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53–242 PDF 2009

INDUSTRY PERSPECTIVES ON THE 

OBAMA ADMINISTRATION’S FINANCIAL 

REGULATORY REFORM PROPOSALS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JULY 17, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–62 

( 

(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) 

C O N T E N T S 

Page 

Hearing held on: 

July 17, 2009 ..................................................................................................... 1 

Appendix: 

July 17, 2009 ..................................................................................................... 29 

WITNESSES 

FRIDAY, JULY 17, 2009 

Baker, Hon. Richard, President, Managed Funds Association ............................ 7 

Brodsky, William J., Chairman and Chief Executive Officer, Chicago Board 

Options Exchange ................................................................................................ 8 

Lassus, Diahann W., President, Lassus Wherley & Associates, on behalf 

of The Financial Planning Coalition ................................................................... 16 

Lowenstein, Douglas, President/CEO, Private Equity Council ............................ 14 

Nichols, Robert S., President and Chief Operating Officer, The Financial 

Services Forum ..................................................................................................... 17 

Snook, Randolph C., Executive Vice President, Securities Industry Financial 

Markets Association (SIFMA) ............................................................................. 11 

Stevens, Paul Schott, President and CEO, Investment Company Institute ....... 13 

APPENDIX 

Prepared statements: 

Baker, Hon. Richard ......................................................................................... 30 

Brodsky, William J. .......................................................................................... 54 

Lassus, Diahann W. ......................................................................................... 72 

Lowenstein, Douglas ........................................................................................ 76 

Nichols, Robert S. ............................................................................................. 84 

Snook, Randolph C. .......................................................................................... 90 

Stevens, Paul Schott ........................................................................................ 121 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachus, Hon. Spencer: 

Written responses to questions submitted to Hon. Richard Baker .............. 158 

Written responses to questions submitted to William J. Brodsky ............... 163 

Written responses to questions submitted to Diahann W. Lassus ............... 165 

Written responses to questions submitted to Douglas Lowenstein .............. 166 

Written responses to questions submitted to Paul Schott Stevens .............. 170 

Green, Hon. Al: 

Written responses to questions submitted to Hon. Richard Baker .............. 175 

Royce, Hon. Ed: 

Written statement of Hon. Sheila C. Bair, Chairman, FDIC, from a 

March 19, 2009, hearing before the Committee on Banking, Housing, 

and Urban Affairs of the U.S. Senate ......................................................... 177 

(1) 

INDUSTRY PERSPECTIVES ON THE 

OBAMA ADMINISTRATION’S FINANCIAL 

REGULATORY REFORM PROPOSALS 

Friday, July 17, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 11:08 a.m., in room 

2128, Rayburn House Office Building, Hon. Paul E. Kanjorski 

[member of the committee] presiding. 

Members present: Representatives Kanjorski, Waters, Watt, 

Sherman, Meeks, Clay, Miller, Green, Cleaver, Perlmutter, Foster, 

Carson, Minnick; Royce, Biggert, Hensarling, Garrett, Neugebauer, 

McHenry, Posey, Jenkins, Lee, Paulsen, and Lance. 

Mr. KANJORSKI. [presiding] This hearing of the Committee on Financial Services will come to order. Without objection, all members’ 

opening statements will be made a part of the record. 

Today we will hear from several industries that will soon feel the 

effects of the regulatory reform this committee will adopt. All affected parties deserve to have a voice in our ongoing deliberations 

about reform. I hope, however, our witnesses understand that because public faith in our financial system has significantly ebbed, 

we must enact strong new laws. 

Among many of the casualties of the ongoing financial crisis, investors’ confidence ranks high. According to a survey by 

shareowners.org, 58 percent of investors are now ‘‘less confident in 

the fairness of the financial markets than they were 1 year ago.’’ 

One of the biggest reasons investors cite for their lack of confidence 

is the failure of regulators. 

Earlier this week, I advised Chairman Schapiro of the Securities 

and Exchange Commission that the Commission must take bold 

and assertive action as it moves forward to strengthen enforcement. The Commission must also rewrite the rules governing the 

industry to better protect investors who sorely lack adequate safeguards. 

Additionally, Congress must update our securities laws to advance action on regulatory reform for the securities industry. I 

have already solicited input from the experts at the Commission, 

and Chairman Schapiro recently transmitted 42 legislative proposals to me. The Commission’s Inspector General has also provided input on these matters. Moreover, the Obama Administration’s White Paper and accompanying pieces of legislative language 

complement these suggestions, especially in areas like hedge fund 

2 

regulation and establishing a fiduciary duty for broker dealers providing investor advice. 

Based upon these many ideas, I am now developing legislation. 

Ultimately, we need to close loopholes and stop unscrupulous practices. Among other things, we ought to put more cops on the beat 

by allowing the Commission to pay bounties to whistleblowers 

whose tips result in catching fraudsters. 

Reform of credit rating agencies also has a top spot on our agenda. Overly optimistic ratings, to put it kindly, played a significant 

role in the global crash. I am therefore working to craft a bill that 

will bring sanity back to the credit rating process. 

As the various ideas for overhauling financial service regulation 

undergo debate, the industry representatives present today should 

rest assured that we will dutifully consider your ideas and critiques. However, we can no longer allow the investing public to suffer at the hands of narrow interests. Profit is fine. It is capitalism. 

But profit seeking alone, without regard to long-term viability of 

the system, and abated by weak regulatory oversight, has proven 

disastrous. We must therefore put in place a thoughtful, smart, and 

efficient regulatory system for the future. 

In closing, I welcome the witnesses and look forward to their testimony. The Chair now recognizes Mr. Hensarling for 2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. For many of us 

here, we continue to feel like we are in an ‘‘Alice in Wonderland’’ 

moment, as we look at a piece of legislation that seems to want to 

give five unelected government bureaucrats the power to essentially ban consumer financial products, decide which mortgages 

Americans can have, and whether or not they qualify for a credit 

card. 

I had the opportunity yesterday in the House to introduce the 

guest clergy to offer the prayer. I saw once again over the Speaker’s chair were the words, ‘‘In God we trust.’’ I fear for many on 

this committee, they now may want to change the words to, ‘‘In 

government we trust.’’ They have a lot more faith in government 

than I do. 

As I look again at the financial turmoil that we have in our economy, I think about Fannie Mae and Freddie Mac. Government really wasn’t to be trusted there with that particular policy. 

I think about oligopolies that were in the credit rating agency. 

Government was not to be trusted there. 

I think about AIG and the head of OTS telling us that he had 

the supervisory capacity, he had the regulatory authority, but he 

just missed it when it came to AIG’s credit default swap exposure. 

I am particularly concerned, as I look at this Draconian piece of 

legislation, how it will impact jobs in an economy that is seeing the 

highest unemployment rate in a quarter of a century—2.6 million 

people have lost their jobs since President Obama was sworn in. 

I am concerned about a credit contraction that can be caused by 

this regulator of consumer products. I am concerned about what 

may happen to derivatives that are used by those who want to finance our small businesses and our jobs to lower their risk. I am 

wondering what is going to happen to the cost, the greater cost of 

clearing these. The lack of the ability to customize them is going 

to cause many financial firms to no longer have the ability to lessVerDate Nov 24 2008 17:03 Dec 08, 2009 Jkt 053242 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\53242.TXT TERRIE
3 

en their risk, leading to less credit and fewer jobs in an economy 

that is drowning in unemployment. 

So Mr. Chairman, we have to take a very, very careful look at 

this rather radical Draconian piece of legislation before it is passed 

through this committee. I look forward to hearing from our witnesses, and I yield back the balance of my time. 

Mr. KANJORSKI. Thank you, Mr. Hensarling. Now, we will hear 

from Mr. Sherman for 3 minutes. 

Mr. SHERMAN. Thank you. I shared the gentleman from Texas’s 

concern that the Consumer Financial Protection Agency would be 

a lawmaking body until I received assurances from the chairman, 

I believe the author, that we were creating a law enforcement body 

that would issue interpretive and implementing regulations, and 

would not be a lawmaking body. The chairman has invited me, and 

I assume all members of this committee, to suggest legislative language that would nail that down, and I don’t think it is the purpose of this bill to transfer to an unelected body the decisions, and 

very tough decisions. I would prefer to punt them, actually. But as 

long as I am paid to be a Member of Congress, we should be debating them here. 

There are three other issues. First, we have to look at how the 

banks dominate the selection of the members of the regional 

Boards of Governors of the Federal Reserve, especially as the Fed 

acquires more power, and particularly because those regional 

boards then elect members to the Open Markets Committee. 

Second, we need to look at a system where the issuer of a debt 

instrument picks the rating agency. That is like the home team 

picking the umpire. They gave triple A to Alt-A. They won’t do that 

again soon with dodgy mortgage-backed securities, but we will see 

other types of dodgy securities out there instead. I will propose legislation, or hopefully an amendment that will allow the SEC to select the credit rating agencies, just as the league selects the umpire, not the home team. 

Finally, as to custom over-the-counter derivatives, these have 

been justified as a way to hedge legitimate risks. But I see perhaps 

the majority of the transactions are actually just casino bets where 

someone does not have a risk to hedge. This is of particular concern 

since Secretary Geithner told this committee and the Agriculture 

Committee that he reserves the right to perhaps bail out derivatives, their issuers, and their counterparties, even derivatives that 

are being issued now. So the Federal Government has a real interest in restricting these instruments as long as we have a Secretary 

of the Treasury who may want to bail them out. 

We at least need to see much higher capital requirements for 

over-the-counter derivatives. We might look toward restricting 

those derivatives, to only use them where you cannot hedge a legitimate risk in a market-traded derivative. In any case, we should 

by legislation make it clear that none of these derivatives, over-thecounter or exchange, are going to be subject to any bailouts in the 

future, and that if you buy an AIG derivative, you have to look only 

to the balance sheet of AIG. 

I yield back. 

Mr. KANJORSKI. The gentleman from Texas, Mr. Neugebauer, for 

2 minutes. 

4 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. I appreciate the 

witnesses providing us today with their views on the Administration’s financial regulatory restructuring proposal. While we have 

draft legislation covering a few of these areas now, I hope that we 

will have an opportunity to get further feedback when we actually 

have additional legislative language, particularly with regard to 

over-the-counter derivative proposals. There seems to be an agreement with broad principles of the Administration’s proposal on improving transparency and information about the activities in this 

market. But with complex products in a complex marketplace, the 

devil will certainly most be in the details. 

At the end of the day, we must ensure businesses large and 

small, hedge risks, particularly risks that are customized to their 

particular business, and having the ability to do so. We shouldn’t 

take actions that make users of derivatives less competitive, and 

we shouldn’t take actions that put U.S. markets at a disadvantage 

with our competitors. 

As we consider options to correct regulatory failures, we have to 

acknowledge that the government cannot micromanage our capital 

markets to prevent future failures or losses. Government regulation can’t substitute for due diligence for investors and other market participants. They need to know, in no uncertain terms, the responsibility rests on them and that future government bailouts for 

poor behavior are not an option. 

Basically, what we have seen so far is product regulation, not a 

new way of doing business in the regulatory structure. And one of 

the concerns I have is that in product regulation, we are trying to 

protect investors from themselves. What we do need, though, is a 

robust look at the way we have been doing business, looking at 

where the failures were in the system and making sure that we address those, but not radically changing the way that businesses 

have been able to take precautions to hedge their risks, which in 

fact protect investors, and also make sure that the marketplace is 

a more streamlined place to do business in a way that we can make 

sure that American markets continue to be very competitive. 

With that I yield back. 

Mr. KANJORSKI. Thank you very much, Mr. Neugebauer. Now we 

will hear from Ms. Waters for 3 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. As some of 

our witnesses may already know, I am very concerned with protecting our financial system from similar crises in the future. To 

accomplish this, we will need stronger and more innovative investor protections. We must also make sure that institutional financial 

instruments, such as over-the-counter derivatives, never have the 

chance to halt consumer or small business lending again. 

While products such as credit default swaps may have been sold 

to institutions, many of them were used to insure consumer debt 

in the form of CDOs. As these CDO structures failed and credit 

events occurred, these credit default swap contracts came due. A 

lack of transparency, combined with an overwhelming number of 

improperly collateralized swap contracts, served to freeze our lending markets and transfer billions of dollars from taxpayers to all 

kind of Wall Street firms such as Goldman Sachs and banks such 

as Bank of America. 

5 

Some say we should only be concerned about naked credit default 

swaps, which is swaps where people have no interests insuring 

anything they actually own. Those who enter into naked CDS contracts are simply trying to profit from some company’s bankruptcy, 

yet as Gillian Tett pointed out in a recent Financial Times column, 

even nonnaked CDSs have motivated investors to send a company 

into bankruptcy. 

No matter what shape our financial reforms take, rooting for 

companies, especially American companies, to fail should no longer 

be allowed. That is why I introduced H.R. 3145, the Credit Default 

Swap Prohibition Act of 2009. Banning credit default swaps is vital 

to preserving companies, jobs, and taxpayer funds. Our constituents and their 401(k)s will not be safe until we eliminate this product. 

I know that is highly controversial, and I am sure we will hear 

a lot of disagreement. But I thank you for arranging this hearing, 

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

Mr. KANJORSKI. Thank you very much, Ms. Waters. Now we will 

hear from Mr. Royce of California for 2 minutes. 

Mr. ROYCE. Thank you, Chairman Kanjorski. Much of the blame 

for the recent economic turmoil has centered on the belief that a 

lack of regulation was the root cause of the excessive risks and residual effects that followed, whereas there was a great deal of regulation in the banking sector. It was our most regulated sector. 

I think that Congressman Richard Baker was the first to really 

point out at great length the enormous overleveraging that was occurring in Fannie Mae and Freddie Mac, as did the Federal Reserve, and the systemic risk they posed to the system. But I think 

it is worth noting that while hedge funds and private pools of capital have experienced significant losses, they have not asked for or 

received any direct government bailouts in an era where the government has become savior of all things failed. 

The losses borne by hedge funds and their investors did not pose 

a threat to our capital markets or the financial system. A major 

reason why this was the case was because of the general lack of 

leverage within the hedge fund sector. Thus far it appears 

counterparty risk management, which places the responsibility for 

monitoring risk on the private market participants who have the 

incentives and capacity to monitor the risks taken by hedge funds, 

has held up well. 

Considering so many of our major heavily regulated financial institutions acted recklessly, drove up their leverage ratios to unstable levels, suffered significant losses on failed investments, and 

then came to the American taxpayers for assistance, the performance of these private pools of capital over that same period is reassuring. 

I must also note my concern with adding additional responsibilities to the SEC given their recent handling of the Bernie Madoff 

incident and what looks like a similar misstep in the handling of 

Allen Stanford’s firm. The few hearings on the Madoff Ponzi 

scheme revealed an overlawyered, overly bureaucratic SEC. 

As former SEC Commissioner Paul Atkins recently noted, if 

hedge funds and private equity firms are forced to register with the 

SEC, the burden to the agency’s examiners would be enormous. I 

6 

think it would be wise to first address the problems within the 

SEC, and then discuss adding new responsibilities onto the agency. 

I would like to thank the panel of witnesses for coming here 

today, Mr. Chairman. Thank you. 

Mr. KANJORSKI. Thank you very much, Mr. Royce. Now we will 

hear from Mr. Green for 1 minute. 

Mr. GREEN. Thank you, Mr. Chairman. And I welcome our colleague Mr. Baker back to the committee. Mr. Chairman, it is very 

obvious, intuitively obvious to the most casual observer that our 

regulatory institutions failed. We allowed persons to be qualified 

for teaser rates, but we did not qualify them for the adjusted rate. 

We had undisclosed yield spread premiums that allowed persons to 

be pushed into the subprime market who actually qualified for 

prime rates. We had universal defaults that were taking place. We 

had persons who were having to make payments on interest rates 

such that they were allocated to lower rates when they could have 

been allocated to higher rates. 

Some changes have taken place. But these changes have been reactionary changes; they were not proactive changes. Reactive legislation is fine, but proactive legislation is better. I think we must 

take advantage of the opportunity to make some serious changes 

that will look out for the consumer in the future. The consumer 

must be protected. Safety and soundness must be protected. These 

things are not mutually exclusive. 

I yield back. 

Mr. KANJORSKI. Thank you, Mr. Green. And we will now hear 

from the gentleman from North Carolina, Mr. McHenry, for 2 minutes. 

Mr. MCHENRY. Thank you, Mr. Chairman. Thank you all for 

being here today. This is by far one of the most wide-ranging panels that we have had representing the financial markets, and I am 

glad you are here. 

My concern is for my constituents and average Americans to 

have options for investments, have options for the type of savings 

accounts they have, the type of investment vehicles they have. And 

my additional concern is about the credit rating agencies. 

But beyond that, when you look at CFPA and the idea of creating 

another bureaucracy by which you have to jump through hoops, 

will that limit options for my constituents to have products that 

they can invest in? Will it basically make vanilla bean products, 

will it limit innovation in the marketplace? Will it hamstring our 

capacity and my constituents’ capacity to get the lending that they 

need to grow this economy? 

The fact is that in this severe downturn, capital is hard to come 

by for average Americans. Will this proposal further restrict capital? And what are your firms and the people that you represent 

doing in anticipation of this massive regulatory reregulation, overregulation? So what are they doing right now? Are your firms holding more capital in anticipation of regulatory changes? Are we further limiting options because Congress is talking about completely 

changing financial regulations? 

That is a concern that I have, and I would hope that the panel 

would touch on that today as well. Thank you, Mr. Chairman. 

7 

Mr. KANJORSKI. Thank you very much, Mr. McHenry. We will 

now have our panel, the only panel for today. And each witness 

will be recognized for 5 minutes to present their testimony. Their 

written testimony will be made a part of the record. 

First, we have our friend and former colleague, the gentleman 

from Louisiana, the Honorable Richard Baker, President of the 

Managed Funds Association. Mr. Baker? 

STATEMENT OF THE HONORABLE RICHARD BAKER, 

PRESIDENT, MANAGED FUNDS ASSOCIATION 

Mr. BAKER. Thank you, Mr. Chairman, Mr. Hensarling, and 

members of the committee. I am pleased to be back in this very familiar room and enjoy the opportunity and appreciate your courtesy in asking me to participate. 

I am Richard Baker, President and CEO of the Managed Funds 

Association (MFA), which represents the majority of the world’s 

largest hedge funds and are the primary advocate for sound business practices for professionals in hedge funds, funds of funds, and 

managed futures. Our funds provide liquidity and price discovery 

to markets, capital for companies to grow, and risk management 

services to investors such as our Nation’s pension funds. Our work 

enables them to meet their commitments to their retirees. 

With an estimated $1.5 trillion under management, the industry is significantly smaller than the $9.4 trillion mutual fund industry 

or the $13.8 trillion banking industry. I make note of this fact for 

the reason to assess the appropriate level of risk that our sector 

could present to broader market function. 

Further, many hedge funds use little or no leverage, as has been 

stated earlier this morning, which additionally limits their contribution to market risk. In a recent study, 26.9 percent do not deploy leverage at all. And a recent analysis by the Financial Services Authority found that industry-wide, over a 5-year period, fund 

leverage averaged between two and three to one. This is certainly 

not the generally accepted view of leverage in our industry. 

The industry’s modest size, coupled with the relatively low leverage, give reasons for those to view that we are not and have not 

been contributors to the current dislocation in the market and, unfortunately, that has led to the broad deployment of taxpayer dollars. 

Notwithstanding these facts, our funds have a shared interest 

with other market participants in restoration of investor confidence 

and in establishing a more stable and transparent marketplace. 

These important objectives we believe can be attained with careful 

analysis and construction of a smart regulatory structure. This will 

require appropriate and sensible regulation. It is aided by the 

adoption of industry-sound practices, which we have promoted at 

the MFA, and it will require investors to engage in their own due 

diligence. There is no substitute for asking the right questions before you write the check. 

Our members recognize that mandatory SEC registration for 

those advisers who are not currently registered for all private pools 

of capital is a key regulatory reform. Registration under the Investment Advisers Act, we believe, is the smartest approach. Currently, 

over half of our members are registered in this manner with the 

8 

SEC. The Advisers Act is a comprehensive framework, and among 

many other elements, requires disclosure to the SEC regarding the 

advisers’ business, detailed disclosure to clients, policies and procedures to prevent insider training, maintenance of books and 

records, periodic inspection, and examination by the SEC. 

We do believe it is important to establish an exemption from registration, however, for the smallest investment advisers that have 

de minimis amount of assets under management. This exemption 

should be narrowly drawn to ensure that an inappropriate loophole 

from registration is not created. 

Also the provision should coordinate, not duplicate, we hope, regulation at the State level. Good regulation is also efficient regulation. In that regard, we do have some concerns with the Administration’s proposed legislation that would impose duplicative registration requirements on a number of our commodity trading advisers, most of whom who are already regulated by the CFTC. We 

hope, Mr. Chairman, that we would be able to work with the committee to remedy this particular concern. 

With regard to a subject of some recent interest, credit default 

swaps, we have worked with regulators to reduce risk and improve 

market efficiency. We support efforts to increase standardization 

and central clearing or exchange trading of OTC derivatives. However, it is essential to maintain the ability of market participants 

to enter into customized OTC contracts. All market participants 

should post appropriate collateral for OTC transactions. And that 

collateral should importantly be segregated, meaning that it is protected. And there should be reporting to the regulator as deemed 

appropriate. 

The subject of systemic risk is also of current concern as well. 

There should be a systemic risk regulator with oversight of the key 

elements of the entire financial system, but it should only be enabled with confidential reporting by our firms to that regulator. A 

clear mandate for the regulator should be established to protect the 

integrity of the financial system, not individual market participants. The regulator should have clear authority to act as required 

by his evaluation of the circumstance and in a decisive manner. 

We believe these views are consistent with the Administration’s 

stated goals. I appreciate this courtesy to present these views, and 

look forward to working with the committee toward effective resolution. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Baker can be found on page 30 

of the appendix.] 

Mr. KANJORSKI. Thank you very much. And now, we will have 

our next witness. We have Mr. William J. Brodsky, chairman and 

chief executive officer of the Chicago Board Options Exchange. Mr. 

Brodsky. 

STATEMENT OF WILLIAM J. BRODSKY, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, CHICAGO BOARD OPTIONS EXCHANGE 

Mr. BRODSKY. Thank you, Chairman Kanjorski, and Mr. Hensarling. I am honored to be here on behalf of the Chicago Board 

Options Exchange. I also want to just mention that I have had the 

distinct honor in my career to have served as a senior executive of 

9 

the American Stock Exchange. I was for 11 years the CEO of the 

Chicago Mercantile Exchange, a futures exchange, and now for 12 

years as chairman of the Chicago Board Options Exchange. 

The CBOE actually operates several exchanges. We have a stock 

exchange, we have a futures exchange, and our main business, of 

course, is a securities options exchange. And we also own an interest in One Chicago, which is a single stock futures exchange. 

Just a minute on the growth of the options business. The options 

industry in 2008 traded 3.5 billion contracts, which was a 25 percent increase from the prior year. And our 5-year compound growth 

has been 25 percent. That is spread among seven vibrant and highly competitive exchanges. A lot of that growth is due to the risk 

management tools that we provide for all investors who can hedge 

their individual stocks, their ETFs, and their mutual funds. 

I applaud the Administration’s proposal on financial regulatory 

reform, but I don’t think that the Congress should squander the opportunity offered by this period we have just experienced to design 

and mandate regulatory reforms that are long overdue. The status 

quo should not be an option. At the outset, I would like to commend the Administration for drafting a proposal that seeks that reform, and I will comment on certain aspects of it. 

We are also gratified that the proposal addresses not only the 

underregulation of OTC derivatives, but also the existing regulations, including the CFTC–SEC jurisdictional divide, which we believe is dramatically antiquated. While this jurisdictional matter 

may be a mere technical issue to some, given the many serious 

issues that face this committee, this bifurcated system has had persistent negative consequences that we ignore at our peril. 

The proposal clearly describes that the regulation of securities 

and futures under different structures, with separate agencies and 

separate congressional committees, causes legal uncertainty, delay, 

and impedes innovation and competition, and imposes unnecessary 

costs on our regulated financial markets. But it is important to 

note that in the midst of the financial tsunami that we have endured, when precious little worked, regulated exchanges delivered 

as promised. There were no failures. There were no closures. And 

there were no taxpayer rescues. Despite the most extreme market 

conditions, exchanges continued to provide transparent, liquid, and 

orderly markets, and protections against counterparty risk through 

centralized clearing without interruption, and continued to fulfill 

those essential functions of capital formation and risk management. 

Yet the effectiveness of many exchanges is severely compromised 

by the yoke of the regulatory structure that is outdated. The nature 

of our legacy system of regulation has had the perverse effect of facilitating regulatory arbitrage and the problems it fosters by inhibiting the inherent strengths of regulated exchanges. I would like to 

give you two examples. 

One, in the area of new products, there have been persistent 

problems and conflicts between the SEC and the CFTC in determining whether a product is a future or whether it is a security. 

It has caused interminable delays. The most vivid example is the 

CBOE proposal to trade options on gold ETFs. ETFs, as you know, 

are a very valuable investor tool. We proposed to trade this, and 

10 

it took the SEC and CFTC 31⁄2 years to come to a resolution on 

that issue. In another case Eurex, which is Europe’s largest derivative exchange, proposed to trade a credit default instrument on an 

exchange with counterparty clearing, and they proposed to do that 

in a matter of weeks, and it took our agencies 7 months to agree 

on how to approve that product. 

I note that these product delays are not just an exchange issue, 

but also represent loss of revenue to the Federal Government. Dual 

jurisdiction means that futures and comparable securities are not 

regulated consistently. This leads to disputes between the agencies 

in areas involving default of market participants. 

And the fact that the CFTC doesn’t have an insider trading provision potentially enables a wrongdoer to use inside information 

when others are prohibited from doing so under the SEC. This disparity will take on increased importance as this committee grapples with the jurisdiction of credit-related products. 

We heartily endorse the Administration’s recommendation as 

necessary first steps toward a comprehensive regulatory reform. 

Specifically, we support the reform proposal’s recommendation that 

there be created a Federal Regulatory Oversight Council, chaired 

by the Treasury, to resolve disputes between the two agencies. Currently, there is no dispute mechanism, and we believe that Treasury is well suited to chair that group. 

In addition, we strongly recommend that exchanges, as self-regulatory organizations, have the ability to bring issues directly before 

the new Council. We support the Administration’s recommendation 

for harmonization of the statutes that exist between the two agencies, and we urge Congress to adopt that proposal. 

However, while harmonization may represent an improvement, 

we believe it is only a step toward ending the ultimate issue of bifurcated jurisdiction. Even with optimal harmonization, the existence of two separate agencies with different philosophies will continue to foster conflicting interpretations and enforcement of similar laws and perpetuate regulatory uncertainty and delay. While 

the reform proposal outlines interim steps that can dampen some 

of the ill effects of divided jurisdiction, consolidation of the SEC 

and the CFTC is the only truly comprehensive solution. Any rational, unbiased assessment of the bifurcated regulatory system would 

lead to this conclusion. 

On other issues, I would just summarize by saying that we agree 

with the reform proposal’s recommendation that there should be a 

single authority, the Federal Reserve Board, to supervise all firms 

that pose a systemic risk. 

Second, we agree with the proposal that greater regulatory oversight is needed of OTC derivatives. At a minimum, we believe that 

jurisdiction over all OTC derivatives involving securities, including 

corporate events, should be with the SEC. I might point out that 

I gave testimony in 1997 saying that the absence of regulation on 

OTC derivatives would be a very dangerous thing. And I said that 

it had seeds of great danger. Unfortunately, that was 1997, and 

there was an exemption granted which we opposed. That was part 

of my testimony. 

We recognize that there are competitive disadvantages inherent 

in the way the SEC approves rule filings, and we support the reVerDate Nov 24 2008 17:03 Dec 08, 2009 Jkt 053242 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\53242.TXT TERRIE
11 

port’s recommendation that the SEC should overhaul its process of 

reviewing proposed rule changes by allowing more SRO rule filings 

to become effective upon filing. 

Finally, in conclusion, the CBOE believes that Congress should 

promptly adopt the harmonization of SEC and CFTC rules and regulations and the establishment of the Federal Regulatory Oversight 

Council as well as the proposal’s call for the streamlining of SRO 

rule processes at the SEC. 

Taking these steps will at least help our markets remain competitive in the global marketplace until we are able to complete a 

more comprehensive reform. No other major country with well-developed derivative markets uses a system of having two different 

government agencies regulating equivalent financial products. The 

U.S. markets require a 21st Century system of market regulation 

to operate in today’s global marketplace. 

On behalf of CBOE, I personally thank you for the opportunity 

to appear before the committee, and we would certainly welcome 

an opportunity to work with you in the coming months. 

[The prepared statement of Mr. Brodsky can be found on page 

54 of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. Brodsky. Next, we 

will hear from Mr. Randy Snook, executive vice president, Securities Industry Financial Markets Association. 

STATEMENT OF RANDOLPH C. SNOOK, EXECUTIVE VICE 

PRESIDENT, SECURITIES INDUSTRY FINANCIAL MARKETS 

ASSOCIATION (SIFMA) 

Mr. SNOOK. Thank you, Mr. Chairman, and members of the committee. We appreciate the opportunity to testify at this important 

hearing. We appreciate your continued leadership on regulatory reform. SIFMA supports efforts to make the regulatory reform 

changes necessary to restore confidence in the financial markets 

and meet the challenges of the 21st Century marketplace and to 

protect consumers and investors. The financial system is critical to 

the Nation’s competitiveness, and reform must provide a durable 

platform for steady economic growth, employment, and investment. 

I would like to now highlight elements from our written testimony. Systemic risk has been at the heart of the financial crisis. 

We have testified before as to the need for a financial markets stability regulator as a first step in addressing the challenges facing 

financial regulatory reform. Generally, we support Treasury’s recommendations for a single accountable systemic risk regulator, balanced with the newly created Financial Services Oversight Council, 

as it would improve upon the current system. We think this construct should effectively assess threats to financial stability and ensure appropriate action is taken promptly. A Federal resolution authority for certain systemically important financial institutions 

should be established. 

Being systemically important in our judgment does not mean toobig-to-fail, but does require an orderly resolution plan should it be 

needed. The FDIC has broad powers to act as conservator or receiver of a failed or severely troubled bank, but does not have the 

experience with the operations of other types of systemically important financial institutions. We welcome Treasury’s proposal to esVerDate Nov 24 2008 17:03 Dec 08, 2009 Jkt 053242 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\53242.TXT TERRIE
12 

tablish this authority for other institutions, and urge that it draw 

upon the experience of regulators familiar with the entity being resolved. 

We support proposals for increased regulation, reporting, and 

transparency in the derivatives markets. Clearing is a useful tool 

in the comprehensive risk management framework, and we support 

clearing of standardized OTC derivative transactions by financial 

firms whenever possible, but strongly believe there is a role for the 

continued use of customized contracts, which are employed by thousands of manufacturing and other companies across America every 

day to manage various kinds of risks. We believe that the transparency needed can readily be achieved without mandating exchange trading of OTC derivative products. 

SIFMA supports Treasury’s proposal to harmonize the regulation 

of securities and futures. The key concern in this area is that the 

law should expressly delegate the regulation of financial products 

such as broad market indices, currencies, and interest rate swaps 

to the SEC, and nonfinancial products such as commodities to the 

CFTC. 

We agree that targeted reforms are needed in order to restore 

confidence and functionality to the securitization market, one of the 

keys to a better functioning market broadly, and the industry is 

working aggressively to make improvements in this area. 

We support efforts to find appropriate ways to have skin in the 

game, for securitization market participants to have skin in the 

game. One mechanism that can promote this goal is the required 

retention of a meaningful economic interest in securitized exposures, helping to align the incentives of originators and transaction 

sponsors with those of investors. 

SIFMA supports strengthening consumer protection regulation, 

including the creation of national standards governing consumer 

credit products and lending practices. There are concerns that creating a new agency for these purposes might result in mixed messages and conflicting directives, and therefore may fail to deliver 

the hoped-for benefits that underlie the suggestion of a new agency. More critical is the balancing of functions of any new consumer 

protection entity with other regulators. The CFPA as proposed 

could inadvertently encroach on the jurisdiction of the SEC and the 

CFTC. And we understand it was not intended to supersede the 

broad investor protection mandate of these two agencies, but suggest the clarity of a full exclusion for investment products and services regulated by the SEC and CFTC. 

SIFMA has long advocated the modernization and harmonization 

of disparate regulatory regimes for brokers, dealers, investment advisers, and other financial intermediaries. Individual investors deserve, and SIFMA supports, the Administration’s recent proposal to 

create a new Federal fiduciary standard of care that supersedes 

and improves upon existing fiduciary standards, which have been 

unevenly developed and applied over the years, and which are susceptible to multiple and differing definitions and interpretations 

under existing Federal and State law. The new Federal standards 

should function as a standard that is uniformly applied to both advisers and broker-dealers when they provide personalized investment advice to individual investors. When broker-dealers and adVerDate Nov 24 2008 17:03 Dec 08, 2009 Jkt 053242 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\53242.TXT TERRIE
13 

visers engage in identical service, they should be held to the same 

standard of care. 

Finally, the global nature of financial markets calls for a global 

approach to regulatory reform. Unless common regulatory standards are applied and enforced across global markets, opportunities 

for regulatory arbitrage will arise. And so importantly, close cooperation among policymakers on an international basis is essential if we are to effectively address the challenges facing the financial system. 

We thank you for your time and look forward to your questions. 

[The prepared statement of Mr. Snook can be found on page 90 

of the appendix.] 

Mr. KANJORSKI. Thank you very much. Now, we will hear from 

Mr. Paul Schott Stevens, president of the Investment Company Institute. Mr. Stevens. 

STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND 

CEO, INVESTMENT COMPANY INSTITUTE 

Mr. STEVENS. Thank you, Chairman Kanjorski, Congressman 

Royce, and members of the committee. I am very pleased to appear 

today to discuss the Obama Administration’s proposal for financial 

regulatory reform. And I must say we commend this committee for 

all the very hard work and attention it is devoting to these important and complex issues. 

As you know, mutual funds and other registered investment companies are a major factor in our financial markets. For example, 

our members hold roughly one-quarter of all the outstanding stock 

of U.S. public companies, and funds have not been immune from 

the effects of the financial crisis. But the regulatory structure that 

governs funds has proven to be remarkably resilient. 

As a result of New Deal reforms that grew out of the Nation’s 

last major financial crisis, mutual fund investors enjoy significant 

protections under the Investment Company Act of 1940 and the 

other securities laws. These include daily pricing of fund shares 

with mark-to-market valuations, separate custody of fund assets, 

very tight restrictions on leverage, prohibitions on affiliated transactions and other forms of self-dealing, the most extensive disclosure requirements faced by any financial product, and strong independent governance. The SEC has administered this regulatory regime effectively, and funds have embraced it and have prospered 

under it. 

Indeed, recent experience suggests that policymakers should consider extending some of these same disciplines, which arrived in 

our industry in 1940, to other marketplace participants. 

We are pleased that the Administration’s reform proposals reaffirm the SEC’s comprehensive authority not just with respect to 

registered investment companies and their advisers, but also over 

capital markets, brokers, and other regulated entities. The SEC 

can and should do even more to protect investors and maintain the 

integrity of our capital markets. But for this it needs new powers 

and additional resources. 

We agree with the Administration that the SEC should have new 

regulatory authority over hedge fund advisers, along with expanded authority over credit rating agencies. And we welcome 

14 

plans to give the SEC new powers to increase transparency and reduce counterparty risk in certain over-the-counter derivatives. 

We have long supported additional resources for the SEC. It is 

just as important, however, that the SEC bolster its internal management and deepen the abilities of its staff. We commend SEC 

Chairman Mary Schapiro for the steps she is taking in this regard. 

Lastly, I would like to address one of the central questions of reform, how to regulate systemic risk. ICI was an early proponent of 

the idea that a statutory council of senior Federal regulators would 

be best equipped to look across our financial system to anticipate 

and address emerging threats to its stability. Thus, we are pleased 

that the Administration recommends creation of a Financial Services Oversight Council. 

We are concerned, however, that the Administration proposes 

that this council would have only an advisory or consultative role. 

The lion’s share of systemic risk authority would be invested in the 

Federal Reserve. In our view, that strikes the wrong balance. Addressing risks to the financial system at large requires diverse inputs and perspectives. We would urge Congress instead to create 

a strong systemic risk council, one with teeth. The council should 

coordinate the government’s response to identified risks, and its 

power to direct the functional regulators to implement corrective 

measures should be clear. The council also should be supported by 

an independent, highly experienced staff. 

Now, some have said that convening a committee is not the best 

way to put out a roaring fire. But a broad-based council is the best 

body for designing a strong fire code. And isn’t that the real goal 

here, to prevent the fire before it consumes our financial system? 

This council approach offers several advantages. As I mentioned, 

the model would enlist expertise across the spectrum of financial 

services. It would be well suited to balancing the competing interests that will often arise. It would also likely make the functional 

regulators more attentive to emerging risks or gaps because they 

would be engaged as full partners. And the council could be up and 

running quickly, while it might take years for any existing agency 

to assemble the requisite skills to oversee all areas of our financial 

system. 

Mr. Chairman, thank you again for the opportunity to testify. We 

look forward to continuing to work with the committee as it develops legislation on these and other issues. 

[The prepared statement of Mr. Stevens can be found on page 

121 of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. Stevens. Next, we 

will hear from Mr. Douglas Lowenstein, president, Private Equity 

Council. Mr. Lowenstein. 

STATEMENT OF DOUGLAS LOWENSTEIN, PRESIDENT/CEO, 

PRIVATE EQUITY COUNCIL 

Mr. LOWENSTEIN. Thank you, Mr. Chairman, and members of the 

committee. I appreciate the opportunity to be here this morning 

and to present our views on the financial regulatory reform issues. 

The Private Equity Council is a trade association representing 12 

of the largest private equity firms in the world. I think members 

of this committee are well aware of the positive role private equity 

15 

has played in helping hundreds of American companies grow, create jobs, innovate, and compete in global markets. In the process, 

over the last 20 years, private equity firms have been among the 

best, if not the best performing asset class for public and private 

pension funds, foundations, and university endowments, distributing $1.2 trillion in profits to our investors. 

In these remarks, I want to make four general points. First, it 

is important for Congress to enact a new reform regime. Obviously, 

action which elevates speed over quality is undesirable. But the 

sooner businesses understand how they will be regulated, the 

quicker they will be able to organize themselves to carry out their 

roles in reviving strong capital markets. Private equity firms today 

have $470 billion in committed capital to invest, and we are looking forward to the opportunity to do that. 

Second, the Obama Administration articulated three fundamental factors that trigger systemic risk concerns: first, the impact 

a firm’s failure would have on the financial system and the economy; second, the firm’s combination of size, leverage, including off 

balance sheet exposures, and the degree of its reliance on shortterm funding; and third, the firm’s criticality as a source of credit 

for households, businesses, and State and local governments, and 

as a source of liquidity for the financial system. Private equity contains none of these systemic risk factors. 

Specifically, PE firms have limited or no leverage at the fund 

level, and thus are not subjected to unsustainable debt or credit or 

margin calls. PE firms don’t rely on short-term funding. Rather, PE 

investors are patient, and commit their capital for 10 to 12 years 

or more, with no redemption rights. Private equity does not invest 

in short-term tradeable securities like derivatives and credit default swaps, and private equity firms are not deeply interconnected 

with other financial market participants through derivative positions, counterparty exposures, or prime brokerage relationships. 

And finally, private equity investments are not crosscollateralized, which means that neither investors nor debt holders 

can force a fund to sell unrelated assets to repay a debt. 

Third, we support creation of an overall systemic risk regulator 

who has the ability to obtain information, is capable of acting decisively in a crisis, and possesses the appropriate powers needed to 

carry out its mission. As to exactly how you carry that out, we are 

frankly agnostic on that subject. 

And fourth, regarding private equity and regulation specifically, 

we generally support the Administration’s proposal for private equity firms, venture capital firms, hedge funds, and other private 

pools of capital to register as investment advisers with the SEC. 

And we support similar legislation introduced by Representatives 

Capuano and Castle. 

To be clear, registration will result in new regulatory oversight 

for private equity firms. There are considerable administrative and 

financial burdens associated with being a registered investment adviser. And in fact, these could be especially problematic for smaller 

firms. So it is important to set the reporting threshold at a level 

which covers only those firms of sufficient scale to be of potential 

concern. But despite the potential burdens, we do support strong 

registration requirements for all private pools of capital because it 

16 

is clear that such registration can help restore confidence in the financial markets. And in the long run, private equity will benefit 

when confidence in the system is high. 

While supporting registration, we believe Congress should direct 

regulators to be precise in how new regulatory requirements are 

calibrated so the burdens are tailored to the nature and size of the 

individual firm and the actual nature and degree of systemic risk 

it may pose. It is vital that any information provided to the SEC 

be subjected to strong confidentiality protections so as not to expose 

highly sensitive information beyond that required to carry out the 

systemic risk oversight function. 

We stand ready to work with you, Mr. Chairman, and members 

of the committee as these issues are resolved through the legislative process. Thanks again. 

[The prepared statement of Mr. Lowenstein can be found on page 

76 of the appendix.] 

Mr. KANJORSKI. Thank you again, Mr. Lowenstein. And our next 

witness will be Ms. Diahann Lassus, president of Lassus Wherley, 

on behalf of the Financial Planning Coalition. 

STATEMENT OF DIAHANN W. LASSUS, PRESIDENT, LASSUS 

WHERLEY & ASSOCIATES, ON BEHALF OF THE FINANCIAL 

PLANNING COALITION 

Ms. LASSUS. Thank you, Mr. Chairman, and members of the committee. Thank you for the opportunity to speak on this critically 

important topic. 

My name is Diahann Lassus, and I come before you today as a 

representative of the Financial Planning Coalition, a group of three 

leading financial planning organizations dedicated to improving 

consumer access to competent, ethical, and professional financial 

planning advice. I also serve as chairman of the board of the National Association of Personal Financial Advisers, the leading professional association dedicated to the advancement of fee-only financial planning. Most significantly, however, I am the co-founder 

and president of Lassus Wherley & Associates, a woman-owned 

wealth management firm focused on helping families secure their 

financial future every day. 

Consumer protection and the need for accountability and transparency are not abstract concepts or academic debates. They are 

the reality my clients and I face every day. Every time I meet with 

new clients, I hear stories about their experience with other financial planners. These clients often explain that they trusted and followed the planner’s advice because the planner said he was putting 

the client’s best interests first. Based on the recommended products, it is abundantly clear that the planner was looking to profit 

from commissions, and may not have even considered the client’s 

best interests. Sadly, though, these stories are not unusual. 

Since the Great Depression, financial services regulation has developed essentially along dual tracks: laws governing the sale of financial products; and laws governing investment advice. When the 

delivery of financial services involves a combination of product 

sales and financial advice, the dual regulatory structure has led to 

consumer confusion, conflicts of interest, and gaps in oversight. 

17 

No single law governs the delivery of financial planning advice 

to the public. There is a patchwork regulatory scheme where financial planners currently maintain as many as three different licenses—insurance, brokerage, and investment adviser—with different standards of care and accountability to consumers. This has 

led to consumer confusion, misrepresentation, and fraud, all things 

that the Administration seeks to correct in their reform package. 

We were very happy to see the President propose that brokerdealers who provide investment advice be held to the same fiduciary standard as investment advisers. We are pleased that this 

committee is considering that proposal, and hope it results in an 

unambiguous fiduciary duty for all financial professionals who provide investment advice, and does not undermine the fiduciary duty 

that already exists under the Investment Advisers Act of 1940. 

We are working with a group of organizations that represent diverse interests and constituencies to support this concept. We all 

share the view that the highest legal standard, the fiduciary duty, 

should apply to all who give financial advice to consumers. 

Taking a step beyond extending the fiduciary duty, and in an effort to close the regulatory gap I mentioned, the Financial Planning 

Coalition supports the creation of a professional oversight board for 

financial planners and advisers, much like professional or medical 

legal boards, that would establish baseline competency standards 

for financial planners and require adherence to a stringent fiduciary standard of care. We seek to apply a principles-based regulation to individuals providing comprehensive financial planning 

services or holding themselves out as financial planners, not to the 

firms that employ them. This leaves intact other regulatory coverage for institutions, and operates consistently with existing Federal regulation for broker-dealers and investment advisers, as well 

as State regulation of insurance producers, accountants, and lawyers. 

As a small business owner, I am very sensitive to charges of increased administrative and cost burdens, especially in this economy. However, the ability of Americans to identify and place their 

trust in competent, ethical, and professional financial planners outweighs these burdens. 

We fully support the Administration’s five key principles for 

strengthening consumer protection: transparency; simplicity; fairness; accountability; and access. And we are pleased to see the 

chairman carry these principles forward as he works to fill the regulatory gaps to protect consumers. 

Thank you. 

[The prepared statement of Ms. Lassus can be found on page 72 

of the appendix.] 

Mr. KANJORSKI. Thank you very much. And now, finally, we will 

have Mr. Rob Nichols, president and chief operating officer of the 

Financial Services Forum. 

STATEMENT OF ROBERT S. NICHOLS, PRESIDENT AND CHIEF 

OPERATING OFFICER, THE FINANCIAL SERVICES FORUM 

Mr. NICHOLS. Chairman Kanjorski, members of the committee, I 

would like to thank you as well as Chairman Frank and Ranking 

Member Bachus for the opportunity to participate in today’s hearVerDate Nov 24 2008 17:03 Dec 08, 2009 Jkt 053242 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\53242.TXT TERRIE
18 

ing and to share the Financial Services Forum’s views on the Administration’s proposal to reform and modernize our Nation’s 

framework of financial supervision. 

The Forum, as many of you know, is a nonpartisan financial and 

economic policy organization comprised of the chief executives of 17 

of the largest and most diversified financial institutions doing business in the United States. Our purpose is to promote policies that 

enhance savings and investment, and that ensure an open, competitive, and sound global financial services marketplace. 

Reform and modernization of our Nation’s framework of financial 

supervision is overdue and needed. Our current framework is simply outdated. Our Nation needs a new supervisory framework that 

is effective, efficient, ensures institutional safety and soundness 

and systemic stability, promotes the competitive and innovative capacity of the U.S. capital markets and, quite importantly, protects 

the interests of depositors, investors, consumers, and policyholders. 

With this imperative in mind, we applaud the Administration’s 

focus on reform and modernization and the ongoing hard work of 

this committee. We agree with much of the Administration’s diagnosis of the deficiencies of our current framework, and we applaud 

the conceptual direction and many of the details of the Administration’s reform proposal. I will briefly touch on a couple elements of 

that plan. 

Perhaps the most significant deficiency of our current supervisory framework is that it is highly balkanized, with agencies focused on specific industry sectors. This stovepipe structure has led 

to at least two major problems that created the opportunity for, 

and some would say exacerbated, the current financial crisis: one, 

gaps in oversight naturally developed between the silos of sectorspecific regulation; and two, no agency is currently charged with 

assessing risks to the financial system as a whole. No one is looking at the big picture. 

A more seamless, consistent, and holistic approach to supervision 

is necessary to ensure systemic stability and the safety and soundness of all financial entities. We believe the cornerstone of such a 

modern framework is a systemic risk supervisor. Indeed, one of the 

reasons this crisis could take place is that while many agencies and 

regulators were responsible for overseeing individual financial 

firms and their subsidiaries, no one was responsible for protecting 

the whole system from the kinds of risks that tied these firms to 

one another. 

As President Obama rightly pointed out when he announced his 

plan just a few weeks ago, regulators were charged with seeing the 

trees, but not the forest. This proposal to have a regulator look not 

only at the safety and soundness of individual institutions, but also 

for the first time at the stability of the financial system as a whole, 

is essential. During Q&A, we could visit about who might be best 

suited to be a systemic risk supervisor and how you could make 

that entity accountable. 

Of the many unfortunate and objectionable aspects of the current 

financial crisis, and the subsequent policy response, perhaps none 

is more regrettable and evoking of a more passionate objection than 

too-big-to-fail. Failure is an all-American concept because the discipline of potential failure is necessary to ensure truly fair and 

19 

competitive markets. No institution should be considered too big to 

fail. A critical aspect of regulatory reform and modernization, 

therefore, must be to provide the statutory authority and procedural protocol for resolving, in a controlled way that preserves public confidence and systemic integrity, the failure of any financial 

entity, no matter how large or complex. 

So while no institution should be considered too big to fail, there 

are some that are too big to fail uncontrollably. We think that putting in place safeguards to prevent the failure of large and interconnected financial firms, as well as a set of orderly procedures 

that will allow us to protect the economy if such a firm in fact does 

go under water, should go hand in hand. 

The Forum’s insurance industry members agree that it is essential that there be increased national uniformity in the regulation 

of insurance. Congressman Kanjorski, you and I have had this discussion. And we are supportive of the creation of an Office of National Insurance within the Treasury Department. ONI will ensure 

that knowledge and expertise is established at the Federal level, 

which is critical to ensuring that insurance industry interests are 

represented in the context of international negotiations and regulatory harmonization efforts. 

Again, thank you for the opportunity to appear before you today. 

I look forward to your questions. 

[The prepared statement of Mr. Nichols can be found on page 84 

of the appendix.] 

Mr. KANJORSKI. Thank you very much. 

If I may just comment, I wish we had about 3 hours today just 

for my own questions. All your testimony has excited me, and I 

have tried to limit in my mind what we would ask. 

I think, Mr. Stevens, you talked about a systemic risk regulator 

and you raised the question of where that should exist, that it 

ought to be clear and separate. Have you had an occasion to examine Mr. Donaldson’s suggestions in his most recent report? 

Mr. STEVENS. I have read the news reports about them, Mr. 

Chairman. 

Mr. KANJORSKI. Well, I do not have a full understanding, nor 

have I had the opportunity to read the report fully, but, from what 

I gather, it is the closest thing to setting up a philosopher king elevated expert panel, a supreme court of economics, if you will. And 

it is rather interesting from the standpoint that I myself have extreme doubts about imbuing the Federal Reserve with additional 

responsibilities and powers, particularly some of them which appear to be inherently in conflict if we make them the systemic risk 

regulator also. I do not know how they carry out all the monetary 

policy decisions that may be contrary to what may be good for the 

entire economy. 

On that regard, though, most recently—I do not even know if I 

should refer to this—but we have a troubling financial institution 

right now on the brink of either going into bankruptcy or being rescued, and I had a rather national retailer call me on the phone yesterday in regard to part of the operations of that organization. I 

think you understand the organization I am talking about. I prefer 

not to mention it, if we can, although most people are informed. 

20 

Part of it is they are a factoring operation, which affects 3,000 suppliers and manufacturers. 

The question that disturbs me is that I do not know whether or 

not we are recognizing the systemic risk. We are tending to think 

systemic risk has to be the size of the individual institution within 

their industry or within their field, but it does not necessarily have 

to be that. It could be interconnection. It could be providing vital 

services. 

This retailer said, look, these are 3,000 suppliers, and they are 

all factored by this organization. If they cannot continue that, they 

close down; and I cannot get goods to sell in the store, so that when 

we get the consumers’ demand increase, there is nothing for him 

to buy. 

And it seems to me a pretty logical argument that comes close 

to systemic risk. I guess that is what we are faced with. Do you 

have any thoughts on that? 

Mr. STEVENS. Well, with respect to what I understood to be the 

proposal by former Chairman Donaldson and former Chairman 

Levitt, it is to create a whole new agency that would be the systemic risk regulator, to put it on top of the entire framework that 

we have currently. I think that harbors, frankly, Mr. Chairman, 

even more troublesome concerns than vesting that authority in 

some existing player. 

I think the point that you make in addition is one that certainly 

we have given a lot of attention to, what is a systemic risk and 

what is a firm that should in the Administration’s proposal be a 

Tier 1 financial holding company? 

The criteria that have been proposed, I think, are very uncertain 

of application. That could range to a small group of firms or it 

could range to a very wide group of firms, and I suppose it is in 

the eye of the beholder. I think if there is authority of that kind 

created, it would be imperative on the Congress to make sure that 

the standards are written as clearly as possible. 

In extremis, virtually any firm’s management will say, ‘‘I am systemically significant. You have to bail me out.’’ I think that is just 

the reality of it. We can’t have a system that works that way. You 

have to maintain, like it or not, some Darwinian element so that 

strong firms will survive and weaker firms simply go the way of 

history. 

Mr. KANJORSKI. Thank you. 

Mr. Brodsky, you have been involved in some discussions and 

proposals on short sales, and those proposals are outstanding. 

Could you give us the benefit of your thinking on these proposals? 

Mr. BRODSKY. Thank you, Mr. Chairman. 

The SEC is in the throes of analyzing responses that are in the 

thousands of comments to a proposal they put out on whether the 

short sale rule should be brought back in terms of up-tick or circuit 

breakers or other things. I believe that this committee should be 

reviewing the actions of the SEC in that regard, recognizing that 

the markets of 2009 are very different than they were 5 years, 10 

years, or 20 years ago, and that we want to make sure that we 

don’t hurt the markets in trying to deal with something that maybe 

already has been dealt with. 

21 

The SEC has done a very good job in the last 18 months or so 

in dealing with the issue of closing out short stock positions and 

making sure that all fails-to-deliver have been taken care of. 

But we are very concerned that there are people who would like 

to see a world that doesn’t exist anymore because of the success of 

the national market system and the way stocks are currently traded; and our concern is that if the SEC were to take any action, that 

the agency should not do anything that hurts the liquidity of the 

markets. Our most specific concern is there should be a market 

maker exemption for option market makers who are under very 

strict SEC requirements. 

Having said that, I would refer the committee to the IOSCO 

principles, which are the international standard of all SECs of the 

world, and urge the committee to make sure that our SEC does not 

put this country into a less competitive situation from other countries as the SEC proceeds on their determination of whether they 

should make any changes in the short sale rule. 

I think this is something from an oversight point of view that is 

very critical. Because our markets, as I said earlier, have provided 

tremendous liquidity and transparency, I think it is very important 

that we don’t throw out the baby with the bath water. 

So I appreciate your question. We are very concerned that we 

should not put ourselves in an international competitive disadvantageous situation, and the IOSCO principles which were adopted by all SECs of the world would hold us in very good stead if we 

complied with them. 

Mr. KANJORSKI. Thank you very much, Mr. Brodsky. 

Now the gentleman from California, Mr. Royce. 

Mr. ROYCE. Yes, Mr. Chairman. 

I would like to briefly address an issue from yesterday’s hearing 

regarding Sheila Bair’s perspective on the Consumer Financial 

Products Agency. Sheila Bair has been very vocal, as have most of 

the other banking regulators, in expressing her concern over separating consumer protection from safety and soundness regulation. 

I am sure, under duress, all will tote the line and endorse. But let’s 

hear her concerns. This is March 19th she raised this issue before 

the Senate Banking Committee. 

She said, the current bank regulation and supervision structure 

allows the banking agencies to take a comprehensive view of financial institutions from both a consumer protection and safety and 

soundness perspective. Banking agencies’ assessments of risks to 

consumers are closely linked with and informed by a broader understanding of other risks in financial institutions. 

Conversely, assessments of other risks, including safety and 

soundness, benefit from knowledge of basic principles, trends, and 

emerging issues related to consumer protection. Separating consumer protection regulation and supervision into different organizations would reduce information that is necessary for both entities 

to effectively perform their functions. Separating consumer protection from safety and soundness would result in similar problems. 

Our experience suggests that the development of policy must be 

closely coordinated and reflect a broad understanding of institution’s management, operations, policies and practices, and the bank 

supervisory process as a whole. Placing consumer protection policy 

22 

setting activities in a separate organization apart from existing expertise and examination of infrastructure could ultimately result in 

less effective protection for consumers. 

I would ask the Chair that Ms. Bair’s testimony before the Senate Banking Committee be included into the record. 

Mr. KANJORSKI. Without objection, it is so ordered. 

Mr. ROYCE. Those concerns were the reason that I mentioned Ms. 

Bair, and I just wanted to correct the record to state her precise 

views. 

I will go now to Mr. Brodsky with a question. 

As Congress looks at overhauling the regulatory structure over 

private pools of capital and the broader financial system, I think 

it is important that we focus more on effective regulation, as opposed to simply additional regulation. 

We witnessed some gross negligence on behalf of the SEC during 

the Bernie Madoff instance and the hearing featuring Harry 

Markopoulos, whom we heard from here in this committee. Do you 

believe the SEC and other financial services regulators are currently equipped to conduct examinations and other necessary regulatory steps? 

Mr. BRODSKY. I think this is a question of management at the 

SEC, and I think that the SEC under its current leadership has 

the proper focus to organize itself to do that. I mean, there is always going to be a situation where the cop on the beat misses 

something. 

I think the Madoff situation is particularly regrettable, and I 

think there were things that were missed. But I think the SEC has 

the proper legislative mandate to do it, and I think they just have 

to organize themselves in a better way, and I think the current 

chairman is the person to do that. 

Mr. ROYCE. Let me ask you a question here that is on my mind. 

Because, in the hearing, it became very clear that there was no one 

at the SEC who understood the Ponzi scheme strategy. There was 

no one who could undercover that. There was one in the Boston office, but in the over-lawyered SEC, he didn’t have a seat at the 

table. 

Under that kind of culture, are you going to have anyone who 

can understand how an OTC derivatives contract is structured? Are 

you going to have anybody who understands how a hedge fund engages in quantitative analysis and complex trading strategies? I 

just wonder about what the SEC has already proven itself incapable of handling, and now we transfer this on top of the SEC. 

A story just broke, I think yesterday, about another example of 

another Bernie Madoff-type swindle that the SEC had missed, 

where, again, the information allegedly had been turned over to 

them. They had not even been able to decipher that with the information that was given them. Hence my thoughts on that. 

I would also ask if any of the other panelists, maybe Mr. Stevens 

or Mr. Baker or anybody, would have any thoughts on this front? 

Mr. Stevens? 

Mr. STEVENS. We have over the recent years, Congressman, emphasized the need for the SEC to focus on internal management 

issues and the capabilities and organization of its staff. That is, unfortunately, a priority that has not always been something that 

23 

chairmen have been able to attend to because their tenures are 

fairly short. The markets have changed over the years much more 

than the SEC has. 

I think Chairman Shapiro has made it clear that kind of reinvention of our agency is what she is about and that is what is required. I am a lawyer, and I would agree with you. Different skill 

sets and different mixes and different organizational structures at 

the SEC would be very desirable. And I look at that not only as 

an issue of examination and enforcement. I look at it as an issue 

with respect to the formulation of appropriate regulations as well, 

where understanding regulated entities and regulated markets 

more intimately, not as lawyers do but perhaps as economists do, 

would be very helpful in the mix. I think we are encouraged in that 

direction. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Mr. KANJORSKI. Ms. Waters from California, for 5 minutes. 

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

I would like to thank all of our presenters here today, but I especially would like to welcome Mr. Baker to his old committee. 

You have been talked about a lot since you have been gone, and 

I know you have just gloated because you feel we didn’t take your 

advice and your direction of FM Watch, and because of what has 

happened. I am sure you are saying, ‘‘I told them so.’’ I would love 

to talk about that with you some sometime, but I can’t do it with 

you today. But welcome back. 

I want to ask you about credit default swaps. I have always appreciated your extreme knowledge of the financial markets, and I 

think that you could share information that could be very helpful 

to all of us. 

Now, did your members enter into credit default swap contracts 

with banks and other hedge funds? 

Mr. BAKER. There is broad utilization of credit default swaps in 

the investment world, and our members do engage in utilization of 

those products. 

Ms. WATERS. Did any of these CDS contracts insure consumer 

debt packaged as collateralized debt obligations, CDOs? 

Mr. BAKER. If I may separate the collateralized debt obligations 

from the credit default swap protection, they really run on two separate tracks. Not to avert your question, but I can answer it this 

way: Our members engage in broad investment strategies, and almost every financial product that you would have a concern about 

I am sure that some of our members somewhere are engaging in 

the deployment of those credit risk strategies. 

But I can give you more specific answers at another time. I don’t 

want to take an inordinate amount of your time this morning. 

By the way, thank you for your kind words. 

Ms. WATERS. You are welcome. 

In your absence, I have not always been this kind, but I want 

you to know that I really do want to meet with you and talk sometime about the GSEs still and the future of the GSEs. 

Mr. BAKER. I would be delighted to do that. 

Ms. WATERS. Well, let me just further question you a little bit 

more about these credit default swaps. 

24 

You know, I dropped a bill to discontinue them altogether. Of 

course, I have gotten a lot of pushback and feedback on that. But 

we do know that credit default swaps brought down AIG. We know 

that other companies, such as those that Gillian Tett has written 

about, were forced into bankruptcy over CDS contracts. Is it accurate to say credit default swaps are being misused and that the 

American taxpayer is paying the price? 

Mr. BAKER. I would not characterize it quite that way. I won’t 

attempt to argue your perspective relative to AIG. I will say that 

there were other circumstances that contributed mightily to their 

demise. 

But if I may, by way of best response, give you an example of 

concern I would have with regard to the legislation, and then 

quickly add there are things we can do that would help with your 

concerns relative to transparency, relative to centralized clearing, 

exchanges, collateral segregation, enhanced regulatory authorities, 

I think we can get to the safe point you would wish to go. 

But let me give the quickest, shortest example of the concern I 

have that I think you will find as a legitimate validating reason. 

If there is a pension who has a variety of investments, and let’s 

just call one portfolio a technology-heavy, long-only type of investment strategy. But the pension is worried about having to meet its 

monthly flat obligations to write those pension checks. We all know 

there has been extreme volatility in the markets. The pension then 

wants to protect against that volatility in that technology portfolio. 

They turn around to a bank and say, we would like to buy credit 

index protection from you. No need to get into the definition, but 

it is a way to hedge against the volatility in that broad price swing 

of those technology stocks, enabling them for a small cost to make 

those monthly payments to retirees. Not only is that a credit default swap product, it could be defined—and I worry about this— 

as a naked credit default swap, and here is why: 

The pension might have 20 technology stocks in that portfolio. 

When you buy the credit index protection, it might have 100 companies in it, and you would have no underlying relationship, no 

bond, no debt, nothing with those 80 firms. And technically, if Congress would move ahead in this regard, you might preclude the 

pension from getting access to the credit index protection. 

It even gets worse. Because the bank then, because of regulator 

pressure, wanting to lower its risk profile, will turn that credit 

index exposure over to a hedge fund. The hedge fund will buy it 

and then perhaps need to go long on technology stocks because it 

just shorted the credit index. 

Amazing as it may sound, people will go buy IBM stock and then 

turn around and at the same time go short Apple. Now, it is not 

because they believe Apple is going to go south tomorrow and they 

are actually doing predatory shorting. They are doing it because 

they might be wrong on the long side on IBM, but since they have 

strong belief in the technology sector, they cover both ways. Hence, 

the definition of hedge fund. 

We can provide a lot more technical analysis to your staff. The 

SEC’s Office of Risk Analysis has some really good work on the 

contributing causes to AIG’s demise, and I think it would be very 

25 

helpful in the appropriate context to have that made available to 

you. 

Ms. WATERS. You see what I meant about Mr. Baker? He just 

gave us a lesson in credit default swaps and indexes that we probably have not even discussed before. I thank you very much. 

Let me just complete my remarks by saying I am interested in 

trying to find out who benefits from bankruptcy with these credit 

default swaps. 

Mr. BAKER. Let me echo, I think disclosure is at the heart of 

many of the problems you have concerns about, and very legitimate 

concerns, and I believe we can find ways to offer assistance on this 

matter that would be very constructive. 

Ms. WATERS. Thank you very much. I yield back. 

Mr. KANJORSKI. I just want to advise the committee that we have 

15 votes—18 votes, I am sorry. We are trying to determine—think 

about it, if you will, while we have Mrs. Biggert take her 5 minutes—whether we should return at 2:00 or thereabouts, or else let 

this panel go. Those are famous words, ‘‘let our people go.’’ 

Mr. WATT. Mr. Chairman, my vote would be to allow us to propound our questions in writing. I may be a little biased, because 

you may even get to me. 

Mr. SHERMAN. Mr. Chairman, I hope we would reconvene the 

hearing after the votes. 

Mr. KANJORSKI. Mrs. Biggert? 

Mrs. BIGGERT. If I might ask my questions. Thank you. 

Mr. Brodsky, what was the impact of the ban that Mr. Cox put 

on the short sales? 

Mr. BRODSKY. That was a very regrettable situation. In fact, 

Chairman Cox, in his final farewell remarks, said it was his biggest single mistake. 

I think one of the things was that he caught the market by surprise, and it had broad ramifications. And in the studies I have 

seen, the liquidity in the stocks where he banned short selling actually got worse, not better. I think it is a good lesson for all of 

us. I think that whatever is done has to be done in a very thoughtful way and not done in an ad hoc, knee-jerk way. 

So there are markets, including the convertible bond market, for 

example, that seized up, which hurt pension funds and other investors, because the people who were doing the hedging and other 

strategies in convertible bonds couldn’t then, as Mr. Baker said, 

short the stock as a countervailing move. 

So I think when you are dealing with market mechanisms, you 

have to do these things in a very thoughtful way. And admittedly, 

we were in a very unique environment. But it is instructive that 

Mr. Cox, in retrospect, said it was his biggest single mistake. 

Mrs. BIGGERT. Mr. Baker? 

Mr. BAKER. I will just give you one quick example that really impacted our industry. 

In the convertible securities world, if an institution wants to borrow money and doesn’t want to do it through a conventional bank 

loan, they could come to a hedge fund, borrow the money and, at 

time of settlement, instead paying it back in cash, they would actually transfer ownership to stock. The stock would be held separately from the company and separate from the hedge fund, and we 

26 

would be worried in the intervening period of exposure that the 

value of the stock would go down, meaning we wouldn’t get repaid. 

It had nothing to do with our view that it was a bad deal or a 

bad company. But we would enter into a short position, hence insure against any downturn in value, so when we get settled we get 

as much as we could toward the full obligation. 

Of that practice, the 12 months preceding the issuance of the 

order, the convertible securities world was about a $70 billion business. Of that amount, ironically, $42 billion of it was going to 

banks. So when the short order was issued to protect banks, it 

seized up the convertible securities world because we couldn’t go 

short, and therefore we did not extend the credit. 

Mrs. BIGGERT. Thank you. 

I do have one more question for you. We have been talking a lot 

about what I am calling the Credit Rationing and Pricing Agency, 

which is the Consumer Protection Agency. Could you give me your 

opinion on this? Is this really a wise thing to do, to separate the 

consumer protection from the safety and soundness that the other 

regulator would be responsible for? 

Mr. BAKER. My members have directed me on this particular 

issue that we had an understanding or maybe a misperception 

about the applicability of this agency to certain financial sectors, 

and it is not now clear to me exactly how an SEC-regulated or a 

CFTC-regulated entity will relate to this new agency, if adopted. 

We would need to have a lot more clarity before I could fairly respond. But we have some big questions, I would say is a fair characterization. 

Mrs. BIGGERT. Thank you. I am going to yield back. 

Mr. KANJORSKI. Thank you very much. 

Mr. Watt, for 30 seconds, if possible. 

Mr. WATT. That is fine. 

I just wanted to welcome Mr. Baker and ask Mr. Nichols to let 

me know what his position—his organization’s position on the consumer thing was. You didn’t mention that very much. And ask Mr. 

Brodsky to give me some more explanation about how he can be 

so out of step with everybody else in this industry about consolidating, unless he addressed it more directly in his written comments. 

I will pass to Mr. Sherman. 

Mr. SHERMAN. Do all of that in writing. 

Mr. Brodsky, I am impressed that you were warning the Agriculture Committee of these dangers clear back in 1997. That is the 

only time I wish I had been a member of the Ag Committee. 

Mr. Nichols, you say no one should be too big to fail, but it is 

not clear whether you are saying that, through effective regulation, 

no matter how big they are, they are not too big to fail, or whether 

you are saying that there should be a limit on the size, of the complexity of an institution and we might have to break somebody up. 

I need to be convinced that the regulatory system was really good 

before I was convinced that unlimited size was not a problem. 

And I believe my time has expired. 

Mr. KANJORSKI. Mr. Green? 

Mr. GREEN. Yes, sir. Thank you, Mr. Chairman. 

27 

Let me just say this: Too big to fail is really the right size to regulate. 

I want to make a comment about a number of things that I mentioned. I can’t get to all of them, but I want to say this. 

I mentioned the notion that you had teaser rates and you didn’t 

qualify for the adjusted rate. Many of you took mortgage-backed securities into your portfolios—and I wanted to connect all of this— 

but those mortgage-backed securities were a problem for you because they did not qualify people for those teaser rates, and I am 

sorry we didn’t get to develop that. 

Thank you very much, Mr. Chairman. 

Mr. KANJORSKI. Thank you very much. 

Mr. Foster? 

Mr. FOSTER. I think getting to the kind of detailed questions I 

was hoping to go to on OTC derivatives is not going to happen in 

30 seconds, so I will just try to get back to you individually. 

Mr. KANJORSKI. The Chair notes that some members may have 

additional questions for today’s witnesses 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 

any of today’s witnesses and to place their responses in the record. 

Without objection, it is so ordered. 

The panel is dismissed. We thank you very much. We are going 

to have to run. You know what it is like, Richard. 

This hearing is adjourned. 

[Whereupon, at 12:32 p.m., the hearing was adjourned.] 

(29) 

A P P E N D I X 

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