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53–237 PDF 2009

SEC OVERSIGHT: CURRENT STATE AND AGENDA 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT 

SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JULY 14, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–57 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

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 

DENNIS MOORE, Kansas 

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 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

BILL FOSTER, Illinois 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

July 14, 2009 ..................................................................................................... 1 

Appendix: 

July 14, 2009 ..................................................................................................... 45 

WITNESSES 

TUESDAY, JULY 14, 2009 

Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange Commission ........................................................................................................................ 11

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 46 

Garrett, Hon. Scott ........................................................................................... 48 

Schapiro, Hon. Mary L. .................................................................................... 50 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Castle, Hon. Michael: 

Op-ed from The Financial Times entitled, ‘‘Protect industry from predatory speculators,’’ by Lawrence Mitchell, dated July 8, 2009 .................... 65 

Hinojosa, Hon. Ruben: 

Letter to Chairman Barney Frank and Ranking Member Spencer Bachus 

from various undersigned organizations ..................................................... 67 

Schapiro, Hon. Mary L.: 

Responses to questions submitted by Representative Biggert ...................... 70 

Responses to questions submitted by Representative Himes ....................... 71 

Responses to questions submitted by Representative Putnam ..................... 74 

Responses to questions submitted by Representative Sherman ................... 80 

(1) 

SEC OVERSIGHT: CURRENT STATE 

AND AGENDA 

Tuesday, July 14, 2009 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, 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. Paul E. Kanjorski 

[chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Ackerman, Capuano, Hinojosa, McCarthy of New York, Baca, Lynch, Maloney, 

Klein, Perlmutter, Donnelly, Carson, Speier, Adler, Kosmas, 

Himes, Peters; Garrett, Castle, Manzullo, Royce, Biggert, Capito, 

Hensarling, Putnam, Bachmann, McCarthy of California, Posey, 

and Jenkins. 

Ex officio present: Representative Bachus. 

Also present: Representatives Gutierrez, Moore of Kansas, Ellison, and Miller of California. 

Chairman KANJORSKI. This hearing will come to order. 

Pursuant to the committee rules, each side will have 15 minutes 

for opening statements. 

Without objection, all members’ opening statements will be made 

a part of the record. 

I want to recognize Mr. Gutierrez and Mr. Ellison, members of 

the full committee participating in today’s hearing who are not 

members of the subcommittee. 

Without objection, it is so ordered. 

We meet today to focus on the work of the U.S. Securities and 

Exchange Commission. Although she is no stranger to us, this 

hearing also represents the first time that Mary Schapiro will testify in her new capacity as the head of the Commission. 

Chairman Schapiro has, of course, taken over the helm of a much 

beleaguered agency. In recent months, many have criticized the 

Commission for its lack of diligent enforcement. The Commission 

showed particular ineffectiveness when, despite numerous warnings, it failed to uncover the Madoff scandal. This $65 billion fraud 

has caused extreme hardship if not ruin for far too many individuals, pension funds, and charitable institutions. 

Our panel has already examined the Madoff affair in great detail, using an unfortunate episode as a case study to examine the 

gaps in our existing regulatory structure and to identify solutions 

2 

to fill these holes. The recent public assessments of Harry 

Markopoulos and the Government Accountability Office show an 

agency in distress. To restore investor confidence in our markets, 

the Commission must expeditiously change the way it does business. 

Since her return to the Commission as Chairman, Mary Schapiro 

has moved aggressively to focus the agency on fulfilling its key mission: protecting the investors. She has beefed-up the importance of 

the enforcement unit, pursued significantly more enforcement actions than her immediate predecessor, and removed unnecessary 

hurdles that slowed progress in enforcement cases. In less than 6 

months, she has also replaced nearly all of the agency senior officials. 

In nominating Mary Schapiro, President Obama remarked, 

‘‘Mary is known as a regulator who is both smart and tough, so 

much so that she has been criticized by the same industry insiders 

whom we need to get tough on. . . I know that Mary will provide 

the new ideas, new reforms, and new spirit of accountability that 

the SEC desperately needs so that fraud like the Madoff scandal 

doesn’t happen again.’’ 

Without question, I wholeheartedly concur with the President’s 

assessment. In her short tenure, Chairman Schapiro has displayed 

a commitment to implementing the reforms needed to change the 

internal culture of external perceptions of the Commission. 

The Commission, however, must continue to take bold and assertive action as it moves forward to bring enforcement actions 

against wrongdoers and to rewrite the rules governing the industry 

to better protect investors. Without further action to finalize regulatory proposals on proxy access, the custody of client assets, and 

short-sale restrictions, investors will lack the real protections that 

they need. The hard work on these matters therefore lies ahead. 

As the Commission works to put in place new rules, Congress 

must also work to update our securities laws. In this regard, Chairman Schapiro has already transmitted an ambitious set of 42 legislative proposals. The Commission’s Inspector General has also offered us some ideas. And the Obama Administration has, of course, 

already relayed general concepts and specific legislative proposals. 

I am now developing a bill based on these useful recommendations. 

Of the many suggestions already proposed, one important one 

stands out. We ought to put in place new standards that reward 

whistleblowers when their tips lead to catching fraudsters. By encouraging whistleblowers to come forward when they know of 

wrongdoing, we will leverage the Commission’s limited resources 

and increase the number of cops on the beat. 

Improving the Commission’s overall operation and performance 

will additionally require a significant increase in its budget. Chairman Schapiro has noted that the agency lacks the resources required to match increasingly sophisticated markets. Fortunately, 

the House will soon consider a bill providing for a modest increase 

of 8 percent in the Commission’s 2010 budget. 

But, we must do even more to remedy these constraints. The financial crisis shows what happens when unbridled capitalism lacks 

a strong regulatory check. We must therefore seriously consider the 

Commission’s request to raise its 2011 budget authorization by an 

3 

additional 20 percent. Alternatively, we might decide to put the 

Commission on the same independent footing as other financial 

regulators by moving the agency outside of the appropriations process. 

In closing, I look forward to Chairman Schapiro’s testimony 

today. Her comments will help us as we embark on overhauling financial services regulation. I would like to recognize Ranking 

Member Garrett for 3 minutes for his opening statement. 

Mr. GARRETT. I thank the chairman. 

I welcome you here today and I appreciated the opportunity to 

meet with you on Friday to chat about some of these issues as well 

before today’s hearing. 

You know there are so many fronts on which the SEC is actively 

engaged, it is a little daunting to know exactly where to start. You 

certainly have your hands full as a new chairman of the agency, 

and I think it is fair to say it is under a lot of scrutiny right now 

for the events that have taken place over the last several months 

and years. 

One place to start is with the SEC’s budget. In the House Financial Services appropriations bill recently passed out of the committee, for the first time ever, the SEC will be funded at more than 

$1 billion. In a recent letter I just received from one of Bernie 

Madoff’s group of victims, they asked why, given the SEC’s recent 

investment protection and enforcement track record, is Congress 

seriously considering giving the SEC even more money and more 

authority to regulate financial services? I think similar questions 

are on a lot of people’s minds, and I look forward to addressing 

that issue. 

And the policy areas on your plate, one of the areas I have been 

increasingly engaged in, is the area of over-the-counter derivatives. 

As I said a number of times in the past, 94 percent of the 500 largest global companies use derivatives to manage risk. Policymakers 

therefore need to tread very carefully as we regulate options for 

these markets. The overregulation or improper regulations might 

sound good politically, I am sure, but there is a lot of major unintended negative consequences that can come about, not just for the 

financial markets but for the broader economy as well. 

It is my understanding that the SEC and the CFTC along with 

the Administration have engaged in discussions over the OTC derivative regulation, including discussions regarding which agency 

should have jurisdiction over particular pieces of the market. So I 

will be interested to hear about particular discussions and any, 

maybe, disagreements that the SEC has with the CFTC on derivative regulation. 

I am also interested to hear if there are any areas of current 

CFTC jurisdiction where you feel they are better suited for the 

SEC. 

On another front, the Administration last week released draft 

legislation seeking to establish consistent standards for broker/ 

dealers and investment advisors that would give the SEC powers 

to ban certain forms of compensation that are, quote, not in an investors’ best interest. This comes on the heels, of course, of the Administration’s proposals of a so-called Consumer Financial Protection Agency. When you think about it, both proposals sort of reflect 

4 

a government-knows-best mentality that will likely restrict consumer choice and may be embraced by trial lawyers for unnecessary litigation. So I will be interested to hear from the Chairman 

regarding the SEC’s input on those proposals and to what extent 

you are comfortable with dictating how a firm should compensate 

employees. 

And finally, I mentioned at the beginning of my statement that 

there are a whole host of other issues that you are currently examining, and I will be interested to hear an update on your proposed 

rules to restrict short selling, as well as your thoughts on different 

ideas to reform credit rating agencies that we talked about, which 

I know the chairman is also very interested in pursuing as well. 

So I welcome the chairwoman being with us today, and I look forward to your discussion. Thank you. 

Chairman KANJORSKI. Thank you, Mr. Garrett. 

Now we will hear from the gentleman from New York, Mr. Ackerman. 

Mr. ACKERMAN. Thank you, Mr. Chairman. 

Welcome, Chairman Schapiro. There are an awful lot of people 

watching this hearing who aren’t too interested in regulatory reform. They are not too concerned about resolution authority or the 

clearing of derivatives, and they aren’t too worried about whether 

Congress complies with your request to increase funding for the 

SEC’s Enforcement Division. 

Madam Chairman, thousands of now penniless victims of Bernard Madoff’s Ponzi scheme are interested in just one thing: making sure their government lives up to its word. 

As you know, the Securities Investor Protection Corporation, that 

is investor protection indicating that it has something to do with 

protecting the investor, SIPC provides insurance of up to $500,000 

to securities investors in the event that a broker/dealer fails. It has 

been 7 months now since the collapse of Mr. Madoff’s fraud, and 

to date, of the over 15,400 claims that have been submitted, only 

450 victims have received even a portion of their SIPC insurance. 

Part of the delay stems from the confusion over the eligibility requirements of SIPC coverage. 

If you believe the law as interpreted by SIPC’s general counsel, 

Josephine Wang, SIPC is obligated to provide up to $500,000 per 

account for securities to any investor who believes that they owned 

securities in Madoff’s investment statements. 

But if you believe Irving Picard, the court-appointed trustee in 

the Madoff case based on a judicial precedent from the 1920’s, 

SIPC is obligated to ensure only the funds that Madoff victims initially invested, minus any withdrawals. According to Mr. Picard’s 

interpretation, many Madoff victims are not entitled to their insurance payments. 

Madam Chairman, that Madoff was able to conduct his fraud 

unmolested by the SEC for decades and despite the repeated red 

flags raised by Harry Markopoulos is tragic. That the court-appointed trustee in the Madoff case is seeking to delay and ultimately deny the insurance payments due to Madoff’s victims is absolutely shameful. 

Many of Madoff’s victims are in complete financial ruin. Many 

have lost their homes and have moved in with their children or 

5 

friends. The lucky ones don’t know how to make their next mortgage payment. At a minimum, they deserve the insurance they believe and to which the law says they are entitled. I hope that you 

can put an end to the confusion today by clarifying SIPC’s eligibility requirements. 

And I yield back the balance of my time. 

Chairman KANJORSKI. Thank you Mr. Ackerman. 

Mr. Bachus is recognized for 3 minutes. 

Mr. BACHUS. Thank you, Chairman Schapiro. 

As Chairman Kanjorski said, this is your first appearance before 

the Financial Services Committee since you have been sworn in. 

And I want to compliment you; in your short tenure as the agency’s 

chief executive, you have embarked on an ambitious regulatory 

agenda and an equally important review of the SEC’s internal operations. And I have been impressed in a very favorable way over 

the way you have conducted the affairs of the agency. 

Madam Chairman, there is a strong need for regulatory reform. 

I think we all agree on that. You certainly do. However, I am very 

concerned that the guiding principle of much of the Administration’s proposals, whether it is health care, energy or financial services, is what could be a heavy-handed intervention into what has 

traditionally been the private market on private choices and private affairs. 

In each of these areas, the key thing seems to be rationing or 

permitting certain conducts, but determining others are not appropriate. The Administration wants to create, as you know, a government health insurance option. And my fear is that if it is like those 

in other countries, it will result in rationing of health care, limiting 

choice, and erosion of quality. 

The cap and tax plan, I think, is another example where they 

will significantly ration energy use, the use of coal and other things 

to discourage it. 

And with financial services, it appears in many cases the Administration wants to ration credit to consumers and businesses to 

make determinations on whether certain transactions are appropriate, and to do so, I think, in a very intervening way. 

Let me just give you one example as it relates to the SEC. With 

the Consumer Financial Products Agency, and this is not the example, it appears to me that they could function as a contract approval and a credit-rationing agency. That is a fear. 

But now, as far as the SEC, last Friday, and I am sure you heard 

Treasury Secretary Geithner say that the government will be looking at every private derivative transaction that isn’t clear to determine if they were spuriously customized to avoid a clearinghouse. 

How can the government possibly look at tens of thousands of daily 

derivative transactions to determine if the intention is to avoid 

clearing? If a derivative trade is ruled invalid and has to be 

unwound, what happens to the contractual rights of the parties? I 

worry that we are asking regulators to function as a behavioral 

psychologist. 

Let me conclude by saying if the SEC has no one who could understand the Bernie Madoff trading strategy, how are they possibly 

going to be able to understand a private corporation and its 

counterparty’s decision to mitigate business risk? What the AdminVerDate Nov 24 2008 14:59 Dec 23, 2009 Jkt 053237 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\53237.TXT TERRIE
6 

istration is doing is turning the SEC into an IRS where fear of second-guessing causes decisions to be made based on fear, fear of excessive punishment, and fear of having to prove the unprovable 

rather than basing decisions on sound business judgment. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you. 

Mr. Capuano will be recognized for 2 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Madam Chairman, welcome. 

Over the last couple of years, I honestly wouldn’t waste my time 

coming to a hearing with the SEC Chair because I didn’t like anything that they were not doing, because they weren’t doing anything, so therefore it wasn’t I didn’t like what they were doing; 

they weren’t doing anything. And it was a waste of time because 

everybody there believed, do nothing, let the market flow, what, no 

big deal. Now we are where we are. 

Today, to some level, it is a little early, but on some levels, it is 

almost I am not sure I want to stick around too long because everything you are doing I like. Now, that doesn’t mean I am going to 

like every detail, I am going to like the final results, and will 

nitpick here and there. 

But, in general, I think you are going exactly in the right direction. And I will tell you that I encourage you to continue doing it. 

I know that you are working with the committee to try to get some 

legislative relief on some items that you need. I think that as— 

well, not an investor, but an indirect investor through 401(k)s and 

the like, and as a person who has some responsibility for overseeing the current system, I am much more satisfied and happy 

that we finally have an SEC that is awake and understands that 

there is a role to play to keep the system within the bounds of propriety, to keep the system so it won’t break again and balancing 

that, obviously, with the desire and the benefits of a strong market 

and a strong system, with an innovative system that brings risk 

with it. 

There is nothing wrong with risk. The question is, how much and 

who pays for that risk? And in general, the things you are talking 

about with credit rating agencies, the things you are talking about 

with the uptick rule, I think you are headed in the right direction. 

And again, I am going to stick around for your testimony just to 

make sure that I haven’t missed something. But other than that, 

if I leave before I get to ask you any questions, it is not because 

I am not interested; it is because on some levels, I think this hearing is a little premature. Not really, but on some levels it is because a lot of these things I know they are in the works; we are 

in the works trying to deal with the regulatory system. And until 

we know where all that goes, I think some of those questions will 

have to wait. 

But I just want to say thank you, thank you for beginning to restore—my faith in the system that we have created. 

Chairman KANJORSKI. Thank you, Mr. Capuano. 

Now the gentleman from California, Mr. Royce, for 3 minutes. 

Mr. ROYCE. Thank you. 

Thank you, Mr. Chairman, for holding this hearing. 

7 

I think it is interesting that we are talking about a 16-year timeframe that the SEC was in the process of examining or had an opportunity to examine Bernie Madoff. And I think one of the most 

troubling hearings that we had here was the hearing where we 

heard from Mr. Markopoulos about the Madoff case. 

And prior to that, I had an opportunity to talk to some of the investigators for the SEC about that particular case because it was 

absolutely astounding what Mr. Markopoulos was telling us. What 

he laid out was the world’s biggest Ponzi scheme and how, over a 

period of years, he repeatedly attempted to reach the SEC and actually found an individual at the Boston branch, Mr. Ed Manion, 

who was not like, as he described, the over-lawyered SEC, the overlawyered SEC that for years had failed in this endeavor. And he 

finally found a guy who had experience as a portfolio manager who 

actually knew what he was doing, who had experience as a trader. 

And when he looked at this data, he instantly saw the same thing, 

the same reality that Mr. Markopoulos saw. 

But Mr. Manion was silenced internally in the organization. 

Why? He wasn’t a lawyer. He was not part of the over-lawyered offices in New York and Washington, and they saw to it that went 

nowhere. 

Now, on several occasions, Mr. Markopoulos attempted on his 

own to go in to explain to SEC officials in detail why Mr. Madoff’s 

returns were simply not possible given the investment strategy. 

And he noted, and this was the astounding aspect that I explained—the SEC investigators explained this to us, they affirmed 

this—there was just a lack of understanding within the SEC of the 

more intricate aspects of our financial markets which they just 

didn’t understand. So what Mr. Markopoulos describes is a combination of a lack of market experience and knowledge by the overlawyered SEC, combined with an investigative ineptitude, which 

we are well aware of, that aspect has to be addressed. 

And to have somebody examined 8 times by the SEC and other 

institutions in 16 years and have this not found when people were 

calling attention to it shows a structural flaw. And I think rather 

than a lack of resources, this structural flaw is the heart of this 

problem. Why? Because it just didn’t happen here. We also had this 

problem in Brittain, as described to us by some of the British investigators, where they were over-lawyered as well. 

What is the proposed solution? Well, many have offered the idea 

of having retired people with market experience brought in so that 

you just don’t have, in the words of Mr. Markopoulos, 20-something-year-old lawyers, so that you have people with real life experience who can spot a Ponzi scheme in a New York minute in a 

position of responsibility, where they can’t be shut down by 20- 

year-old lawyers. 

And so I offer that up simply because he was quite insistent on 

that structural change in the organization. And we are appreciative 

of anything you can do to reset those priorities so that you actually 

have people, retired, with the kind of experience with the industry 

and the market and who understand these schemes. 

Thank you very much, Madam Chairwoman. 

Chairman KANJORSKI. Thank you very much Mr. Royce. 

8 

And now we will hear from the gentleman from Texas, Mr. Hinojosa, for 1 minute. 

Mr. HINOJOSA. Thank you. Thank you, Mr. Chairman. 

Welcome, Madam Chair Schapiro. I want to thank Chairman 

Kanjorski and Ranking Member Garrett for calling and holding 

this important and timely hearing today. This hearing will help us 

understand more comprehensively the role that the SEC plays in 

protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital information. It is yet another step to 

help reassure our constituents that Members of Congress and the 

regulatory agencies are taking the steps necessary to address one 

of the causes of the global economic crisis and prevent another one 

from recurring. 

We need to provide the SEC with a considerable amount of funding, such as that included in President Obama’s proposed 2010 

budget. In fact, we need to increase it beyond his proposed funding 

to ensure that the SEC not only is able to hire staff to fill the void 

at the SEC, but also increase the salary level of its employees to 

ensure continuity of institutional knowledge at the SEC. 

Again, I want to thank you, Mr. Chairman for holding today’s 

hearing. I look forward to the testimony of SEC Chair Mary 

Schapiro. 

I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Hinojosa. 

And now we will hear from the gentleman from Texas, Mr. Hensarling, for 3 minutes. 

Mr. HENSARLING. I thank you, Mr. Chairman. 

And clearly this hearing is being held against the backdrop of the 

Administration’s financial markets reform legislation. It is a piece 

of legislation of which many of us are concerned. 

First of all, it certainly would seem to enshrine us as a bailout 

nation. But yet as history as our guide, I know of no nation that 

has been able to bail out, borrow, and spin its way into prosperity. 

By designating certain firms as systemically risky, we almost 

guarantee that there will be more Fannie Maes and Freddie Macs, 

which ultimately will prove to be the mother of all bailouts, I am 

sure costing the American taxpayers hundreds of billions of dollars. 

In addition, this Office of Consumer Financial Products, we 

would call it financial product polit bureau that ultimately will decide whether Americans can have credit cards, which home mortgages they can hold, whether or not they can even have access to 

ATM machines is regulatory overkill in the nanny state at its 

worse. 

The underlying assumption is that our economic turmoil has 

somehow been caused by lack of regulation. It wasn’t lack of regulation. It was dumb regulation versus smart regulation. If you come 

up with the wrong diagnosis, you are likely to get the wrong remedy. For example, look at the derivatives issue that was discussed 

just last week in a joint hearing between our committee and the 

Agriculture Committee. 

Again, we know that the most high-profile meltdown in this area 

happened at AIG with their credit default swaps. Yet in sworn testimony, sworn testimony before this committee, the head of the 

OTS, AIG’s regulators, said, do you know what? We had the experVerDate Nov 24 2008 14:59 Dec 23, 2009 Jkt 053237 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\53237.TXT TERRIE
9 

tise. We had the resources. We had the manpower, and we had the 

regulatory authority. We just missed it; we made a mistake. 

It is another data point that it is not always more regulation that 

counts; it is perhaps smarter regulators and smarter regulation. 

Now, others have spoken about the Madoff scandal. Clearly, 

again, the SEC had the tools, seemingly they had the expertise, 

seemingly had the manpower and, in many cases, were notified, 

but for whatever reason, they just missed it, and all the suffering 

and the setbacks to the economy have occurred. 

We look at the matter of the rating agency oligopolies. And I certainly believe that some good work is being done in this area by 

the SEC. But for the SEC to essentially have the NRSRO rule that 

created an oligopoly in rating agencies contributed mightily to our 

economic turmoil that we see. 

Again, I have a number of reservations about the Administration’s plan. There are a number of areas that we can talk with the 

Chairman of the SEC. I appreciate her appearance today. I look 

forward to the testimony. 

I yield back the balance of my time. 

Chairman KANJORSKI. Thank you very much, Mr. Hensarling. 

Now we will hear from the gentleman from Florida for 2 minutes, Mr. Klein. 

Mr. KLEIN. Thank you, Mr. Chairman. 

And good morning. Nice to see you again. I appreciate you taking 

on this important responsibility as chairman of the agency. 

You have heard from a number of our members about the concerns of what has happened in the past. And I would probably respectfully disagree with some of my members. Some of this was not 

just a question of lack of regulation or overregulation or quality 

personnel. We have talked about the fact that I think that there 

has been a, whether it is intentional or otherwise, it seems like 

there has been an effort over the years by some of the Members 

of Congress and others to say we need less. It is not a question of 

less in quantity, but we don’t need the smarter kind of oversight 

that is necessary. 

And in my background, I was a securities lawyer years ago. I 

worked with the SEC. I understand what some of the shortcomings 

were and some of the strengths. But overall, I think there has been 

almost a deliberate attempt over the years to not compensate people at a fair level and losing some of the talent, and some of the 

members have recognized that. 

I think as we move forward, it is not just a question of more or 

less; it is a question of the right type of oversight that can help investors understand what they are buying, what they are selling, 

and companies understand what their responsibilities are. It is not 

that complicated. 

And I think a little common sense would go a long way here instead of sort of political posturing. This is the right thing to do at 

this moment. 

I also want to touch briefly on the Madoff situation because there 

is a lot of concern. I am from Florida. A lot of people from Florida 

unfortunately lost a lot in this situation. And the SIPC, at least in 

my impression so far, has not been moving very quickly, and the 

10 

trustee has not been moving as quickly as necessary to get these 

people made whole. 

Some of these people lost everything. Some people lost part of 

their assets, and they are not getting responses from the SIPC. 

And I believe there is a responsibility of the SEC to provide statutory oversight of the SIPC. And I would ask that you with your 

staff take a greater role in helping resolve this as quickly as possible. We don’t want to have to spend millions and millions of dollars for these people in court with lawyers. We want to get them 

whole, to the extent that they are permitted to be whole, with the 

Securities Investor Protection Act backing them up. 

So I would just like to ask for that and I look forward to working 

with your staff and working on some new oversight regulations 

that will help our investors and the United States establish confidence. Thank you. 

Chairman KANJORSKI. Thank you, Mr. Klein. 

Now we will hear from the gentleman from California for 3 minutes, Mr. McCarthy. 

Mr. MCCARTHY OF CALIFORNIA. Thank you, Mr. Chairman. 

Thank you for scheduling this hearing today so we can hear from 

the new SEC Chair, Mary Schapiro, about your agenda. The last 

time this committee heard from the SEC was to discuss the Bernie 

Madoff scandal prior to your tenure. And I will tell you, I was frustrated with the responses that the Members received regarding the 

SEC handling of the Madoff Ponzi scheme. It seemed as if the right 

hand didn’t know what the left hand was doing. 

To try to fix this, I introduced legislation to restructure the SEC 

to return inspections and examination functions to their original location within the Division of Investment Management, Trading and 

Markets. This change would streamline operations at the SEC and 

reduce their current stovepipe structure where those charged with 

inspecting and examining organizations are entirely separate from 

those who set the policy. 

With that said, I do appreciate you coming, and I look forward 

to a new direction and a new restructuring. 

I yield back the balance of my time. 

Chairman KANJORSKI. Thank you very much, Mr. McCarthy. 

And now we will hear from the gentleman from Michigan, Mr. 

Peters, for 2 minutes. 

Mr. PETERS. Thank you, Mr. Chairman. 

And thank you, Chairman Schapiro, for testifying today. The current financial crisis, of course, has numerous causes. But, in my 

view, one of the principal concerns that must be addressed is the 

way in which corporations have stopped serving the interest of 

their shareholders. 

Too often we have seen large companies run for the benefit of 

management and corporate boards that no longer answer to the 

shareholders who actually own the company. I would like to hear 

more today about the efforts that the SEC has undertaken pursuant to its statutory authority to empower shareholders to have 

more control over board elections, executive compensation packages, and other major corporate decisions. 

I am also interested in hearing your thoughts about other steps 

that may need to be taken by Congress to supplement the efforts 

11 

that the SEC is taking. This committee is currently working on 

comprehensive regulatory reform legislation that will give the SEC 

and other agencies the resources they need to look after shareholder interest. 

I believe, in addition to empowering regulators with new and improved authority to watch over our Nation’s financial health, we 

should also empower the owners of these companies to have more 

control and to align management interest with long-term shareholder value. 

I look forward to your testimony today and having an opportunity to hear your thoughts on these very important issues. 

Chairman KANJORSKI. Thank you very much, Mr. Peters. 

That concludes our opening statements. 

So I now with great pride introduce and welcome as our only witness at today’s hearing, Mary Schapiro, Chairman of the Securities 

and Exchange Commission. 

Without objection, your statement, Ms. Schapiro, will be made a 

part of the record. You are recognized for 5 minutes for a summary 

of your testimony. And then I suspect you should be prepared for 

a barrage of questions. 

STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, 

CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION 

Ms. SCHAPIRO. Thank you very much, Chairman Kanjorski, and 

thank you for your lovely introduction. 

Chairman Kanjorski, Ranking Member Garrett, members of the 

subcommittee, thank you for the opportunity to testify today on behalf of the Securities and Exchange Commission. 

In my 5 months at the SEC, we have been singularly focused on 

rebuilding investor confidence in the capital markets and in the 

SEC itself. To that end, we have begun implementing many 

changes designed to better serve and protect investors and promote 

investor confidence. Indeed, there is an invigorating sense of urgency among the staff of the agency to demonstrate that we are up 

to the job. 

Since I returned to the agency, we have been working to fill regulatory gaps exposed by the financial crisis; seeking to strengthen 

the protections for investors against crimes, such as those perpetrated by Madoff and other operators of Ponzi schemes; enhancing corporate governance to hold boards more accountable to shareholders; improving our risk-assessment capabilities; bolstering our 

ability to respond to enforcement more quickly and effectively; and 

bringing on new leadership and new skill sets throughout the agency. 

As I conveyed to you in February, the Madoff fraud is one that 

the agency tragically did not detect, and not a day goes by that we 

do not regret that. In a few weeks, our Inspector General will be 

issuing his report outlining why he believes the SEC missed the 

Madoff fraud. But I understood when I arrived that we could not 

wait to begin making significant changes. And that is why we have 

been implementing many new investor protections, some of which 

I would like to highlight. 

First, we are reinvigorating the SEC’s Enforcement Division by 

streamlining our procedures. Within days of becoming chairman, 

12 

we changed our procedures so that enforcement staff can issue subpoenas and negotiate corporate penalties without first getting full 

Commission approval. And our enforcement focus has squarely 

shifted to higher-impact cases brought in a timely way. 

Additionally, our new enforcement director, Rob Khuzami, is reducing bureaucracy by streamlining management within the Enforcement Division, putting many more talented investigators directly to work on cases. He is also creating specialized units which 

will help to concentrate staff expertise and better coordinate investigations. 

Since the end of January, as compared to the same period last 

year, we have filed 3 times as many emergency restraining orders, 

opened up more than 40 additional investigations, and issued over 

100 more formal orders of investigation. 

In terms of cases, we have brought fraud charges against operators of the Reserve Primary Fund, which broke the buck last fall 

unsetting the money markets; pursued high-profile figures in connection with an alleged kickback scheme involving New York’s 

largest pension fund; brought the first ever hedge fund insider 

trading case involving credit default swaps; charged the former 

Countrywide CEO and other former executives with securities law 

violations; and expanded our case involving Allen Stanford to include the former head of Antigua’s financial regulatory commission, 

who allegedly received bribes and helped Stanford to thwart various inquiries. 

This is just a small slice. There are many more investigations in 

the pipeline. 

Second, we are strengthening our examination program. And we 

are doing that by recruiting more professionals with new skill sets 

and expertise in complex financial instruments, trading, financial 

analysis, risk management and valuation. Significantly enhanced 

training in fraud detection is also being provided to our examination staff. 

Further, because we have only 425 examiners for the more than 

11,000 regulated investment advisors and 8,000 mutual funds, we 

are improving our risk-based methodologies for detecting and focusing on potentially fraudulent firms and activities to maximize our 

ability to protect investors. 

Third, we have proposed rules to substantially strengthen the 

controls of our custody of client assets held by investment advisors 

or their affiliates. Among other things, these custody safeguards 

would encourage investment firms to place their clients’ assets in 

the care of truly independent custodians. Under the proposal, firms 

that do not do so would have to obtain a special custody controls 

report from an independent audit firm, and in addition, all advisors 

with control of client assets would be required to undergo annual 

surprise exams by independent auditors to verify client assets. 

Enhancing custody controls is just one of the many rulemakings 

we have undertaken at the SEC. We have also sought comment on 

several proposals to restrict short selling. We have proposed a series of rules to empower shareholders through proxy access as well 

as through provision of better information in the proxy. We have 

sought comment on a series of money market fund reforms to tighten credit quality, maturity and liquidity standards. We have been 

13 

actively considering ways to strengthen the integrity of the credit 

ratings process, and we have been reconsidering a decade-old proposal to challenge the so-called pay-to-play practices by investment 

advisors to public pension funds. And finally, tomorrow we will be 

considering a proposal that would result in greater and more timely information being provided to investors in municipal securities. 

Mr. Chairman, I want to thank you and the committee for your 

support of the SEC, and I look forward to discussing with you our 

other activities, our thoughts for additional legislation, and the 

state of our resources, and reform of the regulatory landscape. 

Thank you. 

[The prepared statement of Chairman Schapiro can be found on 

page 50 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Madam Chairman. 

It sounds like you are off to a great start. 

Part of the question I have is something I hear from many of my 

constituents, particularly after the most recent financial crisis in 

the country; they ask the question why, after mistakes are made 

by people in various positions of government, particularly in the 

regulatory area of government, you never seem to hear of anyone 

being fired? 

I do not want to suggest you have wholesale firings, but what is 

your philosophy in terms of, if they are a failure at the agency, not 

only from the past but on into the future, implementing some sort 

of more stringent accountability to employees so that they are not 

necessarily lax in how they pursue enforcement or investigations. 

I will be honest with you, in the Madoff situation, I sympathize 

with the constituents of my friend from New York, Mr. Ackerman. 

When you hear some of the stories from the testimony of the Inspector General, that if only somebody turned around when they 

were examining the Madoff operation and just asked Mr. Madoff, 

where are the securities, that would have resolved the problem 

that there weren’t any and therefore that there was something 

fraudulent going on. And yet nobody asked that question. 

And now I think it is important enough to highlight so other people do not miss those questions in the future. So maybe if you could 

lay out your philosophy in how you intend to get a higher response 

to regulatory activities within the agency during your tenure. 

Ms. SCHAPIRO. I would be happy to talk about that. I am a very 

big believer that we have to hold people accountable at all levels 

of the agency for performing the responsibilities that have been entrusted to us by the American people. We also have to be honest 

to undertake what I think we are doing right now, a very honest 

assessment of what were our failings and what were our shortcomings with respect to Madoff and, frankly, any other issues 

where we were not perhaps as quick to the draw as we should have 

been or could have been. 

One of the things that we are engaged in right now, as you know, 

is the review by our Inspector General; that, I expect, will reveal 

much more the fundamental causes of our failure to detect early 

on and prevent or stop early on the Madoff fraud. In the meantime, 

we have tried to pull all the lessons we can, whether it is from the 

stovepipe structure of the organization creating issues, whether it 

is from a lack of skill sets so that the people who received the inforVerDate Nov 24 2008 14:59 Dec 23, 2009 Jkt 053237 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\53237.TXT TERRIE
14 

mation from Mr. Markopoulos didn’t understand what they were 

looking at, whether it was a resource issue, whether it was an inability to track and follow up on the material received; we tried to 

pull all the lessons we can from those failings and move very quickly to put in place as many different changes in how we operate as 

possible. 

So, for example, the goal of creating specialized units within our 

Enforcement Division is really a response to the Madoff failure; the 

new custody rules to fill a gap in regulation that would have made 

it, if not impossible, very difficult for Madoff to do what he did. 

Those new rules that we have proposed are a response to that failure. 

Bringing in new skill sets across the agency through our risk assessment program as well as directly into the examination program 

again are a response very much to the Madoff failure. The fact that 

we have asked this committee to create whistleblower legislation to 

allow us to work more closely with whistleblowers and leverage 

those third-party resources and expertise, again, is a very direct response. 

So my view is, we have to be absolutely open to learning all the 

lessons that this tragedy can teach us and moving ahead to put 

those kinds of changes in place in a very aggressive way. 

Chairman KANJORSKI. Thank you very much. I am sure that you 

are going to do your best. 

We are going to be watching, though, I assure you of that, too. 

I am going to pose my second question quickly if I can because 

my time is running out, but it is not done with the intention of embarrassing you or the Administration. But I am curious, should we 

not now take the opportunity to reform some of the structure of 

government, particularly by merging the CFTC and the SEC? I understand all the political ramifications, we have had meetings on 

end over the last several weeks on those discussions, but I asked 

the question the other day to the Secretary of the Treasury as to 

why in their White Paper they didn’t discuss that seemingly natural possibility. And if we don’t do it now after this disaster, what 

is the future plan of this Administration or Government as to what 

to do about what appears to be conflicting agencies that could logically be merged and accomplish better ends? I am going to end it 

there and not put you any further on the spot than that. 

Ms. SCHAPIRO. Well, I think that the Administration having 

made the decision not to seek full merger of the two agencies really 

puts the burden on the SEC and the CFTC to work together more 

effectively than they have over the course of the last 35 or so years 

that the CFTC has been in existence. And we are both quite committed to doing that. We have been charged with an effort to harmonize our rules to the greatest extent possible, and we are fully 

engaged in that process right now. 

But there will still be areas of uncertainty. There will still be the 

potential for products to be created that fall between the lines of 

the two agencies, and we will have to be extremely cognizant of 

that possibility so that we don’t allow new unregulated markets to 

flourish between our two areas of authority. 

Chairman KANJORSKI. Thank you. Again, we are going to be 

watching that, too. 

15 

Ms. SCHAPIRO. I appreciate that. 

Chairman KANJORSKI. And that concludes my time. 

And now we will hear from Mr. Garrett of New Jersey for 5 minutes. 

Mr. GARRETT. I thank you. 

Again, I thank the chairwoman. As the American public watches 

this hearing today, they probably think, in some respects, that we 

have been here before. 

I appreciate Mr. Capuano’s comment, he is gone now, where he 

said, in light of everything that has happened in the past, he appreciates the fact that everything is going in the right direction 

now, which is good. 

But the public might say, well, we have been here before, because you know, if you think over history, and some of these things 

happened before I was in Congress, you had the mutual fund market timing issue in the past. You had the missed accounting scandals in the past. You had the analyst-conflict issues during the dotcom issues in the past. All these errors, if you will, by the SEC in 

the past, and I assume that there were probably other hearings 

like this after each one where the SEC, someone else other than 

you, would come back and say, we realized we have made some 

mistakes, and now we are going to fix them with X, Y, and Z. And 

probably somebody on this panel sat here and said, well, we are 

glad that they are now going in the right direction. 

I mean, we have already talked about the Madoff situation. What 

somebody hasn’t mentioned so far of course is the SEC is also responsible for investment bank oversight in the Bear/Lehman situations as well. So the list just continues. In one respect, it seems 

like the SEC is always coming in after the fact to the table, always 

a different chairman, saying, we realized our errors, and now we 

are going to try to correct them. 

And that of course probably leaves the American public questioning the veracity of the SEC and also the Congress as well in 

order to do its job. And that probably leads to the tremendous frustration that the public has for all of this. 

One of the issues that has been addressed so far is the Administration’s proposal in a number of different areas. One of them is 

the President wants to give the SEC the power to ensure in the 

area of compensation. And he wants to make sure that it does not 

skew investment advice. So just three quick questions. Is that 

something that the SEC specifically asked for from the Administration for that power? If so, did you work closely to try to come up 

with it? And how would you try to address that issue? 

Ms. SCHAPIRO. Thank you. 

Let me just say that I think, to some extent, all regulators, not 

just the SEC, play catch-up with the fraudsters. And perhaps that 

will always be the unfortunate way for us to operate, although we 

are not going on that assumption, we are really working very hard 

to build a risk-assessment capability to try to get ahead of the 

curve of the problematic practices. And we could I guess end all 

problematic practices, but it would be a pretty heavy-handed regulation in order to ensure that none of them were ever perpetrated 

against the public. 

16 

Mr. GARRETT. Well, that is a good point. Because it can either 

go in the over heavy-handed approach which is suggesting what 

some of us suggest may be coming out of the Administration right 

now, or you can go in completely the other direction. Maybe we 

have to find in the middle where you still ask for personal responsibility from the individual in these cases. But if you can get to the 

point. 

Ms. SCHAPIRO. Yes. What the SEC has been interested in and 

what we worked with the Administration on was the ability—first 

of all, we have done compensation disclosure rules at the SEC 

within the last couple of weeks to try to require forced disclosure, 

required disclosure, of how compensation plans incentivize longterm and short-term risk-taking within the corporation. And we 

have always approached compensation from a disclosure basis at 

the SEC. 

We have sought the ability to regulate investment advisors and 

broker/dealers as to the standard of care that they need to provide 

to customers. Right now, they are actually regulated under different regimes because of their different compensation models. Investment advisors seek compensation for a fee; broker/dealers seek 

transactional compensation. As a result, even though they may 

both be providing advice to retail investors— 

Mr. GARRETT. I don’t have much time. Is that a fiduciary standard? 

Ms. SCHAPIRO. We are looking for a fiduciary standard from the 

perspective of investors on getting advice from a financial services 

professional. 

Mr. GARRETT. Again, I apologize. I don’t have much time. Can an 

advisor receive a commission and still come under a fiduciary 

standard in your understanding? 

Ms. SCHAPIRO. Well, advisors generally don’t get compensation 

related—a transaction-related compensation; broker/dealers do. 

And what we are saying is that it should not be how they are compensated but what they are doing that gives rise to a fiduciary 

standard. So if you are giving advice, whether you are a broker or 

an investment advisor, the act of giving advice should require that 

you adhere to a fiduciary standard. 

Mr. GARRETT. But then the aspect of the first part of the question, as far as giving you the power to set compensation schemes, 

would then commission-type compensation schemes go in an opposite direction from where you want to go with meeting that fiduciary standard or meeting those—making sure that it is in line 

with what the Administration wants to come out of this? 

Ms. SCHAPIRO. I guess I am not exactly sure how directly we 

would set compensation schemes. We would like to see, for example, the end of retail price maintenance that would allow brokers 

or advisors to offer mutual funds without having to adhere to the 

sales prices that are quoted in the prospectus. We would like to be 

able to see much better disclosure with respect to compensation 

schemes so that investors understand exactly what it is they are 

paying for. 

Mr. GARRETT. Thanks a lot. 

Chairman KANJORSKI. Thank you, Mr. Garrett. 

The gentleman from New York for 5 minutes, Mr. Ackerman. 

17 

Mr. ACKERMAN. Thank you, Mr. Chairman. 

Madam Chairman, the issue that I addressed in my opening 

statement, to refresh your memory, is the Madoff victims and the 

terrible situation that we are looking at where we actually have 

classes of victims pitted against each other in addition to all the 

other confusion. Which Madoff investors are eligible for SIPC insurance? 

Ms. SCHAPIRO. Congressman, let me just say that this shouldn’t 

be such a difficult issue, but it is, and of course, it is a very heartbreaking issue, because the tragic truth is there is not enough 

money available to pay off all the customer claims. And as you 

point out— 

Mr. ACKERMAN. That leaves, if I could just interject there, a larger problem because that means that our citizens are not entitled 

to have confidence in the system. 

Ms. SCHAPIRO. Well, there is no doubt that what has happened 

with Madoff has shaken everybody’s confidence in the integrity of 

the financial services industry and in the regulatory system to protect investors. 

With respect specifically to the specific question, as you know, 

the trustee has chosen a cash in/cash out view when determining 

net equity on which claims and at what amount to pay out. There 

are a group of investors who believe that net—so that if you paid 

in $2 million, over time you took out $1 million, your net equity 

would be $1 million. There is a group of investors— 

Mr. ACKERMAN. But these, unfortunately, are people that we 

have encouraged and assured by virtue of the fact that we provide 

the supervision. Now, these people knew that there were questions 

raised about Madoff, and the government basically gave him a 

clean bill of health year after year. People knew about Mr. 

Markopoulos. People knew about other people as well who had 

raised questions that were dismissed and then felt the government 

is saying that this guy is okay, and the million dollars I put in has 

grown over the years, and I have this much money to live on now. 

Ms. SCHAPIRO. I understand that. And there is a group of investors who feel very deeply that their net equity on which they would 

be paid should be determined by looking, as you point out, at their 

last account statement. So they may have paid in $2 million, but 

that amount of money has grown to $10 million, and they were relying on that $10 million to be there for them. 

Mr. ACKERMAN. Well, they weren’t relying on the $2 million, 

which they were of course, they were relying on the government’s 

assurance that they had the $2 million, and they made life decisions based on that. 

So where do you come down, Madam Chair? 

Ms. SCHAPIRO. Well, we have been meeting with SIPC and with 

the lawyers for the investors who would like to calculate the net 

equity based on the last account statement in hopes of trying to 

find a way to settle this matter between the two groups to expedite 

getting these payments out to people who are very dependent upon 

them. These investors have challenged the trustees’ cash in/cash 

out methodology in court, and that is before the bankruptcy court— 

Mr. ACKERMAN. We are going to have to make a decision. Someone has to make a choice here. 

18 

Ms. SCHAPIRO. I understand. 

Mr. ACKERMAN. Here is a case. A woman who has a small business, a publishing business, she sells it for $3 million—she is taking out of, and that is everything she owns in the world, $3 million. 

It is in Madoff. She gets a check for $30,000 a month that she is 

taking out, which is the money she is making on it and still has 

the equity in there. She buys a huge apartment in Manhattan. 

That is the only asset that she has. The asset is now underwater. 

She spends the $30,000 a month paying her taxes, paying her 

mortgage and her maintenance and her living expenses. She has 

done this for a couple of years. 

Suddenly one month, when Madoff turns himself in, she has no 

income. The unit she lives in is upside down, as they say. She can’t 

sell it for what it is worth, she owes $15,000 to $20,000 in carrying 

charges and can get nothing from it if she sells it and has $1,500 

in her bank and is waiting for her $30,000 return from Madoff. She 

is homeless. She has no assets. Her $3 million has been stolen. And 

then, on top of that, she is being told that the $30,000 a month 

that she has gotten that she has paid taxes on with half and half 

to her mortgage, she suddenly owes back because of a clawback 

thing that they are claiming. Where is she going to get the $30,000 a month that she has collected to give back? I mean, these people are absolutely destitute. 

And they were reliant on the government’s seal of approval that 

this guy is legit, that he is on the up and up. How can we turn 

our back on these people? 

Ms. SCHAPIRO. We cannot turn our back on them, and we should 

not turn our back on them. And I am committed to working as aggressively as we possibly can with SIPC to take the most expansive 

possible view of how to repay these claims and to do it in as quick 

a fashion as they possibly can. 

That specific issue is before the bankruptcy judge right now. I 

don’t have, although I would be happy to get for you, some indication of timing when it might be resolved. But I agree that we need 

to push very hard to make people whole to the greatest extent possible. 

Mr. ACKERMAN. I thank you for your concern and your actions. 

Mr. Chairman, if I can just have another couple of seconds to 

add. Some of our colleagues have raised an accountability question. 

And I just want to compliment the chairman. That rather bombastic initial hearing that we had with people from the agency before us that got an awful lot of attention because it was the first 

one, the chairman called me immediately after the hearing and 

said she was aghast at some of the things that she had heard during the testimony. 

Chairman KANJORSKI. You mean she called you, too? 

Mr. ACKERMAN. Yes, she did, even me. 

And by the end of that week, two of those people were gone from 

the agency. And I just want to say that is accountability that I 

have never seen in my 14 terms here. And I want to thank the 

chairman for her swift action and dedication to her mission. 

Ms. SCHAPIRO. Thank you. 

Mr. ACKERMAN. I yield back the balance of my time. 

Chairman KANJORSKI. Thank you, Mr. Ackerman. 

19 

And now we will hear from the gentleman from Alabama, Mr. 

Bachus. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Chairman Schapiro, I mentioned last Friday that Secretary 

Geithner made this statement that they would require regulators 

to carefully police any attempts by market participants to use spurious customization to avoid central clearing and exchanges. 

Now, my concern is that, every day, American companies enter 

into hundreds if not thousands of these derivative agreements and 

customized derivative agreements, today, and yet there is no requirement that they clear them today. So they are not fashioning 

them today. They are not customizing them today to avoid this rule 

that the Administration says they are going to put in place. 

So, number one, I mean, do you agree that this is going to be 

pretty complex and difficult to police these derivative agreements. 

Ms. SCHAPIRO. I think that is a great question. 

I do believe in the approach that should encourage the maximum 

standardization as possible to get as many of these instruments 

cleared through central clearinghouses which will reduce systemic 

risk pretty dramatically, even to get some of them on exchanges so 

we can actually have real pre- and post-trade transparency. 

But I also agree that there is a need and will continue to be a 

need for businesses to be able to hedge their particular needs for 

commodities or financial protection in a customized way. 

And I think we—I honestly can’t tell you that I know how we 

would police specifically at this point, whether or not products that 

could have been standardized are for some other reason being customized and what we would do about that. 

I do think the incentives will be there to move things into the 

more standardized format even without the regulators necessarily 

policing them, because it is envisioned that for the standardized 

product, the capital requirements, the margin requirements are 

likely to be lower, the costs of transacting are likely to be far lower 

than they are for the customized products. 

So I believe the incentive will be for any industrial business that 

wants to hedge its exposure to a commodity or to a currency, for 

example, will be inclined to go the standardized route because it 

will be the most efficient thing to do. 

But where it is not going to work for them, they will have to bear 

the additional costs, likely, of taking the customized approach. And 

we, as regulators, will have to figure out exactly how we are going 

to police them. 

Mr. BACHUS. Yes. You know, he didn’t say whether it was a 

preapproval process, which I don’t think would be workable at all. 

I guess you would have to decide ex post facto. And, you know, to 

me, you would have get inside the minds of these corporations, and 

I am not sure that you have the expertise or could hire that expertise. 

Ms. SCHAPIRO. Well, I think that the industry would have a right 

to expect from the regulators some significant guidance on exactly 

what constitutes standardized and what constitutes customized. 

And it would almost surely have to be a look-back and not a 

preapproval process. 

20 

Mr. BACHUS. But even reviewing all these customized derivatives 

would be an incredibly complex job. 

Ms. SCHAPIRO. I don’t disagree. And I can’t tell you that we have 

thought through exactly how that would happen at this point. 

Mr. BACHUS. All right. And you would have to make the business 

decisions that really—you know, as to what the corporations did 

and why they did it. And, as I said, they are doing that today, so 

it is not, obviously, to avoid a rule. 

You are going to increase supervision of credit rating agencies. 

One of the things that has been talked about, preventing companies from shopping around for favorable credit ratings, how do you 

envision doing that? 

Ms. SCHAPIRO. Well, that is an issue I am particularly interested 

in. As you know, the SEC has engaged in multiple rulemaking 

since it got authority under the Credit Rating Reform Act in 2006 

to provide disclosure for the prevention and the disclosure of conflicts of interests and so forth. 

But I have been particularly interested in the idea that I, as an 

issuer of a structured product, would like to get a good high rating 

for that product to be able to sell it. And so I will shop around and 

get preliminary ratings from multiple rating agencies and then be 

in a position to pick the highest rating. 

One of the areas we are looking at—there are two things we are 

looking at specifically to respond to that. One is that we could require issuers to disclose all of those preliminary ratings so that if 

some of them weren’t AAA, investors would at least know that. 

The second would be to require on a confidential basis disclosure 

of the underlying loan data for a structured product, for example, 

to all the other rating agencies, who could then perform an unsolicited rating and make that rating available to the marketplace. So, 

again, you would have some competition and you would have some 

diversity of perspective about the quality of a particular security 

being brought into the marketplace. 

Mr. BACHUS. All right. I think every member of this committee 

applauds you on your focus on credit rating agencies. I think if 

they had done their job properly, we could have avoided the majority of the problems we find ourselves with today. And I suppose 

your special examination on their role in the financial crisis will 

shed more light on that. 

Ms. SCHAPIRO. That is right. And we are also looking at whether—because ratings are enshrined in many SEC regulations, we 

are looking at creating a roadmap to lessening SEC reliance on ratings in our regulatory— 

Mr. BACHUS. And just the three of them, the oligarchy that I 

think has been set up. 

Ms. SCHAPIRO. Yes, it is a highly concentrated business. I think 

over 95 percent of ratings are done by the top three firms. 

Mr. BACHUS. Which our Republican plan also addresses. 

Thank you. 

Chairman KANJORSKI. Thank you, Mr. Bachus. 

Now we will hear from the gentlewoman from New York, Mrs. 

McCarthy. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. 

And thank you, Chairwoman Schapiro. 

21 

We have talked before, have met and asked questions back and 

forth, and especially on the confidence, what the SEC has to do to 

bring to the consumer and the investor. And I know that, you 

know, everybody looks at the Madoff case and how many millions 

and billions of dollars were lost there. What I think everybody is 

forgetting—and anybody who looks at their 401(k), they are not forgetting—people who were thinking of retiring can’t retire; those 

that are retired are in dire straits. 

And so your job, to build up confidence with the American people 

again, is going to be a difficult one. And even when we see the reaction of the financial institutions and the banks, that they don’t 

want any of these regulations—and they are fighting us. The lobbying that is going on here is unbelievable. And yet we are supposed to be taking care of our constituents. 

So one of the things that I was thinking when you were giving 

your testimony with regard to the many open investigations and 

cases the Enforcement Division is now working on, how is that 

being relayed to the public and the consumers. And, in your opinion, should enforcement updates fall within the CFPA, or is that 

something you would like to maintain within the SEC? 

Ms. SCHAPIRO. Thank you. 

Well, I think everything we are doing at the SEC now is geared 

towards trying to reorient the agency towards investor protection. 

We have spent a lot of time, I think historically, worrying about 

capital formation and the ability of U.S. businesses to compete 

internationally, and those are all important. But right now our 

focus is very much on restoring and rebuilding investor confidence 

which, frankly, is critical, I think, to the success of our economy 

over the long run. 

And the important part of that, as you point out, is enforcement 

cases, because that shows the public we are there, on the job, trying to protect them. And we have stepped up our enforcement efforts very significantly. 

We relay them to the public really through the media, and we 

count on the press to write about the cases that we bring, the dozens of temporary restraining order cases that we have done. Over 

40 in the last several months have gotten very good publicity, particularly in local markets. And those help to both educate people 

going forward about the problems, but it also helps them to think 

of the SEC as a place where they can bring information so that we 

can pursue it. 

I feel very strongly that the SEC’s enforcement program is under 

terrific new leadership, a new director, a new deputy director, a 

new head of the New York office, a new organizational structure 

being rolled out over the next several weeks, new skill sets, and 

new resources that we hope to bring in over time will make this 

once again the premier civil law enforcement agency in the Federal 

Government. 

I think the enforcement of the securities laws very much needs 

to stay with the Securities and Exchange Commission. And the dislocation and disruption that would be created by trying to move it 

into the CFPA or to take investor protection out of the SEC, in all 

of its different permutations because it is about so much more than 

22 

just enforcement, would really leave us with a very fragmented regulatory regime. 

So I would expect that if a CFPA is created, we will work very 

closely with that agency. There will be areas of overlap and 

adjacencies that we will want to coordinate on. But I feel very 

strongly that SEC enforcement needs to stay integrated with the 

rulemaking and the policy functions that we engage in. 

Mrs. MCCARTHY OF NEW YORK. The final thing that I will say— 

and I am speaking for my constituents. They didn’t lose the millions and millions of dollars that might have been invested in the 

Madoff scheme, but, you know, their $200,000 that they might 

have had in their retirement—and they are not going to get that 

back. You know, when reports come out that someone in their 60s, 

middle 60s, even higher, it will take 12 to 15 years for them to get 

that money back. They feel kind of burnt that they are not getting 

any help and they won’t be getting any help. And I think that is 

a shame, because you are turning off an awful lot of people. There 

is probably more money under somebody’s mattresses these days 

than even going into the banks, which haven’t been of any help. 

I hope that you are going to be able to stand up to the financial 

institutions. I hope that you can restore the credit to all the financial institutions, because there are a lot of good people who work 

in those jobs. But I have to say, the pain that the majority of my 

constituents and probably so many constituents around the country—they are not going to trust any of us. And, to be very honest 

with you, I can’t blame them. 

But thank you for your job, and I wish you luck in it. 

Ms. SCHAPIRO. Thank you. 

Chairman KANJORSKI. Thank you very much, Mrs. McCarthy. 

And now the gentleman from California, Mr. Royce, for 5 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Again, Madam Chairwoman, let me ask you a couple of questions 

here. And this goes to a couple of the observations that Mr. 

Markopolos made. 

And one was the vast differences in fraud cases that he was focused on that had come from industry tips as compared to those 

that had come from an audit. And, clearly, his desire was to try 

to get resources into running down these tips that are turned in. 

But let me just read you what he said in his testimony here before 

the House and then get your comment on it. 

He said, ‘‘First, I would replace the senior staff at the SEC, because they have the wrong senior staff right now. And then I would 

go to the bottom of the organization. You need to change who the 

people on these teams are down at the bottom. They can’t be young 

20-somethings without industry experience. You need to get higher, 

senior, seasoned professionals. And the third thing you need to do, 

you need an Office of the Whistleblower to centralize these thousands of complaints that they get so that they are handled ad hoc 

by 11 regional offices. You need one centralized location, the Office 

of the Whistleblower, instead.’’ 

That is his view on that. Now, I know some of the senior staff 

have stepped down since that hearing. What do you make of the 

other suggestions? 

23 

Ms. SCHAPIRO. I would be happy to address those. Let me start 

with the Office of the Whistleblower to handle complaints. 

First of all, we have asked Congress to enact a whistleblower 

statute to give us the authority to compensate whistleblowers, in 

the hopes that they will bring us well-formed and well-developed 

evidence of fraud that the SEC can then prosecute much more 

quickly. And we are very hopeful that will pass, and it was also included in the Administration’s legislative package. 

Mr. ROYCE. And the concept of the Office of the Whistleblower 

instead of doing it through 11 regional— 

Ms. SCHAPIRO. In fact, very shortly after I arrived, I learned that 

we receive between 700,000 and 1.5 million tips every year at the 

SEC. We are a tiny agency to handle that kind of volume. And they 

come in, as Mr. Markopolos points out, to every district office 

around the country and multiple offices in Washington. There is no 

central computer system. There is no tracking. There is no ability 

to look for a trend or a pattern of conduct across complaints coming 

from different areas. And there is no capability to combine that information with external sources of information. 

I brought in the MITRE Corporation’s Center for Enterprise 

Modernization almost within a month after I arrived, I believe, to 

do a top-to-bottom review of exactly how we are handling all of 

these tips and how we might get to a system that could centralize 

them for triage, tracking, and resolution purposes. 

They have completed phase one of the work, which was a complete review of all existing processes. We are in phase two now, 

which will create new procedures for the entire organization. And 

then phase three is procurement of a technology that will provide 

a centralized IT solution for handling these tips agency-wide. 

So we are moving very aggressively on that count. 

Mr. ROYCE. Let me ask you, then, one other question he brought 

up, while I have time. He said he thought the SEC was ‘‘overlawyered,’’ to use his words. And he believed, and the SEC officials 

later affirmed, that there was a fundamental lack of understanding 

of some of the more intricate aspects of the financial markets within the SEC. 

The exception to that that he cited was Ed Manion in the Boston 

office who had actually been a trader and been a portfolio manager 

but, therefore, was frozen out by the Washington and New York offices, which he viewed also as being over-lawyered. 

Can you comment on this idea of the SEC being over-lawyered 

and whether that kept them or maybe prevented them from uncovering the Madoff incident over the years? 

And I know you have taken some reform measures already, but 

what specifically is the SEC doing to address this problem? 

Ms. SCHAPIRO. I would be happy— 

Mr. ROYCE. Maybe along the lines that we had talked about with 

him, bringing in retired people who really had the kind of experience in the market that they could identify scams like this. Well, 

just like Ed Manion, you know, people like that. 

Ms. SCHAPIRO. Let me start by saying that we have really an 

amazing staff at the SEC. We have people who are committed to 

their core to serving the public interest, to enforcing the law, to 

getting to the right answer that will serve investors. And it is imVerDate Nov 24 2008 14:59 Dec 23, 2009 Jkt 053237 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\53237.TXT TERRIE
24 

portant to be said because it is, in fact, true, and that is the backdrop against which all the changes are being made, that we have 

something very important there that we need to grow and provide 

the resources and the training to make better. 

That said, we are recruiting actively for people with trading experience, risk management experience, portfolio valuation experience, forensic accounting, financial analysis. I mean, Wall Street’s 

bad news, in terms of having to lay off many people, has been very 

much good news for the SEC. And we are able to recruit people 

with tremendous industry experience and expertise and bring them 

into the SEC. And we are taking full advantage of that opportunity 

right now. 

Mr. ROYCE. Thank you, Chairwoman Schapiro. 

Chairman KANJORSKI. And now we will hear from Mr. Lynch of 

Massachusetts for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

Madam Chair, I thank you for your attendance at this hearing 

today, and I appreciate the work that you have done. I think the 

SEC is in good hands, and I think you have made a lot of changes 

in an institution that isn’t necessarily inclined to change. 

To follow up on Mr. Royce’s questions, he talked about Mr. 

Markopolos’s valid complaint that the SEC was over-lawyered. As 

well, Harvey Pitt, former chairman, as well, of the SEC, wrote a 

great piece called, ‘‘Over-Lawyered at the SEC’’ that raised a lot of 

the same points. 

What are you doing specifically to get folks in who could help 

make these more, I think, financial-based analyses rather than 

simply a legal analysis? 

Ms. SCHAPIRO. In two ways, we are actually specifically recruiting for those new skill sets to come into the agency. The first is 

within our examination program. As we post positions, as we have 

available a head count, we are actually seeking people with very 

particular skill sets like valuation, risk management, trading, sophisticated structured products, over-the-counter derivatives, and 

so forth. 

Mr. LYNCH. Great, great. 

Ms. SCHAPIRO. The second is that we have an Office of Risk Assessment that is quite small. We are building it rather significantly. And this year we created a risk fellows program. We have 

a very successful accounting fellows program. We bring in very senior people for a period perhaps only of 2 years, but to come to the 

agency and both train our people in very current ways of Wall 

Street but also to help us build risk assessment capabilities so that 

we can take the resources we have and focus them where they are 

most likely to do the maximum amount of good for the integrity of 

the markets and the protection of the investors. 

So through the risk fellows program and through our general recruiting, we are really looking to broaden our skill sets in examination and in enforcement. 

Mr. LYNCH. All right. Let me ask you then, following up on 

that—and that is all good news—the President’s regulatory reform 

framework envisions an exchange for derivatives, let’s call them 

standard linear derivatives, over an exchange, but then also custom 

derivatives, trading privately and in a more opaque system. These 

25 

are custom derivatives; they are the more complex ones. These are 

the ones that generate a big payday for these banks and are custom derivatives for the individual client, and yet those are often exchanged. 

So I am just wondering, from your standpoint, not from the systemic risk perspective that the Fed has to worry about, but from 

your standpoint, how do you think you are equipped to deal with 

that type of bifurcation? Are you going to be able to handle both 

of those situations as at least the President now envisions them? 

Ms. SCHAPIRO. The SEC has a long history of dealing with both 

exchange-traded and centrally cleared products, as well as overthe-counter products. So I think we have the institutional expertise 

to do it. 

I do think for the custom derivatives that are not centrally 

cleared, the key to success will be both transparency and the regulation of the dealers who are engaged in those transactions. So, examination of those dealers, review of their risk management processes to make sure that they are stress-testing, that they know 

their counterparties, that they are collecting margin, that they 

have credit limitations on traders, they have adequate documentation, and that they have appropriate sales practices and business 

conduct rules in place. 

I think it is going to be really critical for the regulators, the bank 

regulators for many of the dealers, the SEC, for others, to have 

very hands-on oversight of the dealers in the customized products. 

Mr. LYNCH. Okay. 

Mr. Chairman, my time has expired. I yield back. 

Thank you. 

Chairman KANJORSKI. Thank you very much, Mr. Lynch. 

Now we will hear from the gentlelady from Illinois, Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

And thank you, Chairman Schapiro, for being here. I have just 

a couple of questions. 

First of all, what is your opinion of the new derivative tax that 

has been proposed in the recently passed cap-and-trade bill? Do 

you support it, or do you have fears that such a tax and additional 

restrictions will send U.S. businesses and jobs abroad? 

Ms. SCHAPIRO. I am afraid I am not that familiar with the capand-trade bill. I would love to be able to come back to you with a 

more thoughtful response. 

Mrs. BIGGERT. Could you do that in writing? 

Ms. SCHAPIRO. Absolutely. Thank you. 

Mrs. BIGGERT. I would appreciate that. 

Then, in response to Mr. Royce’s question, you mentioned forensic accounting and risk management and that you are recruiting 

individuals with expertise in this area. Are you also looking into 

new technologies and outside firms with that kind of expertise? 

You know, I am thinking of whether it is modeling or a central 

database. 

Ms. SCHAPIRO. Absolutely. We have a program going on right 

now where our risk assessment office is reviewing multiple different technologies and services that do valuation, that can run 

tests of performance numbers, for example, for hedge funds and 

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26 

ably consistent and good results coming out of a particular investment vehicle. And it will be very important for us to enhance our 

technological capabilities. 

I will tell you the agency’s technology—well, I was a Commissioner 20 years ago at the SEC and left about 15 years ago. I 

haven’t seen a dramatic improvement in those 15 years from when 

I arrived to this year. And I think, given sufficient budget resources, we really need to devote some time and attention to building the technology that will allow us to keep up with the most technologically enabled financial institutions in the world. 

Mrs. BIGGERT. Thank you. 

Then, last year, former SEC Chairman Chris Cox banned shortselling of stocks in nearly a thousand financial firms, and later I 

believe he stated that he regretted imposing the ban and that its 

cost appeared to exceed its benefits. 

Given that these rules and comments were made at the beginning of our current financial crisis, why does the SEC now seem 

to think it is a good idea to heavily restrict the short-selling? 

Ms. SCHAPIRO. Well, I think what Chairman Cox was referring 

to were outright bans on short-selling, as well as some other requirements the SEC put in place. And the analysis that was done 

after that period does show that, while it resulted in lower shortselling, as you would imagine, it also resulted in lower liquidity 

and much higher volatility. 

What we are doing is quite a different thing. We are looking in 

a very deliberate and thoughtful way at whether reinstatement of 

the uptick rule that had been in place for many, many years up 

until 2007 ought to be reconsidered in our marketplace, which does 

not stop short-selling but only permits short-selling when the last 

prior transaction was done at a higher price. 

So we are looking at reinstatement of that rule or, as an alternative, a circuit breaker, so that if a particular stock declined by, 

say, 10 percent, short-selling might be prohibited for a period of 

time thereafter in that stock. 

We put all of our proposals out for comment. We had a 60-day 

comment period. We have gotten 4,000 comment letters that we are 

now working our way through to determine what our next steps 

might be. 

Mrs. BIGGERT. So the comment period is over, and now you are— 

Ms. SCHAPIRO. The comment period ended June 19th. But it is 

not an emergency action; it is not being done in haste. It is being 

done in what we believe is a very thoughtful and deliberative way. 

We had a roundtable publicly held and brought in all different perspectives to talk about this issue. And we are trying to take it in 

a very thoughtful, deliberate way. 

Mrs. BIGGERT. Do you have any date for when you expect that 

this will be— 

Ms. SCHAPIRO. I am hoping that by the end of the summer, we 

may be able to come back to the Commission with a proposal. I 

honestly don’t know where the full Commission stands on the multiple proposals that we published for comment. 

Mrs. BIGGERT. Okay. Thank you very much for being here. 

Chairman KANJORSKI. Thank you, Mrs. Biggert. 

27 

And we will now hear from the gentlelady from California, Ms. 

Speier. 

Ms. SPEIER. Thank you, Mr. Chairman. 

And thank you, Chairman Schapiro. I have to just add my praise 

to all that has been showered upon you today. It is remarkable 

what you have done in a very short period of time. 

I was astonished to read the new GAO report, though, that suggests that, in the last 3 years, the SEC has reduced the number 

of disgorgements by something like 80 percent and the number of 

enforcement actions by 60 percent. 

We can’t have that happen again. And I want your advice on 

what we should do to make sure that your agency becomes the 

toughest, most scrupulous cop in the Nation. And if it takes more 

staff, I want to give you more staff. 

I am concerned by this chart here, which I presume has been 

given to us by you, that shows that the growth in the enforcement 

staff is something like 23 percent, but the growth in tips and complaints has gone up 146 percent. The growth in SEC staff is up 15 

percent but the growth in trading volume is up 264 percent. 

If we have learned nothing else in the last few months, it is that 

there wasn’t the vigilance at the SEC. And so many people on Main 

Street are hurting today because the SEC wasn’t doing its job. 

Ms. SCHAPIRO. I will say on the budget that the SEC had a long 

period, from 2005 to 2007, of flat or declining budgets. And, in fact, 

even with the President’s request for 2010, we will still have 4 percent fewer staff than we did in 2005. 

So, in the last 2 years, Congress has been very good and very 

supportive of a growing SEC budget, but the fact is we are, as I 

said before, a pretty small agency. We have over 35,000 regulated 

entities; we have 3,600 employees. And that is not a great ratio by 

any standard. If you think about the 11,000 investment advisors 

and 8,000 mutual funds where so many Americans entrust their 

money, we have 400 examiners. 

Ms. SPEIER. We need to give you more staff, and that is my 

point. 

Next question: I am concerned about what I perceive to be a potential revolving-door problem at the SEC. Whether he was involved or not in decision-making, the attorney who was overseeing 

the Madoff case ends up marrying the niece of Mr. Madoff, who 

was also employed at the business. Another firm was being scrutinized. The particular lawyer, I believe, at the SEC then leaves the 

SEC and goes to work for that particular company. 

I do not believe that any SEC employee who has had a responsibility over an enforcement action should be allowed to go and work 

for that company in the next 2 years. What is your opinion of that? 

Ms. SCHAPIRO. It is a very fair question. And the revolving door 

is a problem for many agencies. It is a problem for the SEC, certainly. 

We are looking at a couple of different models. The bank agencies 

have some limitations on your ability to leave the banking agencies 

and go into a regulated institution for some period of time. And so 

we are looking at those. 

Here is my dilemma: I need to get the best and the brightest to 

come to the SEC and do what we do. And I fear that if I put too 

28 

many limitations on their exits down the road, they might not be 

willing to come in the first instance. 

So I am acutely aware of the revolving-door problem, and I would 

like to find a solution to it, and I haven’t figured out the correct 

balance yet. But I am committed to working on that. 

Ms. SPEIER. Rating agencies: I was astonished to find out that 

when they testified before our committee, they take the information 

that the issuer provides them and do not do any due diligence to 

determine whether that information is accurate or not. So, question 

number one, should there be a higher responsibility there? 

Secondly, should there be some kind of liability that the rating 

agencies incur when they rate an AIG as a AAA or a Lehman at 

an A- and then 2 days later both of those institutions are defunct. 

Ms. SCHAPIRO. Well, I will say that the SEC has very recently 

done rules that require disclosure about the level of due diligence 

that they engage in when they are rating structured products, and 

the extent to which they go beyond information they have been 

handed directly by the issuer. So hopefully that disclosure will be 

helpful. 

I think with respect to liability, I would speak for myself and not 

for the SEC because I don’t know the views of my colleagues on 

this, that I think private liability could have a very important effect on the quality of the efforts that rating agencies are making. 

Ms. SPEIER. My time has expired. Thank you, Mr. Chairman. 

Chairman KANJORSKI. The gentleman from Delaware, Mr. Castle, for 5 minutes. 

Mr. CASTLE. Thank you, Mr. Chairman. 

Chairman Kanjorski, I have an op-ed that appeared in the Financial Times, authored by Lawrence Mitchell, who is a law professor at George Washington University. I ask that it be entered 

into the record. 

Chairman KANJORSKI. Without objection, it is so ordered. 

Mr. CASTLE. Thank you, sir. 

It is entitled, by the way, ‘‘Protecting Industry from Predatory 

Speculators.’’ And that, Chairman Schapiro, is what I want to ask 

you about. And I want to cite from that article. I won’t read the 

whole thing; it is pretty long. 

But in the article, he stated, ‘‘In the first place, shareholders are 

hardly an oppressed class. The beneficiaries of shareholder access 

rules will be the pension funds and mutual funds who hold billions 

of dollars of corporate stock. True, they hold it on behalf of ordinary Americans, but the managers of these funds have their own 

interests that often conflict with those of their beneficiaries. Managers thrive by increasing their portfolios value. That is a hard 

thing to do, and it takes time. So, for years, fund managers have 

increased their pay by putting pressure on corporate managers to 

increase short-term stock prices at the expense of long-term business health. Doing business that way puts jobs and sustainable industry at risk, now and in the future.’’ 

He goes on and says, ‘‘For example, managers responded to the 

pressure by using their retained earnings to engage in large stock 

buy-backs. In the 3 years to September 2007, companies in the 

S&P 500 used more money to buy back stock than to invest in production. With retained earnings gone, all that was left to finance 

29 

production was debt. When the credit markets collapsed, these corporations could not borrow and, thus, could not produce. Are 

boards and managers to blame? Sure. But so are the big shareholders who have been pushing management for this kind of behavior for years. They are more the problem than the solution. Enhancing their voting rights will only make things worse.’’ 

I would be interested in your comments concerning that portion 

of his statement. 

Ms. SCHAPIRO. Okay. It is a great question. 

My view on this is that, at the end of the day, the shareholders 

are the owners of the corporations and ought to have the ability to 

influence the election of directors in a meaningful way. And you 

and I have had some limited discussion about the Commission’s 

new proposals on access to the proxy. But that is what our goal has 

been, as we have proposed ideas about which I expect we will get 

thousands and thousands of comment letters. But it is a view that 

the shareholders of the corporation are entitled to vote for directors 

who are overseeing management and that we need to make that as 

meaningful an opportunity as possible. 

That said, there is clearly a lot of short-termism in the perspectives of managers and boards and shareholders, which has not necessarily been completely healthy for the U.S. economy. One of the 

areas we see this particularly has been with compensation plans 

that reward short-term risk-taking or reward short-term results to 

the detriment of longer-term planning and investment and R&D. 

And through our new compensation disclosures proposals, we are 

hoping to get at some of those issues in a very direct way that will 

allow shareholders to see the benefits of compensation plans that 

promote a longer-term perspective on the affairs of the corporation 

and less short-term focus. 

Mr. CASTLE. I, first of all, agree with your answer. I am very concerned that, in the name of small shareholders, that we are encouraging a lot of shareholder and proxy involvement when it may not 

be beneficial, even to the small shareholders. Obviously, a lot of the 

bigger shareholders are trying to drive this, and I would hope that 

we keep that balance in mind. I am aware that, you know, the 

stockholders are ultimately the owners and should have some 

proxy rights and control. But, on the other hand, we certainly don’t 

want decisions being made by corporations which could end up 

being counterproductive. 

So I appreciate your answer. I hope we will keep an eye on this 

as time goes by. 

If I could just ask quickly, some would suggest that, if that the 

SEC repealed mark-to-market accounting and reinstated the uptick 

rule, that capital markets would return to normal. Is this an oversimplification of a rather complex issue? And your thoughts on 

those two subjects? 

Ms. SCHAPIRO. Yes, I would say it is rather an oversimplification. 

I think the uptick rule we are obviously exploring very carefully. 

You know, when the SEC took the uptick rule off several years ago, 

it was one of the most thoughtful, careful rule-makings that probably had almost ever been done. There was a pilot period, there 

were economic studies, there were multiple roundtables held, there 

were, you know, comment periods and so forth. 

30 

Nonetheless, the markets have changed rather dramatically since 

that period of time, and investor confidence is something we have 

to be very concerned about. And so, that is why we are doing this 

very careful examination of the uptick rule. And I am not clear at 

all, as I said before, where we will land with that. 

On the accounting issues, the SEC did a study at the end of last 

year, before my time, on fair value accounting. And one of the 

takeaways from it, while there were things to be tinkered with 

around the edges, was that investors, who we very much need in 

our marketplace and corporations need in order to raise money, 

value fair value accounting. It is important to them in making investment decisions. And the idea that we could eliminate fair value 

accounting and solve our problems—I think we would create many, 

many more problems down the road. 

So I think the approach that has been taken with respect to fair 

value, to provide interpretive guidance and other assistance from 

FASB, I think has helped alleviate some of the pressure on that 

issue. 

Mr. CASTLE. Thank you. 

And I yield back, Mr. Chairman. 

Chairman KANJORSKI. The gentleman from New Jersey, Mr. 

Adler. 

Mr. ADLER. Thank you, Mr. Chairman. 

Madam Chairwoman, for a number of years, predating your time 

at the SEC, there has been some sense from the regulated community that the Commission was very good at nitpicking and not so 

good at catching some of the bigger things. 

I don’t want to refer specifically to the Madoff situation because 

I think, for a number of years before that, there was just a sense 

that personnel at the Commission were very good at finding little 

detailed mistakes and doing enforcement with respect to those detailed mistakes but weren’t so good at seeing the bigger problems 

that might be present there. 

Do you have a sense of whether that is a fair criticism of the 

Commission predating your time, whether you think it is an ongoing program, and, if you think it is a problem, how you think you 

can combat that? 

Ms. SCHAPIRO. I don’t think it is an entirely fair criticism. I think 

the agency, over the last several years, has brought some very important and some very major cases, with respect to the Foreign 

Corrupt Practices Act, with respect to auction rate securities, insider trading, and so forth. So I think they have done a great job 

in many areas. 

That said, we are making it very clear now that our goal is to 

refer to State regulators and to other self-regulatory organizations 

cases that are not going to have a major investor protection impact 

so that we can really focus our attention on very high-impact cases 

done in a much more timely way, because that is really how we 

protect investors. We shut down Ponzi schemes faster, we end accounting frauds faster, we stop insider-trading rings faster. 

So we are trying to shift the focus to larger cases brought more 

quickly, but I don’t think it is entirely fair to suggest that only 

small matters were brought before. 

Mr. ADLER. Thank you, Madam Chairwoman. 

31 

I hear you say it is not entirely unfair either, I think, implicitly 

in your answer. 

You had a colloquy a moment ago with the gentlewoman from 

California regarding personnel and a revolving-door concern. I wonder if, given the fact that Wall Street has something of an unemployment problem right now, you are seeing an upturn in the quality of resumes to look at some of those bigger issues that you are 

describing the Commission doing such a good job pursuing. 

Ms. SCHAPIRO. We absolutely have. And just to give you one 

small anecdote, we posted several positions, I think four, for risk 

assessment experts to come and join us, and we got over 500 resumes, some of which had just amazing experience on Wall Street. 

So we are fully taking advantage of Wall Street’s pain. 

Mr. ADLER. It is good, from a Commission point of view. 

I heard another discussion you had with the gentlewoman from 

California regarding rating agencies. And I want to make sure I 

heard what you said, because I think I agree with you, and I want 

to have you articulate it a second time. 

Would you believe, from a personal perspective, Mary Schapiro’s 

perspective, that imposing liability upon rating agencies would be 

a helpful check in the process of their rating various equities? 

Ms. SCHAPIRO. I think it could certainly make a very big difference. And we would obviously want to be careful in crafting it. 

We want rating agencies to work; we want them to work effectively. And we want them to align their interests with those of investors. They are paid by issuers, but their audience is the investing public. And that is what we need to work on, incentives that 

will encourage that alignment much more effectively. 

Mr. ADLER. I think you would agree with me that the three rating agencies didn’t work so effectively in the last year and a half 

on some of the big failures where the market didn’t have the information that rating agencies perhaps could have shared more accurately. 

Ms. SCHAPIRO. I would agree, they didn’t work perfectly. 

Mr. ADLER. Are there other measures, other than what the Commission has already undertaken, that you would recommend that 

Congress consider, separate from the liability discussion you had 

with the gentlewoman and with me, that might help perfect markets which, right now, in a rating agencies context, are clearly not 

perfect? 

Ms. SCHAPIRO. I would be happy to provide some additional 

thoughts on that in writing or in a separate meeting. 

As I said, we are looking at the rating shopping issues from two 

different perspectives because we are very concerned about that. 

We would like, I think, to move forward with more complete disclosure of the track history of how ratings have performed over time 

so investors can see basically the quality of ratings and whether 

they measured up over time or they would upgrade and then downgrade and how those were achieved. 

So we are look at some additional disclosure, as well. 

Mr. ADLER. I know I would welcome and I believe the subcommittee would very much welcome additional information, additional guidance on that. 

Ms. SCHAPIRO. I would be happy to do that. 

32 

Mr. ADLER. Thank you. I yield— 

Ms. SCHAPIRO. If I could just go back to your question on the enforcement, because I do think it is important for me to say: The Enforcement Division at the SEC is full of people with tremendous energy and desire to bring cases. That is what they are there to do, 

and they are committed to doing it. 

And to the extent the Commission made that difficult for them, 

they may have focused on some of the less significant cases. But 

what I have found in my 5 months with just taking a few of the 

handcuffs off, that they have really stepped up to plate and done 

a phenomenal job. 

And so I don’t want anything I said to in any way suggest that 

these aren’t public servants who have been really knocking themselves out over the last 10 years to try to do the best they can for 

American investors. 

Mr. ADLER. I suspect your work just empowered them further. 

Thank you very much. 

Chairman KANJORSKI. Thank you very much. 

And now we will hear from the gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Madam Chair, welcome. 

I believe that, in an earlier colloquy with one of my colleagues, 

you articulated a concern that the proposal to create a CFPA potentially could erode the investor protection mission of the SEC. 

I don’t want to put words in your mouth. Did you say something 

along those lines? 

Ms. SCHAPIRO. What I said was the transfer of SEC enforcement 

responsibility to the CFPA would erode the SEC’s overall ability to 

protect investors and to keep our rule-making and policymaking 

connected to the enforcement arm of the agency, a linkage I think 

is— 

Mr. HENSARLING. And what would be the consequences of that, 

ultimately, for the investing public, if Congress were to enact legislation that ultimately had that result? 

Ms. SCHAPIRO. That took the SEC’s enforcement authority away? 

Mr. HENSARLING. Yes. 

Ms. SCHAPIRO. Well, I think what you would find is that, over 

time, the rule-making function, which is often informed by enforcement cases, would be damaged. 

So, for example, when we bring enforcement cases because we 

have found problems within a brokerage firm or an investment adviser, the results of that enforcement directly inform the policymakers about whether a new rule is necessary in a particular area. 

And it works going back the other way. 

I think of investor protection as all of a piece. It is enforcement, 

it is examination, it is rule-making, it is the accounting standards 

and the disclosure requirements. Those are all part of the fabric of 

investor protection. 

Mr. HENSARLING. I believe you also said, or acknowledged, that 

you believe there would be some areas of overlap with a potential 

CFPA. What do you believe those areas of overlap may prove to be, 

and what are your concerns in that regard? 

33 

Ms. SCHAPIRO. I think the possibility—first of all, I should say 

that, as the legislation is currently drafted, there are actually some 

definitional issues that I think create concerns. 

Mr. HENSARLING. Well, there are several different pieces of legislation floating out there. 

Ms. SCHAPIRO. Well, the last one I saw talks about the CFPA will 

not regulate entities registered with the SEC but have virtually everything else. The concern of that is public companies issue stock. 

That is very much an SEC-centered function that we bring enforcement actions for. We would not want to see this legislation preclude that, and I don’t believe that is what was intended. 

But the areas I see where we have a potential are hybrid products. Credit products are intended to be part of the CFPA. There 

is a possibility for hybrids, I think, to be created. Undoubtedly, as 

we sit here, a rocket scientist somewhere is devising a product that 

will fall in an unusual place within the regulatory regime. And so 

it will require a lot of coordination, I think, to make sure that 

doesn’t happen. 

Mr. HENSARLING. With respect to a hybrid product, some type of 

investment product, isn’t it true that an investment product may 

actually lower risk for one investor, yet the same investment product could increase the risk, depending upon what investment portfolio the investor has, what his investing goals are? Is that not 

true? 

Ms. SCHAPIRO. Sure. I mean, that is why the SEC’s rules and 

customer protection rules are really built on a concept of suitability: that a broker recommending a product must make a determination that product is suitable for that investor. 

Mr. HENSARLING. So, again, one product could be helpful to one 

investor and may prove to be harmful to another investor. That is 

why many of us have the concern that, under all of the pieces of 

legislation we have seen with respect to the CFPA, that we have 

a body that ultimately can proscribe and simply outlaw certain consumer credit products. And so, again, I just make the point that 

a consumer credit product may be right for one consumer and may 

be wrong for another consumer. 

Let’s move on in the very brief time I have to executive compensation. I believe I heard you say in your testimony that it is an 

area, certainly, the SEC is moving. I know there are at least two 

broad proposals that are out there. I think we are in the comment 

period, I believe, on those. 

My question is this: Has the SEC undertaken a study to look at 

the compensation proposals of, say, JPMorgan, Bank of America, 

Citi? And is there any data that indicates that the compensation 

structures for those that were hardest hit by the credit crisis were 

somehow different than the compensation structures of those who 

navigated the crisis more successfully? 

And, with the limited time I have, also with respect to the firms 

that have returned their CPP money, were they judged to have superior compensation structures than those that didn’t return their 

CPP money as of yet? 

Ms. SCHAPIRO. I am not aware of a study undertaken by the 

SEC. 

34 

I do believe that compensation practices can contribute very significantly to risk-taking within a company. But our rules have been 

designed to get at the maximum clarity and disclosure about how 

that happened. So we have already, and have had for years under 

my predecessors, very complete disclosure of compensation and a 

discussion by the compensation committee about how they arrive 

at different kinds of compensation programs within the company. 

What we are proposing to do now is expand that disclosure, to 

ask for a discussion by the comp committee about the linkage between compensation programs and risk-taking and also to disclose 

conflicts of interests of compensation consultants to the board who 

may also be doing work for management. 

Mr. HENSARLING. Thank you. 

I see I am out of time. 

Chairman KANJORSKI. Thank you very much, Mr. Hensarling. 

And now we will hear from Mr. Himes of Connecticut. 

Mr. HIMES. Thank you, Mr. Chairman. 

I have a couple of questions relating to a specific matter I would 

like to submit for the record, if that is okay. 

Chairman KANJORSKI. Without objection, it is so ordered. 

Mr. HIMES. Thank you. 

Madam Chairman, thank you for joining us. And I would like to 

add my voice in praise for the efforts you have taken to date. 

I have two maybe paradoxical observations and questions. The 

first is with respect to investor responsibility. And you are going 

to hear me say momentarily how important I think it is that we 

get the regulatory apparatus correct. 

But I get concerned, frankly, as we talk about the regulatory apparatus, that we may lose the critical concept of the responsibility 

that investors have for understanding the risk of the instruments 

that they employ. As we talk about money market funds, which 

were never designed to be guaranteed against the breaking of a 

buck, or about alternative investments like the Bernie Madoff deal, 

I think it is critical and the system will not work unless people understand that unless their instrument says ‘‘guaranteed by the 

Federal Government,’’ it is not and they can lose it. 

And I guess I would just love to hear you say that this is a 

thought and a concern of the SEC, as well. 

Ms. SCHAPIRO. It very much is. 

This is a personal view. As a Nation, we don’t do a very good job 

educating, starting with our young people, about investment and 

why it is important, what the risks are, and what the individual’s 

responsibility really is. And it is something I hope that perhaps 

this Congress or another Congress will take up in a serious way. 

Mr. HIMES. Thank you. I am sorry, but I have very limited time, 

and I am actually more concerned about question number two, 

which is: It staggers me, frankly, that the conclusions drawn by 

this debacle often on the other side of the room are that, because 

the regulatory apparatus failed, we should just throw the enterprise over the edge. 

It is dangerous, and it is ahistorical. The history of the last 120 

years in this country has been of a gradual development of a regulatory apparatus that has protected American families—120 years 

ago, Americans ate rotten fruit, they burned to death in shirt facVerDate Nov 24 2008 14:59 Dec 23, 2009 Jkt 053237 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\53237.TXT TERRIE
35 

tories that were not regulated, they bought securities that would 

make Madoff look easy, they bought snake oil. For 120 years, we 

have evolved a regulatory apparatus that has dramatically increased the quality of life and the safety of the American citizenry. 

And the conclusion, therefore, that because we did it wrong— 

and, boy, did we do it wrong in the last 4 or 5 years—that we 

should just throw the enterprise away and leave everything to individual responsibility is dangerous and ahistorical. 

We have talked a lot today about the rules and the changes that 

have been proposed, but we haven’t talked enough about the topic 

that I would love to devote the rest of my time to hearing you talk 

about, which is the culture of your agency. 

We can get the rules right and everything else absolutely right, 

but unless the SEC has an entrepreneurial culture, where people 

feel like they can take some risk, where they can raise their hand 

if they think that something is wrong, where they think that they 

are adequately compensated for doing their job well, we are going 

to fail. 

So I guess I would love to, just in whatever remaining time I 

have left, hear you talk about what your vision is for the culture, 

the compensation of the SEC and its people. 

Ms. SCHAPIRO. It is a great question, and it is absolutely fundamental to our being able to do any of the things that we have laid 

out as being important. 

And I would agree with you that writing rules is great and bringing enforcement cases is great and necessary and getting the structure right is necessary, but we have to be able to tap into a deep 

well of energy and enthusiasm on the part of our people in order 

to make any of that happen. 

And I have to say, in my 5 months, I have been stunned by the 

willingness of people, after a pretty long period of not raising their 

hands and not taking risks, I have been stunned by their willingness to do just that now. 

And some of the cases I mentioned in my opening statement, 

those are cutting-edge cases for the SEC. The willingness of people 

to come up with new ways to approach problems like Madoff, it 

gives us a list of actions that we have been able to take very quickly to try to respond. It didn’t prevent Madoff, but hopefully going 

forward it helps us to prevent the next one. 

Those things are all important. And my experience, as having 

been in and out of government my entire career, is that if you entrust people with the ability to make those decisions and do what 

they came to government to do, the results will be pretty good. And 

I will tell you, in my 5 months, that is exactly what I have seen 

at the SEC. 

Mr. GARRETT. I see the gentleman has time, but will the gentleman yield? 

Mr. HIMES. I will yield. 

Mr. GARRETT. If the gentleman would please supply the committee with which Members on either side of the aisle has called 

for the entire scrapping of the entire system, I would be curious. 

I think I have heard from both sides of the aisle. Over here, Mr. 

Ackerman saying that Members from his constituency having problems with the system. I have met people from our side of the aisle 

36 

saying they have problems with the system and that we are trying 

to get the right regulation. But if he has heard anyone say that 

they want to scrap the entire system and go back to absolutely no 

regulation, I would appreciate hearing from you, because I have 

never heard that. 

And I yield back. 

Mr. HIMES. Thank you. 

Mr. Chairman, I yield back the balance of my time. 

Chairman KANJORSKI. Thank you very much. 

And now we will hear from the gentleman from Florida, Mr. Putnam. 

Mr. PUTNAM. Thank you, Mr. Chairman. I don’t think I was next 

in line. 

I think the gentleman from California beat me here. 

Chairman KANJORSKI. Oh, he did? Well, we will withdraw your 

recognition, and we will hear from the gentleman from California 

for 5 minutes. 

Mr. MILLER OF CALIFORNIA. Well, thank you very much. 

Welcome, Madam Chairman. 

It was probably February last year I introduced an amendment 

to one of the housing bills, and it required the SEC and the Feds 

basically to look at the mark-to-market issue and consider suspending mark-to-market or modifying it in some fashion. 

And it was funny, back then, many people you talked to, when 

you mentioned mark-to-market, they kind of looked at you like a 

deer in the headlights, like, what are you talking about? I know 

Chairman Frank understood the issue, and the committee accepted 

it on a voice vote. And I think it took me three more times putting 

it in bills, and every time we would put it in the bills, the Senate 

would pull it out of a bill and not recognize the situations we are 

going through today. 

And, according to the Feds, they give investors up to 90 percent 

of asset current market value today, and then the Feds hold that 

asset and collateral in a non-mark-to-market account. Is that correct? 

Ms. SCHAPIRO. I am sorry; I don’t know the answer to that. 

Mr. MILLER OF CALIFORNIA. Okay. Have you been very involved 

in the mark-to-market issue? 

Ms. SCHAPIRO. Well, I have been involved in the mark-to-market 

issue from the perspective of FASB and the SEC’s oversight of 

FASB. And the SEC produced a report last year on fair value of 

mark-to-market accounting, which led to FASB’s April guidance 

that was issued, with respect to how companies should value assets 

for fair market purposes, meaning that it is the price that you 

would get for an asset sold in an orderly market as opposed to having to go with a fire sale price. 

Mr. MILLER OF CALIFORNIA. Okay. Under the terms and conditions of the Taft program, it states, ‘‘Taft loans will not to subject 

to mark-to-market or remargining requirements.’’ Is that correct? 

Ms. SCHAPIRO. I assume so. I am sorry, I just don’t know. I would 

be happy to provide information— 

Mr. MILLER OF CALIFORNIA. Having been involved in the real estate industry for well over 35 years, you could see the problems 

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37 

cially in a declining market when you could not go out and determine the value of an asset because there was no market for the 

asset. Lenders not only made the loan, they were setting up huge 

reserves for prospective losses or, in some cases, losses they were 

taking on current foreclosures. It created a situation where the 

market basically became illiquid. 

It is an interesting marketplace we are facing today with banks. 

It seems like the Feds have put a lot of money in the banking industry today, and the banks are sitting on money. But the anomaly 

of that is they are not making loans, and for the average citizen 

who has money they want to put in a savings account, banks don’t 

want the money. 

And so we have created an unusual situation that I think is having a dramatic impact on the marketplace. And if you look at how 

the mark-to-market has really had a negative impact on the banks 

today as it applies to residential loans, I think you see the same 

problem coming in the near future in commercial/industrial loans. 

Are you current on the situation that the market is facing with 

those two areas? 

Ms. SCHAPIRO. Very generally. 

Mr. MILLER OF CALIFORNIA. We have experienced a huge decline 

in the residential marketplace in the last 2 or 3 years. Probably by 

the fourth quarter of this year—and I have been saying it for about 

6 months now—you are going to see a huge foreclosure hit on the 

commercial/industrial sector. But the problem with that is the bottom to that trough is probably not going to hit for 3 years. 

So we have a situation now where banks are not lending, they 

are not wanting loans because they have so many funds from the 

Federal Government they are holding, and they are going to be 

taking huge hits again on the commercial/industrial sector. 

How are the revisions in the mark-to-market going to impact 

them or benefit them in the future? 

Ms. SCHAPIRO. Well, I think the way that—they are really two 

areas. One is the fair value guidance that was issued by FASB that 

makes it clear they do not have to price assets at fire sale prices, 

that they can use prices that would be received in an orderly market. And the second is with respect to other than temporarily impair, which allows the banks to recognize fair value declines that 

result from volatility, interest rates, liquidity, to include those in 

other comprehensive income and not have to include them in any— 

Mr. MILLER. But how do the regulators apply this to the holdings 

of the banks at that point in time? 

Ms. SCHAPIRO. I don’t know how the bank regulators would apply 

the accounting rules or use them with respect to their capital requirements. 

Mr. MILLER OF CALIFORNIA. But don’t you think that is germane 

to what we are trying to deal with there? Or it is going to be significant. If you have two agencies looking at it from a different perspective, you trying to resolve the mark-to-market issue in some 

limited fashion and the regulators are looking at it from a different 

perspective, don’t you think we need to do something to get those 

two together? 

Ms. SCHAPIRO. Well, we do talk with the bank regulators on 

these issues, and FASB has a very open door and an open line of 

38 

communication with the bank regulators on all these issues. So for 

example, when the banks were going through their stress tests 

they were utilizing information provided by FASB about what 

might be expected in the future, for example, with respect to off 

balance sheet accounting so that those tests could be more comprehensive. So there is quite close communication. 

Mr. MILLER OF CALIFORNIA. I think Ranking Member Bachus 

and Chairman Frank have a bill that they are putting on suspension, it should be next week. And the banks are in a difficult situation. They are having to take homes back, and then the regulators 

are basically forcing them to put those homes in the marketplace 

because of mark-to-market and liquidity and they are sitting aside 

because they are nonperforming assets at that point in time. And 

basically what the bill does is it says that a lender can have up to 

5 years that they can put the unit on the market as a rental, thereby getting it off the declining asset again, performing asset market, 

which would change the mark-to-market value of it. Because in 

California, like San Bernardino County—they are part of this— 

probably 78 percent of the homes in the marketplace are distressed 

sales from lenders. L.A. County is like 56 percent. Even Orange 

County, which is a very good market, is about 43 percent. And 

dealing with the same situation of trying to give them some relief 

because the regulators are forcing the banks to put these units out 

there instead of holding them because banks are really not in the 

real estate business by law, but this gives them a 5-year window 

to try to deal with it. 

But I think the concern I have is that the regulators and you 

might not be on the same page on this. 

Ms. SCHAPIRO. Well, I can tell you, as I said, we have regular 

communication with the bank regulators with respect to accounting 

issues. And I think they have obviously great flexibility in the application of their capital requirements for banks, greater flexibility 

than we have— 

Mr. MILLER OF CALIFORNIA. I hope they demonstrate their flexibility in working through these difficult times. 

Ms. SCHAPIRO. I am sorry? 

Mr. MILLER OF CALIFORNIA. I hope they demonstrate their flexibility in working through these difficult times. And I thank you for 

your patience, Mr. Chairman. I yield back. 

Chairman KANJORSKI. Thank you, Mr. Miller. And now we will 

hear from the gentleman from Michigan, Mr. Peters. 

Mr. PETERS. Thank you, Mr. Chairman. Thank you, Chairman 

Schapiro, as well for your testimony here today. And I would like 

to join others in applauding your efforts and appreciate several of 

your comments. 

One of your comments that I found particularly welcome was 

that everything at the SEC now is related to investor protection, 

and I appreciate that statement. And I believe it has also been consistent with your record, particularly as head of FINRA. I had the 

opportunity to be an arbitrator for a number of years at FINRA 

and know that under your tenure that organization continued to 

strive for excellence in protecting investors. And in follow-up to my 

colleague here, Mr. Himes, about investor education, I also had an 

opportunity to be part of an investor seminar that FINRA hosted 

39 

in my district not too long ago to really work to make sure that 

investors understood the risk related to investments and to make 

sound investment decisions. And I know that occurred under your 

tenure so I appreciate your efforts. 

I also appreciated your comments to a question that at the end 

of the day it is the shareholders who are the owners of these companies. And in a capitalistic system of course it is fundamental to 

capitalism that the owners have the ability to exercise the authority that they have because of their ownership interest of those organizations. 

So my question is related to a speech that was given before the 

Society of Corporate Secretaries and Governance Professionals last 

month by Commissioner Walter. She discussed the SEC’s efforts to 

enact new rules to empower investors in that speech. She specifically discussed proposed rules to give shareholders access to management proxy materials for the purposes of board elections, an 

SEC-approved rule on unrestricted broker voting, and improved 

disclosure of executive compensation and corporate governance. 

And in that speech she stated that, ‘‘legislation that reaffirms our 

authority would remove the distraction of challenges to authority 

that Congress had previously granted to the SEC.’’ 

Do you also believe that it would be helpful for Congress to provide specific statutory authority to the SEC as it undertakes what 

I believe are very important reforms? 

Ms. SCHAPIRO. I do believe it would be helpful. The agency has 

gone down these paths before and frequently been challenged in 

court over these issues. And we may well be challenged this time 

around, particularly with respect to proxy access. 

So while we have gone ahead and done proposed rules that we 

believe make sense, it would certainly not be harmful in any way 

to have backstop statutory authority. 

Mr. PETERS. And in follow-up, are there other reform measures 

with respect to corporate governance that you feel may be important but would also explicitly require some statutory authority on 

our part to assist you in these efforts? Maybe you can answer 

broadly as to where you think we should be going, but also where 

Congress can be helpful to you in those efforts. 

Ms. SCHAPIRO. Well, I think we are very focused right now on the 

issues. We have outstanding access to the proxy, the additional 

proxy disclosure requirements that we have gone forward with. We 

will be looking later this year at disclosures related to environmental issues as those become very, very prominent topics of public 

policy and enormous costs for public companies as they seek to 

meet different standards under environmental legislation. We will 

be looking at those issues. Again, those are disclosure related, so 

I don’t think they will require legislation. I know that Congress has 

talked from time to time about whether there ought to be say-onpay legislation. The SEC has gone forward with rules that were required under the Economic Stabilization Act to require say-on-pay 

advisory votes for companies that are recipients of TARP funding, 

and it would be a question whether say-on-pay should be extended 

more broadly to other public companies although many of those advisory votes are being done now pursuant to shareholder proposals. 

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

40 

Chairman KANJORSKI. Thank you very much, Mr. Peters. And 

now we will hear from the gentleman from Florida, Mr. Putnam. 

If you start talking very quickly, that is it. 

Mr. PUTNAM. Thank you, Mr. Chairman. And I want to thank 

the Chairlady. Let me begin with short sales. Your predecessor suspended them in the beginning of the economic crisis. He later stated that he regretted having done so and that the costs outweighed 

the benefits. 

What is your take on that? 

Ms. SCHAPIRO. Yes, Chairman Cox did make the statement that 

it was one of the worst mistakes that he felt that they had made. 

And I will say that what the agency did last fall was done in a series of very quickly implemented emergency measures of different 

sorts; banning short selling, along with a number of other things. 

As we have reexamined short selling, we have determined not to 

do it in any kind of an emergency context but rather to do it in 

a very thoughtful deliberative rulemaking process. So we published 

several months ago two different approaches to not banning short 

selling but restricting short selling. 

One would essentially bring back a marketwide uptick rule that 

would require that you could only short sell when the last prior 

transaction was implemented on an uptick or an up bid. The other 

is a very focused rule that would apply to individual stocks but not 

across the whole market where if a stock declined by say 10 percent in a day there might be a short selling restriction for some period of time thereafter. 

The comment period on those proposals closed on June 19th. We 

have close to 4,000 comment letters that we are working our way 

through. We also held a roundtable where we brought lots of experts, investors, financial services firms, exchanges and others in 

to talk about the impact on the markets of short selling rules and 

the impact on investor confidence. We are factoring all of that into 

our process and our thinking and we have come to no conclusions 

yet about whether or not to go forward. 

Mr. PUTNAM. Let me jump ahead to money markets. One of the 

most telling signs that we were in a noncyclical economic crisis last 

fall was when a money market broke the buck and another closed 

just before breaking the buck. Your new rules—first of all, the additional government protection that has been placed in the money 

market funds world, will that in your view cause greater risk taking among the money market pool of funds? 

Ms. SCHAPIRO. Well, that cover guarantee program, I believe, expires in a couple of months. So what we have actually seen, 

though, is given the events of the Reserve Fund breaking the buck, 

money market funds actually tightened up on their quality and liquidity and maturity standard. So they went to higher quality, not 

lower quality, despite the presence of the guarantee fund. And I 

don’t know that the Fed and the Treasury have come to any conclusion yet on whether or not to extend that. 

Our proposed rules are geared towards really bolstering the resiliency of money market funds going forward, so they are higher 

quality standards. We also propose that money market fund boards 

of directors be able to suspend redemptions when a fund breaks the 

buck as the Reserve Fund did so that all shareholders will get 

41 

equal treatment in the distribution of assets rather than those who 

are just quick to the draw getting in first when the fund has broken a buck and getting a higher payout. And we have also asked 

for comments on whether money market funds should move away 

from the $1 stable net asset value to a floating net asset value that 

might cut down on the chances for a run on money market funds. 

Mr. PUTNAM. And finally, the regulatory reform bill package that 

is being discussed, it is my understanding does not include GSE reform. 

Ms. SCHAPIRO. No, that is right. I believe the decision of the Administration was to engage in further study with respect to the 

GSEs and come back to that issue later this year. 

Mr. PUTNAM. Is it your view that these entities which hold up 

to 50 percent of the mortgages in the country would need to be part 

of a regulatory overhaul? 

Ms. SCHAPIRO. I think at some point we as a government are 

going to need to address the future of the GSEs, yes. 

Mr. PUTNAM. Thank you. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Putnam. Now 

we have a request for a second round. I have passed, and Mr. Garrett has passed, but we recognize the ranking member of the full 

committee, Mr. Bachus, for 5 minutes. 

Mr. BACHUS. Thank you, Mr. Chairman. Recently FASB announced some changes in the securitization accounting rules. The 

Federal Reserve and other bank regulators have cautioned that the 

rule changes threaten the viability of the Federal Government’s 

economic recovery plan because that plan is partially dependent on 

restarting the securitization markets. And there has been some 

comment and concern that the accounting changes would actually 

throw into question the securitization model that we have been 

using in the past. 

Are you concerned about the timing of the scope of their accounting rule changes, particularly given the emphasis that the government and I think private economists have in restarting the 

securitization market? 

Ms. SCHAPIRO. I should say as a prelude to that, that the SEC 

is very interested in doing what we can to help assure a vibrant 

asset-backed securities market. And we have made a number of 

proposals that would require legislation that would allow for a 

more continuous disclosure, and so forth, for asset-backed securities. I think what FASB has done with respect to off balance sheet 

is really very important. There has been a conclusion or at least 

a view widely expressed, frankly, by governments around the world 

that off balance sheet accounting is a contributor to the financial 

crisis. 

And so FASB and other accounting standard setters have worked 

very hard to eliminate the exception that allowed a company to remove financial assets from their balance sheet when they transferred them to a special purpose entity even though they retained 

an interest in the loans—in the cash flow from the loans. And I 

think it was a very important gap for them to close. 

I recognize, and maybe there is never a good time for new accounting standards to be put in place from the perspective particularly of regulated entities, but I think it was a very important gap 

42 

that needed to be closed. It goes into effect at the end of the year, 

and obviously we will watch it very closely. 

Mr. BACHUS. Now, you are aware that the bank regulators and 

the Federal Reserve has expressed some real concerns about it. 

Ms. SCHAPIRO. Well, I haven’t heard that they had recently expressed real concerns about it, although it doesn’t completely surprise me. We will certainly have conversations with them. 

Mr. BACHUS. And when you do, when you talk to them could you 

maybe, if you maybe respond in writing as to whether you think 

that if they still have those concerns, if there is merit. 

Ms. SCHAPIRO. I would be happy to. 

Mr. BACHUS. Okay. Thank you. You know, for the first time in 

the SEC’s history, your budget is likely to cross the $1 billion 

mark. And with all the current responsibilities you have and the 

likelihood that you are going to have a greatly increased number 

of entities subject to your Commission oversight, you know, that is 

not surprising. 

Do you think that the Commission can leverage the expertise of 

the existing and potentially new self-regulatory organizations to 

supplement its work? How do you perceive it? 

Ms. SCHAPIRO. Well, my bias is I come from a self-regulatory organization where I spent 13 years. And so I think self-regulatory 

organizations with close oversight from the Federal Government, 

from the SEC in the case of FINRA or the New York Stock Exchange or the Nasdaq Stock Market, with close oversight can bring 

tremendous value to the protection of investors, and in the case of 

exchanges the assurance of market integrity. 

So it is an area that we are willing to explore, because even 

though our budget is growing we are likely to never have all the 

resources we need to do everything we would like to do. And the 

extent to which we can leverage SROs, accounting firms, other 

whistleblowers, I am game to do that because I think it will allow 

us to do a better job. 

Mr. BACHUS. And to focus on the Bernie Madoffs of the world. 

Any specific ideas on where you might go with that? 

Ms. SCHAPIRO. Well, we have engaged in quite a lot of work to 

try to be very responsive to the Madoff tragedy. 

Mr. BACHUS. No, I didn’t mean the Madoff. I meant the private, 

the self-regulator. 

Ms. SCHAPIRO. Again, I think the key to the success of self-regulation is really vigilant oversight by the SEC, and it is something 

that we don’t have a self-regulatory organization, for example, with 

respect to investment advisers. We have not opined as an agency 

about whether that would be an appropriate thing for us to do. But 

I think given our resources, we need to consider every opportunity 

to leverage third parties. 

Mr. BACHUS. Could I have one more question, Mr. Chairman? 

You know, for almost 30 years we have had a financial products 

regulatory structure which is divided into two categories, securities 

and futures, where you had two different regulators, and I know 

there has been a lot of discussion about where to go. I am not going 

to ask you whether you think we ought to merge the CFTC and the 

SEC. I don’t think you probably want to volunteer your opinion on 

that, but if you do you are welcome to. I know we are the only naVerDate Nov 24 2008 14:59 Dec 23, 2009 Jkt 053237 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\53237.TXT TERRIE
43 

tion that still has separate regulators. But given that there is a 

unique situation which does present some regulatory challenges, do 

you—and you are supposed to prepare, you and the CFTC are supposed to prepare a report to harmonize the offering rules, the regulations, and the regulatory approaches on securities and futures. 

What are some of the challenges facing you with this September 

30th date coming up and do you think you are going to be able to 

do it by the 30th? And I will throw in, and do you think there 

ought to be one regulator? But you don’t have to— 

Ms. SCHAPIRO. I have said that I believe there is a logic and efficiency to merging the two agencies. I think we have overlapping 

authorities, we have some arbitrary lines that have been drawn between the agencies over many years, and I absolutely understand 

the origins of all that. There would be a logic and an efficiency. But 

if we are not going to do that then it really does behoove the two 

agencies to work together as effectively as we possibly can. And we 

are both, Chairman Gensler and I, very committed to doing that. 

As you point out, we have been charged with creating a report 

on harmonization initiatives by September. We are well into working through that and trying to identify those areas where the agencies have different rules and requirements. It is challenging in part 

because we also have very different approaches to regulations and 

we grew up under very different circumstances. CFTC largely regulates an institutional market with a vertically integrated exchange 

and clearing structure. We regulate largely retail markets with 

multiple exchanges and clearinghouses that are not vertically integrated. And just those two perspectives alone make this a challenge, but we are working in good faith to get as far as we can in 

this process of identifying the areas of difference. 

Mr. BACHUS. And if you can’t make that deadline of course you 

will ask for a—will you put—do you anticipate putting out some 

agreement and then working towards other areas of harmonization? 

Ms. SCHAPIRO. We haven’t really talked through what we would 

do if we don’t make it on the theory that we have to put the pressure on our staffs to see if we can make it, but my guess is we 

would put out some kind of interim statement at least about our 

progress. 

Mr. BACHUS. All right. Thank you very much. Thank you, Mr. 

Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Bachus. 

The Chair notes that some members may have additional questions for this witness which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to this witness and to 

place her responses in the record. 

I will just take a moment. We normally dismiss the panel, but 

thank you very much, Chairman Schapiro, for I think really being 

forthcoming to the committee since your entry into this position 

and working with us over the last 51⁄2 months in a very positive 

way. We look forward to a continuation of that progress and want 

to thank you for being here. We thought we would have you out 

before noon but it is pretty close, and for government time that is 

very good. 

44 

Ms. SCHAPIRO. Thank you very much. 

Chairman KANJORSKI. Thank you. The panel is dismissed, and 

this hearing is adjourned. 

[Whereupon, at 12:25 p.m., the hearing was adjourned.] 

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A P P E N D I X 

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