, small banks are going to be subject to new, clear requirements under the SEC and the CFTC unless they are exempted as 

end-users. And when you stop and think about the high cost of regulations and the small part of the swaps market that small bank 

comprise, I would like to know from you, Mr. Cook, whether or not 

the SEC will exercise its authority to exempt small banks as endusers? 

Mr. COOK. Thank you, Congressman. The proposal that the Commission issued with respect to end-users did include an exemption 

for small financial institutions. This is an exemption, as you may 

know, that the statute directed us to consider providing to basically 

cover small banks and exempt them from the mandatory clearing 

requirement. 

37 

That is in the proposal, so it is something we are requesting comment on, and the Commission will take those comments into consideration. 

Mr. HURT. Thank you. 

My second question deals will be for Ms. Rominger, and it deals 

with the private equity investment advisers. I know that Mr. Royce 

and Mr. Peters have talked a little bit about it. And you talked 

scalability. I would like to know a little bit more about what you 

mean there? 

I would subscribe to some of the same sentiments that have been 

expressed with respect to private equity investment advisers, and 

I think that overregulation of them could certainly lead to lost opportunities to preserve jobs and create jobs, because obviously at 

least a big part of what they do relates directly to jobs. 

And so I would like to hear more about the scalability issue that 

you talked about. And I would also like to know whether or not 

under Section 206A of the Investment Advisers Act, whether or not 

you all would consider exempting private equity firms pursuant to 

Dodd-Frank until Congress can take further action with respect to 

that issue? 

Ms. ROMINGER. Right now, it is my understanding that we are 

receiving comments on the proposals. I have been impressed in my 

short time at the Commission with the high degree of thought and 

content that comes through in the comment process. And we certainly will be very, very attuned to some of the issues that you are 

mentioning and raising here and that will come through in the 

comment process. 

Mr. HURT. Do you agree that you said the SEC has that exemptive authority under the Act, and will the SEC consider that? 

Ms. ROMINGER. This is a matter that I look forward to spending 

a great deal more time on with my staff— 

Mr. HURT. Is there anybody else who can help on this question? 

Ms. CROSS. I don’t think we have someone here at the table who 

is familiar with what the exemptive authority might be under this 

provision, but we would be happy to get back to you with a written 

response. 

Mr. HURT. Okay. I would appreciate that. And in the event that 

you are not, that is not something that is viewed to be within the 

authority of the SEC, certainly I would ask you to consider postponing the registration requirements to the extent that can be done 

to allow Congress to give further guidance on this issue. 

Ms. CROSS. And we are certainly happy to get back to you with 

a written response. 

Mr. HURT. And one last question to anybody, but maybe we can 

start with you, Ms. Rominger. 

I am very concerned about the implementation of Dodd-Frank 

and the hundreds of new registrants that will suddenly have to be 

regulated. Have there been any efforts to identify what kind of burden this is going to be on the States, who also have in many cases 

concurrent jurisdiction over these matters? Are we going to be 

passing huge, unfunded mandates down to the States when we 

suddenly have this increased registration? And that could go to 

anybody. 

38 

Ms. ROMINGER. Their degree of preparedness, I would imagine, 

spans a range. And I certainly hope that they would be prepared 

to take this on. 

Mr. DI FLORIO. I would just add in addition to what Ms. 

Rominger said, there has been an ongoing dialogue between the 

SEC and the States regarding the transfer of private fund advisers 

under $100 million. And the States—we get calls bi-weekly to talk 

about the transfer and the readiness around that transfer. 

The States are very organized in regard to their strategy with regard to those advisers. So there is an ongoing dialogue that is 

cross-functional in the agency with the States about that transfer. 

Mr. HURT. Mr. Chairman, could I just follow up? 

Mr. SCHWEIKERT. [presiding] The time has expired. 

Mr. HURT. Thank you. 

Mr. SCHWEIKERT. But if Congressman Stivers would like to yield 

you some time, he is more than welcome to do so. 

Congressman? 

Mr. STIVERS. Thank you, Mr. Chairman. 

Thank you to the panelists for coming today, and I would like to 

thank you for what you do to regulate the securities industry. 

And I just want to kind of put all this budget stuff in context. America is broke. We are running at a $1.5 trillion annual deficit, 

and we have a $14 trillion national debt. And my daughter Sara, 

who is 18 months old, owes $45,000 as her share of the national 

debt. 

I am not asking about your specific expenditure here, but how many of the panelists think it is morally okay for us to borrow $1.5 

trillion from our kids every year? If you do think it is okay, raise 

your hand, because I don’t think it is okay, and I don’t see anybody 

raising their hand. 

I know that you are required to do a lot of new things under 

Dodd-Frank, so I am not trying to be negative here. You are required to create 123 new rules. You are required to do 32 new studies. And I guess my point is during this time of really expansive 

government and, frankly, in a time when we can’t afford everything 

we are doing, I think it is a time to really focus and prioritize, so 

I wanted to ask some questions about that. 

Has the SEC looked at all its activities and tried to recommend 

things that can be cut or reduced or savings that can be found in 

the SEC, because maybe you have and I haven’t seen it, and I don’t 

know the right person to ask. Would anybody like to take a shot 

at that one? 

Ms. CROSS. I can start us off. We are just now going to be receiving the recommendations from the study that was done of our organizational structure from the Boston Consulting Group. And we 

will very carefully review those recommendations and see what 

cost savings are available from that. I think that will be— 

Mr. STIVERS. That is a great answer. Thank you. And I appreciate you doing that. 

Ms. CROSS. Okay. 

Mr. STIVERS. Second question, do you do cost-benefit analysis on 

every rule that you perform, and do you make that public? 

Ms. ROMINGER. Yes, we do, for rulemaking. In the second half of 

the rules after we describe in the beginning of the release what the 

39 

rule proposal is, the second half of it includes a robust cost-benefit 

analysis. And we have a new Division of Risk, Strategy, and Financial Innovation that has top-notch economists in it, who help us 

with that. 

We get public comment on the cost-benefit analysis and often 

make changes to our final rule based on the comments we receive 

on a cost-benefit analysis. 

Mr. STIVERS. Thank you. 

I know that under Dodd-Frank there was language that required 

you to look at the fiduciary duty. And broker-dealers are currently 

just under a suitability standard for investors, and there is a proposal to take them to a fiduciary standard, fiduciary duty standard. 

I have seen studies that say that will increase costs for consumers and increase litigation. Have you looked at that as part of 

your cost-benefit analysis with regard to that particular regulation? 

Mr. COOK. We haven’t issued any proposed rules on that. And 

there is no statutory timeframe to issue the proposed rules, so if 

the Commission does issue proposed rules, there will be a cost-benefit analysis of that. 

Mr. STIVERS. And it will include the potential increased cost of 

litigation and increased cost to consumers of changing that standard for broker-dealers? 

Mr. COOK. We will work with our economists to take into account 

all of the direct costs. 

Mr. STIVERS. I would like to ask you to specifically take a look 

at that. 

Now, I would like to look at something that Mr. Royce, Mr. 

Peters, and Mr. Hurt have all talked about, and that is private equity funds. We have a lot of mezzanine-based funds in all our jurisdictions that help create jobs. I have one, for example, in my area, 

and they do all FDIC funds now, but they have some old legacy 

funds that would require them to register, because they don’t get 

an exemption if they have any non-FDIC funds. But they—frankly, it would cost them about $300,000 to register 

and then about $50,000 a year in round numbers on an ongoing 

basis. Is there any thought—and those old funds are obviously just 

running off—to taking a look at folks like that and saying okay, 

you kind of meet the spirit here? 

Ms. ROMINGER. This is why it is so valuable to get feedback 

through the comment process. And your points are well taken. 

Mr. STIVERS. Great. 

And the last question on derivatives. I want to thank you for 

what you have done on derivatives regulations in a very thoughtful 

way that looks at the Securities and Exchange Act of 1934, has 

similar definitions to the Act, but the CFTC has not been as 

thoughtful. 

Are you working with them to harmonize things? And you can 

give me a yes or no, because I am out of time. 

Mr. COOK. Yes. 

Mr. STIVERS. Oh, good. 

Mr. COOK. We have certain rules that we have to issue jointly, 

and there are certain rules that we are seeking to—we have to collaborate and reach a comparable result where it is appropriate, so 

we will be working with them to— 

40 

Mr. STIVERS. You recognize where your roles today— 

Mr. COOK. We recognize that there are some differences, and we 

recognize we need to focus on that in terms of reducing the burdens 

on the industry. 

Mr. SCHWEIKERT. Thank you, Mr. Stivers, and Mr. Cook. 

The Chair is going to take the next couple questions. Why not? 

Mr. Cook, just particularly because you happen to be in the center and have actually one of the areas I am most interested in, in 

your budget mechanics, how much of your Division or your area is 

going into data and using data mining to find compliance? How 

much is moving in improving your technology chewing up your 

budget? 

Mr. COOK. Right now, not enough, certainly. One of the areas 

that we are weakest on, frankly, is our ability to monitor the market and to obtain the types of data from the market that, frankly, 

many of the trading firms get today on a routine basis. 

The value of getting that data is to help us understand market 

quality, market metrics. And it is a very cumbersome process today 

to bring that all in from many different trading platforms. May 6th 

was a good example of the challenges that data presented, and so 

one of the things we would like to build out is a better analytics 

and data analysis capability to be able to respond to those sorts of 

things. 

Mr. SCHWEIKERT. You sort of beat me to where I was going with 

that. Doesn’t part of this sort of data mining, data aggregation already exist in the private marketplace? 

Mr. COOK. The capacity to bring together and analyze quickly 

some of the data that is out there in the market in the private sector is quite significant in some firms. 

Mr. SCHWEIKERT. I expect much of that is proprietary, so has 

there been the discussion of not completely having to reinvent the 

wheel? 

Mr. COOK. Absolutely. 

Mr. SCHWEIKERT. Can you contract or buy, whether it be on the 

other side of the Chinese wall, but having even a contractor provide you those data and that access and their analytics? 

Mr. COOK. Yes, sir. There certainly are challenges in this area 

in terms of being a regulatory agency and how much of that sort 

of relationship it makes sense to develop with a private firm. However, we are certainly interested in considering all avenues with an 

eye to what is going to be most cost effective, frankly. 

We issued a request for information last year to learn from potential providers of software and a data analytics tool—what is 

available out there that we could buy off the shelf. How much 

would it need to be customized to be able to serve our needs? 

Mr. SCHWEIKERT. My concern is having been on both sides of 

that equation, when you hire programmers and build it or contract 

it out, it always seems to take much longer and much more expensive. It would be fascinating if the marketplace has products that 

you could actually capture. You would obviously respect the proprietary, because— 

I didn’t know if that is a path you had been looking at. And that 

is true for all the Divisions. Is this a common issue across all the 

different layers? 

41 

Mr. DI FLORIO. It is a common issue, certainly, I think, across the 

entire SEC, Congressman. And your point is well taken. 

We have made two very positive developments very recently of 

bringing on a new COO and a new head of IT, both who come from 

the private sector and have spent significant time with massive 

data aggregation analytics and are very knowledgeable about the 

systems that are out there. We will certainly be leveraging them 

to inform the process going forward. 

Mr. SCHWEIKERT. And I probably need to do this quickly. Does 

anyone else want to touch this one? 

Mr. KHUZAMI. I could just give you one small fact that shows the 

challenges that we face in this area. We get three to four terabytes 

of information on average per month in the course of our investigations in the Enforcement Division. 

The entire Library of Congress print book edition is 20 terabytes 

of information. We get massive amounts of data, and we don’t have 

the capability to do the kind of data analytics that we should be 

doing on that information in order to make sure we have it all, we 

extract the useful information, we see that patterns and relationships that are necessary. 

Mr. SCHWEIKERT. Okay. I am going to try and do a couple of 

these other bits quickly, but part of the reason for that question is 

I know we are discussing budget and growth, but I have also seen 

many very efficient regulatory agencies, the ability to use data and 

their data sets as the greatest cost savings account. 

But it is getting over the hump of that programming and what 

is out there. And in 25 seconds, Mr. Cook, talk to me about some 

of the muni conflict of interest regs that are coming. 

Mr. COOK. The MSRB that you may be referring to is a proposal 

that they are working on to deal with the registration and regulation of muni advisers and to address the situation, so-called hatswitching where someone might serve as an adviser to a municipal 

entity and then switch and become an underwriter. 

Mr. SCHWEIKERT. Okay. For me to be respectful to my fellow 

members, without objection, I would like to go to a second round, 

and I was going to give the next 5 minutes to the gentlewoman 

from New York. 

Ms. WATERS. I don’t need the 5 minutes, so you may give them 

to Dr. Hayworth. 

Mr. SCHWEIKERT. Thank you. 

The gentlewoman from New York? 

Dr. HAYWORTH. I thank the chairman and the gentlelady from 

California. 

Section 975 of Dodd-Frank, of course, as you know, requires that 

municipal advisers register with the SEC. And in May of 2009, the 

head of SEC’s Office of Municipal Securities said that establishment of the program would be easy because there would probably 

only be about—the number is here only about 260 non-broker-dealer municipal advisers. 

But since the SEC has now written the rules, they actually encompass thousands more individuals, with some interesting exemptions, including engineers who provide engineering advice, government officials regarding strategies to improve energy efficiency in 

42 

government buildings, that they would be subject to registration 

and disclosure rules. 

It is striking that there is so much potential for you to create 

definitions that may be ripe with potential for skirting, if you will, 

or getting around them. How do you make them fair without incurring—again, I keep going back to the cost of these promulgating 

these regulations. How do we keep things fair and reasonable, rational? 

Do you feel as though you are able to have a voice in how these 

things in away that won’t confer unusual costs on our municipalities that have to deal with these things and on the engineering 

firms who provide these services? 

Mr. COOK. Thank you, Congresswoman. It is a challenge in this 

area to get it right, I think, because we don’t want to inhibit the 

certain sorts of functions that occur day-to-day that aren’t really 

our fight. 

In terms of that estimate you mentioned, I think that may well 

have been based on both a different set of data than we have today 

and also a different standard of what it means to be an adviser. 

I think that estimate may have been based on estimating how 

many independent entities out there that are advisers and a different definition. The statutory definition is somewhat broader 

than that. 

But the muni adviser definition rule has been proposed, has not 

been adopted. We have gotten a lot comment letters on it, and we 

are going to be looking at those very carefully. 

Engineering is one area where we have received some comments. 

We actually did include an exception for engineers providing engineering advice. But, of course, it begs the question as well, what 

does that mean? What are the services that are ancillary to engineering? 

And I think what we want to try to do is provide the guidance 

people need to have legal certainty to be able to continue functioning and providing valuable services that were never intended 

to be registered as advisers, but at the same time not create exceptions that overwhelm the rule. So that is the challenge, and we certainly are benefiting greatly from the comments we have received 

on it. 

Dr. HAYWORTH. And I appreciate that. It would seem that drawing rules so very broadly again will lead to that problem of contributing to stasis, conferring excessive costs, getting in the way of 

progress, ultimately impeding effective government that can be 

cost-effective and can free resources for job creation, which is what 

we are talking about. 

I hope that you will be able to bring to bear, and certainly I 

think this committee would like to help you bring to bear, a great 

measure of common sense. I do get the sense from all of you that 

you have a lot of common sense. 

And I want you to feel free, speaking for myself, but I think I 

speak for the members of the committee, to feel free to tell us in 

addition to the comments you get from the public, which are very 

important, but please tell us what we can do on the statutory side 

to make it possible to fulfill a mission without tying everybody up 

into such knots that we get less done than we should. 

43 

Thank you. 

Mr. Chairman, I yield back. 

Mr. SCHWEIKERT. Dr. Hayworth, thank you for the 5 seconds. 

And you always speak for the committee. 

Mr. Hurt? A couple of minutes. 

Mr. HURT. Thank you, Mr. Chairman 

Just a brief follow up with Mr. Di Florio, who was talking about 

the communications with States. What has been the forum for 

that? And you indicated that there was regular contact. What has 

been the forum for that? 

And do you have any cost estimates? Have they expressed to you 

cost estimates of what it is going to take for them to comply with 

the kind of trickledown effect of Dodd-Frank at a time when States 

are having a terrible time balancing budgets? At least they balance 

the budget. 

Mr. DI FLORIO. Congressman, the forum has been bi-weekly teleconferences. The party has been NASAA, which has been organizing on behalf of the State regulators, and they have not shared 

specific cost estimates in the context of those discussions. 

Mr. HURT. Okay. If you get information about that, I would certainly be interested to know, and I guess we can contact that agency ourselves. 

And then just to follow up, Ms. Cross, thank you very much for 

your offer to provide information. I think it was you who offered 

to provide information relating to the exemptions for private equity 

firms. And I certainly look forward to receiving that. Thank you 

very much for your time. 

Mr. SCHWEIKERT. Thank you, Mr. Hurt. 

The chairman now yields himself, let us see, the next 6 hours? 

You notice that no one—they are just not sure. I am so sorry. I am 

going to give myself just a couple of minutes, because I really want 

to come back. 

You talked about your comments starting to light up when you 

did some of the muni. So did my e-mail, and on many different levels. One of the questions that was coming at me was from those 

folks who are already—broker-dealers, investment advisers in the 

banking world—regulated. What will the proposed rules and how 

will it touch those folks. 

And then there is the other side of that, the proposed rules and 

where you think it is going to go in regards to influence of the municipality to go out and bond or do a defeasance, these sorts of 

things. 

And I am going to start with Mr. Cook, and we will move around 

to who has something to share. 

Mr. COOK. The proposed definition does have carve-outs for certain other regulated entities like investment advisers and the like, 

but the area of overlap is something that we will have to be sensitive to. 

I know one issue that has been raised, for example, is that 

banks, who are holding deposits for a municipality, cash deposits, 

have expressed concern that the definition of municipal adviser 

would include providing advice about that cash deposit. So that is 

an issue we are focusing on and talking to other regulators about 

and will— 

44 

An example, I think, of the point you are raising, is that there 

may be overlapping regulation and therefore not a need to impose 

a new regime on certain sorts of entities— 

Mr. SCHWEIKERT. Mr. Cook, I know you guys are going through 

sort of the modeling of what is the rule. 

But in my experience as having been a country treasurer, okay, 

over here I have the law firm that is also doing some of the advising to the municipality. Okay, on the same side, somewhere on the 

other side of the Chinese wall, you may have lawyers who are also 

representing the property owners or some of the others they may 

part of that general obligation. Over here is the law firm that is 

helping move some money around, but what if that law firm is also 

providing certain other banking services? 

I know we have a web here where a lot of these folks are touching each other. And I have a real concern, if this is really a discussion about budget, how do you guys write rules that are effective 

and work—at the same time also don’t blow up your budget and 

make you have to come back to us and say please, we need more 

resources? 

Mr. COOK. I will take a stab at that. I think it is a challenge, 

but I think what it means is that we need to be very thoughtful. 

And I think the tools we have are the common process, which is 

enormously important to help identify issues that may be raised by 

the rules that we propose, taking the time we need to get it right, 

and frankly, a sense of humility about what we know and what we 

don’t know. 

And I think that is some of the leverage we have to try to make 

sure that as we, given the resource constraint environment we are 

in and the obligation nevertheless to promulgate certain rules, that 

we strike the right balance. 

Mr. SCHWEIKERT. Does anyone else wish to touch this one? Give 

me—and we will try to finish up here in the next couple of minutes 

so you can at least go get some lunch—share with me what you 

think is the biggest crisis within that market, within the muni 

market and the folks providing the advice? How big of a distortion 

do we have? 

Mr. COOK. We have seen some instances, and I don’t know if 

there may be some on the enforcement side, if you mean what are 

the— 

Mr. SCHWEIKERT. The problem that we are trying to fix. 

Mr. KHUZAMI. I think that the concern is that people who would 

be advising municipalities about both the issuance of their securities and the product that they could invest the proceeds in are not 

subject to oversight now in the same way that advisers to you or 

me or anyone else providing similar sorts of investment advice are. 

And that can lead to concerns such as conflicts of interest, whose 

interests are they really acting in? I believe that was the policy rationale behind the act. 

Mr. SCHWEIKERT. In that case, just having spent some time in 

this world, I saw some issuances—actually they were, I think, 

defeasances at the time—where the fee was pretty close to almost 

what was being saved. So in that case since you are doing the rulemaking, in many ways it is how do you get access to who is actually receiving compensation. 

45 

And, motivation is there and the disclosures that come with that, 

and I don’t know if that creates a much more narrow cap. My fear 

was you would get the bad guys, but don’t do something that blows 

up your budget, because now you are touching so many people who 

are two or three off. 

Mr. COOK. Right. And it is not just our budget. It is the costs imposed on those people who weren’t intended to be covered by the 

statue. 

Mr. SCHWEIKERT. All right. Does anyone else have anything that 

they are burning to share? You have been a wonderfully cooperative group. And, actually, what you do is absolutely fascinating, 

being a freshman Member reading all the things you touch. 

And some of it is impossible, and I am not sure it is necessarily 

money-based, as the scale of the markets seem to change and move 

faster than often we can never catch them. And that is why my fixation on you having data mining abilities, because in many ways, 

this may be about technology and data, and not necessarily the old 

shoe leather world of regulation. 

And I am trying to convince my brothers and sisters around here 

that it is time to step into the next century of technology. 

With that, the Chair notes that some members may have additional questions for this panel which they may wish to submit in 

writing. Without objection, the hearing record will remain open for 

30 days for members to submit written questions to these witnesses and to place their responses in the record. 

Thank you for spending time with us today. 

[Whereupon, at 12:28 p.m., the subcommittee was adjourned.] 

(47) 

A P P E N D I X 

March 10, 2011 

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