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S. HRG. 112–206 

NOMINATIONS OF: LUIS A. AGUILAR, DANIEL 

M. GALLAGHER, JR., ANTHONY FRANK 

D’AGOSTINO, AND GREGORY S. KARAWAN 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON 

NOMINATIONS OF: 

LUIS A. AGUILAR, OF GEORGIA, TO BE A MEMBER, SECURITIES AND EXCHANGE

COMMISSION

DANIEL M. GALLAGHER, JR., OF MARYLAND, TO BE A MEMBER, SECURITIES

AND EXCHANGE COMMISSION

ANTHONY FRANK D’AGOSTINO, OF MARYLAND, TO BE A DIRECTOR, SECURITIES

INVESTOR PROTECTION CORPORATION

GREGORY S. KARAWAN, OF VIRGINIA, TO BE A DIRECTOR, SECURITIES

INVESTOR PROTECTION CORPORATION

JUNE 14, 2011 

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

( 

Available at: http://www.fdsys.gov/ 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

CHARLES YI, Chief Counsel and Deputy Staff Director 

DEAN SHAHINIAN, Senior Counsel 

ANDREW OLMEM, Republican Chief Counsel 

HESTER PEIRCE, Republican Senior Counsel 

MICHAEL PIWOWAR, Republican Chief Economist 

DAWN RATLIFF, Chief Clerk 

BRETT HEWITT, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)
C O N T E N T S 

TUESDAY, JUNE 14, 2011 

Page 

Opening statement of Chairman Johnson ............................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 2 

WITNESSES 

Luis A. Aguilar, of Georgia, nominee to be a Member, Securities and Exchange Commission .............................................................................................. 4 

Prepared statement .......................................................................................... 22 

Responses to written questions of: 

Chairman Johnson .................................................................................... 26 

Senator Reed .............................................................................................. 29 

Senator Hagan ........................................................................................... 30 

Daniel M. Gallagher, Jr., of Maryland, nominee to be a Member, Securities 

and Exchange Commission .................................................................................. 5 

Prepared statement .......................................................................................... 22 

Responses to written questions of: 

Chairman Johnson .................................................................................... 33 

Senator Reed .............................................................................................. 34 

Senator Hagan ........................................................................................... 39 

Anthony Frank D’Agostino, of Maryland, nominee to be a Director, Securities 

Investor Protection Corporation .......................................................................... 6 

Prepared Statement ......................................................................................... 23 

Responses to written questions of: 

Chairman Johnson .................................................................................... 39 

Senator Reed .............................................................................................. 40 

Gregory S. Karawan, of Virginia, nominee to be a Director, Securities Investor 

Protection Corporation ......................................................................................... 7 

Prepared Statement ......................................................................................... 24 

Responses to written questions of: 

Chairman Johnson .................................................................................... 41 

Senator Shelby ........................................................................................... 42 

Senator Reed .............................................................................................. 42 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter from California Public Employee’s Retirement System (CalPERS) supporting Luis A. Aguilar’s nomination ................................................................. 44 

(III)

(1) 

NOMINATIONS OF: 

LUIS A. AGUILAR, OF GEORGIA, 

TO BE A MEMBER, 

SECURITIES AND EXCHANGE COMMISSION; 

DANIEL M. GALLAGHER, JR., OF MARYLAND, 

TO BE A MEMBER, 

SECURITIES AND EXCHANGE COMMISSION; 

ANTHONY FRANK D’AGOSTINO, OF MARYLAND, 

TO BE A DIRECTOR, 

SECURITIES INVESTOR PROTECTION CORPORATION; 

GREGORY S. KARAWAN, OF VIRGINIA, 

TO BE A DIRECTOR, 

SECURITIES INVESTOR PROTECTION CORPORATION 

TUESDAY, JUNE 14, 2011 

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

The Committee met at 10:05 a.m. in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. Good morning. I will call this hearing to 

order. Thanks to all of you for joining us here today and special 

thanks to our witnesses and their families and friends who are 

with us. 

Today we consider four individuals nominated to serve in positions on the Securities and Exchange Commission and the Securities Investor Protection Corporation. Both of these agencies play 

key roles in our securities markets. 

Trillions of dollars of stocks, options, bonds, and other securities 

trade hands in our markets. About half of American families invest 

in these markets as they save for retirement, college tuition, and 

other important purposes. And companies of all sizes rely on these 

markets to raise capital to help them grow and create jobs. 

The SEC maintains order in the securities markets, roots out 

fraud and abuse, and protects investors. The SIPC also protects securities investors whose brokerages have failed. Since its inception 

in 1970 it has helped recover over $100 billion for investors. 
2 

The securities markets are emerging from a difficult period. They 

have suffered economic loss and an erosion in public confidence, 

brought on by a wide range of problems including failed mortgagebacked securities, unreliable credit ratings, fraudulent investment 

schemes, and more. 

In response to the financial crisis, Congress passed the DoddFrank Wall Street Reform and Consumer Protection Act. The SEC 

is now implementing Dodd-Frank through roughly 100 

rulemakings and 20 studies. These deal with many areas, from 

securitization to credit ratings, municipal securities, corporate governance, investor protection, enforcement, whistleblowers, executive pay, and regulatory management. And at the same time, the 

SEC is dealing with a strained budget. 

The SIPC is busy as well, managing claims from investors defrauded by the likes of Bernie Madoff and Allen Stanford. 

We need strong leadership at all our financial regulators, and I 

am glad the President has sent us four well-qualified individuals 

to fill these openings. I hope the Senate can consider their nominations in a timely manner. 

The Honorable Luis A. Aguilar is currently serving as a Democratic Commissioner at the SEC. He is renominated for a term expiring June 5, 2015. Prior to his appointment to the SEC, Commissioner Aguilar was a partner with the international law firm of 

McKenna Long & Aldridge, specializing in securities law. 

Daniel M. Gallagher, Jr., is a Republican nominee to be a Commissioner for a term expiring June 5, 2016. He is a partner in the 

Securities Department of the law firm Wilmer Hale. Prior to joining the firm, Mr. Gallagher was at the SEC, where he served as 

Co-Acting Director of the Division of Trading and Markets and as 

Counsel to Chairman Christopher Cox and to Commissioner Paul 

Atkins. 

Tony D’Agostino is a managing director and chief operating officer of the Global Quantitative Analytics group at the UBS Investment Bank. From 2000 to 2009, Mr. D’Agostino worked at 

Wachovia Securities, and prior to 2000, Mr. D’Agostino was an officer in the U.S. Navy where he served on active duty for 24 years. 

Mr. Gregory Karawan is senior vice president and general counsel of retirement and protection at Genworth Financial. Prior to 

joining Genworth, Mr. Karawan was a partner at the law firm of 

Sonnenschein Nath and Rosenthal. 

I look forward to hearing all of their testimony. 

I now turn to Senator Shelby for any opening remarks he may 

have. Senator Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. 

Today, as you pointed out, the Committee will consider four 

nominations—two for the Securities and Exchange Commission and 

two for the Securities Investor Protection Corporation. Both organizations have played an important role in the aftermath of the financial crisis and will continue to do so. 

The Dodd-Frank Act gave the Securities and Exchange Commission a long list of rules to promulgate. In addition, the SEC is contemplating other major rulemakings. The SEC also recently re-
3 

structured its enforcement and compliance programs to address 

some of the systemic problems that enabled Bernie Madoff and 

Allen Stanford to defraud thousands of investors for years without 

being caught. 

These initiatives, along with the important day-to-day business 

of the SEC, will continue to have significant effect on our economy 

for years to come. Therefore, I think it is important that the Commission use economic analysis to understand not only the cost of 

particular regulations but also the cumulative effect that all of the 

rulemaking is having on the markets and the economy. 

At this critical time, the SEC, I believe, should do everything it 

can to ease the regulatory burden it imposes on American businesses, while at the same time remaining a credible deterrent to 

misconduct in the markets. 

With respect to the Securities Investor Protection Corporation, or 

SIPC, the Madoff and Stanford frauds have put a spotlight on its 

responsibility for assisting customers of failed brokerage firms. The 

Madoff liquidation has been at the heart of their work over the 

past several years and is much bigger than anything that they 

have dealt with in its four-decade history. As for the Stanford case, 

they have taken the position that coverage under the Securities Investor Protection Act is not appropriate. That is troubling to a lot 

of us. The defrauded Stanford victims have asked the SEC to consider the propriety of that decision, and several Senators have met 

with the Chairman on that very issue. 

The SEC’s delay in making a decision is harming investors, who 

already were harmed by the SEC’s failures to prevent the Stanford 

case in the first place. It is my hope that the SEC will stop delaying and make a final decision as quickly as possible in that area. 

Thank you, Mr. Chairman, for holding this hearing. I look forward to hearing from the nominees and hope that we can expedite 

their confirmation. 

Chairman JOHNSON. Will the nominees please rise and raise your 

right hand? Do you swear or affirm that the testimony that you are 

about to give is the truth, the whole truth, and nothing but the 

truth, so help you God? 

Mr. AGUILAR. I do. 

Mr. GALLAGHER. I do. 

Mr. D’AGOSTINO. I do. 

Mr. KARAWAN. I do. 

Chairman JOHNSON. Do you agree to appear and testify before 

any duly constituted Committee of the Senate? 

Mr. AGUILAR. I do. 

Mr. GALLAGHER. I do. 

Mr. D’AGOSTINO. I do. 

Mr. KARAWAN. I do. 

Chairman JOHNSON. Please be seated. 

Please be assured that your written statement will be part of the 

record, so if you could confine your remarks to 5 minutes, that 

would be greatly appreciated. Please also note that Members of this 

Committee may submit written questions to you for the record, and 

you should respond to those questions promptly in order that the 

Committee may proceed on your nominations. 
4 

I invite all the witnesses to introduce your families and friends 

in attendance before the beginning of your statement. Mr. Aguilar. 

STATEMENT OF LUIS A. AGUILAR, OF GEORGIA, TO BE A 

MEMBER, SECURITIES AND EXCHANGE COMMISSION 

Mr. AGUILAR. Chairman Johnson, Ranking Member Shelby, and 

Members of this Committee, good morning. It is a great honor to 

be here with you today. I do want to acknowledge my wife, Denise, 

who was not able to accompany me today. She has been a constant 

source of support and enabled me to serve as a member of the 

United States Securities and Exchange Commission. I also want to 

acknowledge my parents, Juan and Gladys Aguilar, who sent their 

two small sons to the United States as Cuban refugees, to escape 

the Castro revolution, and would be bursting with pride to see one 

of them serving this great country in such a manner. 

Three years ago, I had the honor to come before this Committee 

for confirmation hearings to be a member of the SEC, and it has 

been my tremendous privilege to serve as a Commissioner of the 

SEC. I was, and remain, humbled to be asked to serve the American people at the agency where I started my career as a staff attorney over 30 years ago. My deep respect and admiration for the 

importance of the institution and its mission has only grown during 

my tenure. I recognize the significant responsibilities of the SEC to 

fulfill its statutory mandate to protect investors, maintain fair and 

orderly markets, and facilitate capital formation. 

I have remained focused on these responsibilities during these 

recent challenging times. The collapse of Lehman Brothers and the 

ensuing market turmoil—of a kind not seen since the Great Depression—began just weeks after I was sworn in as a member of 

the Commission. In these extraordinary times I have dedicated all 

of my skills, knowledge, and energy to the work of the SEC. My 

professional career spans over 30 years, and I have been a practitioner in corporate, securities, and international law. I have seen 

the securities industry from many vantage points. I have worked 

in Government, private practice, and in corporate America. I have 

been an SEC staff attorney, a law firm partner, and a general 

counsel and head of compliance, and I have spent time as a domestic and international business person. This breadth of experiences 

has served me well as the SEC has taken up, or been confronted 

with, a multitude of issues stretching across the securities and corporate spectrum. 

And so I was deeply honored to be nominated by President 

Obama to serve another term as a Commissioner. It has been a 

privilege to work with Chairman Mary Schapiro and my other colleagues on the Commission: Kathleen Casey, Elisse Walter, and 

Troy Paredes. If confirmed, I look forward to continuing this work, 

along with Commissioner-Designate Dan Gallagher. I believe a 

great deal of unfinished business remains before the SEC—work 

that is vital toward improving our markets as well as the agency 

itself. 

I am committed to answering these challenges. When I arrived 

in the United States as a refugee from Cuba, I was 6 years old and 

had little more than the clothes I was wearing. The generosity and 

opportunities of this country provided me the foundation to become 
5 

the person who now has the honor of appearing before you today. 

Serving as a Commissioner of the SEC and being able to apply my 

securities expertise on behalf of the American people is a tremendous honor and truly my privilege. 

If the U.S. Senate determines to confirm my nomination to a second term as a member of the SEC, I promise to work faithfully to 

serve the American people at this critical time. 

I thank you. I will be happy to answer any questions the Committee might have. 

Chairman JOHNSON. Mr. Gallagher. 

STATEMENT OF DANIEL M. GALLAGHER, JR., OF MARYLAND, 

TO BE A MEMBER, SECURITIES AND EXCHANGE COMMISSION 

Mr. GALLAGHER. Chairman Johnson, Senator Shelby, distinguished Members of this Committee, it is a very great honor for me 

to appear before you today. I am grateful and humbled by the 

President’s nomination to serve on the Securities and Exchange 

Commission, and I am also honored to be sitting here next to Commissioner Aguilar today. 

I would first like to introduce you to members of my family that 

are here with me today. My wife, Stephanie Gallagher, who is sitting behind me, was recently named to be a Federal magistrate 

judge in Maryland; her investiture is this Friday so it is a big week 

for us. She is an incredible wife and mother, and she has always 

been a tremendous source of support for me, as she has been 

throughout the process that brings me before you today. With her 

are my two sons, Danny and Charlie, and I am incredibly proud 

of both of them. 

My parents, Barbara and Daniel Gallagher, who have come down 

from Philadelphia for this hearing, have been small business owners for most of my life. Their work ethic, integrity, and devotion to 

family have been a continuous inspiration to me. 

Since its creation, the SEC has been one of the most important 

agencies in the Federal Government. Investor protection and oversight of the capital markets are essential to American investors as 

well as the overall economy. The SEC must accomplish its mission 

in the context of complex, dynamic, and globally connected markets. 

This is a time of great importance for the SEC. It is rebuilding 

after some setbacks, dealing with a loss of faith in the financial 

markets, and facing broad new oversight and regulatory responsibilities over complex financial instruments and markets. The SEC 

staff, which is the engine of the agency, is cognizant of the critical 

role they play, and I know from personal experience that the staff 

is intensely dedicated to the protection of investors and the health 

of the capital markets. 

Despite the financial crisis, the U.S. capital markets are the 

strongest in the world. To maintain that status, the markets need 

the SEC to be a strong and respected regulator. Investors will only 

commit capital if they have faith in the fairness of our markets, 

and the SEC is charged with instilling and maintaining this confidence. By requiring transparency and rigorously and fairly enforcing the law as directed by Congress, the SEC plays a major role 

in maintaining the preeminence of the U.S. capital markets. If con-
6 

firmed, I will strive every day to ensure that the agency satisfies 

this mission. 

On a personal note, I want to point out that I have been nominated to fill the seat being vacated by Commissioner Kathleen 

Casey, who is someone very well known to this Committee. Commissioner Casey has been an outstanding Commissioner and has 

served the country and investors with integrity and dedication 

through an incredibly difficult time. Should I be confirmed, I hope 

to serve as ably as she has. 

Thank you, Mr. Chairman, Senator Shelby, and Members of the 

Committee, for this opportunity to be before you today. I would be 

pleased to take any questions you may have. 

Chairman JOHNSON. Thank you. 

Mr. D’Agostino. 

STATEMENT OF ANTHONY FRANK D’AGOSTINO, OF MARYLAND, TO BE A DIRECTOR, SECURITIES INVESTOR PROTECTION CORPORATION 

Mr. D’AGOSTINO. Good morning, Mr. Chairman, Members of the 

Committee. My name is Tony D’Agostino, and I am honored to be 

before you today as President Obama’s nominee to serve on the 

Board of SIPC. 

I believe I am well qualified to serve on the SIPC Board based 

on my management background in the securities industry and my 

hands-on experience working within the capital markets. 

Prior to joining Wall Street, I served in the United States Navy 

for 24 years. I started out as a young enlisted man flying in the 

H–3 helicopter, acted as a rescue swimmer, and operated anti-submarine warfare equipment flying off aircraft carriers in the Pacific. 

After I completed my undergraduate degree at the University of 

Kansas, I was commissioned and went on to serve in roles of increasing responsibility. A few job examples: I was a briefer for the 

Secretary of the Navy and Chief of Naval Operations during Desert 

Storm. I was an aide to a Navy admiral and went on to qualify as 

a surface warfare officer onboard aircraft carriers, my last ship 

being the USS John F. Kennedy. 

Since retiring from my career in the Armed Forces, I have 

worked in the Capital Markets businesses of Wachovia and UBS. 

In both organizations, I served in executive roles, which allowed me 

to closely observe and fully appreciate the intricacies of how the 

businesses are structured, staffed, and operated. 

As the chief operating officer of Wachovia’s equity capital markets platform, I directly oversaw and managed internal functions 

supporting the equity businesses—technology, compliance, legal, 

and finance. After serving as COO, I went on to build from scratch 

an algorithmic and program trading business, electronic trading 

business, and then went on to manage an internal hedge fund 

known as a proprietary trading desk. 

I had to study and understand the operational characteristics of 

hundreds of different companies in dozens of diverse industry 

groups. During the 2008 market collapse where 40-percent losses 

were the norm, our ability to manage risk—our fund was down just 

2.4 percent. This part of my training to serve in these roles, I was 

FINRA-registered with Series 7, 24, 55, and 63. 
7 

After Wachovia’s collapse and takeover by Wells Fargo, our division was shut down, and like so many other Americans, I found 

myself out of work for the first time in my life. After nearly a year 

out of work, I was recruited by UBS where I now serve as the COO 

of the Global Quantitative Analytics group. The QA group is responsible for building sophisticated mathematical models, which 

are used to create, price, and evaluate the risk of complex financial 

products—derivative products, CDS, MBS, CMOs, et cetera. I oversee and manage divisions around the world, which include modeling, trading support, strategy, and off-shoring. 

Our recent economic challenges have inspired me to once again 

serve our great country, and I am very proud that President 

Obama has asked me to apply my experience in the Navy and in 

the capital markets to address these challenges. I understand the 

hardships that so many Americans are facing, and I am dedicated 

to working with the Board of SIPC to help ensure that the investors are protected when broker-dealers fail. The unique combination of more than a decade in the trenches of the financial services 

industry and twice that long serving my country in the Navy allow 

me to bring a wealth of experience, hard work, and accountability 

to the Securities Investor Protection Corporation. 

If confirmed as a Director of SIPC, I promise the President and 

this Committee that I will use my experience to maintain and 

strengthen SIPC’s accountability to the investing public. 

In closing, I would like to recognize a few important people in my 

life. I am pleased to have some of my family with me here today: 

Havilah D’Agostino; Dr. Leigh Vinocur and her son, Max; as well 

as several of my friends visiting from up and down the east coast: 

Mr. Matti Kon, Scott Kaimien, Jeff Rassmussen, and Mark Carter. 

In addition to my family and friends that are with me today, I 

would like to thank some of my mentors over the years that have 

given me opportunities that a milkman’s son—that a milkman’s 

son never expected: Colonel Mike Wyly, who happened to be Senator Jim Webb’s commanding officer in Vietnam, as well as my 

commanding officer; Rear Admiral Ed Fahy, my commanding officer from onboard the John F. Kennedy; Mr. Al Berkley, former 

president of the NASDAQ; and my dear friend Mickey Misera, who 

is the former head of Wachovia’s Equity Capital Markets, and all 

of my opportunities after my retirement have been due to Mick. 

Mr. Chairman, that concludes my remarks. Thank you for your 

attention and consideration. I would be happy to answer your questions. 

Chairman JOHNSON. Thank you. 

Mr. Karwan, please proceed. 

STATEMENT OF GREGORY S. KARAWAN, OF VIRGINIA, TO BE A 

DIRECTOR, SECURITIES INVESTOR PROTECTION CORPORATION 

Mr. KARAWAN. Good morning. Chairman Johnson, Ranking Member Shelby, and Members of the Committee, it is indeed a great 

honor to appear before you as you consider my nomination to be 

a Director of the Securities Investor Protection Corporation. 

Growing up in Sheepshead Bay Brooklyn, it never occurred to me 

that someday I might have the great privilege of being before a 
8 

U.S. Senate Committee with an opportunity to serve the public in 

such an important role. I can attribute my good fortune to a primary cause, and she is sitting behind me today: my mother, 

Devorah Einbinder. From my earliest memories, she stressed the 

importance of education, instilled in me the work ethic and values 

that I carry with me today, and propelled me to be part of the first 

generation of our family to attend college. I want to acknowledge 

her and thank her for her love and support, and for traveling up 

from Florida to be here today. 

For the past 23 years, I have served as a lawyer responsible for 

handling complex commercial litigation, transactions, and regulatory issues. For the first 12 years of my career, I was in private 

practice, becoming a partner in the litigation group of the firm 

where I practiced. I represented a variety of financial sector clients 

in financial, securities, and other types of complex litigation and 

disputes. For the past 11 years of my career, I have been in-house 

counsel at a large financial services corporation. In that capacity I 

have had litigation management responsibility for the entire company, including insurance, broker-dealer, and wealth management 

operations. 

And for the most recent 4 of those 11 years, I have also served 

as general counsel of the business segment that includes brokerdealer and investment adviser operations, with overall legal responsibility for those businesses. And throughout my 23-year career, I have counseled boards of directors on a variety of issues. 

Now, today’s environment is definitely a challenging one. Financial markets are global and in flux and are recovering from a devastating crisis. Financial frauds, as we have seen, are growing ever 

more complex and sophisticated. Technology—and the good, and 

bad, uses to which it can be put—is advancing at a lightning pace. 

The types of securities in which customers can invest are evolving 

and getting more complex every day. An experienced, dedicated, 

proactive, and forward-thinking SIPC Board is crucial to dealing 

with these challenges. If confirmed, I believe that as a result of my 

extensive experience dealing with financial services companies, I 

believe I am well equipped to serve as a SIPC Director and confront these challenges head on. 

My commitment, if confirmed, is to bring my experience to bear 

as a SIPC director, to be unbiased, to be guided but not ruled by 

my instincts, to exercise sound judgment with an absence of hubris, 

and, most importantly, to always have an open mind, to hear and 

value all points of view, and, ultimately, to do the right thing. 

Being a passionate advocate for investor protection will always be 

one of my primary goals. 

Mr. Chairman and Members of the Committee, thank you again 

for your consideration of my nomination, and I am happy to answer 

any questions you may have. 

Chairman JOHNSON. Thank you, Mr. Karawan. 

Commissioner Aguilar and Mr. Gallagher, the SEC has new responsibilities under Dodd-Frank that entails over 100 rulemakings, 

20 studies, and the implementation of the new rules. In your opinion, does the SEC have the necessary budget to undertake these 

tasks as well as to perform its other duties as a securities regulator, or would it benefit from additional funding? Mr. Aguilar? 
9 

Mr. AGUILAR. Thank you, Mr. Chairman. Clearly, the DoddFrank Act imposes a great challenge on the SEC on top of our core 

responsibilities: those which have been part of the SEC’s history for 

the last 77 years. The SEC has had a chronic problem, in my view, 

with appropriate budgets for over a decade. As the markets have 

been growing exponentially in sophistication and in size, the SEC 

staff has remained quite static and even gone down a little bit. We 

are only now getting back to 2006–2007 levels. And on top of that, 

Dodd-Frank is now imposing on us both a short-term responsibility 

and a long-term responsibility. Short-term, we are required to 

enact 100 or so rules, conduct 20 studies, create five new offices, 

an enormous task for any agency, especially one of our size, with 

approximately 3,800 staffers. 

In addition, the Continuing Resolution stage that we went 

through in the first half of this fiscal year required us to freeze hiring, required us to curtail a number of our activities and to triage 

the things that we do, while at the same time trying mightily to 

fulfill our obligations under the Dodd-Frank Act, which I think the 

staff and the Commission has done an admirable job on. We are 

not going to meet all of our deadlines, but I think we are doing so 

in a measured, reasonable fashion. 

Do we have resources to continue through the rulemaking phase? 

It will be a strain, but with the SEC’s passionate, hard working 

staff, I think the answer is yes. Do we have enough resources to, 

on a long-term basis, to effectively regulate new markets we have 

never regulated? I think that SEC Chairman Schapiro has spoken 

to various Congressional committees and has indicated that we 

probably need a more robust budget. 

Chairman JOHNSON. Mr. Gallagher? 

Mr. GALLAGHER. Thank you, Chairman Johnson, for that question. It is critically important for the nation’s investors and for the 

markets that the SEC have proper resources to satisfy its multiple 

missions. This issue of the proper budgeting for the agency is one 

that has been a hot topic for decades now and it is traditionally one 

that is handled by the Chairman of the agency. I can tell you, I 

do not have all the details as to the exact budgetary information 

and the allocation of resources, but if confirmed by the Senate, I 

will wholeheartedly jump into this issue to ensure that the Chairman has all the support that she needs as she tries to figure out 

proper budgeting. 

At the same time, I want to point out, we are living in an extraordinarily difficult financial environment, and the SEC, like private bodies, needs to ensure that it is operating efficiently so that 

every penny that is sent to the SEC by way of budget is used for 

the protection of investors, and I hope, again, if confirmed, to be 

able to help the agency satisfy that mission. 

Chairman JOHNSON. Mr. D’Agostino and Mr. Karawan, the Securities Investor Protection Corporation formed a task force to further 

its mission of protecting customers of failed securities brokerage 

firms in order to promote investor confidence. What is your opinion 

of the task force’s progress thus far? When it issues a report, will 

you carefully review its recommendations and take appropriate actions? 
10 

Mr. D’AGOSTINO. Thank you, Mr. Chairman. The report has not 

yet been issued, and we understand that they have made great 

progress and they are going to present some good recommendations, and when that report is submitted, we will carefully consider 

it and evaluate it at the board levels. 

Chairman JOHNSON. Mr. Karawan? 

Mr. KARAWAN. Thank you, Mr. Chairman. I have the same understanding as Mr. D’Agostino and I would look forward, if confirmed, to working with the Board to examine the task force proposal and evaluate them on a speedy basis. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

Commissioner Aguilar, you have taken credit for giving more enforcement authority to the staff of the SEC as a member. While I 

understand the interest in ensuring that enforcement cases proceed 

quickly—they are very important—delegation of the Commission’s 

powers to the staff should not be undertaken lightly, particularly 

when that staff has been implicated in notable failures, such as 

Madoff and Stanford. Do the failures in the Madoff and Stanford 

cases indicate that SEC Commissioners need to be more, not less, 

involved in overseeing enforcement cases? In other words, what 

have you learned from that, the failures there? 

Mr. AGUILAR. Thank you, Ranking Member Shelby, for that question. Clearly, the Madoff and Stanford situations are tragic: tragic 

to many American investors, and tragic to our capital markets, 

with a very adverse impact on investor confidence. The SEC staff, 

especially the Enforcement Division and the Office of Inspections 

and Examinations, as the market watchdogs, must maintain a very 

robust and aggressive posture when it comes to overseeing our regulated entities, such as Madoff and Stanford, and the markets as 

a whole. 

I have been quite vocal in trying to look at the SEC’s policies in 

the enforcement and exam programs: trying to highlight the ones 

that I think could be much better, identifying the ones that I think 

are ill advised. And I have made a number of recommendations, 

many of which have been adopted, to try to streamline and expedite the process by which the Commission staff can get active on 

a case, look robustly at what is going on, and I have been very supportive of them taking robust action to quickly remedy the situation. 

I do think the Commission and the Commissioners have to keep 

a watchful eye on the staff at all times. The delegated authority to 

open an investigation that you have alluded to is one that I did 

champion early on. I think the staff has found it to be quite useful. 

We have now been able to go from finding out about a fraud to putting a freeze within the course of a week, which is to the benefit 

of the American public, and hopefully we will find assets before 

they are dissipated. 

I do believe that the Commission should keep a watchful eye— 

and we have asked the staff to provide us periodic reports. We 

meet with the staff to make sure that we know how they are using 

that authority, and it is something that continues to be monitored, 

both to make sure that it is appropriately used and that it, quite 
11 

frankly, does not fall into not being used when, in fact, it should 

be being used. 

Senator SHELBY. Well, we all know this. It is very important that 

it is the Commissioners on the Securities and Exchange Commission that are accountable to the American people. The staff is accountable to you, and the staff are very important, but the buck 

has got to stop with the Commissioners, has it not? 

Mr. AGUILAR. I wholeheartedly agree. The buck does have to stop 

with the Commission—— 

Senator SHELBY. Mm-hmm. 

Mr. AGUILAR.——and that is why I believe it is important for the 

Commissioners to speak clearly and to speak loudly about the policies that they think should be in place and to make sure that they 

monitor the staff as well as they possibly can to make sure that 

they are adhering to the appropriate policies. 

Senator SHELBY. Mr. Gallagher, in February of this year, the Republicans on the Senate Banking Committee here sent a letter to 

all of our financial regulators urging them to employ rigorous economic analysis in their rulemaking. Given the scope of rulemaking 

under Dodd-Frank and the weak state of the economy that we are 

all confronted with, I believe it is particularly important that agencies such as the Securities and Exchange Commission understand 

the cost and benefits of their rules and the effect their rules will 

have on economic growth be considered. 

In that context, what role do you believe economic analysis 

should play in the SEC rulemaking? Will you bring any unique 

skills in this area to the Commission? 

Mr. GALLAGHER. Well, thank you, Senator Shelby. It is an excellent question. Now, more than ever, given the large number of 

rulemakings that the Commission is undertaking under DoddFrank, it is critically important that the SEC and other regulators 

get the rulemakings right, and to me, getting it right means also 

properly weighing the costs and benefits of the rulemaking. It 

would be impossible to say that you got the rulemaking right when 

the costs outweigh the benefits. So it is critically important. 

It is an issue over the last several years that the agency has had 

some problems with in the D.C. Circuit and so it is critically important just functionally that the agency get it right, weigh the costs 

and benefits, and without doing so, it would be very hard to satisfy 

the missions that it has to facilitate capital formation, ensure fair 

and orderly markets, and protect investors—— 

Senator SHELBY. And ultimately create jobs, right? 

Mr. GALLAGHER. And create jobs, Senator. That is right. 

Senator SHELBY. Mr. Gallagher, you will be joining on the Commission at a time when the SEC faces an unprecedented rulemaking agenda unprecedented. I believe as a result, there is a risk 

that less attention will be paid to the SEC’s day-to-day business 

while the rulemaking syndrome is going. What will you do to ensure as a Commissioner that the SEC continues to fulfill its regular 

routine, but critically important roles of reviewing filings, examining registrants, and enforcing the securities laws? 

Mr. GALLAGHER. Thank you, Senator. That is another great question—— 
12 

Senator SHELBY. You have been there. You have had experience 

there. 

Mr. GALLAGHER. I have been there, Senator. I have been both 

counsel to a Commissioner and a Chairman and a senior staffer in 

one of the divisions, so I think I have a pretty unique perspective 

on that issue. I understand the day-to-day. I got to experience a 

normal day-to-day for at least a year or two before the crisis, and 

after that, I do not know, sincerely, what a normal day was like. 

But the day-to-day business of the agency goes on, to your point, 

in addition to all of the Dodd-Frank rulemaking, and if confirmed 

as a Commissioner, I think I will have a unique perspective on ensuring that the agency is paying enough attention to that day-today work while at the same time trying to meet the mandates of 

Dodd-Frank. 

Senator SHELBY. Commissioner Aguilar, the economy, as we all 

know, is in a very fragile state, yet the Dodd-Frank Act has unleashed a flood of new regulations that impose significant costs on 

businesses. These costs are passed along to investors in the form 

of lower returns and to consumers in the form of higher prices, generally. Collectively, I believe they are likely to diminish economic 

growth and further increase unemployment. Having said that, do 

you believe that the SEC should consider carefully the economic 

import of its actions, and what are you doing—you are a Commissioner now—doing to ensure that the SEC is assessing and taking 

into account the economic impact of its regulations? 

Mr. AGUILAR. Thank you, Senator Shelby. The SEC has a robust 

process for promulgating the rules that we adopt. Dodd-Frank is no 

exception. We follow the notice and comment procedure mandated 

by the Administrative Procedures Act. When we issued the proposal, we received many comments and many fulsome comments. 

I, myself, have an open door policy. I make sure that I try to listen 

to all the views from all the interested parties and take that into 

consideration, and the burdens and costs of our rulemaking is certainly one of the topics that I take into serious consideration, and 

I also try to consider the benefits that we are trying to achieve with 

the rulemaking that we are trying to adopt. 

I think it is important as part of our process to weigh, as best 

as we can, the balance between the costs and the benefits that are 

mandated by the Dodd-Frank Act, in particular, and what we are 

trying to accomplish—and the goals that Dodd-Frank has asked us 

to try to accomplish. 

Senator SHELBY. Mr. Gallagher, in a speech in late 2009, you 

noted that, and I will quote you: 

it is human nature for people, once they get through the immediate crisis, 

to forget the historical errors and jump into the next industry trend without 

proper risk reflection and planning. 

Although you were speaking about an industry, regulators are 

also human and are prone to forget their past mistakes. Since you 

were on the staff—I know you were not a Commissioner, but you 

were a very important staffer—at the SEC during the financial crisis, explain what lessons you learned from errors made in the runup to the crisis and how will these lessons affect the way you fulfill 

your role as a Commissioner at the Securities and Exchange Commission. 
13 

Mr. GALLAGHER. Thank you, Senator Shelby. It was a tremendous honor to serve at the SEC on the staff during the financial 

crisis. It was amazing to me to see the hard work and diligence, 

the tireless efforts of the staff and the Commissioners, quite frankly, Commissioner Aguilar included. 

The lessons learned from the crisis are many. First and foremost 

for me, I learned the incredible importance of regulatory cooperation and the flow of information amongst regulators, both domestic 

and international, and if confirmed as a Commissioner, that will be 

something that will be very important to me, to ensure, whether 

through the implementation of the Dodd-Frank Act or participation 

in international bodies, that the SEC is properly involved in the information flow and cooperating well with other regulators. 

As to other issues leading up to the crisis, things that we saw, 

aggressive risk taking without aggressive risk management was 

probably, in a nutshell, the biggest problem, something that the industry was guilty of and regulators did not pay enough attention 

to. And so that is another area where, if confirmed, I would want 

to be paying a lot of attention to ensure that the Commission, 

whether through participation in the FSOC or just in our day-today business, that we are paying enough attention to that, Senator. 

Senator SHELBY. Thank you. 

Chairman JOHNSON. Senator Reed. 

Senator REED. Well, thank you very much, Mr. Chairman. 

First, I want to commend Mr. D’Agostino for his outstanding 

service in the United States Navy. As a Rock Squad swimmer at 

West Point, I am very jealous of a Navy Rescue swimmer, so I 

think you have got me already. I do not think you have to do anything, OK? 

Mr. D’AGOSTINO. I can count on your vote. 

Senator REED. You are all set. You are all set. 

[Laughter.] 

Senator REED. But, no, remarkable service to the Nation in the 

Navy. Thank you, sir. 

Let me follow up. I thought Senator Shelby asked a very good 

question, Mr. Gallagher, about your experiences, because you were 

in several very critical positions and I just want to make sure I am 

aware. In your staff position, you had some involvement with the 

Consolidated Supervised Entity Program, which was designed to 

supervise Lehman, among others. How deeply engaged were you in 

the day-to-day activities of Lehman before it collapsed? Were you 

getting real-time information? 

Mr. GALLAGHER. Thank you, Senator, for that question. I came 

down to the Division of Trading and Markets as a Deputy Director 

at the end of July of 2008, so like Commissioner Aguilar, came into 

a new role just shortly before Lehman failed. In that short window, 

just weeks before Lehman failed, myself, my boss, Erik Sirri, the 

Division Director of the Trading Markets, along with the Chairman 

and other senior staff, were getting a fair flow of information and 

trying to coordinate with other domestic regulators to ensure that 

we could best contain any problem that happened if Lehman did, 

in fact, fail. 

Senator REED. There have been some allegations that I have 

read publicly where Lehman was reporting liquidity figures which 
14 

were much different than the actual figures which it has been suggested that the regulators knew about. Are those allegations accurate? 

Mr. GALLAGHER. Senator, I have heard some of those same reports. I am not aware personally that that was an issue. I know 

it was something that was raised, I believe, in the Trustee’s Report 

regarding Lehman, and I know it is something that the staff is investigating, or was, at least, when I left, investigating vigorously, 

and I assume that to the extent there was any impropriety, that 

they will—— 

Senator REED. But that would be very disturbing if, in fact, market information was much different than what regulators had. 

Mr. GALLAGHER. Absolutely, Senator. Again, one of the lessons 

learned was the need for information, not just the sharing with 

regulators, but for somebody to have the information by which you 

could make rational decisions as a regulator. And if the businesses 

were not giving appropriate information, if they were taking different perspectives on pricing, for example, of the same types of instruments, then you cannot have the information you need to make 

those rational decisions. 

Senator REED. Do you think, given your experience, that the SEC 

is in a stronger position now with the Dodd-Frank legislation to effectively regulate these institutions? 

Mr. GALLAGHER. There is no doubt that the SEC has many more 

tools given to it by Dodd-Frank to regulate the institutions, the 

markets, and to take action that before the enactment of the statute they did not have. 

Senator REED. And I know there is an appropriate concern with 

cost-benefit analysis, but the next issue and the hard issue is, OK, 

what are the costs and what are the benefits, and who is paying 

the costs and who is paying the benefits? And you can define a 

cost-benefit analysis in some cases, you know, what answer do you 

want? I will give you the analysis. 

I think one of the aspects of this crisis was the huge cost to taxpayers which may have been mitigated or avoided with better regulation, and I would urge both you gentlemen, when you consider 

this cost-benefit analysis, it is not just a narrow, what cost will be 

paid by the regulated entity, what nominal benefit it is in terms 

of specific information to consumers, but a much broader, if this 

fails, we are on the hook for trillions of dollars, and I hope you do 

that. 

Another aspect, Mr. Gallagher, too, because, again, of your critical role, and Senator Shelby alluded to it, and that is the degree 

at which enforcement is delegated to non-Commissioners. There are 

five Commissioners. You have extraordinarily complicated duties, 

et cetera. And the impression that many, particularly critics, have 

lodged is that the enforcement agents, division, were, in effect, hobbled. They had to get permission to do things which previously they 

could do on their own—subpoenas, collect information. To a certain 

degree, they could settle claims. That was dramatically held back 

under Chairman Cox, and I think Commissioner Atkins was particularly vocal. 

Personally, I do not think it resulted in effective performance and 

I think it might have done something even worse, send a message 
15 

to the street that the cops were off the beat. So what is your impression now, the new rules that Chairman Schapiro and others 

have adopted? 

Mr. GALLAGHER. Thank you, Senator. Let me just say at the outset, it is imperative for the SEC to have a strong and vibrant enforcement program. It is imperative for investors. It is imperative 

for markets. The agency needs to be seen as the cop on the beat 

and there needs to be comfort and confidence in the markets that 

the SEC will be there. 

As to your specific question of the hobbling of the agency, I understand that there was some coverage of the issue and implication 

that there was hobbling. I think that was largely related to the 

Commission diving into an important enforcement policy issue 

which related to penalizing shareholders of corporations. That was 

a very, very small part of the enforcement docket, and I know that 

because I worked for Chairman Cox, 2 percent or less of the cases. 

But I think it got an out-sized reaction, and that, to my initial 

point, you cannot have these negative perceptions about the agency. Whether it is really hobbling somebody or not, it is very bad for 

the agency. 

As to the changes that Chairman Schapiro has implemented, the 

restructuring of the division, some of the new delegations, I have 

been looking at it from the outside, and, if confirmed, am eager to 

get involved and see how this is paying off, what dividends have 

been paid, what are the new efficiencies. 

The one thing I can tell you is a constant, though, is that I have 

the utmost faith in the Enforcement staff. They are men and 

women of just an unbelievable caliber. They have been through a 

hard time, and I think with proper encouragement and oversight 

from the Commission, they are going to regain the confidence that 

they used to have. 

Senator REED. Can I add just one final point to Mr. Aguilar. 

There were a couple of situations in which you had a principled opposition, I believe, and you refrained from voting. Am I being accurate? I do not want to mischaracterize—— 

Mr. AGUILAR. Senator Reed, I think I know what you are speaking about, and I would not necessarily characterize it that way. 

There was an ill-advised staff policy that had been adopted with respect to certain claw backs that in my mind read out of the Sarbanes-Oxley Act legislation certain authority given to the SEC by 

Sarbanes-Oxley in 2002, and I engaged in a series of discussions 

with my colleagues and with the staff to try to get that policy reversed. While that was going on, there were a couple of cases 

where, while the discussion was ongoing, I thought it best not to 

participate in—while I continued to dialog with the staff and with 

the Commission as to what the policy should be so we could address those cases under the appropriate policy. I would have 

wished that those cases had been delayed until the policy had been 

restructured, as it subsequently was, but the decision was made for 

them to proceed with those cases while the dialog was still ongoing 

for us to try to develop a better policy. 

Senator REED. Well, all I can say, we have these similar situations around here, and sometimes votes do not come on time, but 
16 

typically, we feel when the vote is called, we have to vote, so just 

one impression. 

Thank you very much, Mr. Chairman. 

Chairman JOHNSON. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Let me congratulate all the nominees on their nominations. 

Mr. Gallagher, there are some of us who believe very strongly in 

a free market, but there is a difference between a free market and 

a free-for-all market, and many of us believe that the challenges 

we faced in September of 2008 when we were called upon to make 

sure the Nation did not go into what Chairman Bernanke described 

as the potential of a new depression was the lack of a regulator 

that instead of being the cop on the beat was asleep at the switch. 

So you have had experience there. You have seen the consequences. Tell me how you would act today as a Commissioner to 

ensure that we have a free market but not a free-for-all market, 

that we do not relive—you know, the Ranking Member’s concern 

about too much regulation, I understand the importance of having 

that pendulum just swing just right, but by the same token, I do 

not want to have to cast votes again to face another 2008 in this 

country. So tell me how you are going to approach their position. 

Mr. GALLAGHER. Thank you, Senator Menendez. It is a great 

question—— 

Senator MENENDEZ. I only ask great questions. 

[Laughter.] 

Senator MENENDEZ. Just kidding. I am just kidding. 

Mr. GALLAGHER. We will stipulate it for the next one, then. 

[Laughter.] 

Mr. GALLAGHER. As I mentioned earlier, it is critical that the 

SEC and the other agencies get these rulemakings right. To get 

them wrong could have some major impacts. If confirmed by the 

Senate, you have my pledge that I will do everything possible to 

ensure the rulemakings are done appropriately, done as timely as 

possible, and do not have adverse negative consequences to the extent we can predict those. 

To your point about my prior experience, there is nothing I want 

less than to come back to this agency and deal with what I had 

to deal with in 2008. It was the most horrific experience of my life. 

It had a profound effect on me, my family, and I will do everything 

in my power to ensure it does not happen again. 

Senator MENENDEZ. So I would expect you to be part of the cop 

on the beat—— 

Mr. GALLAGHER. Absolutely, Senator. 

Senator MENENDEZ.——not asleep at the switch. 

Mr. GALLAGHER. No doubt. 

Senator MENENDEZ. Let me ask you one other question. What 

are your priorities as you look at your new role upon confirmation? 

Where do you put investor protection? 

Mr. GALLAGHER. I put it number one, Senator. The missions of 

the SEC are incredibly challenging—investor protection, facilitating 

capital formation, fair and orderly markets, but, you know, at the 

end of the day, if investors do not have confidence in the agency 

and the markets, then there will not be an agency around. 
17 

Senator MENENDEZ. Commissioner Aguilar, give me a sense—I 

know your work at the SEC for the last several years. I know the 

work that you did before. But give me a sense of—you mentioned, 

touched upon in your opening statement your private sector experience. Give me a sense of how that private sector experience informs 

your work at the SEC. 

Mr. AGUILAR. Thank you, Senator Menendez, and may I also say 

that is an awesome, great question, as well. 

[Laughter.] 

Senator MENENDEZ. I will not reiterate what I said to Mr. Gallagher. 

[Laughter.] 

Mr. AGUILAR. It pervades everything I do. In my 30 years as a 

professional in securities industries, I have worked at the SEC, I 

have worked in private practice, and I have worked for a very large 

global asset manager. I have done almost everything in my private 

practice that the Commission touches. I have been a president of 

a broker-dealer. I have been a senior officer for an investment advisor. And I think I have been a well known, and a well respected 

mutual fund lawyer. I have taken companies public. I have done 

a great number of private placements. 

There really is not anything that the SEC does that I did not do 

in private practice with one notable exception—and that is that I 

was not a litigator. I never got sued. My clients never got sued as 

a result of my work. So I found it strange, to use Ranking Member 

Shelby’s statement, I think, that when I first became SEC Commissioner, I focused heavily on the enforcement program, partly because it—it needed to be focused on, and so I found it strange that 

I was tagged by a publication as the Enforcement Commissioner, 

because it is the one thing I did not do in my private practice. 

But in the role of a Commissioner, most of the matters that are 

brought to us for consideration outside of the enforcement world, 

I have had some personal experience with in many ways and I am 

able to see the practical impact of our rules. I am able to see what 

is likely to work, what is likely not to work. I am looking for smart 

regulation. I am looking for a regulation that finds that appropriate 

balance between the cost and the benefits, but at the end accomplishes the goals of the SEC to fulfill our mission and protect investors, maintain effective and orderly markets, and facilitate capital 

formation. 

Senator MENENDEZ. Thank you. One last question, Mr. Chairman, to the SIPC nominees. 

I have spoken to many Madoff scam victims in New Jersey and 

they are generally dissatisfied with SIPC policies and reimbursement process. What do you think—or, I should say, why do you 

think that is the case, and what would you do to improve such policies in this area? 

Mr. KARAWAN. Senator, you are obviously batting a thousand on 

your questions today, so thank you for that one. 

[Laughter.] 

Mr. KARAWAN. From my personal experience in private practice 

and as in-house counsel, it is usually failed expectations that lead 

to disappointment. So one area to look at in terms of SIPC’s role 

is do investors understand the extent and limits of the protections 
18 

that are provided by SIPC. If you have the understanding going in, 

you might not be disappointed on the back end if you need to rely 

on SIPC protections if that should ever come to pass. 

So if I am confirmed, one of the things I would be interested in 

reviewing are the SIPC disclosures and investor education materials that are made available, how good they are, how robust they 

are, and how well understood—— 

Senator MENENDEZ. Mr. D’Agostino. 

Mr. D’AGOSTINO. Senator—— 

Senator MENENDEZ. Would you put your microphone on, please? 

Mr. D’AGOSTINO. Senator, a lot of people think that SIPC is kind 

of similar to the FDIC, and it is not. And it is a common 

misperception. When I was talking to some of my partners that 

have been in the financial services industry their whole lives, they 

did not understand the differences. And so I think a big part of 

what we need to do is educate the public. The SEC needs to educate the public. All regulators need to educate the public. Brokerdealers, Series 7, Series 6 representatives, they need to educate the 

public. 

The responsibilities of SIPC are pretty clearly spelled out in 

SIPA. The courts ruled on this matter, and I think SIPC has taken 

the appropriate approach with regards to SIPA. 

Senator MENENDEZ. Do either of you think that there are any 

changes needed to the Securities Investor Protection Act? 

Mr. D’AGOSTINO. Senator, I have not had an opportunity to serve 

on the Board and spend time with colleagues and spend time with 

the staff to really understand those issues, and I am looking forward to the report that is going to be coming out to help me understand that. 

Mr. KARAWAN. I agree with Mr. D’Agostino on that. The work, 

which I understand is fairly extensive, being done by the task force 

will be an extremely good starting point as to whether or not the 

current state of affairs at SIPC and the statute that governs it is 

appropriate and whether it needs modernization. 

Senator MENENDEZ. Well, I look forward to working with you. I 

understand the question of expectations, and I can see that. I also 

think that there are certain failings here for investors, and I would 

look forward to working with you in that regard. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Commissioner Aguilar and Mr. Gallagher, 

the Dodd-Frank Act requires the SEC and the CFTC to craft new 

rules on the regulation of derivatives. It is important that the SEC 

and the CFTC rules be as consistent as possible to minimize costs 

and ensure effective oversight. 

What is your view on the current SEC/CFTC coordination? And 

what can be done by the SEC to ensure that differences between 

these sets of rules are minimized and the agencies are cooperating? 

Commissioner Aguilar. 

Mr. AGUILAR. Thank you, Mr. Chairman. In the proud history of 

both the CFTC and the SEC, we have, I am told, only met as a 

body on three separate occasions, all within the last couple of 

years. So we are now learning to work together. Our staffs have 

had more periodic involvement with one another. Under the DoddFrank Act they are certainly being asked to develop a number of 
19 

rules jointly and consult with one another, and that is happening 

regularly. 

We have had a number of joint roundtables in the last year, and 

I think that the relationship between the two agencies is developing in an appropriate manner, both at the staff level and at the 

Commissioner level. 

This country is one of the few countries that has decided to separate the oversight of the capital markets by having a separate regulatory agency, and it, therefore, is incumbent upon us to work 

twice as hard, three times as hard, to make sure the two agencies 

work as jointly as possible both to have consistency in the regulation and in the protection that investors have, because you today 

have the ability to accomplish the same economic goal by either 

using an instrument in the securities field or in the derivatives 

field. And so we do not want to have so much fragmentation that 

things get both convoluted for the capital markets as well as have 

things fall through the cracks. 

Chairman JOHNSON. Mr. Gallagher. 

Mr. GALLAGHER. Thank you, Chairman Johnson. It has traditionally been very important for the CFTC and the SEC to enjoy a good 

and collaborative relationship. With Dodd-Frank and the number of 

joint rulemakings, and under Title VII in particular, it is critically 

important that they cooperate and work together. 

In my experience from being a staffer, sometimes this relationship is strained. Unfortunately, sometimes the relationship is too 

dependent on personalities at the agencies and not the formal protocols. And I think right now my sense, from looking in from the 

outside, is things are going pretty well. And my only fear is that 

is because the personalities seem to be meshing. 

Commissioner Aguilar will have a much better sense of how 

things are actually going day to day. I do see these joint meetings. 

I know that the staffs seem to be working together pretty well. But 

I continue to ponder whether that is simply because of relationships. And if confirmed as a Commissioner at the SEC, I can tell 

you that this is an issue that is of the utmost importance to me, 

this regulatory cooperation with the CFTC, and it is something I 

am going to work hard ensuring happens, that we get it right and 

we cooperate. 

Chairman JOHNSON. Senator Hagan. 

Senator HAGAN. Thank you, Mr. Chairman, and thank you for 

holding this hearing. 

I wanted to ask a question about the fiduciary duty. I am hearing so much concern about this right now. At the end of April, I 

sent a letter to the Department of Labor on its proposed fiduciary 

rule with Senator Reed of Rhode Island and Senator Bennet, and 

in that letter we encouraged the Department to consult with the 

SEC, citing the Commission’s recent study on fiduciary standards. 

Mr. Aguilar, can you describe what consultation has taken place 

between the SEC and the Department of Labor on the issue of fiduciary duty? And at what level have these conversations taken 

place? And do you feel that the Department of Labor has engaged 

the SEC adequately, appropriately on this rule, which I think has 

wide-ranging implications for securities markets? 
20 

Mr. AGUILAR. Thank you, Senator. I do know that the SEC staff 

has been meeting with the DOL staff on this particular issue. However, I have not yet been briefed by our staff as to the nature of 

those discussions, how many they have had, how in-depth they 

have gotten into the discussion. But I would be happy to look into 

it upon my return, and if you would like, I could supplement the 

record after the hearing. 

Senator HAGAN. I would appreciate that. 

Senator HAGAN. Anybody else want to address this issue? 

Mr. GALLAGHER. Senator Hagan, I have no knowledge, being on 

the outside now, of what the interactions are with the staff. But 

being a practitioner in this space, I can tell you there is no more 

important issue than regulatory cooperation between DOL and the 

SEC on this issue. The implications, the ramifications of getting 

this wrong or one agency or department moving ahead of the other, 

could be huge. 

Senator HAGAN. I agree. Thank you. 

Since May 6th of last year, when we experienced the flash crash, 

I have heard an increasing number of concerns expressed by market participants about the stability of the exchanges. And once 

again, Mr. Aguilar, can you discuss the direction that the SEC is 

taking to address market structure issues that contributed to the 

flash crash? 

Mr. AGUILAR. Thank you, Senator. Even before May 6th of last 

year, the staff and the Commission have put forth their concept release to try to look at the market structure from A to Z. The market has changed dramatically over the last decade, both in the volume of high-frequency traders and new products, such as ETFs 

that have really mushroomed, and that impact the trading markets, certainly in the last half-hour or so of a typical day. And so 

we put that concept release out, and then May 6th, of course, overtook those events. 

We then, together with the CFTC, put together a task force to 

look at the events of May 6th, and reports have come out particularly on May 6th. But the work is not done. The SEC did establish 

single-stock circuit breakers to respond to May 6th, and they are 

now looking at limit-up/limit-down mechanism as an additional 

measure. And the staff is now developing a plan for how to continue to study the market structure and how to sequence the analysis that they need to do and how to consider what, if any, additional actions should be taken. The SEC Chairman has spoken 

about that a fair amount. But I am waiting to get the staff’s considered thoughts on what the next concrete actionable steps should be 

and to further analyze and perhaps consider what additional rules 

may be required to deal with market structure. 

Senator HAGAN. What is the timing to get that report back? 

Mr. AGUILAR. I think the staff is working on it, and I will get 

back to the office and find out the exact thinking on that and respond with a more accurate statement. 

Senator HAGAN. OK. Thank you. 

Senator HAGAN. Mr. Gallagher, what steps do you believe still 

need to be taken to ensure that markets are safe for investors and 

allow for job-creating capital formation to take place? 
21 

Mr. GALLAGHER. Thank you, Senator. I assume this question is 

in connection with—— 

Senator HAGAN. Yes. 

Mr. GALLAGHER. Yes. As Commissioner Aguilar alluded, a lot has 

been going on. A personal digression—in preparing for the hearing 

and meeting with the SEC staff—I had not seen them because I 

had been in my time-out period, and I got to confess to one of the 

lead staffers working on the May 6th initiative that on May 6th I 

was in the airport going to visit my sister with my parents and my 

son, and I saw the news coming about the Dow swing, and I had 

one of these 2008 moments of, you know, a heart flutter and feeling 

a little faint. And then I remember I was not there anymore, and 

I did not have to deal with it. I felt bad that they did. 

But since then, they have been incredibly active. I mean, the 

number of proposals that have come out have been unbelievable, 

and quite frankly, in the months leading up to May 6th, even when 

I was just leaving the agency, between the concept release on market structure, the flash order proposal, there has been more going 

on in the market structure space than there has been at the SEC 

in over 10 years. 

I think that dovetails with Senator Shelby’s question earlier 

about the day-to-day business of the agency. These initiatives are 

not necessarily either May 6th or—they are definitely not DoddFrank mandated, but they are incredibly important to the markets, 

and they are incredibly important to get right. Whether it is limitup/limit-down, the single stock circuit breaker, the short selling circuit breaker, and all of the other proposals that the Chairman has 

put out there, they all have laudable goals, but we need to ensure 

that when in operation together they work effectively and do not 

hinder the markets at a time when we are trying to bolster them. 

Senator HAGAN. True. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. I thank the witnesses for your testimony 

and for your willingness to serve our Nation. 

I ask all Members of the Committee to submit questions for the 

record by noon this Friday, and I request that you submit your answers to us in a timely manner so that we can move your nominations forward. 

This hearing is adjourned. 

[Whereupon, at 11:11 a.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 
22 

PREPARED STATEMENT OF LUIS A. AGUILAR 

NOMINEE TO BE A MEMBER, SECURITIES AND EXCHANGE COMMISSION

JUNE 14, 2011 

Chairman Johnson, Ranking Member Shelby, and Members of this Committee: 

It is a great honor to be here before you today. I do want to acknowledge my wife, 

Denise, who was not able to accompany me today. She has been a constant source 

of support and enabled me to serve as a Member of the United States Securities 

and Exchange Commission (‘‘SEC’’). I also want to acknowledge my parents, Juan 

and Gladys Aguilar, who sent their two small sons to the United States as Cuban 

refugees, to escape the Castro revolution, and would be bursting with pride to see 

one of them serving this great country in such a manner. 

Three years ago, I had the honor to come before this Committee for confirmation 

hearings to be a member of the SEC. It has been my tremendous privilege to serve 

as a Commissioner of the SEC. I was, and remain, humbled to be asked to serve 

the American people at the agency where I started my career as a staff attorney 

over 30 years ago. My deep respect and admiration for the importance of the institution, and its mission has only grown during my tenure. I recognize the significant 

responsibilities of the SEC to fulfill its statutory mandate to protect investors, maintain fair and orderly markets, and facilitate capital formation. 

I have remained focused on these responsibilities during these recent challenging 

times. The collapse of Lehman Brothers and the ensuing market turmoil—of a kind 

not seen since the Great Depression—began just weeks after I was sworn in as a 

member of the Commission. In these extraordinary times, I have dedicated all of 

my skills, knowledge, and energy to the work of the SEC. My professional career 

spans over 30 years and I have been a practitioner in corporate, securities, and 

international law. I have seen the securities industry from many vantage points. I 

have worked in Government, private practice, and in corporate America. I’ve been 

an SEC staff attorney, a law firm partner and a general counsel and head of compliance, and I have spent time as a domestic and international business person. This 

breadth of experiences has served me well as the SEC has taken up, or been confronted with, a multitude of issues stretching across the securities and corporate 

spectrum. 

And so, I was deeply honored to be nominated by President Obama to serve another term as a Commissioner. It has been a privilege to work with Chairman Mary 

Schapiro and my other colleagues on the Commission: Kathleen Casey, Elisse Walter, and Troy Paredes. If confirmed, I look forward to continuing this work, along 

with Commissioner-Designate Dan Gallagher. I believe a great deal of unfinished 

business remains before the SEC—work that is vital toward improving our markets 

as well as the agency itself. 

I am committed to answering these challenges. When I arrived in the United 

States as a refugee from Cuba, I was 6 years old and had little more than the 

clothes I was wearing. The generosity and opportunities of this country provided me 

the foundation to become the person who now has the honor of appearing before you 

today. Serving as a Commissioner to the SEC and being able to apply my securities 

expertise on behalf of the American people is a tremendous honor, and truly my 

privilege. 

If the U.S. Senate determines to confirm my nomination to a second term as a 

member of the SEC, I promise to work faithfully to serve the American people at 

this critical time. 

Thank you. I will be happy to answer any questions the Committee might have. 

PREPARED STATEMENT OF DANIEL M. GALLAGHER, JR. 

NOMINEE TO BE A MEMBER, SECURITIES AND EXCHANGE COMMISSION

JUNE 14, 2011 

Chairman Johnson, Senator Shelby, Distinguished Members of this Committee, it 

is a very great honor for me to appear before you today. I am grateful and humbled 

by the President’s nomination to serve on the Securities and Exchange Commission. 

I would like to introduce you to members of my family that are here with me 

today. My wife, Stephanie Gallagher, who was recently named to be a Federal Magistrate Judge in Maryland—her investiture is this Friday—is an incredible wife and 

mother, and she has always been a tremendous source of support for me, as she 

has been throughout the process that brings me here today. With her are my two 

sons, Danny and Charlie, and I am incredibly proud of both of them. My parents, 

Barbara and Daniel Gallagher, who have come down from Philadelphia for this 
23 

hearing, have been small business owners for most of my life. Their work ethic, integrity, and devotion to family have been a continuous inspiration to me. 

Since its creation, the SEC has been one of the most important agencies in the 

Federal Government. Investor protection and oversight of the capital markets are 

essential to American investors as well as our overall economy. The SEC must accomplish its mission in the context of complex, dynamic, globally connected markets. 

This is a time of great importance for the SEC. It is rebuilding after some setbacks, dealing with a loss of faith in the financial markets, and facing broad new 

oversight and regulatory responsibilities over complex financial instruments and 

markets. The SEC staff, which is the engine of the agency, is cognizant of the critical role they play, and I know from personal experience that the staff is intensely 

dedicated to the protection of investors and the health of the capital markets. 

Despite the financial crisis, the U.S. capital markets are the strongest in the 

world. To maintain that status, the markets need the SEC to be a strong and respected regulator. Investors will only commit capital if they have faith in the fairness of our markets, and the SEC is charged with instilling and maintaining this 

confidence. By requiring transparency and rigorously and fairly enforcing the law 

as directed by Congress, the SEC plays a major role in maintaining the preeminence 

of the U.S. capital markets. If confirmed, I will strive every day to ensure that the 

agency satisfies this mission. 

On a personal note, I want to point out that I have been nominated to fill the 

seat being vacated by Commissioner Kathleen Casey, who is someone very well 

known to this Committee. Commissioner Casey has been an outstanding Commissioner and has served the country and investors with integrity and dedication 

through an incredibly difficult time. Should I be confirmed, I hope to serve as ably 

as she has. 

Thank you, Mr. Chairman, Senator Shelby, and Members of the Committee, for 

this opportunity to appear before you today. I would be pleased to take any questions you may have. 

PREPARED STATEMENT OF ANTHONY FRANK D’AGOSTINO 

NOMINEE TO BE A DIRECTOR, SECURITIES INVESTOR PROTECTION CORPORATION

JUNE 14, 2011 

Good morning Mr. Chairman and Members of the Committee. My name is Anthony (Tony) D’Agostino, and I am honored to be before you today as President 

Obama’s nominee to serve on the SIPC Board of Directors. 

I believe I am well qualified to serve on the SIPC Board based on my management background in the securities industry and my hands-on experience working in 

the capital markets. 

Prior to joining Wall Street, I served in the United States Navy for 24 years. I 

started out in the Navy as an enlisted man flying in the H–3 helicopter as a rescue 

swimmer and anti-submarine warfare specialist. After I completed my undergraduate degree at the University of Kansas I received my commission and went 

on to serve in roles of increasing responsibility, a few examples are: SECNAV–CNO 

Briefer during Desert Storm, an Admirals Aide and as a Surface Warfare Officer 

onboard the USS John F. Kennedy (CV–67). Since retiring from my career in the 

Armed Forces, I have worked in the Capital Markets businesses of Wachovia and 

UBS. In both organizations, I served in executive roles, which allowed me to closely 

observe and fully appreciate the intricacies of how these businesses are structured, 

staffed and operated. 

As the Chief Operating Officer (COO) of Wachovia’s Equity Capital markets platform I directly oversaw and managed internal functions supporting the Equity Capital Markets business including Technology, Compliance, Legal, and Finance. After 

serving as COO, I went on to build from scratch, the firm’s Program and Algorithmic equity trading business. As the architect for that business I became proficient in all aspects of electronic trading. I then went on to build another new venture for Wachovia: I helped build a proprietary Long/Short U.S. Equity Hedge Fund 

(i.e., a proprietary trading desk) where I focused on portfolio and risk management 

as well as financial analysis. In that role, I had to study and understand the operational characteristics of hundreds of different companies, in dozens of diverse industry groups. During the 2008 market collapse where 40 percent losses became the 

norm, the fund we managed was down only 2.4 percent. As part of my training to 

serve in these roles, I was a FINRA Registered Principal and held Series 7, 24, 55 

and 63 licenses. 

After Wachovia’s collapse and takeover by Wells Fargo, our division was shut 

down. Like so many other Americans, I found myself unemployed for the first time 
24 

in my life. After nearly 1 year out of work, I was then recruited by UBS where I 

am currently serving as the COO of the Global Quantitative Analytics (QA) group. 

The QA group is responsible for building sophisticated mathematical models, which 

are used to create, price and evaluate the risk of complex financial products (Derivatives, CDS, CMO, ABS, MBS, etc.). I oversee and manage divisions around the 

world, which include quantitative modeling, trading support, technology, strategy 

and off-shoring. 

Our recent economic challenges have inspired me to once again serve our great 

country, and I am very proud that President Obama has asked me to apply my experience in the Navy and in the Capital Markets to address these challenges. I understand the hardships that so many Americans are facing today, and I am dedicated to working with the Board of SIPC to help ensure that investors are protected 

when broker dealers fail. The unique combination of more than a decade in the 

trenches of our financial industry and twice that long serving my country in the 

Navy allow me to bring a wealth of experience, hard work, and accountability to 

the Securities Investor Protection Corporation Board. 

If confirmed as a director of SIPC, I promise the President and this Committee, 

that I will use my experience to maintain and strengthen SIPC’s accountability to 

the investing public. 

In closing, I would like to recognize a few important people in my life. I am 

pleased to have some of my family with me today: Havilah and Hannah D’Agostino, 

Dr. Leigh Vinocur, and her son, Max, as well as my friends Matti Kon, Scott 

Kaimien and Jeff Rassmussen. 

In addition to my family and friends with me today, I would like to thank my 

mentors from over the years that have given me opportunities that a milkman’s son 

from South Jersey never expected: Col Mike Wyly, USMC (retired), Rear Admiral 

Ed Fahy, USN (retired), Mr. Al Berkley, former President of the NASDAQ and my 

dear friend Mickey Misera, former Head of Wachovia’s Equity Capital Markets business. Mick believed in me and hired me directly from active duty to be his COO; 

all of my opportunities to work within the financial services industry are due to 

him. 

Mr. Chairman, that concludes my remarks, thank you for your attention and consideration. I will be happy to answer your questions. 

PREPARED STATEMENT OF GREGORY S. KARAWAN 

NOMINEE TO BE A DIRECTOR, SECURITIES INVESTOR PROTECTION CORPORATION

JUNE 14, 2011 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, it’s 

a great honor to appear before you as you consider my nomination to be a director 

of the Securities Investor Protection Corporation. 

As a boy growing up in Sheepshead Bay Brooklyn, I never considered that I might 

someday have the privilege of being before a United States Senate Committee with 

an opportunity to serve the public in such an important role. I can attribute my 

good fortune to a primary cause, and she’s sitting behind me today, my mother 

Devorah Einbinder. From my earliest memories, she stressed the importance of education, instilled in me the work ethic and values that I carry with me today, and 

propelled me to be part of the first generation of our family to attend college. I want 

to acknowledge and thank her for her love and support, and for traveling up from 

Florida to be here today. 

For the past 23 years, I have served as a lawyer responsible for handling complex 

commercial litigation, transactions and regulatory issues. For the first 12 years, I 

was in private practice, becoming partner in the litigation group of the firm where 

I practiced. I represented a variety of financial sector clients in financial, securities, 

and other types of disputes. For the past 11 years I have been in-house counsel for 

a large financial services corporation. In that capacity I have had litigation management responsibility for the entire company, including insurance, broker/dealer, and 

wealth management operations. 

And for the most recent 4 of those years, I have also served as General Counsel 

of the business segment that includes broker/dealer and investment advisor operations, with overall legal responsibility for those businesses. Throughout my 23 

years of practice, I have counseled boards of directors on many issues. 

Members of the Committee, today’s environment is challenging. Financial markets 

are global and in flux, and are recovering from a devastating crisis. Financial frauds 

are growing ever more complex and sophisticated. Technology . . . and the good, 

and bad, uses to which it can be put . . . is advancing at a lightning pace. The types 

of securities in which customers invest are constantly evolving. An experienced, 
25 

dedicated, proactive and forward-thinking SIPC Board is crucial to dealing with 

these challenges. As a result of my extensive experience dealing with financial services companies, I believe I am well equipped to serve as a SIPC director and confront these challenges head on. 

My commitment, if confirmed, is to bring my experience to bear in my role as a 

SIPC director, to be unbiased, to be guided but not ruled by my instincts, to exercise 

sound judgment with an absence of hubris, and, most importantly, to always have 

an open mind, to hear and value all points of view, and, ultimately, to do the right 

thing. Being a passionate advocate for investor protection will be one of my primary 

roles. 

Mr. Chairman and Members of the Committee, thank you again for your consideration of my nomination, and I am happy to answer any questions you may have. 
(26) 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM LUIS A. AGUILAR 

Q.1. What is your view of the changes the SEC has made to improve enforcement of the securities laws in the wake of the Madoff 

and Stanford Ponzi schemes? How would you work to support or 

enhance the effectiveness of SEC enforcement in the future? 

A.1. The SEC has made a number of changes that are designed to 

improve enforcement and that seek to respond to weaknesses identified by the Madoff and Stanford Ponzi schemes. As outlined by 

Chairman Schapiro, these include: 

• New management across the major divisions and offices. 

• A new Division of Risk, Strategy, and Financial Innovation to 

re-focus the agency’s attention on—and response to—new products, trading practices, and risks. 

• Additional senior operational personnel, specifically a Chief 

Operating Officer and Chief Compliance Officer. 

• Efforts to modernize the SEC’s information technology, including a centralized system for tips and complaints, enforcement 

and examination management systems, risk analysis tools, and 

financial management systems. 

To better ensure effective performance in detecting and addressing fraud, the agency has carried out a restructuring of its two 

largest programs—enforcement and examinations. These reforms 

are intended to maximize the SEC’s use of resources and permit 

the agency to move more swiftly and strategically. 

Specifically, the Division of Enforcement has streamlined its procedures in order to be able to bring cases more quickly; removed 

a layer of management to permit more staff to be allocated to frontline investigations; created five national specialized investigative 

groups dedicated to high-priority areas of enforcement; and created 

a new Office of Market Intelligence to serve as the hub for the effective handling of tips, complaints, and referrals. The Office of 

Compliance Inspections and Examinations (‘‘OCIE’’) has been implementing reforms to the agency’s national examination program, 

in response to rapidly changing Wall Street practices and lessons 

learned from the Madoff and Stanford frauds. 

The changes provide greater consistency and efficiencies across 

the SEC’s 11 regions, and are expected to sharpen the staff’s focus 

on identifying the higher risk firms that it targets for examination. 

OCIE also implemented new policies requiring examiners to routinely verify the existence of client assets with third-party 

custodians, counterparties, and customers. Going forward, the national exam program plans to continue to conduct sweeps in critical 

areas, from trading practices to market manipulation, to structured 

products. 
27 

I believe it is critical that the SEC’s enforcement program be effective. I have been a strong supporter of reforms to improve the 

effectiveness of the program, and I will continue to do so. 

Q.2. The Dodd-Frank Act includes over 100 rulemaking provisions 

applicable to the SEC. This is a large undertaking and a tremendous responsibility. What is your opinion of the progress of these 

rulemakings? Will you commit to promulgating rules that are consistent with the letter and spirit of the Dodd-Frank Act? 

A.2. As you note, the Dodd-Frank Act contains a number of provisions that require SEC rulemaking, and dozens of other provisions 

that give the SEC discretionary rulemaking authority. In terms of 

where the SEC stands, as of the most recent status review by SEC 

staff in late May of this year, the SEC has proposed or adopted 

rules for about two-thirds of the mandatory rulemaking provisions. 

As you note, the SEC’s rulemaking responsibilities under the DoddFrank Act are a significant, and important, undertaking. 

To help perform these responsibilities effectively, the SEC buttressed its process for obtaining input from the public and interested parties, such as by soliciting comment in advance of formal 

rule proposals. The SEC’s staff has worked very hard to review 

these comments, develop formal proposals, review comments on 

proposals, and prepare final rules for consideration by the Commission. The dedication of our staff has been on display throughout 

this period. 

I am committed to working faithfully to promulgate rules that 

are consistent with the letter and spirit of the Dodd-Frank Act. 

Q.3. The Department of Labor has proposed amendments to ERISA 

that would expand the activities subject to a fiduciary duty under 

ERISA. On May 3, 2011, I co-signed a letter authored by HELP 

Committee Chairman Harkin sent to the SEC, DOL and CFTC 

about the importance of working together on this issue to avoid disruption. On June 6, 2011, Chairman Schapiro responded, stating 

that the SEC staff has been meeting with and the SEC is committed to coordinating with DOL ‘‘to prevent potentially conflicting 

standards while recognizing the different mandates of the statutes 

that each agency administers.’’ Would you support the Chairman’s 

efforts and support coordination by the SEC and DOL on these 

matters? 

A.3. I understand from SEC staff that there have been several formal meetings, as well as numerous telephone calls and other informal communications, between senior staff members of the SEC, the 

Department of Labor (‘‘DOL’’), and, in some cases, the Commodity 

Futures Trading Commission (HCFTC’’). Senior staff members of 

SEC, CFTC, and DOL have also participated in joint briefings with 

Congressional staff on these issues. SEC staff members attended 

the hearings held by the DOL on March 1 and 2, 2011, to hear the 

concerns raised by affected parties, and they continue to consult 

with DOL and CFTC staff on these matters. 

The consultations with DOL staff have included discussions of 

the potential overlap between the DOL’s proposed rule amending 

the definition of ‘‘fiduciary’’ under ERISA and the SEC’s pending 

rulemaking relating to business conduct rules applicable to security-based swap dealers and major security-based swap partici-
28 

pants under Title VII of the Dodd-Frank Act. Senior SEC staff 

members have also had several meetings with DOL staff to discuss 

the interplay between the fiduciary standard under ERISA (both 

existing and proposed) and the rules applicable to broker-dealers 

regulated by the SEC. 

Based on my interaction with the SEC staff, I believe that they 

recognize the concerns alluded to in your question regarding the 

possible impact of different standards. The staff informs me that 

they intend to continue to consult with DOL staff to avoid potentially conflicting standards. I believe deeply in cooperation between 

regulators and support Chairman Schapiro’s efforts to continue coordination and consultation between the SEC and DOL. Based on 

the information I have received from the staff, the extent of the 

consultation between the SEC and DOL appears appropriate and 

productive. I have asked the SEC staff to continue this consultative 

process. 

Q.4. On May 25, 2011, the Commission adopted final rules to create a whistleblower program that rewards individuals who provide 

the agency with high-quality tips that lead to successful enforcement actions, pursuant to Dodd-Frank. The program was designed 

to help the SEC by identifying wrongdoers and providing evidence. 

Would you support the robust implementation of the Dodd-Frank 

whistleblower program consistent with Congressional intent? 

A.4. Too often, we see frauds revealed only after the money is gone 

and investors are tragically harmed. In an attempt to systematically combat this, Congress mandated that the SEC promulgate 

rules so that whistleblowers would serve as an early warning system to detect fraud. The goal of the whistleblower program is to 

create a system that incentivizes individuals to come forward with 

high quality information to help the Commission expose fraud. 

These are critically important goals, and I support robust implementation of the Dodd-Frank Act’s whistleblower program to support Congressional intent. 

Q.5. Public Company Accounting Oversight Board Chairman James 

Doty at the recent SEC and Financial Reporting Institute Conference on June 2 gave a speech entitled ‘‘Rethinking the Relevance, Credibility and Transparency of Audits.’’ In it, Chairman 

Doty described an agenda for the PCAOB to work with the SEC, 

investors, auditors, preparers, audit committee members, scholars 

and other interested parties to analyze the structural foundation 

for auditing with a view to enhancing the relevance, credibility and 

transparency of the audit. He cited topics for possible inquiry, including cultural impediments to auditor independence and skepticism, the auditor’s reporting model, enhancing audit committees’ 

understanding of the PCAOB inspection process, and audit transparency. Would you support these goals and such analysis by the 

PCAOB? 

A.5. The PCAOB is a vital institution, one that is able to have a 

significant positive effect on investor protection and audit quality. 

The SEC has an important responsibility to select the members of 

the Board, approve PCAOB rules, and generally to engage in oversight of the PCAOB. I believe that it is critical for the SEC and 

PCAOB to work together for the good of the public. 
29 

I believe the goals outlined by Chairman Doty are important, and 

I will support his efforts to carefully analyze how best to accomplish them. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 

FROM LUIS A. AGUILAR 

Q.1. There have been a number of recent high-profile criminal 

cases concerning insider trading. As we see in the recent cases, 

there appears to be an evolution of insider trading from one-off opportunists to more sophisticated networks and structuring to obtain 

nonpublic information. How has insider trading changed over recent years? Do these changes require changes at the SEC? Please 

explain in detail. 

A.1. A longstanding goal of SEC law enforcement has been to deter 

market participants from unfairly exploiting informational advantages. As evidenced by recent insider trading cases, some wrongdoers have expended significant efforts to obtain material nonpublic information and avoid detection of their unlawful trading. 

The Galleon and Cutillo cases, in which the SEC charged more 

than a dozen hedge fund managers, lawyers, and investment professionals, in two overlapping serial insider trading rings, clearly 

indicate that insider trading remains an issue. These cases collectively constituted one of the largest insider trading prosecutions in 

Commission history. Moreover, on Monday, June 20, a defendant in 

the first expert network case was convicted for selling inside information about multiple companies to hedge fund traders. As your 

question notes, these are not one-off opportunists. 

While these cases were successful, they highlight changes in the 

nature of insider trading schemes. These schemes appear to be 

more lucrative than a single episode, can result in a pattern of activity, and may involve persons who traditionally were considered 

gatekeepers, such as lawyers. The SEC’s response to these new 

schemes should include tailored investigative techniques. In addition, the elements of any response should include (i) better market 

data and (ii) better analysis of that data. 

The SEC has taken some steps to develop better market data 

and data analysis. These have already paid dividends and computer analysis of trading records has helped the SEC to bring 

charges in complex insider trading schemes, such as the recent actions against Matthew H. Kluger and Garrett D. Bauer. 

However, there is much more that is possible with regard to 

technology and data analytics. Chairman Schapiro and I have 

championed rules that would require standardized market data 

across a fragmented market structure, and that would permit SEC 

investigators to track a securities transaction from the original 

order through execution and settlement. This is often referred to as 

a consolidated audit trail. I also support efforts to establish a stateof-the-art IT forensic lab within the Division of Enforcement. 

Q.2. What is your view concerning the imposition of corporate penalties by the SEC? 

A.2. As the Commission has said, corporate penalties are an essential part of an aggressive and comprehensive program to enforce 
30 

the Federal securities laws, and the availability of a corporate penalty, as one of a range of remedies, contributes to the Commission’s 

ability to achieve an appropriate level of deterrence through its decision in a particular case. 

Q.3. What should be the top five priorities of the SEC? Please explain in detail? 

A.3. The SEC has an essential responsibility to oversee the U.S. 

capital markets, and maintain their preeminence. Accomplishing 

this goal requires the SEC to focus on many things. Of these, I believe the top five priorities at this time are: 

• The SEC must maximize its resources, improve its use of technology, and work toward reforming the agency to support its 

mission. In particular, the SEC must continue to ensure that 

its enforcement and examination programs are effective. It is 

vital for the protection of investors and the maintenance of 

market confidence that the SEC hold wrongdoers accountable, 

and return stolen money to those who have been harmed. 

• Continue and complete the implementation of the Dodd-Frank 

Act’s rulemaking directives to accomplish the goals Congress 

intended. I believe the SEC should continue to implement the 

Dodd-Frank Act’s provisions in a measured, thoughtful way 

that improves the strength of the financial system and quality 

of the capital markets. 

• Establish required investor initiatives. It is essential that the 

SEC have investors at the forefront of its mind. Congress 

agreed, and the Dodd-Frank Act requires, the implementation 

of two initiatives to accomplish this goal: (1) establishing an 

Investor Advisory Committee; and (2) creating the Office of the 

Investor Advocate. I believe it is important to expeditiously reestablish the Investor Advisory Committee, which the SEC had 

established in 2009. In addition, I would like to see the prompt 

establishment of the Office of the Investor Advocate. 

• Strengthen our oversight and understanding of the markets, 

and work toward preventing market breaks like May 6th from 

occurring again. The SEC must continue to strive to address 

the problems manifested in the May 6th market break. In addition, the SEC should adopt a consolidated audit trail to enable it to comprehensively monitor trading activity and perform meaningful market surveillance for suspicious activity. 

• Recruit and retain a high quality, diverse, and motivated workforce, dedicated to serving the public interest. The SEC can 

and must do a better job of recruiting and retaining a diverse, 

knowledgeable workforce, who are committed to fulfilling the 

Commission’s mission—protecting investors, maintaining fair 

and orderly markets, and facilitating capital formation. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR HAGAN 

FROM LUIS A. AGUILAR 

Q.1. Mr. Aguilar, In March Federal financial regulators published 

a proposed rule that would implement Section 956 of the DoddFrank Act. Section 956 requires regulators to issue rules that pro-
31 

hibit ‘‘covered financial institutions’’ from entering into incentivebased compensation arrangements that encourage inappropriate 

risks. 

‘‘Covered financial institutions’’ are defined to include investment 

advisers that have $1 billion or more in total consolidated assets. 

The proposed rule seems to ignore assets under management and 

leverage employed by institutions. 

It would seem to me that an asset manager’s consolidated assets 

could be minimal relative to its assets under management and 

more importantly, to the leverage it employs. Wouldn’t you agree? 

A.1. Section 956 of the Dodd-Frank Act requires the SEC and six 

other Federal agencies to engage in rulemaking regarding the incentive-based compensation of ‘‘covered financial institutions.’’ As 

you note, the joint proposal by Federal agencies defines ‘‘covered financial institutions’’ in a way that includes investment advisers 

that have $1 billion or more in total consolidated assets. 

As a general rule, asset managers do not consolidate the assets 

and liabilities of a managed fund. As a result, it is true that an 

asset manager’s consolidated assets can be small relative to the assets held by funds that are under management, and relative to the 

leverage of such funds. 

Q.2. In that case, if one of the reasons for the standard under Section 956 is to avoid compensation arrangements that could lead to 

material financial loss to the institution, shouldn’t some consideration be given to assets under management or leverage when defining covered financial institutions? 

A.2. Earlier this year, after extensive inter-agency discussions, the 

Commission, the Board of Governors of the Federal Reserve, the 

FDIC, the Office of Comptroller of the Currency, the National 

Credit Union Administration, the Office of Thrift Supervision, and 

the Federal Housing Finance Agency (the ‘‘Agencies’’) jointly proposed rules pursuant to section 956 of the Dodd-Frank Act, which 

concern incentive-based compensation arrangements at financial 

institutions with assets of $1 billion or more. 

The Agencies sought to propose a rule that could be applied consistently to the different categories of entities that might be ‘‘covered financial institutions’’—depository institutions and their holding companies, credit unions, broker-dealers, investment advisers, 

Fannie Mae, Freddie Mac, and any other financial institution that 

the Agencies, by rule, determine should be included. The proposal 

measures ‘‘total consolidated assets’’ by the financial institutions’ 

own balance sheets (as reported to their regulators), thus drawing 

a distinction between an institution’s own assets and the assets it 

has under management. Nonetheless, the proposing release reflects 

awareness that it may be appropriate to consider a different measure for investment advisers, and it specifically solicits public comment on the issue. The release states, ‘‘Commenters are asked to 

provide additional comments on the proposed method of determining asset size for investment advisers, and specifically to address whether the determination of total assets should be further 

tailored for certain types of advisers, such as advisers to hedge 

funds or private equity funds, and if so, why and in what manner.’’ 
32 

1 The CFTC published its proposed rules regarding Business Conduct Standards for Swap 

Dealers and Major Swap Participants with Counterparties on December 22, 2010. 75 FR 80638 

(Dec. 22, 2010), available at http://cftc.gov/ucm/groups/public/@lrfederalregister/documents/ 

file/2010-31588a.pdf. In response, the CFTC received a number of comments relevant to the 

SEC’s consideration of its own rulemaking regarding business conduct standards pursuant to 

the Dodd-Frank Act. 

As the Commission considers adopting final rules jointly with the 

other Agencies, I will carefully consider this issue and any comments we receive on the subject. 

Q.3. Mr. Aguilar, during your testimony before the Committee you 

offered to follow up on certain questions about the coordination between the SEC and the Department of Labor with respect to the 

Department of Labor’s proposed rule on Fiduciary Duty. 

I understand that you have not yet been briefed on the nature 

of those discussions, but would like to understand better what coordination is taking place. In particular, at what level have these 

conversations taken place? What has been the nature of the coordination? Do you feel that the Department of Labor has engaged the 

SEC actively, adequately and appropriately on this rule writing, 

which I think has wide ranging implications for securities markets? 

A.3. Having consulted with SEC staff, I can confirm that there 

have been several formal meetings, as well as numerous telephone 

calls and other informal communications, between senior staff 

members of the SEC, the Department of Labor (DOL), and, in some 

cases, the Commodity Futures Trading Commission (CFTC).1 Senior SEC staff members participating in these discussions have included the Chief Counsel and Associate Director of the Division of 

Investment Management, and the Acting Co-Chief Counsel of the 

Division of Trading and Markets. Senior members of the SEC, 

CFTC, and DOL have also participated in joint briefings with Congressional staff on these issues. SEC staff members attended the 

hearings held by the DOL on March 1 and 2, 2011, to hear the concerns raised by affected parties, and they continue to consult with 

DOL and CFTC staff on these matters. 

The consultations with DOL staff have included discussions of 

the potential overlap between the DOL’s proposed rule amending 

the definition of ‘‘fiduciary’’ under ERISA and the SEC’s pending 

rulemaking relating to business conduct rules applicable to security-based swap dealers and major security-based swap participants under Title VII of the Dodd-Frank Act. Based on my interaction with the SEC staff, I believe that they recognize the concerns, to which you alluded during the hearing, regarding the possible impact of differences between business conduct obligations imposed by the Dodd-Frank Act and the proposed revised definition 

of ‘‘fiduciary’’ under ERISA. The staff informs me that they intend 

to continue to consult with DOL staff to avoid potentially conflicting standards. 

Senior SEC staff members have also had several meetings with 

DOL staff to discuss the interplay between the fiduciary standard 

under ERISA (both existing and proposed) and the rules applicable 

to broker-dealers regulated by the SEC. As you know, market participants have expressed concern about being a fiduciary under 

ERISA when they offer securities to Individual Retirement Account 

customers. 
33 

Based on the information I have received from the staff, the extent of the consultation between the SEC and DOL appears appropriate and productive. I have asked the SEC staff to continue this 

consultative process. 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM DANIEL M. GALLAGHER, JR. 

Q.1. What is your view of the changes the SEC has made to improve enforcement of the securities laws in the wake of the Madoff 

and Stanford Ponzi schemes? How would you work to support or 

enhance the effectiveness of SEC enforcement in the future? 

A.1. I support strong and vigorous enforcement of the Federal securities laws and support changes at the Commission to achieve that 

goal. The Commission has already made several changes in response to the Madoff and Stanford Ponzi schemes. The Commission 

has promulgated rules designed to improve the protection of investor assets in the custody of financial professionals. The Office of 

Compliance, Inspections and Examinations has revamped its examinations of investment advisers and broker-dealers to include a 

focus on asset verification and other important areas of customer 

protection. The Enforcement Division has restructured and devoted 

more resources to its tips and complaints processes, including the 

creation of a new Office of Market Intelligence. 

If confirmed, I will actively work to support the effectiveness of 

the Division of Enforcement. I will regularly interact with the Enforcement staff at all levels so that I am aware of the needs of the 

Division, and I will work to maintain and enhance the esprit de 

corps in the Division. I will also focus on ensuring that the SEC 

is appropriately engaged with other law enforcement agencies, and 

that SEC enforcement resources are being focused and used to 

maximum advantage. 

Q.2. The Dodd-Frank Act includes over 100 rulemaking provisions 

applicable to the SEC. This is a large undertaking and a tremendous responsibility. What is your opinion of the progress of these 

rulemakings? Will you commit to promulgating rules that are consistent with the letter and spirit of the Dodd-Frank Act? 

A.2. The Dodd-Frank Act has mandated a rulemaking agenda that 

is more extensive than at any other time in the SEC’s history. 

Looking in from the outside, I believe the SEC is making good 

progress in proposing and adopting Dodd-Frank related rules in a 

timely manner. I understand that some deadlines will not be met, 

but I believe this is understandable given the large number of rules 

and the complexity and importance of many of the rules. If confirmed, I will be committed to promulgating Dodd-Frank related 

rules in accordance with the statutory mandates. 

Q.3. The Department of Labor has proposed amendments to ERISA 

that would expand the activities subject to a fiduciary duty under 

ERISA. On May 3, 2011, I co-signed a letter authored by HELP 

Committee Chairman Harkin sent to the SEC, DOL and CFTC 

about the importance of working together on this issue to avoid disruption. On June 6, 2011, Chairman Schapiro responded, stating 

that the SEC staff has been meeting with and the SEC is com-
34 

mitted to coordinating with DOL ‘‘to prevent potentially conflicting 

standards while recognizing the different mandates of the statutes 

that each agency administers.’’ Would you support the Chairman’s 

efforts and support coordination by the SEC and DOL on these 

matters? 

A.3. Yes. If confirmed, I will strive to ensure that the SEC and 

DOL are working together on these critically important initiatives. 

It is of the utmost importance to investors—especially those who 

are saving for retirement—that the SEC and DOL ensure that the 

rulemakings work appropriately together, and are rolled out in a 

way that allows for proper implementation and investor education 

and protection. 

Q.4. On May 25, 2011, the Commission adopted final rules to create a whistleblower program that rewards individuals who provide 

the agency with high-quality tips that lead to successful enforcement actions, pursuant to Dodd-Frank. The program was designed 

to help the SEC by identifying wrongdoers and providing evidence. 

Would you support the robust implementation of the Dodd-Frank 

whistleblower program consistent with Congressional intent? 

A.4. If confirmed, I will be duty-bound to follow Congressional 

mandates with respect to the whistleblower provision and the rest 

of the Dodd-Frank rulemakings. 

Q.5. Public Company Accounting Oversight Board Chairman James 

Doty at the recent SEC and Financial Reporting Institute Conference on June 2 gave a speech entitled ‘‘Rethinking the Relevance, Credibility and Transparency of Audits.’’ In it, Chairman 

Doty described an agenda for the PCAOB to work with the SEC, 

investors, auditors, preparers, audit committee members, scholars 

and other interested parties to analyze the structural foundation 

for auditing with a view to enhancing the relevance, credibility and 

transparency of the audit. He cited topics for possible inquiry, including cultural impediments to auditor independence and skepticism, the auditor’s reporting model, enhancing audit committees’ 

understanding of the PCAOB inspection process, and audit transparency. Would you support these goals and such analysis by the 

PCAOB? 

A.5. I believe that auditors play a critical role in our capital markets, and it is imperative that investors have confidence in the 

independence and competence of auditors. If confirmed, I would 

look forward to working with the PCAOB on all matters. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 

FROM DANIEL M. GALLAGHER, JR. 

Q.1. There have been a number of recent high-profile criminal 

cases concerning insider trading. As we see in the recent cases, 

there appears to be an evolution of insider trading from one-off opportunists to more sophisticated networks and structuring to obtain 

nonpublic information. How has insider trading changed over recent years? Do these changes require changes at the SEC? Please 

explain in detail. Would the practice of granting stock options in 

advance of the announcement of good news, or so-called ‘‘spring- 
35 

loading’’ of stock options, constitute insider trading? Why or why 

not? 

A.1. The SEC enforcement program must keep pace with changes 

in the securities markets. While the tools of insider trading have 

evolved since the infamous scandals of the 1980s, such as the use 

of foreign accounts, Internet trading, emails, and instant messages 

instead of phone calls and faxes, the complexity of some schemes 

remains unchanged. I believe that the SEC has the appropriate 

legal remedies available to investigate and bring insider trading 

cases. If confirmed, I would work to ensure that the Enforcement 

staff has the appropriate technological resources, including surveillance tools, to discover suspicious trading patterns and to pursue 

insider trading cases. 

With respect to the options grant question, I believe that this 

issue arose in connection with the options backdating investigations in 2006. There was an argument advanced that the practice 

of granting options ahead of the public disclosure of good news 

could constitute insider trading because a board would be approving grants while in possession of material nonpublic information. 

The countervailing argument was that such a situation would not 

give rise to insider trading liability because both parties to the 

transaction, the employee and the corporation acting through the 

board, would be fully informed of the relevant information and the 

board should be acting in the best interests of the corporation and 

the shareholders. I do not believe a court addressed this issue 

under the Federal securities laws. I understand both sides of this 

debate, and I believe that the facts and circumstances of a particular case would dictate whether there is insider trading or some 

other basis for liability. Putting aside the insider trading analysis, 

I believe that companies employing this practice should fully and 

fairly disclose to investors that options may be granted in this 

manner. 

Q.2.a. Several articles and critics have asserted that then-Chairman Christopher Cox engineered procedural and tactical changes 

to reduce the SEC’s enforcement division’s power. Specifically, critics point to control of the Commission’s calendar to delay and water 

down enforcement cases, reduction in the staff’s ability to negotiate 

individual and corporate civil monetary penalties, and shifting priorities away from larger public companies to petty-fraud cases. 

During your tenure with Chairman Cox, what was your role in 

managing the Commission’s Enforcement calendar? 

A.2.a. One of my duties when I was counsel to Chairman Cox was 

to work with the Division of Enforcement (and other Divisions or 

Offices as necessary), the Secretary’s Office, and the Commissioners’ offices to finalize a roster of enforcement recommendations 

that had been prepared by the Secretary’s Office for the weekly 

closed meetings held by the Commission. We would also decide 

whether some recommendations could be sent to the Commission 

for consideration on a seriatim basis, thereby allowing more room 

on the weekly closed meeting roster for pressing or complicated recommendations. The primary goal of this process was to maximize 

the amount of recommendations considered by the Commission 

each week. 
36 

Q.2.b. How important is a robust enforcement division? 

A.2.b. As I stated in the confirmation hearing, I believe it is critically important for the SEC to have a robust Enforcement Division, 

and it is also important that investors and markets have confidence 

that the SEC is actively policing the markets. SEC Enforcement 

cases can and should have a deterrent effect, and deterrence is a 

significant part of the Commission’s effort to police the markets. 

The SEC Enforcement program is the most high profile aspect of 

the Commission’s work, and the effectiveness of the SEC is judged 

by investors and others in large part on the work of the Enforcement Division. If confirmed, I will actively support the work of the 

Division of Enforcement. 

Q.2.c. What is your opinion on the degree of independence that the 

SEC enforcement staff should have with respect to determining 

what matters to pursue and what recommendations to make to the 

Commission? 

A.2.c. I believe that the Enforcement staff is, and has traditionally 

been, very independent in determining what to investigate and 

what to recommend to the Commission. I also believe it is important for the Commission to play an active role in overseeing the 

work of the Division, to see that Staff has adequate support and 

resources, and to ensure that the Enforcement program is meeting 

the policy goals of the Commission. 

Q.2.d. If you were to become a Commissioner, what additional recommendations do you have for improving enforcement at the SEC? 

A.2.d. Chairman Schapiro and Enforcement Director Khuzami 

have implemented several important changes in the Division of Enforcement over the last 2 years. I believe that the impact of these 

changes has not yet been fully realized, and if confirmed I will 

study the effectiveness of the changes and the potential for further 

enhancements and refinements. One thing I would focus on in particular is the use of technology by the Enforcement Staff, whether 

the technology is sufficient, and what additional technological resources are needed. 

Q.3. What is your view concerning the imposition of corporate penalties by the SEC? 

A.3. Civil monetary penalties are part of the SEC’s enforcement arsenal and should be used in appropriate cases, including enforcement cases brought against corporations. Corporate penalties can 

be an effective tool for the SEC to remediate securities law violations, particularly when they are returned to harmed investors 

through the Commission’s Fair Funds authority, and to deter 

wrongdoing. At the same time, a corporate penalty should not be 

used in a way to harm the investors and shareholders the SEC’s 

enforcement program should protect and who have already been 

harmed by the conduct. 

In 2006, a unanimous Commission adopted a policy statement regarding the imposition of corporate penalties. The Commission policy statement analyzed and attempted to implement the guidance 

provided by the Committee on Banking, Housing, and Urban Affairs in a report that accompanied the statute providing for the 

SEC’s penalty authority in 1990. The Committee’s report noted, 
37 

among other things, that shareholders could be harmed by a corporate penalty unless the shareholders received an improper benefit from the company’s securities law violation. The Committee report also recognized that corporate penalties can have a deterrent 

effect on would-be violators of the securities laws. 

Q.4. In 2007, the Commission endorsed the concept of ‘‘scheme liability,’’ which considered the ability of shareholders to sue third 

parties for another company’s fraud. What is your view of scheme 

liability? Please explain in detail. 

A.4. The ‘‘scheme liability’’ theory is the private liability corollary 

of the SEC’s aiding and abetting authority. Congress expressly 

gave the SEC authority to bring aiding and abetting actions, but 

did not provide for a private right of action for the same activity. 

Questions about scheme liability have arisen in private securities 

cases based on an implied right of action under section 10(b) of the 

Exchange Act and Rule 10b–5. Congress and the courts have been 

the principal architects of the scope of that implied right of action, 

and the Supreme Court rejected the scheme liability theory in the 

2008 Stoneridge case. I believe it is important for the SEC to exercise its statutory aiding and abetting authority, when appropriate, 

to address activity that supports securities laws violations. 

Q.5. The SEC staff from time to time issue interpretive guidance 

in the form of Staff Accounting Bulletins (SABs) or Staff Legal Bulletins (SLABs). In your opinion, what is the role of ‘‘Staff Accounting Bulletins’’ or ‘‘Staff Legal Bulletins’’? What weight do they 

have? Do you agree with this role? Why or why not? 

A.5. Although I have not worked with SABs or SLABs on a regular 

basis, my understanding is that both types of bulletins are meant 

to provide guidance to corporate filers regarding the content of filings made with the Commission. The bulletins are issued by the 

Staff, not the Commission, and they appear to be issued infrequently. The Staff makes it clear in these bulletins that the guidance is not official Commission policy such as a rule or formal 

Commission interpretation. 

I believe it is very useful for registrants and others to have timely staff level guidance on issues that are new or unclear, including 

the guidance relating to accounting practices that is included in 

SABs and SLABs. I also believe that the Staff is cognizant of when 

legal or policy issues are important enough to warrant Commission 

level approval, and that the Staff will elevate those issues to the 

Commission. 

Q.6. What should be the top five priorities of the agency? Please 

explain in detail? 

A.6. On a macro level, I believe that the SEC needs to continue to 

focus on having the most effective enforcement program possible, 

and to study, monitor, and take action on issues of systemic risk 

posed by the markets and market participants overseen by the 

agency. With respect to examples of specific issues of priority, I believe that the following issues, which I address in no particular 

order of importance, are currently important to the SEC: 
38 

A. Dodd-Frank Act implementation. 

It is important that the SEC and other agencies meet the mandates Congress established in the Dodd-Frank Act, while at the 

same time striving to promulgate rules that do not have negative 

unintended consequences. If confirmed, I would look forward to 

helping the SEC meet these very difficult goals. 

B. Market Structure/May 6 Initiatives 

The SEC has taken several important steps to address the ‘‘flash 

crash’’ of May 6, 2010. And before the flash crash, the agency was 

very active in the market structure area. For example, the SEC 

proposed a very important concept release on market structure 

issues in early 2010 that garnered much public comment. I believe 

it is important for the SEC to study these issues carefully and to 

receive appropriate public comment as the proper functioning of 

the equity markets is crucial for U.S. investors. 

C. Credit rating agency oversight 

Since Congress gave the SEC statutory authority to oversee certain rating agencies in 2006, the agency has been very active in 

processing registrations and promulgating rules in this area. And 

with the increased authority and other mandates in the DoddFrank Act, the SEC will continue to focus on the proper oversight 

of credit rating agencies over the next several years. Given the important role that rating agencies play in the U.S. capital markets, 

and the problems with certain rating agency activities that 

emerged during the financial crisis, this is an area that will require 

careful attention by the Commission. 

D. Organizational Issues 

As described in the Boston Consulting Group’s SEC Organizational Study and Reform report that was mandated in the DoddFrank Act, there are numerous operational issues that the agency 

needs to address. It is imperative that the SEC be incredibly efficient so as to maximize the resources allocated to it by Congress, 

and to ensure that investors are protected. An obvious area of focus 

(as indicated in the BCG report) should be the agency’s technology 

resources. The SEC cannot be fully effective if its technology is 

vastly inferior to that of the markets and market participants it is 

charged withoverseeing. 

E. Fixed Income Markets Oversight 

The SEC has become very active with respect to the oversight of 

municipal markets over the last few years. I believe that the Commission should be studying in detail these and other fixed income 

markets to better understand how they operate, and whether the 

protections that are in place for investors are adequate. At a time 

when the Commission is examining the equities markets at a micro 

level and beginning to oversee certain aspects of the credit markets, the SEC should also devote resources to fixed income market 

oversight as all of these markets are interconnected and vital to 

the health of our economy. 

Based on the lessons learned from the events of the last several 

years, I assume that the SEC will need to focus on other new and 
39 

pressing issues, perhaps even in the near term. The securities markets are dynamic and constantly evolving, and issues will undoubtedly arise that will take priority over those listed above. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR HAGAN 

FROM DANIEL M. GALLAGHER, JR. 

Q.1. Mr. Gallagher, In March Federal financial regulators published a proposed rule that would implement Section 956 of the 

Dodd-Frank Act. Section 956 requires regulators to issue rules that 

prohibit ‘‘covered financial institutions’’ from entering into incentive-based compensation arrangements that encourage inappropriate risks. 

‘‘Covered financial institutions’’ are defined to include investment 

advisers that have $1 billion or more in total consolidated assets. 

The proposed rule seems to ignore assets under management and 

leverage employed by institutions. 

It would seem to me that an asset manager’s consolidated assets 

could be minimal relative to its assets under management and 

more importantly, to the leverage it employs. Wouldn’t you agree? 

A.1. I agree that an asset manager’s consolidated assets could be 

much smaller than its assets under management. Whether a manager’s Consolidated assets could be minimal relative to the leverage 

it employs would depend, I believe, on the nature of the investment 

strategies—which would include the use of leverage—employed by 

the asset manager. 

Q.2. In that case, if one of the reasons for the standard under Section 956 is to avoid compensation arrangements that could lead to 

material financial loss to the institution, shouldn’t some consideration be given to assets under management or leverage when defining covered financial institutions? 

A.2. Because this is a pending rulemaking, I do not believe it 

would be appropriate for me to express a view at this time. If confirmed, however, you have my commitment that I will study and 

seek to fully understand this issue and will work to ensure that the 

final rule is designed to accomplish the statutory purpose. 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM ANTHONY D’AGOSTINO 

Q.1. The recent failure of Madoff has diminished the SIPC fund. 

What is your view of the adequacy of the fund? If confirmed, how 

would you recommend that the SIPC oversee the adequacy of the 

fund in the future? 

A.1. The SIPC Fund has been well managed and adequately funded since its inception. 

The Madoff fraud is an example of a ‘‘Black Swan’’ event that 

would test the adequacy of virtually any investor protection program. 

With hindsight as my guide, I believe the fund should now be expanded to a level that will better prepare SIPC for similar outlier 

events in the future. 
40 

If confirmed, I would recommend that the current assessment 

rate be maintained until such a time as the fund is adequately 

funded to address future outlier events. 

The Board will need to work with Congress to determine what 

the appropriate funding level might be going forward. Recent decisions by the Securities and Exchange Commission indicate they are 

taking a more expansive view of the protection than has historically been provided by SIPC. In that regard, the starting point for 

the appropriate funding level is a clear understanding of what is, 

and what is not, protected under the SIPC statute. 

Q.2. I understand that certain conflicts of interest may exist in connection with you serving on the SIPC Board and that you have 

agreed to recuse yourself on certain SIPC matters. Please describe 

the conflicts and the scope of your recusals. 

A.2. By statute, ‘‘ . . . three such directors shall be selected from 

among persons who are associated, with, and representative of different aspects of, the securities industry.’’ 

I am qualified for the Board because I am an employee of UBS 

Securities, UBS, like every large financial institution has transactions that were in some way connected to Madoff and/or Lehman. 

Because of the scope of the Madoff fraud and the size of Lehman 

Brothers, it would be nearly impossible to find a qualified Board 

member that came from a firm that did not have some connection 

to Madoff and/or Lehman. I believe that large firm representation 

on the SIPC Board is particularly important at this time. Under 

Dodd-Frank, Congress has created a new scheme for the resolution 

of systemically important firms, including securities broker-dealers, 

in which SIPC have a role. I believe that my position at UBS 

makes me particularly qualified to offer guidance, knowledge, and 

experience as the resolution program is developed and put into 

place. 

When discussions arise and when decisions are required about 

issues that may affect UBS, I will seek and follow the advice of 

SIPC counsel and recuse myself from discussions and decisions as 

appropriately advised. 

As reference, a departing member of the Board, Mark Shelton, is 

employed by UBS and also recused himself on Lehman matters because UBS was/is involved in LBI claims trading and litigation 

with the LBI trustee. 

RESPONSE TO WRITTEN QUESTION OF SENATOR REED 

FROM ANTHONY D’AGOSTINO 

Q.1. What should be the top five priorities of SIPC? Please explain 

in detail? 

A.1. —In light of the recent SEC direction regarding the Stanford 

fraud, we need to take a hard look at revising SIPA, and make appropriate recommendations to Congress on how to update the Act. 

SIPC needs an updated, clear statutory mandate of the extent of 

protection under the statute. 

—An adequate fund to carry out a revised statutory mandate. 

—Adequate staffing and technology at SIPC to implement the 

mandate. 
41 

—Education of the public investor regarding the extent and level 

of protection provided by SIPC. 

—Ensure that SIPA is properly aligned with the risks associated 

with modern-day sophisticated markets and securities investment 

products. 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM GREGORY S. KARAWAN 

Q.1. The recent failure of Madoff has diminished the SIPC fund. 

What is your view of the adequacy of the fund? If confirmed, how 

would you recommend that the SIPC oversee the adequacy of the 

fund in the future? 

A.1. From my experience being on the senior leadership team of a 

large financial services company, I am very familiar with issues 

such as reserve adequacy, surplus capital, and funding sources. I’m 

also aware that assessing such issues requires a detailed review of 

relevant data and metrics in order to form reliable, well informed 

opinions. Assessing reserve adequacy, or, by analogy, the adequacy 

of the SIPC fund, is not something I would be comfortable ‘‘ballparking’’. I would want detailed data, metrics and analyses to inform an opinion on funding adequacy. At a minimum, I would like 

to see, for example, historical data on fund adequacy, the average 

size of investor accounts, the trend in terms of account-size growth, 

the average investor loss in a broker-dealer liquidation, the average SIPC covered loss in a broker-dealer liquidation, the trend in 

terms of growth of these data points, and perhaps a stochastic 

analysis of fund adequacy given the likelihood of events in the future. As of today, I do not have this type of information in order 

to assess the current adequacy of the SIPC fund. If confirmed, however, I believe that such an analysis should be performed at least 

annually in order to oversee the adequacy of the fund, with perhaps a quarterly summary review to ensure that intervening 

events have not altered the view of fund adequacy. 

Q.2. I understand that certain conflicts of interest may exist in connection with you serving on the SIPC Board and that you have 

agreed to recuse yourself on certain SIPC matters. Please describe 

the conflicts and the scope of your recusals. 

A.2. My brother, Howard Karawan, suffered losses as a result of 

indirect investments with Bernard L. Madoff Investment Securities, LLC (‘‘Madoff’). My brother did not invest directly with 

Madoff, but rather through a feeder fund, and accordingly, he is 

not expected to receive any direct advances from SIPC. However, 

my brother did file a claim in the Madoff liquidation proceeding, 

and has objected to the trustee’s denial of the claim. The objection 

will likely be the subject of litigation in that proceeding. As a result, I may have a potential conflict of interest with respect to the 

Madoff proceeding. I will recuse myself from involvement in any 

issues giving rise to even the appearance of a potential conflict of 

interest in this regard. 

Additionally, I am currently employed by Genworth Financial, 

Inc., a financial services company, which includes a subsidiary that 

is a broker-dealer. As such, I am associated with and representa-
42 

tive of the securities industry. I also receive deferred compensation 

from General Electric Corporation (‘‘GE’’) and own shares in 

Citigroup Inc. (‘‘Citigroup’’), which have broker-dealer subsidiaries, 

and own life insurance through Metropolitan Life Insurance Company (‘‘MetLife’’), which has a broker-dealer affiliate. I do not believe that any of these associations present a conflict of interest 

with respect to my service on the SIPC Board of Directors if confirmed. However, if a specific situation arose, such as, for example, 

a potential liquidation of the Genworth Financial subsidiary 

broker-dealer, I would recuse myself from Board activities involving that situation. 

RESPONSE TO WRITTEN QUESTION OF SENATOR SHELBY 

FROM GREGORY S. KARAWAN 

Q.1. The Madoff liquidation is one of the biggest the Securities Investor Protection Corporation has ever handled. According to the 

Corporation’s annual report for 2009, the Madoff liquidation, together with the Lehman liquidation, ‘‘dominated SIPC’s agenda in 

a way that SIPC has never previously experienced in its 39-year 

history.’’ Issues related to Madoff will continue to occupy a substantial part of the Corporation’s agenda for some time. However, your 

confirmation papers note that, because of a conflict, you will have 

to recuse yourself from all matters relating to the Madoff liquidation. Is it true that you will have to recuse yourself from all 

Madoff-related issues? Won’t your recusal significantly reduce your 

utility as a Board member? 

A.1. Although the Madoff liquidation has dominated the SIPC 

Board’s agenda, I am advised that the amount of activity and time 

devoted to the Madoff liquidation is naturally trailing off since its 

peak in the 2009 timeframe. And, given recent events, the amount 

of time devoted to situations such as the Stanford liquidation is 

likely to significantly eclipse the time devoted to the Madoff liquidation. 

Additionally, the work of the modernization task force is being finalized, with the likely result that there will be a number of recommendations that will require analysis, discussion, and possibly 

implementation. That work is also likely to require significant devotion of Board member time and attention. 

I believe that my utility as a Board member may actually be 

greater in that we have existing Board members continuing to devote the necessary time and attention to the Madoff liquidation, a 

matter with which they have significant involvement and experience, while I could pick up a greater share of the laboring oar on 

these other significant, and important issues. 

RESPONSE TO WRITTEN QUESTION OF SENATOR REED FROM 

GREGORY S. KARAWAN 

Q.1. What should be the top five priorities of SIPC? Please explain 

in detail? 

A.1. As I alluded to in my testimony before the Committee, the 

complexity and sophistication of financial frauds are growing, financial markets are global, investment vehicles are evolving every 
43 

day, and technology is advancing rapidly. Without being steeped in 

the facts and details of what might presently be SIPC’s priorities, 

which might alter my view, the confluence of all these things would 

suggest to me that, amongst SIPC’s top priorities, should be the following: 

• The adequacy of the SIPC fund (for further detail, see my response to Question 1 from Chairman Johnson). 

• The adequacy of current SIPC protection limits. 

• Whether SIPC has all the necessary subject matter experts at 

the operational level to deal with these global and growing 

complex challenges. 

• Reviewing the work and recommendations of the modernization task force. I would include, as part of that work, reviewing 

whether legislation needs to be amended and updated to deal 

with the more sophisticated manner in which financial frauds 

are now taking place to help clarify which situations fall under 

SIPC coverage, and which do not. 

• Assessing and improving investor disclosure and education, 

and SIPC communication about the level, extent, and scope of 

SIPC protection. 
44 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD
45