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S. HRG. 112–301 

FINANCIAL SERVICES AND GENERAL GOVERNMENT 

APPROPRIATIONS FOR FISCAL YEAR 2012 

HEARINGS 

BEFORE A

SUBCOMMITTEE OF THE 

COMMITTEE ON APPROPRIATIONS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON

H.R. 2434/S. 1573 

AN ACT MAKING APPROPRIATIONS FOR FINANCIAL SERVICES AND 

GENERAL GOVERNMENT FOR THE FISCAL YEAR ENDING SEPTEMBER 

30, 2012, AND FOR OTHER PURPOSES 

Commodity Futures Trading Commission 

Department of the Treasury 

Securities and Exchange Commission 

Small Business Administration 

Printed for the use of the Committee on Appropriations 

( 

Available via the World Wide Web: http://www.gpo.gov/fdsys/browse/ 

committee.action?chamber=senate&committee=appropriations 
(II) 

COMMITTEE ON APPROPRIATIONS 

DANIEL K. INOUYE, Hawaii, Chairman 

PATRICK J. LEAHY, Vermont 

TOM HARKIN, Iowa 

BARBARA A. MIKULSKI, Maryland 

HERB KOHL, Wisconsin 

PATTY MURRAY, Washington 

DIANNE FEINSTEIN, California 

RICHARD J. DURBIN, Illinois 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

JACK REED, Rhode Island 

FRANK R. LAUTENBERG, New Jersey 

BEN NELSON, Nebraska 

MARK PRYOR, Arkansas 

JON TESTER, Montana 

SHERROD BROWN, Ohio 

THAD COCHRAN, Mississippi, Ranking 

MITCH MCCONNELL, Kentucky 

RICHARD C. SHELBY, Alabama 

KAY BAILEY HUTCHISON, Texas 

LAMAR ALEXANDER, Tennessee 

SUSAN COLLINS, Maine 

LISA MURKOWSKI, Alaska 

LINDSEY GRAHAM, South Carolina 

MARK KIRK, Illinois 

DANIEL COATS, Indiana 

ROY BLUNT, Missouri 

JERRY MORAN, Kansas 

JOHN HOEVEN, North Dakota 

RON JOHNSON, Wisconsin 

CHARLES J. HOUY, Staff Director 

BRUCE EVANS, Minority Staff Director 

SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT

RICHARD J. DURBIN, Illinois, Chairman 

FRANK R. LAUTENBERG, New Jersey 

BEN NELSON, Nebraska 

DANIEL K. INOUYE, Hawaii (ex officio) 

JERRY MORAN, Kansas 

MARK KIRK, Illinois 

THAD COCHRAN, Mississippi (ex officio) 

Professional Staff 

MARIANNE UPTON

DIANA GOURLAY HAMILTON

MELISSA ZIMMERMAN

DALE CABANISS (Minority) 

ELLEN BEARES (Minority) 

Administrative Support 

NORA MARTIN

LASHAWNDA SMITH (Minority) 
(III) 

C O N T E N T S 

TUESDAY, APRIL 5, 2011 

Page 

Department of the Treasury: Office of the Secretary ........................................... 1 

Material Submitted Subsequent to the Hearing ................................................... 41 

WEDNESDAY, MAY 4, 2011 

Commodity Futures Trading Commission ............................................................. 45 

Securities and Exchange Commission ................................................................... 61 

Material Submitted Subsequent to the Hearing ................................................... 121 

WEDNESDAY, MAY 25, 2011 

Small Business Administration .............................................................................. 125 

Department of the Treasury: Community Development Financial Institutions 

Fund ...................................................................................................................... 133 

Material Submitted Subsequent to the Hearing ................................................... 161 

WEDNESDAY, JUNE 8, 2011 

Department of the Treasury: Internal Revenue Service ...................................... 165 

(1) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2012 

TUESDAY, APRIL 5, 2011 

U.S. SENATE, 

SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS, 

Washington, DC. 

The subcommittee met at 10:10 a.m. in room SD–138, Dirksen 

Senate Office Building, Hon. Richard J. Durbin (chairman) presiding. 

Present: Senators Durbin, Lautenberg, Moran, and Kirk. 

DEPARTMENT OF THE TREASURY 

OFFICE OF THE SECRETARY

STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

Senator DURBIN. Good morning. I’m pleased to convene this hearing of the Appropriations Subcommittee on Financial Services and 

General Government, the first in a series of hearings we’re going 

to have this spring as we embark on the 2012 appropriations bills. 

I want to welcome my Ranking Member, Senator Jerry Moran of 

Kansas. Welcome in your new position here. 

Senator MORAN. Thank you. 

Senator DURBIN. I am looking forward to working with you. 

And, of course, my colleague from Illinois, Senator Mark Kirk— 

we’ve both worked together on many things. 

And let me start with an apology to the Secretary and to my colleagues, but it’s all the President’s fault. He decided, at the last 

minute, to call in the leaders, including Senator Reid, and I had 

the responsibility of opening the Senate. So, I apologize to all of 

those who are in attendance. 

Today, we’re going to examine the fiscal year 2012 funding request for the Department of the Treasury. While the Treasury programs funded in our appropriations bill include the Internal Revenue Service (IRS) and the Community Development Financial Institutions Fund (CDFI), we’re planning to look at those two agencies separately. We’ll save questions on those for focused hearings. 

The Treasury programs we’re going to talk about today are programs which deliver a generous return on investment to taxpayers. 

I’d like to illustrate a few examples. 
2 

Before any coalition planes were in the sky over Libya, the Department of the Treasury’s Office of Foreign Assets Control had 

frozen $32 billion in Libyan assets. That’s $32 billion that Muammar Gaddafi can’t use to pay mercenaries, gas up his tanks, or purchase weapons to kill his own people. 

The Treasury’s Financial Crimes Enforcement Network 

(FinCEN), tracks the financial paper trail when a criminal tries to 

steal your identity, cash out the equity in your home, or skim your 

credit card. And again, when that criminal tries to wire your 

money abroad, blow your money on blackjack, or even flee the 

country with a pocketful of diamonds, it’s the Treasury’s FinCEN 

that follows the money to make sure crime doesn’t pay for terrorists, financiers, organized crime, narcotics traffickers, Ponzi scheme 

operators, and loan modification scammers. 

The Treasury’s Financial Management Service ensures that Social Security payments make their way to seniors, that benefit payments make their way to our disabled veterans, and, as many of 

you may be looking forward to, that tax refunds make their way 

to taxpayers. 

The Treasury employs a professional cadre of staff who forecast 

economic indicators and analyze market conditions in order to monitor risk building up in our financial system and promote not just 

an economic recovery, but sustainable economic growth. 

The Treasury’s special inspector general (IG) for the Troubled 

Asset Relief Program (TARP) works diligently to root out fraud and 

abuse in that program and provide transparency. Last year alone, 

the IG saved $555 million in taxpayer dollars that would have otherwise been lost to fraud. The office continues to work, this year, 

on 153 criminal and civil investigations that they actively pursue. 

To continue all these activities in 2012, the Treasury requests 

spending authority of $1.39 billion. The request is actually a net 

decrease of $18 million, or 11⁄2 percent, compared to both the fiscal 

year 2010 enacted level and the fiscal year 2011 continuing resolution level that we’re currently operating under. 

I’m glad to see a restrained budget proposal, though I’m concerned about some of the proposed cuts. There are several that 

have come to my attention. The Treasury proposes to scale back 

local law enforcement access to data on suspicious financial transactions. There’s also a proposal to discontinue funding for law enforcement pursuing criminal activity related to alcohol and tobacco. 

We’ll discuss those today. 

In addition to these ongoing duties, the Treasury is shepherding 

the creation of the Bureau of Consumer Financial Protection 

(CFPB). For too long, consumers have struggled to navigate financial products fraught with hidden fees, bait and switch terms, and 

other complex features that even experts have difficulty understanding. The CFPB will operate with a simple mission: to empower consumers with the information they need to make financial 

decisions for themselves and their families. 

PREPARED STATEMENT

Since the day I introduced the first bill to create this bureau, 

Wall Street has fought it and tried to undermine it. In fact, with 

the help of some in the House, Wall Street is attempting to limit 
3 

spending by this Bureau to barely half of what it needs to get 

started. It’s not a surprise that Wall Street is balking at the CFPB 

starting up. Fully informed consumers will make markets more 

competitive, eliminating the ability of banks, lenders, and mortgage 

brokers to profit from sheer confusion. We’re going to work to make 

sure this agency has what it needs to start working for consumers 

from the start. 

I look forward to discussing these and other issues with the Secretary. 

And I now turn to my ranking member, Senator Moran, for any 

opening remarks. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR RICHARD J. DURBIN

Good morning. I am pleased to convene this hearing of the Appropriations Subcommittee on Financial Services and General Government, the first in a series of 

hearings I am planning this spring as we embark on developing our 2012 appropriations bill. 

I welcome my ranking member, Senator Jerry Moran, and other colleagues who 

have joined me on the dais today. I also welcome Treasury Secretary Timothy F. 

Geithner to the hearing. 

Today we will examine the fiscal year 2012 funding request for the Department 

of the Treasury. While the Treasury programs funded in our appropriations bill include the Internal Revenue Service (IRS) and the Community Development Financial Institutions (CDFI) Fund, we’re planning to look at these two agencies in depth 

in separate hearings scheduled over the next several weeks. We’ll save questions on 

the IRS and CDFI for those focused hearings. 

The Treasury programs we’ll examine today deliver a generous return on investment to taxpayers. I would like to illustrate a few examples of how Treasury programs provide taxpayers with the best bang for their buck. 

Before any coalition planes were in the sky over Libya, Treasury’s Office of Foreign Assets Control froze $32 billion in Libyan assets. That’s $32 billion that Muammar Gaddafi can not use to pay mercenaries, gas up his tanks, or purchase weapons 

to fight his own people. 

Treasury’s Financial Crimes Enforcement Network (FinCEN) tracks the financial 

paper trail when a criminal tries to steal your identity, cash out the equity in your 

home, or skim your credit card, and again when that criminal tries to wire your 

money abroad, blow your money on blackjack, or even flee the country with a pocket 

full of diamonds. It’s Treasury’s FinCEN that follows the money to make sure crime 

doesn’t pay for terrorist financiers, organized crime, narcotics traffickers, Ponzi 

scheme operators, and loan modification scammers. 

Treasury’s Financial Management Service ensures that Social Security payments 

make their way to our seniors, that benefit payments make their way to our disabled veterans, and—as many of you may be looking forward to—that tax refunds 

make their way to taxpayers. 

Treasury employs a professional cadre of staff who forecast economic indicators 

and analyze market conditions in order to monitor risks building up in our financial 

system and promote not just an economic recovery, but sustainable economic growth 

and global competitiveness. 

Treasury’s Special Inspector General for Troubled Asset Relief Program (TARP) 

works diligently to root out fraud and abuse in the TARP program and provides 

transparency of a complicated program. Last year alone, the inspector General 

saved $555 million in taxpayer dollars that would have otherwise been lost to fraud. 

The office continues its work this year with 153 criminal and civil investigations it 

is actively pursuing. 

Treasury’s Alcohol and Tobacco Tax and Trade Bureau collects more than $24 billion in taxes on alcohol and tobacco every year with a budget of just $103 million. 

The agency combats tax evasion, keeps illegal tobacco and alcohol products off the 

shelves, and ensures alcohol products are labeled properly and advertised appropriately. Every time you open a beer, a bottle of wine, or a bottle of spirits, you can 

trust the label because Treasury has ensured the safety of that product. 

To continue all of these activities in 2012, Treasury requests spending authority 

of $1.39 billion. The request is actually a net decrease of $18 million, or 1.5 percent, 
4 

compared to both the fiscal year 2010 enacted level and the fiscal year 2011 continuing resolution level we are currently operating under. 

While I’m glad to see a restrained budget proposal, I have some concerns about 

a few of the proposed cuts. Let me talk about a couple of them. Treasury proposes 

to scale back local law enforcement access to data on suspicious financial transactions. Treasury also proposes to discontinue funding for law enforcement pursuing 

criminal activity related to alcohol and tobacco. I look forward to discussing those 

proposals in more detail today. 

In addition to these ongoing duties, Treasury is shepherding the creation of the 

Consumer Financial Protection Bureau (CFPB), known as the CFPB. For too long, 

consumers have struggled to navigate financial products fraught with hidden fees, 

bait-and-switch terms, and other complex features that even experts have difficulty 

understanding. The CFPB will operate with a simple mission—to empower consumers with the information they need to make financial decisions for themselves 

and their families. 

Since the day I introduced the first bill to create such a bureau, Wall Street has 

fought to defeat and undermine it. In fact, with the House Republicans’ help, Wall 

Street is attempting to limit spending by that agency to just half of what it needs 

to get started. It’s not a surprise Wall Street is balking at the CFPB starting up— 

fully informed consumers will make markets more competitive, eliminating the ability of banks, lenders, and mortgage brokers to profit from sheer confusion. 

We’re going to work to make sure this agency has what it needs to start working 

for consumers right from the start. 

I look forward to discussing these and other issues with you. I now turn to my 

Ranking Member, Senator Moran, for any remarks that he would like to make. 

STATEMENT OF SENATOR JERRY MORAN

Senator MORAN. Mr. Chairman, thank you very much. 

Secretary Geithner, welcome. 

Today marks my first opportunity to sit in this new role as Ranking Member of the Financial Services and General Government 

Subcommittee, and I appreciate the opportunity to serve on the Appropriations Committee, particularly given its very important role 

in providing oversight over all discretionary spending. 

I look forward to working with you, Mr. Chairman, as we review 

this budget, and others, and make certain that our agencies have 

the opportunity to explain their story and we reach the right agreement in regard to spending levels. 

Mr. Secretary, you have many, many challenges, and your responsibilities are great, and they include, in my view, reinvigorating bank lending to consumers and small businesses, stabilizing 

the housing market, and encouraging sustainable economic growth. 

Most importantly, you must promote this economic growth at a 

time in which the long-term financial security of the United States 

is one that is burdened by unprecedented debt. 

Our country faces enormous fiscal challenges which, left unchecked, will have a disastrous impact upon the future of our Nation. For too long, members of both political parties have ignored 

this growing fiscal crisis and allowed our country to live well beyond its means. 

Americans are looking for leadership in Washington to confront 

the problems we face today and not to push them on to future generations. Oftentimes, the debate about Government spending is 

seen as a philosophical, academic, another political discussion, a 

partisan issue; but, in my view, the truth is that out-of-control borrowing and spending has very real consequences upon the everyday 

lives of Americans. We are facing a turning point in our country’s 

history and can no longer avoid these difficult decisions. 
5 

Mr. Secretary, I know that you’re fully aware of the crisis we are 

facing, and I hope that we can work together to right the ship. The 

Congress needs a partner in the administration if we are to enact 

any meaningful changes or reforms. 

In my remaining few moments, I want to address another problem hampering our economic recovery: the uncertainty coming out 

of Washington, DC. regarding bank regulations and bank regulators. You and I had a conversation about this at a joint hearing 

when I was a Member of the House. And unfortunately, I don’t 

think things have changed. We have reached a sad point in America when small-town banks are unwilling or unable to lend to 

small-town businesses. This sort of relationship banking played no 

role in the fiscal crisis we just experienced, and I feel strongly that, 

once we correct this trend, we will see a recovery take hold. 

I hear, from many Kansas bankers, that the most serious reason 

for their inability to lend to creditworthy borrowers in the community—in their community—is the fear of bank examiners’ unwarranted scrutiny and the increasing cost of unnecessary regulations. 

Time and time again, I hear from bankers, like I heard this morning, Ken Domer, of Spearville, Kansas, who, in his 30 years experience as a banker, has never experienced such an unprecedented examination process like what has been ongoing recently. I hope that 

you will work with me to find solutions to this circumstance. 

Finally, I am requesting your thoughts—Senator Durbin mentioned the CFPB—I intend to introduce legislation today that 

would reform the structure of the CFPB by subjecting it to an appropriations process and replacing the single-director structure 

with a five-person commission, similar to the Securities and Exchange Commission, Commodity Futures Trading Commission, and 

a host of other Federal agencies. While my concerns with DoddFrank extend beyond the structure of the CFPB, this legislation, I 

believe, is a good first step to making sure the Congress has the 

necessary oversight of such a powerful agency. 

Secretary Geithner, the Department of the Treasury plays an important role in managing the Federal Government’s finances and 

attempting to reinvigorate our economy, and I stand ready to work 

with you to address the challenges, and look forward to working 

with you and Senator Durbin and my other colleagues on this subcommittee to find common-sense solutions to address our mounting 

fiscal crisis. 

Senator MORAN. I thank the Chairman and welcome Secretary 

Geithner. 

Senator DURBIN. Thank you, Senator Moran. 

Mr. Secretary, you have the floor. 

SUMMARY STATEMENT OF HON. TIMOTHY F. GEITHNER

Secretary GEITHNER. Thank you, Chairman Durbin, Senator 

Moran, and members of the subcommittee. Thank you for letting 

me come up here today and talk to you. And I appreciate both your 

opening statements. 

We’re here to talk about the Treasury budget, which, at first 

glance, may not seem central to the broad questions we’re debating 

about how to strengthen the economy and restore fiscal sustain-
6 

ability. But, I want to spend a few minutes at the beginning just 

highlighting what’s at stake. 

As you know, the Treasury plays a key role in a range of important programs to help strengthen economic growth. We play a central role in designing and administering a powerful set of tax incentives to encourage business investment and capital spending, investment in small, high-growth, start-up companies, make it easier 

for families to afford college. We play a central role in the evolving 

debate about how to design a better means for financing infrastructure across the country, in setting up a series of very important 

programs to help facilitate small business lending and credit 

growth, the new market tax credit, the CDFI program. We play a 

very important role helping expand United States exports, not just 

through our work with China, to encourage them to appreciate 

their currency more rapidly, but broader efforts to help us to establish a more level playing field for American companies. Obviously, 

we’re playing a central role in helping repair the damage caused 

by the crisis to the housing market. And we’re working to design 

a better corporate tax system that can help strengthen incentives 

for investment in the United States. 

Second, beyond these broad questions about economic growth, of 

course, we’re playing a critical role in helping reform our national 

financial system. We chair the council established by the Congress 

for financial stability. We’re helping work to wind down the government-sponsored enterprises’ fixed housing finance system established by the CFPB, bring oversight to derivatives markets, all as 

part of a broad strategy working with countries around the world 

to make sure that U.S. firms face a level playing field as we 

strengthen these basic constraints on risk taking and leverage. 

The Treasury plays a key role, as the Chairman said, in help 

protecting our national security through administering our terrorist 

financing sanctions programs, not just with Iran and North Korea, 

but, as the Chairman said, most notably and recently, Libya. 

The Treasury, as you know, is responsible for raising the resources required to fund the obligations the Congress has established for the Government and for helping Americans meet their 

obligations as citizens. Every $1 we spend at the IRS helps generate nearly $5 in tax revenue. Every $1 we cut in enforcement 

through the IRS will increase our future budget deficits, add to our 

debt, and increase the risk that Americans who pay their taxes, 

pay more than their fair share of the burden. 

Now, we carry out these responsibilities with a very tight, efficient use of taxpayer resources, a very lean and talented, dedicated 

staff of professionals at the Treasury. You know, it’s a remarkable 

achievement that, in a $14 trillion economy at a time of severe economic and financial crisis, enormous economic challenges here and 

from around the world, that the entire main Treasury staff, what 

we call the departmental offices, is about the size of a tax department at one of America’s single iconic corporations. 

We play a lead role in the executive branch in helping find ways 

to save resources. Let me just cite two examples that are highlighted in my testimony. 

Within the Treasury, we’ve identified, in our last three budget 

requests, more than $1 billion in savings by consolidating functions 
7 

and helping bring the Government payment system into the modern era by shifting to electronic processing of payments, paperless 

transactions. And with very careful management of the emergency 

programs established by the Congress to resolve our financial crisis, we have helped save hundreds of billions of dollars of taxpayer 

resources through the careful management of those investments. 

As you know, our overall investments in the banking system alone 

are likely to generate a very substantial profit to the American taxpayer, estimated, today, in the range of $20 billion. 

Now, the President and the congressional leadership are meeting 

this morning on the budget for this year. Of course, we’re 6 months 

into the year now. House Republicans outlined, this morning, a 

proposed strategy for how we reduce our deficits over the long 

term. A group of bipartisan Senators are working hard to reach 

agreement on a comprehensive, multiyear set of reforms to put us 

on a path back to living within our means as a country. 

So, I want to just conclude by emphasizing how important it is 

that we reach a bipartisan agreement on how to restore fiscal sustainability by reducing spending where we can, but still investing 

in the types of reforms, like education, that are essential to our 

economic future, and by enabling us to meet our commitments to 

our seniors and those less fortunate Americans. 

The economy is healing, job creation is accelerating, businesses 

are investing, but we have a long way to go to heal the damage 

caused by this crisis, and we face enormous challenges, including 

from—countries new competitors around the world. So, I think all 

of us in Washington have a responsibility to demonstrate that we 

can solve these problems, not just talk about them. 

PREPARED STATEMENT

So, I look forward to working with you, and I appreciate very 

much your support for the exceptionally talented and professional 

staff of the Treasury that carry out such an enormously complicated set of responsibilities. 

[The statement follows:] 

PREPARED STATEMENT OF TIMOTHY F. GEITHNER

Chairman Durbin, Ranking Member Moran, members of the subcommittee, thank 

you for the opportunity to testify about the President’s fiscal year 2012 budget for 

the Department of the Treasury. 

The Congress has given the Treasury a very broad mission, with responsibilities 

that touch many aspects of the lives of Americans. 

The Treasury is responsible for raising the resources necessary to fund critical 

Government functions, from national defense to protecting national parks. As the 

Government’s financial manager, we process payments on a daily basis of almost 

$100 billion, including Social Security payments to 54 million Americans each 

month. We design and deliver tax credits to help support business investment and 

help families finance a college education. We design and enforce the financial sanctions necessary to prevent the spread of nuclear weapons and the finance of terrorism. 

The Treasury plays an important role in helping shape the President’s overall economic policies. Our lead policy responsibilities include tax policy, international economic policy, and the stability of the U.S. financial system, which is the focus of 

the recently established Financial Stability Oversight Council that I chair. 

Unlike most Federal agencies, the Treasury’s annually appropriated budget is 

about people more than programs, with most of the resources we seek from the Congress directed to supporting the talented public servants charged with these important economic and financial responsibilities. Salaries and operating costs make up 
8 

96 percent of our budget, and most of the rest is for investments in technology they 

require to function. 

In the President’s budget for fiscal year 2012, the administration requested slightly more than $14 billion, $13.3 billion of which is for the Internal Revenue Service 

(IRS). This request includes efficiency savings and program reductions across all 

Treasury bureaus, as well as a number of targeted investments to allow us to better 

address some of the most important economic challenges facing the United States. 

Let me begin by summarizing the core economic and financial priorities that 

shape this budget request. 

STRENGTHENING ECONOMIC GROWTH

As we work to strengthen the economy and help get more Americans back to 

work, we are responsible for a range of initiatives designed to help support business 

investment. 

As part of the Small Business Jobs Act of 2010, the Treasury is implementing two 

new programs—the Small Business Lending Fund and the State Small Business 

Credit Initiative—designed to improve access to capital for small businesses. 

We are working to encourage private sector investment in start-ups and small 

businesses operating in moderate and low-income communities through investments 

in the Community Development Financial Institutions Fund and the New Markets 

Tax Credit Program. 

ASSISTING HOMEOWNERS AND REPAIRING THE HOUSING MARKET

In the face of the worst housing crisis in a generation, the Treasury plays an important role in the Government’s programs to prevent avoidable foreclosures and 

support the continued repair of the housing market. 

The Treasury’s Home Affordable Modification Program (HAMP), which is one of 

several critical homeownership assistance programs under our Making Home Affordable initiative, has helped more than 630,000 families stay in their homes. By 

setting affordability standards and providing a framework for homeowner assistance 

that the private sector can follow, HAMP has also driven industry improvements 

that have resulted in 2 million additional modifications outside the program. We 

continue to refine and strengthen our housing programs and are taking additional 

steps to help ensure Americans are better served by their mortgage companies, including publishing a quarterly compliance scorecard for each of the 10 largest 

HAMP servicers and requiring all Making Home Affordable participating servicers 

to assign a single point of contact to each homeowner requesting a HAMP modification. 

Another key priority is comprehensive housing finance reform. In February, the 

administration laid out a plan to wind down Fannie Mae and Freddie Mac and reform our Nation’s housing finance system. We look forward to working with the 

Congress in the coming months to develop legislation that will help create a safer 

and more stable housing finance market. 

REPAIR AND REFORM OF THE FINANCIAL SYSTEM

Our programs to help strengthen and reform the financial system have made very 

substantial progress, but we still face a number of challenges ahead. 

The financial recovery bank programs under the investment portion of the Troubled Assets Relief Program (TARP) are now estimated to provide a substantial positive return to the taxpayer. On March 30, we announced that TARP’s bank programs officially turned a profit. Moving forward, we’re working to exit our remaining investments and continue recovering taxpayer dollars. Ultimately, we expect 

TARP’s bank programs will produce a lifetime profit of nearly $20 billion. 

We are also continuing to work in cooperation with the Federal Housing Finance 

Agency to protect taxpayers and reduce the ultimate cost of the Government’s support for the housing market through the Government Sponsored Enterprises (GSEs). 

In the President’s fiscal year 2012 budget, the net cost of rescuing Fannie Mae and 

Freddie Mac is projected to drop by 44 percent from $131 billion today to $73 billion 

over the next 10 years as those companies continue to pay back dividends on the 

Government’s investment. In fact, in each of the last two quarters, the net cost of 

the Government’s investment in Fannie Mae and Freddie Mac has declined, because 

those firms have paid more back in dividends than they have requested in new 

funding. 

We are helping shape the rules to implement the comprehensive reforms to the 

financial system passed by the Congress last year, including stronger protections for 

consumers and tougher limits on risk-taking by banks. These reforms will help 
9 

make our financial system more secure and protect the American taxpayer, but to 

be effective we need to fully fund their implementation and enforcement. 

TAX REFORM

The President has proposed to reform our corporate tax system to make America 

more competitive. 

We look forward to working with Members of Congress and the business community to design a comprehensive, revenue neutral reform of the corporate tax system 

that would lower tax rates, eliminate special tax breaks, and encourage investment 

in the United States. 

PROMOTING U.S. ECONOMIC AND NATIONAL SECURITY INTERESTS GLOBALLY

The Treasury plays a critical role in helping advance U.S. economic interests 

abroad and protecting against foreign threats to our economic and financial security. 

Our request sustains the Department’s investment in counterterrorism and financial 

crime programs. This includes funding for implementing targeted economic sanctions against foreign threats to the United States and stopping the flow of money 

to terrorist organizations and their support networks. 

IMPROVING THE EFFICIENCY OF GOVERNMENT SERVICES

As we pursue these core priorities, we are working to deliver savings, program 

reductions, and improvements in the overall efficiency of government. As a result 

of these savings, our budget requests for fiscal year 2012 in five accounts are below 

the fiscal year 2010 enacted levels, and in three accounts are below the fiscal year 

2008 enacted levels. 

Taxpayer Services and Tax Enforcement 

The customer service and enforcement programs at the IRS provide one of the 

best values in the Federal Government. Every $1 invested in IRS yields nearly $5 

in increased revenue from noncompliant taxpayers. The targeted investments in this 

budget request are expected to produce more than $1.3 billion in additional annual 

revenue once fully implemented in fiscal year 2014. 

In fiscal year 2010, the IRS enforcement efforts brought in $57.6 billion in additional tax revenues. This is a 53 percent increase in enforcement revenue since 2003 

and a clear example that the investment in the IRS over the past few years is producing significant returns. 

Over the last decade there have been nearly 4,500 changes to the tax law, providing IRS with a challenging and constantly changing business environment. Despite this fact, service levels have increased and each year the IRS has delivered 

a successful filing season. 

The IRS continues to implement information programs and online applications to 

help taxpayers find and understand information. Use of the popular IRS Web tool, 

‘‘Where’s My Refund.com’’ has nearly tripled since 2006 to 67 million users. This 

modernization has not only helped improve IRS’ daily interactions with taxpayers 

but has also provided the platform for significant productivity increases in IRS operations. 

Today, we receive nearly 100 million tax returns electronically each year. In the 

past these returns would have been opened, sorted, and transcribed manually. Last 

year, nearly 70 percent of individual tax returns were filed electronically compared 

to a mere 10 percent 15 years ago. The efficiency savings have allowed us to consolidate 10 submission processing sites into six and reduce the need for manual submission processing jobs. We will repurpose an additional processing site later this year. 

Our information technology modernization effort will decrease the time it takes 

to process and post-taxpayer information from 2 weeks to 1 day, allowing the IRS 

to issue faster refunds and customer service representatives to answer taxpayer 

questions based on more up-to-date information. 

The Treasury’s Electronic Payments Initiatives 

Modernizing processes and reducing waste are key components not only of the 

IRS portion of the Treasury’s budget but also of our overall efforts to make sure the 

Department operates more efficiently and effectively. 

The Treasury now makes 82 percent of its payments electronically. We are taking 

action to further increase electronic payments. Effective May 2011, all newly enrolled Federal beneficiaries will receive payments electronically. By March 2013, we 

plan to move all existing beneficiaries to electronic payment. 

Productivity increases have already allowed the Financial Management Service to 

repurpose the Austin, Texas payment center as a debt collection center. Debt collec-
10 

tion efforts last year alone totaled more than $4 billion, a 41 percent increase over 

fiscal year 2000. 

Automation of our debt financing functions has allowed the Bureau of Public Debt 

to decrease staffing by more than 20 percent over the last 5 years. Additionally, we 

transitioned to an entirely electronic process for issuing payroll savings bonds earlier this year. 

We are working to further automate debt financing. 

In early 2012, we will no longer issue over-the-counter paper savings bonds. Instead, we will focus on supporting electronic means to issue bonds to individuals, 

reducing the cost of staffing, postage, paper forms, and processing fees. 

Overall, these efforts to increase the Treasury’s paperless transactions with the 

public are expected to produce more than $500 million in cost savings and efficiencies over the next 5 years. These savings, which include reductions in personnel 

and facilities costs, will create a more efficient Department and allow us to increase 

the quality of the services we provide. 

Reducing Fraud and Improper Payments 

The Treasury will also expand upon and maintain the administration’s 

VerifyPayment.gov portal to prevent ineligible recipients from receiving payments 

from the Federal Government. The Treasury will also continue to improve the management of the delinquent debt portfolio by implementing reforms that will increase 

collection of delinquent tax and nontax debt, including child support, by more than 

$5 billion over the next 10 years. 

Overall Improvements in Efficiency 

The Treasury will cut the number of data centers we currently maintain by onethird by 2015, resulting in significant dollar and energy consumption savings. 

These overall savings build on substantial improvements over the last 2 years. 

The Treasury’s fiscal year 2009, fiscal year 2010, and fiscal year 2011 budgets collectively included a total of more than $1 billion in savings and offsets. The Treasury’s fiscal year 2012 budget alone identifies nearly $1 billion in savings, including 

$336 million in direct cost savings and efficiencies and $630 million in offsets primarily from assets seized as a result of violations of U.S. sanctions. 

These savings allow us to finance some very important investments. Any substantial cut to the IRS budget will hurt revenue collection and service to taxpayers, resulting in unanswered phone calls and letters. Cuts to the remaining Treasury responsibilities would weaken our ability to support reforms that are critical to economic recovery and repair of the financial system. Cuts to the Community Development Financial Institutions Fund program would limit our ability to attract private 

investment to communities hit hardest by the economic crisis. 

To carry out the Treasury’s responsibilities, we need to be able to retain and support the dedicated public servants that make up the career staff of the Treasury and 

its Bureaus. 

These are a very talented group of people, working extremely hard in the face of 

the most challenging economic and financial problems in many decades. They have 

played a vital role in helping restore economic growth and a measure of financial 

stability. 

I look forward to working with you to ensure we continue to attract and retain 

a diverse, highly skilled workforce that delivers enhanced results for the American 

public. 

Senator DURBIN. Thank you, Mr. Secretary. 

I’ve been notified by the staff that Senator Lautenberg has an 

opening statement. And I’ll extend the same courtesy to Senator 

Kirk, if he would like to make one. 

STATEMENT OF SENATOR FRANK R. LAUTENBERG

Senator LAUTENBERG. Thanks, Mr. Chairman. 

Little could be more important than to view where it is that we 

are and where it is we’re going. 

Welcome, Secretary Geithner. 

We learned, last week, that that the Nation’s jobless rate hit a 

2-year low in March, another sign that the economy is continuing 

its slow but steady recovery. 
11 

And if I may add a personal note here, the company I ran before 

I came here is the company that releases the labor statistics that 

we see, a company called ADP. Yesterday, I’ll take another moment 

of personal privilege—we said goodbye to my—to the founder of 

ADP—a partner, a humble man who worked very hard and created 

a company that today has 45,000 employees. We did it from nothing—nothing to help us along except our intelligence and our muscle. And I’m not sure that I provided much of the intelligence. 

Right now, we’ve got to help Americans get back to work. That’s 

got to be our top priority. And that’s why I was pleased to see 

President Obama’s budget call for critical investments we need to 

spark job creation. But, we can’t make those investments if we 

don’t start paying more attention to the revenue side in the Government’s ledger. I was a CEO for many years, and I know that 

you can’t run a company, or a country, without revenues. No matter how much you cut expenses, if you don’t increase the revenues, 

you’re headed for disaster. 

And that’s why I voted, last year, to end the Bush tax cuts for 

the top 2 percent of wage earners. Windfalls for the wealthy don’t 

create jobs, reduce the deficit, or help us invest in our future. And 

I urge President Obama to keep the commitment in his budget to 

let the Bush tax cuts for the wealthy expire at the end of 2012, because if the wealthiest among us don’t pay their fair share, we’ll 

be denying children and grandchildren the future that they deserve. 

The President’s budget also funds the landmark Wall Street reforms that we passed last year. This new law will protect our economy from the kind of meltdown we suffered through in 2008. And 

that’s why I’m deeply concerned that the Tea Party Republican 

plan to cut funding for reform is in place. If the Republicans—Tea 

Party Republicans succeed, Wall Street could return to its reckless 

ways, which will threaten our economic recovery and undermine 

our ability to create jobs. 

We also need to strengthen investment in our Nation’s infrastructure by repairing crumbling roads and bridges and building 

much needed new projects like high-speed rail. Construction of a 

21st century rail system will make it easier for people to get where 

they need to go, improve our environment, and spark job creation. 

President Obama has proposed creating an infrastructure bank 

to invest in products that will—projects that will get America moving. And I look forward to hearing your commentary, Mr. Secretary. 

I’m also eager to hear from the Secretary about how we can 

make taxes fairer, keep Wall Street in check, and accelerate our 

economic recovery. 

Senator LAUTENBERG. And I thank you, Mr. Chairman. 

Senator DURBIN. Thanks, Senator Lautenberg. 

Senator Kirk. 

Senator KIRK. No opening statement, thank you. 

Senator DURBIN. Thanks a lot, Senator Kirk. 

FINANCIAL MANAGEMENT DURING BUDGET UNCERTAINTY

Mr. Secretary, before we get to important policy and budget 

questions, I have to address the issue of crisis management. We 
12 

have been lurching from short-term continuing resolution to shortterm continuing resolution. And I would like to ask you if you 

would tell me what impact this has had on the management of 

your agency and operations. 

Second, we are now starting to have very active discussions 

among Senators about what to do if the Government shuts down 

after Friday—how many staff will still be around, whether anyone 

will answer the phones, whether there will be a skeletal staff or 

more. And I’d like to know what your preparations have been at 

the Department of the Treasury, and what services might be affected, from your Department, when it comes to that. 

The final question is larger than the first two, and that is: 

Around the corner is another looming crisis, which you spoke to 

yesterday, and that is the extension of the debt ceiling. Some Senators have already come to the floor and said, flat out, ‘‘We don’t 

care. We’re not going to vote for an extension of the debt ceiling.’’ 

Please tell us what the impact of failing to extend the debt ceiling 

would be on the American economy. 

Three very simple questions. 

Secretary GEITHNER. Mr. Chairman, thank you. Very consequential questions. 

The Office of Management and Budget (OMB) has been coordinating the work of the executive branch in preparing for a shutdown. I think the Director of the Office of Management and Budget, Jack Lew, sent to the agencies, yesterday, a set of detailed guidance for how they would manage through, what critical services 

they would have to retain, would be permitted, under the law, to 

retain, and which they could no longer function with. I just want 

to emphasize that, confidence is very important to economic recoveries. There are a lot of things happening in the world today that 

carry some risk to the global economy and financial system. It is 

very important that we in Washington demonstrate that we are 

going to be doing things that are going to help reinforce confidence, 

support recovery. And part of that requires making sure that Government can carry out its critical functions. And those functions 

would be impaired during a shutdown. 

We would be happy to brief your staff in more detail on exactly 

what would happen for the critical functions we’re responsible for 

at the Treasury, but let me just say, they’re very material. 

Now, you’re right, of course, to highlight the fact that to say it 

again, if we force the Government to live week by week now, more 

than 6 months into the fiscal year, we risk undermining the recovery now underway. And I think our first obligation to the American 

people, given the trauma still caused by this crisis and the depth 

of the damage we still face, is to make sure we’re doing everything 

we can to ensure that we’re reinforcing business confidence, helping get more Americans back to work, repairing the damage caused 

by the crisis—a shutdown will get in the way of that, of course. 

Now, you’re right to say that, in the next several weeks, the Congress will run out of room. Under the debt limit, it will be forced 

to raise the basic debt limit. You asked the question, ‘‘What happens if we do not? If the Congress does not raise the debt limit?’’ 

As I said in my recent letters, and as all my predecessors have 

said, the consequences of that would be catastrophic to the United 
13 

States. Default by the United States would precipitate a crisis 

worse than the one we just went through. I think it would make 

the crisis we went through look modest in comparison. It would 

force us, of course, to cut payments to military, cut critical payments to our seniors. And it would be a reckless, irresponsible act 

of this country. I find it inconceivable that the Congress would not 

act to increase the limit. 

I welcome that all the leaders of both parties, in both houses of 

Congress, have reaffirmed the importance of making sure that this 

country, the United States of America, will meet its obligations. Of 

course, that requires the Congress to act in a timely manner to increase the limit. 

If we take no additional actions, we face that—we run out of 

room on May 16. There are a series of measures my predecessors 

have used in the past, that the Congress has authorized, that 

would give the Congress a little bit more time, but those measures 

don’t buy us nearly as much time as they did in the past, because 

our debt and deficits are so large now. So, they will buy us an additional few weeks if the Congress doesn’t act. 

Now, of course, even resorting to those measures does create 

some risk of adding to uncertainty in the markets. So, you don’t— 

you’d rather us not do that. But, we’ll do everything we can to 

make sure that we meet our obligations, and, of course, encourage 

the Congress to act in a timely manner. 

DEBT CEILING AND ECONOMIC CONSEQUENCES

Senator DURBIN. Let me ask you this question, Mr. Secretary. 

The United States Dollar is viewed as the most credible global currency, and if we default and don’t extend our debt ceiling, what impact could this have on the reputation of the dollar and our economy? 

Secretary GEITHNER. Again, it would be catastrophic. If you call 

into question the willingness of the Government of the United 

States to meet its obligations, you will shake the basic foundations 

of the entire global financial system. It is inconceivable that America would do that. And I’m—of course, I’m totally confident that the 

Congress will act to avoid that. 

But, you know, again, to think about it in a direct sense, what 

it does is, it will raise, dramatically, the borrowing cost, permanently, for all Americans. Every business, for a very long period of 

time, would raise a much higher cost of borrowing. Every family 

would raise a higher cost of borrowing. Unemployment would rise 

dramatically. Thousands, if not hundreds of thousands, of businesses would fail. And, of course, you would shake the confidence 

of the world in U.S. financial assets and treasuries. It would be a 

deeply irresponsible act. Again, inconceivable. 

Senator DURBIN. Thank you. 

Senator Moran. 

Senator MORAN. Mr. Chairman, thank you. 

Mr. Secretary, I appreciate your exhortation about the necessity 

of raising the debt ceiling, and the consequences that you describe 

would occur. I also would welcome you and the administration raising the same kind of concerns in describing the scenario that will 

occur if we do not get our debt under control. There are con-
14 

sequences to the value of the dollar, to the standard of living, to 

inflation. And I very much, again, would encourage the administration to join with the Congress—Republicans and Democrats—to 

find a path toward a long, sustainable reduction in our national 

debt. There are bad consequences—you certainly described one scenario of events, but there’s another scenario that will come if we 

do not respond appropriately, responsibly, to the ever increasing 

debt. 

TAX REFORM AND CFPB FUNDING AND STRUCTURE

One of the things we can do, in addition to cutting spending, is 

to get a tax code in place that is fair, that treats American business 

and individual taxpayers in a way that makes sense in a global 

economy and, again, would—I’d be interested in hearing what the 

Treasury Department is doing in regard to the so called grand plan 

for tax reform, or major modifications in our tax code. 

I’m learning from Senator Durbin to ask all my questions at the 

very beginning, so that the clock is on your time, not mine. 

And finally, a much more specific one. I indicated, in my opening 

statement, that I’m introducing legislation today in regard to the 

board of the CFPB. And I’d like your view as to the appropriations 

process. You’re funding that—the Federal Reserve is funding that 

today. I’d like to see greater oversight by the Congress in regard 

to the appropriation process—a five-person commission or board, as 

compared to an individual. And then, perhaps most importantly, 

can you tell what the administration’s timeline is for submitting a 

nomination to the Senate for the person to head that bureau? 

Secretary GEITHNER. Excellent questions. Thank you for raising 

them. 

Of course, you’re absolutely right that it is critically important, 

as I said in my opening statement, that the Congress come together, on a bipartisan basis, and lock in a set of multiyear reforms 

that put us back on a path to living within our means as a country. 

That’s very important to future economic growth. There is no alternative to doing that. It’s very important. If we don’t do that, you’re 

right, you would put at risk future economic growth. And we need 

to come together. We can’t keep putting it off indefinitely. 

You have before you a—not just a process under way by a group 

of bipartisan Senators, but looking at a comprehensive plan that 

the fiscal commission which Senator Durbin served on, which is a 

very comprehensive, very balanced, reasonable starting point for 

discussion. You know, this is not beyond our capacity, as a country, 

to solve. In fact, if you look at how the world views the United 

States today, the world investors are very confident we’re going to 

solve this problem. But we have to earn that confidence. We have 

to justify that confidence. And that requires us acting. And you’re 

right to emphasize it. I completely agree with you. 

You asked about tax reform. I think it’s inevitable that the Congress and the administration come together and reform, comprehensively, the U.S. tax code, not just for individuals, but for corporations. You have a very compelling model for doing that, in the 

Commission’s proposal—a lot of merits in that basic approach, 

which is to broaden the base and use some of the savings from 

broadening the base to lower rates and lower future deficits. We 
15 

are—as I said in my opening statement, we are designing a corporate tax reform that’s comprehensive, that would lower the statutory corporate rate very substantially, and pay for that by reducing 

or eliminating a set of special preferences for individual industries 

and activities of the United States. We think that’s absolutely necessary to improve incentives for investment in the United States. 

And we’re hopeful that we’re going to be able to work with the Congress on doing that, perhaps ahead of the comprehensive reform of 

the individual code, which is likely to come—I think it’s going to 

have to come in the next few years. 

And again, that’s very important, because we want to do everything we can to make it more likely that American companies build 

their next plant in the United States and that foreign companies 

build their next plant here, too. And tax incentives are important 

to that. 

Senator MORAN. Mr. Secretary, in addition to the National Commission on Fiscal Responsibility and Reform, does the administration—is there a plan in the works on corporate tax? 

Secretary GEITHNER. Yes. We have been working on a comprehensive proposal to help get the process in the Congress moving. And we’ve been consulting closely with your colleagues on the 

tax-writing committees about how to design that, and with the 

business community. And I’m actually quite optimistic we’re going 

to be able to start that process with a very strong pro-investment, 

pro-growth, pro-competitiveness proposal. 

Now, it, of course, is going to have to be revenue neutral, given 

the broader fiscal challenges we face, but I think we can do that. 

Now, you raised a set of important questions about the CFPB. I 

can’t answer your last question, which is, ‘‘How soon are we going 

to nominate?’’ But, of course, it’s very important that we nominate 

and confirm a director, because the full authorities the Congress 

gave this bureau do not come into place until we have a confirmed 

director. Some happen in advance of a confirmed director, but not 

all. And so, obviously, we’d like to do that. We’re consulting with 

the Congress. We want to nominate somebody who can be confirmed. That is why it’s taking us a little bit of time. As you know, 

it’s been a challenge for us to find—to confirm a number of positions for important financial responsibilities. 

You said you were going to propose legislation to establish a different set of checks and balances on the bureau. And, of course, I 

understand that motivation. But, I believe, as you would suspect, 

that the Congress, having considered a range of alternative models, 

came up with a very good model that combines strong authority 

and independence with a set of very powerful checks and balances. 

The most powerful of those in this structure are that the decisions 

of this bureau are subject to review and approval by the Council 

of Financial Supervisors and Regulators that the Congress established. That creates, in some ways, a stronger set of checks and 

balances than I think exists for many other financial regulators, 

independent or not; and I think the Congress got that balance 

right. 

Again, of course, if you look at what happened in our country in 

this crisis, you saw really appalling, unforgivable failures in consumer protection. It is very important that we fix that. And I think 
16 

the Congress, you know, thinking about it for a long time, a lot of 

difficult debates, came up with a good balance. 

Senator MORAN. If I could follow up, Mr. Chairman? Thank you. 

Can you think of any downside to not having a director confirmed by the operation date in July? Is that— 

Secretary GEITHNER. Absolutely. You know, what happens at 

what we call the transfer date, which is a date where the authority 

that exists among existing Federal agencies for consumer protection is transferred to this new bureau. You know, that responsibility is shared among, I think, seven different Federal agencies. 

So, we’re going to centralize that, consolidate that. But, there are 

other authorities to write rules that only take effect when there’s 

a confirmed director. 

And now let me tell you about the consequences of that delay. 

I think one of the biggest problems we had in our system was, we 

held banks to a set of standards, no similar standards established 

for entities that provide consumer finance, lent to individuals without protection. So, what happened over time is, a lot of that basic 

business of consumer finance moved outside the banking system to 

nonbank financial institutions that were not supervised adequately. 

And that created, of course, appalling vulnerability to fraud and 

predation for individuals, but it also created this huge unfairness 

for banks— for community banks, as well. So, one of the most important things the Congress did is to say, ‘‘We’re going to establish 

a level playing field across banks and nonbanks so that the business can’t just shift to where there’s no regulation. And if we delay, 

we starve funding or delay full powers for the agency, then you’re 

going to be putting banks at a disadvantage again. And they’re 

going to face again the possibility of having that business competed 

away by entities that aren’t subject to oversight and supervision. 

So, that would be an unfortunate consequence of delay. 

Senator DURBIN. Senator Lautenberg. 

Senator LAUTENBERG. Thanks, Mr. Chairman. 

ECONOMIC CONSEQUENCES OF A GOVERNMENT SHUTDOWN

Mr. Secretary, might a consequence of a shutdown result in an 

inflationary reaction? 

Secretary GEITHNER. I think that’s an excellent question. And I 

don’t think I would frame that as the most significant risk. I think 

the most significant risk is that you leave entities that are doing 

vital things, not just supporting Americans in combat, not just 

making payments to seniors, providing benefit checks that Americans depend on for their living, processing tax returns—you put 

those things at risk. The risk is, for a long period of time, you create uncertainty, and that could slow momentum of recovery. So, I 

would think—not about a risk that we accelerate inflation so much 

as what we do is, we take a little bit of the momentum, the wind, 

out of the recovery, and therefore slow the pace of getting more 

Americans back to work. 

BUSH’S TAX CUTS

Senator LAUTENBERG. House Republicans claim that cutting programs like Head Start and medical research is going to solve the 

deficit problem. But, they refuse to look at the revenue side of 
17 

things. I mentioned that earlier. And how important is it to, for instance, let the Bush tax cuts for the wealthy expire at the end of 

next year to help to eliminate the budget deficit? 

Secretary GEITHNER. It’s critically important. I’ll give you an example of how to—if the Congress extends those tax cuts that go to 

2 percent of the most fortunate Americans in the country, we have 

to go borrow $1 trillion over 10 years. It’s those, plus the estate tax 

exemptions. We cannot afford to do that. It is not a responsible act 

of Government, of asking my successors to go out and borrow $1 

trillion over 10 years to finance tax cuts for the richest 2 percent 

of Americans. We cannot afford it. There’s no credible case for 

doing it. 

And you cannot restore fiscal sustainability—you cannot restore 

a modicum of balance to our fiscal position and still preserve our 

capacity to invest in things critical to U.S. economic growth and 

critical to our commitments to our seniors if you sustain those tax 

cuts that we cannot afford. 

FUNDING FOR WALL STREET REFORM

Senator LAUTENBERG. The administration’s budget calls for increased funding for agencies implementing the Wall Street reform 

law. House Republicans failed in their attempts to block this historic law. So, they proposed, instead, to cut the funding for these 

agencies. In your capacity—you’re head of the Financial Stability 

Oversight Council—what effect might these proposed cuts have on 

Wall Street reforms and our ability to prevent another financial 

crisis? 

Secretary GEITHNER. Well, I think you said it right. Those—the 

cuts are designed to starve those agencies of the ability—deny 

them the ability to enforce a set of basic, sensible protections for 

consumers and investors. And if they were passed, they will have 

that effect. 

I’m confident they won’t pass, because we think it would be irresponsible to pass them. But, if they did pass—become law—they 

would have that effect of depriving us of the ability to fix what we 

got so devastatingly wrong, at enormous cost to the American people, a financial crisis, you know, without recent precedent, enormous damage to the country. And so, I think it’s very important 

the Congress equip the executive branch and the regulatory agencies with the resources and the people we need to enforce those 

basic, sensible rules of the game. 

SANCTIONS ON LIBYA

Senator LAUTENBERG. Mr. Secretary, yesterday you lifted the 

sanctions against former Libyan Foreign Minister Moussa Koussa, 

a man who’s been linked to numerous terrorist attacks, including 

Pan Am 103, which killed 270 people, 189 of whom were Americans. In your consultation with Secretary Clinton regarding lifting 

these sanctions, did you discuss what other levers might be available to be sure that he’s held accountable for these crimes? 

Secretary GEITHNER. I know my colleagues in the national security community have discussed that, and I’d be happy to talk to 

them, pass on your concern and question, and ask them to come 

talk to you about how we can be responsive to your concern. 
18 

DEFICIT REDUCTION

Senator LAUTENBERG. What would the estimate be of the revenues needed to help us stabilize things and continue looking to improvements in our economy? 

Secretary GEITHNER. Well, the central question we face is how to 

get the deficits down to a level where we put our national debt, as 

a share of the economy, on a declining path. You have to first stabilize it at an acceptable level, and then you have to start to reduce 

it. And that requires we get our fiscal deficits down to a level below 

3 percent of the gross domestic product. That’s a level at which our 

revenues and our commitments, apart from interest, are in balance. 

Now, to do that—we proposed, in our budget, a way to do that. 

You have, in the Commission proposal, a more ambitious way to do 

that. But, that provides—both those examples provide a package a 

balanced package of tax reforms and reductions in spending and 

our commitments that would achieve that measure of balance without putting at risk future economic growth, without causing material damage to the economy. Those are things we can—changes we 

can afford to make, changes that we can accept. And both those examples give you a measure of what you want to do to make sure 

you have a balanced package. 

Again, the challenge is not to just reduce the deficit. The challenge is to do it in a way that doesn’t hurt future economic growth 

and hurt investment in the United States, is fair to the American 

people—judged as fair as—the American people. And that requires 

you do it in a balanced, comprehensive way. I think it’s within our 

capacity to do, as a Nation. I think this is something we should 

make sure we let Americans know, because they’re uncertain about 

this, that this is something we can do at acceptable costs, with time 

for people to adjust. 

Senator LAUTENBERG. Well said, Mr. Secretary. Thank you. 

Senator DURBIN. Senator Kirk. 

Senator KIRK. Thank you. 

FUNDING FOR TREASURY’S INTERNATIONAL PROGRAMS

I want to turn to your budget request. You requested a 4 percent 

increase. And a couple of accounts stood out. There’s a request for 

$3.4 billion for the Treasury international programs, which was a 

58 percent increase more than fiscal year 2011. And then food security accounts was a 1,027 percent increase request in your budget. 

And debt relief was a 336 percent increase in your budget. Can you 

review, quickly? 

Secretary GEITHNER. Absolutely. You know, usually I testify separately on the international piece of our budget. The Treasury 

piece of the—what’s called the foreign assistance budget is about 

5 percent of the total foreign assistance budget. And our piece, the 

piece we’re responsible for, is for funding the institutions, like the 

World Bank, the international financial institutions. And in those 

institutions, we get enormous leverage for every $1 of taxpayer resources. 

The specific request you refer to includes a variety of commitments that the Government of the United States made in the past, 

under Republican and Democratic administrations, and a set of 
19 

new commitments targeted in areas where we think there’s the 

highest return to our basic national security and economic interests. 

I’ll give you an example. In food security, what we’ve proposed 

to do is to help seed a multilateral fund to help support improvements in agricultural productivity and investment in developing 

countries, because, of course, the enormous challenges of poverty in 

those countries. But, that’s also an example where there’s a very 

high return to American technology and American innovation, because we’re the most productive farmers in the world. 

I’d be happy to talk in more detail to you and your staff about 

that. But, it’s worth noting, we’re 5 percent of the foreign assistance budget, but our resources in that 5 percent leverage multiple 

dollars, both by bringing other people to the table and borrowing. 

And so, the total resources that 5 percent supports is more than 

one-and-a-half times the entire 150 account budget. 

So, as we figure out how we reduce spending and reduce our deficits—and we’re going to have to reduce spending—we want to 

make sure we’re preserving things where we have the biggest bang 

for the buck, the biggest improvement, the biggest return on the 

marginal dollar taxpayer resources. And that’s what our request 

provides. 

Senator KIRK. I’m worried—we have appropriated money that 

apparently is going directly to the Islamic Republic of Iran under 

your administration, meaning that the Treasury Department manages our relationship with the International Bank for Reconstruction and Development (IBRD), International Finance Corporation 

(IFC), and Multilateral Investment Guarantee Agency (MIGA). The 

IBRD has a $344 million unexpended balance to Iran. Since we 

own 16.8 percent of the bank, that’s 58 million United States dollars that would be provided to Iran. The IFC—$17 million, since 

we own 24 percent. That’s 4 million U.S. dollars from the taxpayer. 

The MIGA are going to provide $127 million to Iran. We own 18.5 

percent of that. It’s a total of $85 million, direct from the U.S. taxpayer. And I understand these payments are made directly to the 

Finance Ministry of the Islamic Republic of Iran. Is that about 

right? 

Secretary GEITHNER. Senator, you and I are in the same exact 

place in this, we oppose lending by the World Bank and its entities 

to Iran. We have opposed them for a long period of time. And the 

last loans that were approved by the World Bank board were approved in 2005. 

Senator KIRK. I guess what I’m talking about is, you haven’t cut 

these checks yet, but you’re about to. 

Secretary GEITHNER. Well, I’m not sure which checks you’re referring to. Again, there—— 

Senator KIRK. These are 2005 loans—— 

Secretary GEITHNER. Yes, 2005 loans. That’s the last time the 

World Bank approved a loan. We opposed—— 

Senator KIRK. Yes. 

Secretary GEITHNER [continuing]. That loan then—— 

Senator KIRK. No, but I what I’m saying is—— 

Secretary GEITHNER [continuing]. And fought against it over that 

period of time, and, of course, as you know, working very, very 
20 

hard to dramatically tighten the financial sanctions on Iran 

now—— 

Senator KIRK. Yes. 

Secretary GEITHNER [continuing]. With substantial success. 

Senator KIRK. Let me just say, you do not have substantial success. I have written you a classified annex, and I hope you read it, 

a very—before you testify again, on this subject, I hope you read 

that very carefully. 

Secretary GEITHNER. Of course I would. And again, I’d be 

happy—I know that you—I know you care a lot about these issues, 

as we do. And I’d be happy to talk to you in more detail about it. 

But, I will say again that the financial sanctions programs that my 

colleagues have helped us design, in cooperation with the national 

security community, have resulted in a dramatic, incredibly powerful tightening of the basic economic sanctions on the Government 

of Iran. 

Senator KIRK. With all—— 

Secretary GEITHNER. It’s very important we do that. 

Senator KIRK. With all due respect—— 

Secretary GEITHNER [continuing]. And we will continue—— 

Senator KIRK. I urge you——— 

Secretary GEITHNER [continuing]. To look for ways to tighten it 

further. 

Senator KIRK. Before you testify before the Congress again and 

make a statement like that, I would absolutely urge you to review 

the record. 

Secretary GEITHNER. And again—and we’re happy to work with 

you and your colleagues in ways to go further. And we—of course, 

this job requires a relentless focus, because, when we tighten something here, what happens is, over time, unless you stay on it, it— 

the stuff will shift gradually; people get around it. So, it requires 

relentless focus. Happy to talk to you in more detail about it. 

FEDERAL DEBT AND ECONOMIC CRISIS

Senator KIRK. In March, the U.S. Government raised a net of 

$128 billion and it spent a net of $1.05 trillion, meaning your 

spending-to-raising ratio was—you spent $8 for every $1 that you 

raised. You covered it by borrowing $786 billion and reducing your 

cash balance $72 billion, to an ending balance, for the U.S. Government, of $118 billion in the bank. Is that your estimate of how your 

March went? 

Secretary GEITHNER. Well, I’d have to check those numbers. But, 

keep going. Go ahead. I’ll be happy to—— 

Senator KIRK. So, Erskine Bowles, yesterday, testified before the 

House that we are facing the most predictable economic crisis in 

history. Would you agree with him? 

Secretary GEITHNER. I agree that our long-term fiscal challenges 

are an imperative for the country to solve, as I said before, in response to Senator Moran’s questions. And I agree it’s very important we do it. Of course, we have lots of other challenges, too. Our 

challenge is how to—it’s to do that in a way that doesn’t hurt the 

recovery, hurt the economy, hurt our long-term strength and competitiveness. 
21 

Senator KIRK. I’ll ask the last question. If you were the Chinese, 

would you lend us another trillion? 

Secretary GEITHNER. Of course. Let me just repeat something I 

said before. The world still views the United States and the American political system as up to the challenge of delivering reforms 

that make our economy stronger and our fiscal position more sustainable. If you look at what we pay to borrow today, there’s still 

enormous confidence around the world in the capacity of this political system, people in Washington, coming together and solving 

these problems, because we’ve always done it in the past. But, we 

have to earn that confidence every day. And that’s why these efforts underway, including the ones that Senator Durbin was part 

of in the Fiscal Commission, are so important. And it’s important, 

again, that the Congress find a way to come together and lock in 

comprehensive restraints that reduce those long-term deficits. It’s 

completely within our capacity to do, and we have to make sure we 

justify that confidence that you see in markets every day now. 

Senator KIRK. Thank you, Mr. Chairman. 

Senator DURBIN. Thank you, Senator. 

WALL STREET REFORM

Mr. Secretary, before joining the administration, you were in 

New York, at the Federal Reserve, and in the eye of the storm as 

this recession came upon us. You witnessed, and participated in, 

discussions that led to an effort to save financial institutions from 

ruin. And I think, by most standards, the fact that the money has 

been repaid to our Government—the TARP money—with interest, 

in most instances, is an indication of recovery among those financial institutions. 

The purpose of Wall Street reform was to make certain we never 

had to walk that road again. We had to make sure that we put in 

place oversight and regulation so that the excesses which led to our 

recession were not repeated. 

Since passage of that legislation, there has been a steady effort 

by Wall Street to undo that Wall Street reform. We’ve seen it in 

many aspects. I’m not going to raise the issue, but I’m battling an 

issue over interchange fees, you may have heard of. And clearly, 

when it comes to the consumer financial responsibility effort, there 

is an effort to slow down that implementation, or stop it. 

As you step back and look at the banking industry, from the 

darkest days, beginning this recession, until today, I see profit reports which suggest that most are doing quite well. Is there any 

indication that you can point to of weakness in our financial institutions that has been brought on by too much Government regulation and oversight? 

Secretary GEITHNER. Let me say a few things in response to that. 

I think the U.S. financial system, as a whole, is in a dramatically 

stronger position today than it was in the years running up to the 

crisis, not just from the depths of the crisis, but relative to where 

it was before the crisis. There’s much more capital in the banking 

system, much less leverage. The weakest parts of the system have 

been washed away by the crisis, appropriately so. And I think what 

we have left is much stronger. 
22 

The challenges we face in the financial system today are—as 

Senator Moran referred to, is, community banks across the country, 

who got themselves too exposed to commercial real estate are still 

facing a lot of challenges. And that’s hurting their small business 

customers. And, as you know, the housing finance market is still 

deeply damaged, really at the early stage of—just the beginning of 

repairing that basic challenge. So, we’ve got a lot of challenge to 

go. 

But, I believe these reforms are absolutely essential to the basic 

health of the American private sector, are absolutely essential to 

credibility of the American financial system, globally, when we ask 

people to invest in the United States, absolutely essential to the 

ability of this financial system to take the savings of Americans 

and channel them to people that have an idea and want to build 

a growing company. And we have to make sure that we meet the 

basic challenge of the legislation in designing sensible rules. They 

have to have a balance. You know, they have to preserve competition, some measure of efficiency, a loss of dynamism, innovation. 

But, we have to do a dramatically better job of protecting the economy, protecting the innocent, protecting investors and consumers 

from the kind of abuses we felt. 

And I think our biggest challenges now are to make sure those 

reforms get designed well, they’re allowed to take effect, they’re administered by people who have the resources and the independence 

and the authority to carry out those responsibilities, not subject to 

political influence. And we’re at the early stage of that process of 

implementation. 

FORECLOSURE CRISIS

Senator DURBIN. Mr. Secretary, yesterday I went to an opening 

of a housing project in Lawndale, which is on the west side of Chicago. Coincidentally, it was the same location where Dr. Martin 

Luther King stayed when he lived in Chicago for a short period of 

time. And they were quite proud of the fact that they have 45 

units. The CDFI had a lot to do with it. And as I went to this ribbon cutting, I drove through the neighborhood. And I will tell you 

that virtually every third home was boarded up with plywood, indicating it was in foreclosure and not currently occupied. It strikes 

me that this is still an unresolved issue—and you’ve alluded to it— 

about the value of real estate in America and our housing crisis. 

Can we really expect a solid recovery of this economy unless or 

until we mark-to-market and understand what the true value of 

real estate is? With so many Americans facing the prospect of being 

under water in their own personal debt on their homes, are we delaying the inevitable of facing a resolution of this crisis? 

Secretary GEITHNER. I don’t think so. It’s important that we not 

do that. I think you’re absolutely right to remind everybody that 

the housing market in the United States is still in crisis. It’s not 

just in California, Florida, Nevada, and Arizona, the states—most 

affected by the rise in prices and the collapse in prices of construction. But, it’s in cities across the country. And there are still millions more Americans at risk of losing their homes. 

There are two really important things that we have to do in the 

near term to reduce—to address that problem and help repair it. 
23 

One is, we have to get the economy stronger. Really the only way, 

and the most powerful way, to make sure that you bring the market back to a reasonable level, protect the value of people’s homes, 

reduce the risk of foreclosure, is to get more Americans back to 

work, make sure incomes are growing. Overwhelmingly, that’s 

going to dominate the outcomes. 

But, it’s also very important that we continue to make sure that 

we use all the tools we have to make sure that servicers and banks 

are giving people a chance to stay in their homes if they can afford 

to do that. Now, the programs we have, have reached millions of 

Americans, but there’s millions more at risk. And we want to make 

sure we do everything we can to make sure that, again, people who 

have—who, given a chance, can afford to stay in their home, have 

that basic chance. Doing those two things are important. 

But, again, the most important thing is to make sure everything 

we do is motivated today by the challenge of getting the economy 

stronger, more Americans back to work. That’s the best thing we 

can do for those communities still caught up in all the trauma. And 

it is going to take several more years, under the best of circumstances, to heal that pain, still. 

Senator DURBIN. I’m over time, but I’m just going to say, very 

briefly—2 years ago, I addressed the bankruptcy code as a way to 

have some reckoning in this process so that banks would know, if 

they were about to foreclose, or pushed forward foreclosure, leading 

to bankruptcy, that, ultimately, there would be a bankruptcy judge 

who would have the power to change the terms of the mortgage 

and keep the people in their homes. It was fought by the financial 

institutions. It wasn’t enthusiastically supported by the administration. And it failed. And here we are today in a situation where 

I cannot reconcile, in my mind, how a bank believes that foreclosing on a home, boarding it up, letting the weeds grow in the 

front yard and the vandals come in and rip out all the copper 

plumbing until it reaches the point that it becomes a burned out, 

hollow building and has to be torn down is in the best interest of 

the banks, let alone the country and the neighborhood. That, to me, 

is what’s happening over and over again. I lived through this in my 

hometown of East St. Louis, Illinois, and it looks like Dresden, 

after the bombing, for all the vacant land that’s there. And I’m seeing it happen in Chicago. I’m seeing it happen in King County, Illinois. And I see no end in sight. 

I know we’ve tried. I understand what you’re saying, ‘‘the overall 

economy is part of it,’’ but I don’t believe we have addressed the 

responsibility of the financial institutions in this situation. 

Secretary GEITHNER. I—well, I just want to associate myself with 

something very important in this context. You’ve said it for a long 

time—is that the servicers have done a really terrible job of helping 

fix and repair and heal and help people through a mess that they 

helped contribute to. And they are not putting enough resources in 

this effort. They are not doing a good enough job of helping homeowners navigate through a very complicated, difficult process. They 

have to do a better job. And, as you know, we’re involved in a series of efforts that try to bring more force to a more rapid resolution of those problems. 
24 

Senator DURBIN. I would say to you, in closing, Mr. Secretary, on 

this subject, we have given them a lot of carrots. It’s time to find 

a stick. 

Senator Moran. 

Senator MORAN. Mr. Chairman, thank you. 

BANKING REGULATIONS

Let me follow up on a topic that—a path you started down. 

When Senator Durbin describes that neighborhood with the 

boarded up houses, it brings me back to the value of community 

banking, in which I—just my commonsense human nature tells me 

there is a different reaction—if you’re the banker who is lending 

to the house down the street, down the road, you have a lot of care 

and compassion for your community, and you drive by that house 

every day; you’re going to have a response of trying to figure out, 

‘‘How do we get this house back in some owner’s hands?’’ And I— 

again, it gives me the opportunity to reiterate what I said in my 

opening statement, that—and the reason this—the real estate aspect of this is so prevalent in my mind is, I’ve had numerous bankers, a half a dozen, tell me that with new regulations, they no 

longer are making home loans. I think this is a terrible, sad circumstance, in our country, when your hometown banker says, ‘‘It’s 

no longer worth the regulatory cost, the fingerprinting of my employees, to make a loan to somebody who lives in our town.’’ 

In Kansas and much of Illinois, we have large rural communities—and we have large areas of rural communities in which our 

bankers know their community very well. And the idea that you 

can’t go to your hometown banker and get a home loan is trouble— 

is hugely troublesome to me. 

Also, a conversation I had with one of our regional bankers, who 

was telling me, for the first time in their bank’s history, instead 

of the bank—the regional bank calling a community bank, saying, 

‘‘We’re interested in buying your bank,’’ it’s now the community 

bankers who are calling the regional banks, saying, ‘‘I can’t afford 

this anymore.’’ The regulatory costs have to spread among such a 

large group of borrowers—a larger asset base, that we’re seeing, in 

my view, the demise of something that is very important to the life 

of a community; that’s the local financial institution. And while, if 

that occurs as a result of market forces, that’s one thing to me. 

But, if that occurs because we have an over-regulated lack-of-commonsense regulatory scheme, we ought to be able to fix that problem. 

Secretary GEITHNER. I agree with you. And let me just associate 

myself with your central point. One of the great strengths of this 

financial system is that we have not just some of the largest, 

strongest, most innovative global financial companies, but we have 

8,000 small community banks that provide a level of diversity, responsiveness, customer service care that is a huge asset for the 

country. And we want to make sure we do everything we can to 

sustain it. 

And I do not believe that is at risk in any meaningful sense. In 

fact, the financial reforms that the Congress passed went the extra 

mile to make sure that institutions that were not part of the problem, did not cause the problem, were not subject to a greater bur-
25 

den from these reforms. They’re largely protected from the additional regulations, which are really designed to get at the largest, 

most risky institutions and risky practices. 

Now, what—most of what you’re seeing happen in the community banks today is the result of the fact that a number of them— 

not all of them—got themselves too exposed to commercial real estate and risk. And what you saw—what you’ve seen is, bank examiners, who got a little bit caught by excess in parts of the country, 

as they do in every crisis, they’re over-correcting now. And the burden you hear banks across the country express concern about is the 

concern that examiners now are becoming too aggressive and making it harder for them to do things that are economically sensible 

loans to viable customers. And that’s a very important thing to try 

to counterbalance and resist. 

The Chairman of the Federal Reserve, the Chairman of the Federal Deposit Insurance Corporation, our bank supervisors, are 

aware of this problem and they have been working to try to mitigate it. They’re independent of the Treasury. I should say, I can’t 

control what they do in this context. But, I know they’re concerned 

about it, too. 

But, I hear what you hear, too, which is, across the country, community banks still say that ‘‘We’re getting a little bit too much heat 

from our examiners at a time when we want to increase lending.’’ 

And we want to make sure we can help counteract that. 

Now, the Congress did pass a very well-designed set of programs 

to help banks—community banks—get access to capital to help support lending and help give more resources to State small business 

credit programs across the country, which we’re doing. And that 

will help a little bit, too, because not all these banks can go out 

and raise capital now, even the ones that have viable businesses. 

And so, we think that’s a good, sensible response. 

But, I do agree with your concern. And I am, personally, completely committed to make sure that we preserve that great 

strength of diversity of a banking system that has thousands and 

thousands of small community banks operating on Main Streets, 

trying to do a better job and meet the needs of their customers. 

Senator MORAN. Well, I’m never quite certain as to whether— 

how much of the problem is additional regulation, how much of it 

is additional enforcement or—and, in part, is just the uncertainty 

of the enforcement: What is coming next? 

Secretary GEITHNER. Yes. 

Senator MORAN. So, there’s a reluctance to lend money. And I 

have had this conversation with you previously, and with Chairman Bernanke, and with Sheila Bair. We’ve been down the line. 

Everybody is sympathetic, and yet the problem continues. And I 

would say—and I’m not necessarily here advocating for my bankers; I’m here advocating for what I think is important to the economy in putting people to work is banks that can make loans. In 

communities across our country, across Kansas, access to credit is 

a determining factor as to whether or not you’re going to grow or 

expand your business. And we have a reluctance on the part of 

bankers, because of the regulatory burden or uncertainty or enforcement that is making it very difficult for those things to occur. 
26 

And I don’t know whether you would have somebody at—again, the 

OTC is firewalled—— 

Secretary GEITHNER. Yes. 

Senator MORAN.—I guess it’s part of the Treasury, but not—you 

don’t have direct. But, it would be great to have somebody who 

would ultimately sit down with community bankers and their customers and say—because I get this, as you would—as I’m doing to 

you, people do this to me—‘‘Fight bureaucracy. Fight paperwork. 

Get rid of the unnecessary burden.’’ It’s very hard to fight the word 

‘‘bureaucracy.’’ But, if we can have the specific examples of the 

rules and regulations or the enforcement action that make no 

sense, we can address those individually, as compared to the big 

picture of, you know, fighting the bureaucrat. 

So, if you have suggestions of who I could get in a room with 

bankers and their customers, to see if there are the individual 

items of regulation, or the regulators that are not following the protocols of the exam process, so we can get some certainty back into 

this process. 

Secretary GEITHNER. Happy to work with you on that. And I 

think you’re right to call attention to it. And I would point out that 

if you look at the broad measures of what businesses report, in 

terms of credit terms and availability, and if you look at the very 

broad measures of access to credit to businesses, price of credit, 

lending terms they face is—it’s now starting to improve; not as 

soon as we’d like, not as quickly as we’d like, but much faster than 

credit, for example, of consumer—or somebody who wants to borrow to finance a house is improving. And that’s encouraging, but 

we want to reinforce it. And I think we have a long way to go. 

Senator MORAN. Mr. Secretary, I have one additional question 

that I’d like to ask you personally, if you can—if I can catch you, 

for a few moments, after this hearing. 

Secretary GEITHNER. Sure. 

Senator MORAN. Thank you. 

Senator DURBIN. Senator Lautenberg. 

FUNDING TO FIGHT ILLEGAL TOBACCO TRAFFICKING

Senator LAUTENBERG. Mr. Secretary, it’s estimated, by the Treasury, that Federal revenue lost due to illegal tobacco trafficking may 

reach as high as $41⁄2 billion annually. Now, the Congress provided 

$3 million this year for the Alcohol and Tobacco Tax and Trade Bureau to hire agents and improve enforcement efforts. However, the 

President’s budget, next year, would eliminate these positions. 

Now, without filling these jobs, how will the Treasury have the resources it needs to carry out effective tobacco taxing? 

Secretary GEITHNER. Senator, I know this is important to you, 

and I’m aware of your concern. And I’d like to try to work with you 

to see if we can address it. 

And let me tell you a little bit of what’s guiding our judgment. 

You know, we’re finding, across the board, that we’re—you know, 

we’re having to do more with less. Where we have limited enforcement resources, we’re trying to make sure we devote them to where 

we have the highest return, in terms of revenues and other objectives the Congress gives us. And so, that’s forced us to cut back in 

some areas. This is an example. 
27 

I know why you’re concerned about it, because it makes it easier 

for people to evade these things. That erodes the revenue base of 

States. And so, I think it’s important, in this context. I’d be happy 

to work with you on this. 

We do have a lot of—because of what the Congress enabled us 

to do the last 2 years—we have a lot enforcement efforts underway 

which we think have some deterrent value. But, obviously, we want 

to do as much as we can with the few resources we can. And I’d 

be happy to work with you on how best we can do that. 

Senator LAUTENBERG. So, we need the people to get the job done. 

Secretary GEITHNER. We do. Absolutely. And what we did is to— 

temporarily, is, we used those resources to use IRS agents to help 

them in a separate, and they’re doing a lot of important things—— 

Senator LAUTENBERG. That imposes an extra burden on those 

who have the audits to do, and—— 

Secretary GEITHNER. It does. And, you know, as you’ve seen, 

there are some people who want to cut the IRS resources, too. But, 

again, what we want to do is to make sure that, with the resources 

you give us, we allocate them to where they have the highest possible return. And I know why this is important to you. 

INFRASTRUCTURE BANK PROPOSAL

Senator LAUTENBERG. Yes. The administration has recommended 

an infrastructure bank to fund transportation projects of national 

significance. Now, at a time when budgets are stretched so thin, 

how would the administration’s proposal focus Federal dollars to 

maximize our country’s economic competitiveness? 

Secretary GEITHNER. Well, as you know, we face a huge longterm infrastructure deficit that puts enormous burden—it hurts 

the competitiveness of American businesses by raising the cost of 

doing business, bringing their products to market. And so, as you 

think about the long-term challenge we face, we have to find a way 

to finance, responsibly, much higher levels of infrastructure across 

the country. 

We believe an infrastructure bank or fund is—should be part of 

the solution. It can’t be the entire solution. And what it does is give 

us the chance to get better use of limited taxpayer resources to borrow from the market and bring private capital alongside what the 

Government does directly so get—we get more power, more bang, 

more ammunition behind these financing projects. 

And there’s a lot of interest in this in the Congress, as I know 

how—you’ve been a big supporter of this. There are some new ideas 

in the Congress, too. And we’d like to work with you and your colleagues to figure out how we get something done. 

Again, one of the most important things we can do to help get 

more Americans back to work, to help increase employment opportunities for people most affected by the crisis, in construction, for 

example, and for our long-term competitiveness, is to invest substantially more in infrastructure projects that have a high return 

over time. And we cannot do that adequately through the traditional mechanisms the Congress has used to fund, for example, 

transportation budgets. 

Senator LAUTENBERG. Will we hear some of what might be considered, in the near future, so that we can get on with this? 
28 

Secretary GEITHNER. Yes. We’re—again, we’ve—have a series of 

detailed proposals we’ve been modifying as a way to get more support in the Congress. And there’s a bunch of new ideas on the Hill 

that we want to work with you on. And again, I think this is something that we should be able to do. It’s not a partisan issue. It’s 

traditionally had a lot of bipartisan support. And it’s a good, efficient use of taxpayer resources. 

CORPORATE TAX HOLIDAY

Senator LAUTENBERG. Well, some companies are pushing for a 

tax holiday if they repatriate income that’s currently invested overseas. These companies believe that it’s going to—that it will boost 

the U.S. economy, create jobs. I’m skeptical about it, but some have 

suggested that a tax holiday may make sense in the larger context 

of corporate tax reform. How do you feel about that kind of proposal? 

Secretary GEITHNER. That’s something we would not consider 

outside the context of corporate tax reform, because—for the reasons you said, on the basis of how it’s been—of the experience in 

the past. It’s a—well, I won’t say—I’ll say it directly—it has not 

produced an increase in investment, job creation. And it’s expensive. So, we would not support it outside the context of corporate 

tax reform. But, in the context of comprehensive corporate tax reform, we think there may be a way to try and do that in a way 

that would be responsive to these broader interests of trying to get 

more of those resources held overseas, to bring them back. But, not 

outside of that context—— 

Senator LAUTENBERG. No, because it’s believed that, by keeping 

these companies from bringing back the income that they’ve 

earned, that we’re not only losing revenues, but we’re also increasing competition within—for jobs within our own country. 

Secretary GEITHNER. That’s right. That’s why it’s a very good 

idea to try to do comprehensive reform that lowers the statutory 

rate, broadens the base, and again, improves the incentives for people to bring back those resources and invest more in the United 

States. And that’s what our reforms—we’re going to try and do. 

And you’ll see, in that proposal, that we’re going to try to find a 

way to be responsive to that broader interest. Again, what we want 

to do is improve incentives for people investing more of those resources here in the United States. 

FUNDING FOR THE CFPB

Senator LAUTENBERG. Our colleagues on the other side of the 

aisle have proposed to cut the new CFPB’s budget this year to $80 

million. The CFPB estimates that we’ll need approximately $143 

million to do its job. If the House Republicans get their way, how 

is that going to affect the CFPB’s ability to start up and fulfill its 

mission of protecting consumers? 

Secretary GEITHNER. Well, again, the purpose of those cuts are 

to starve this entity of the resources it needs to get going. And 

what that will do is put at risk—I gave one example to Senator 

Moran, but I’ll repeat that and tell you another one. What the— 

the most important priorities of this bureau from day one are to 

simplify and improve disclosure for people who want to get a loan 
29 

to buy a house or to borrow against their credit card. And providing more simple disclosure, so people understand how to borrow 

responsibly, can shop for a better deal, is an overwhelmingly sensible simple objective. You will delay—make it harder for the agency to do that. The other thing that would make it harder to do, if 

you starve it of resources, is—as I said to Senator Moran, is, you’ll 

leave banks with an unlevel playing field, where they’re competing 

against nonbank finance companies, without constraint, who might 

be trying to take advantage of their customers in that context. 

That’s not good for banks or for consumers. Those are two examples of what you put at risk. 

Senator LAUTENBERG. Thanks, Mr. Secretary. 

Thanks, Mr. Chairman. 

FINANCIAL CRIMES ENFORCEMENT NETWORK

Senator DURBIN. Mr. Secretary, in my opening statement, I mentioned the Financial Crimes Enforcement Network, which—I don’t 

know if many people follow it, but FinCEN, as it’s known, collects 

red flags on suspicious financial transactions from banks and other 

financial entities. Hundreds of Federal, State, and other local law 

enforcement agencies access this data to track the financial paper 

trail of criminal financial activity, including terrorist financing, organized crime, and drug trafficking. 

In many places, like Chicago and New York City, local law enforcement entities have direct access to this data. In fact, in Illinois, 75 users ran more than 20,000 searches on the FinCEN database in 2010. 

Under the Treasury proposal for next year’s budget, all those 

searches would have to funnel through just two staffers at the 

State level. The Treasury would save $1.3 million with the proposed cuts in this agency. It seems to me that FinCEN has a significant role in dealing with the use of our financial network by 

wrongdoers: criminals, drug traffickers, would-be terrorists. This 

proposed cut seems to me to be penny-wise and pound foolish. Can 

you comment? 

Secretary GEITHNER. Yes, Mr. Chairman. Thank you for raising 

this. And I understand your concerns. And we will work with you 

to try to mitigate that effect. 

And you’re right, and I appreciate very much what you said in 

your opening statement, about the important role FinCEN provides, as a whole. And, of course, we’re always looking for ways to 

make sure that we’re directing them to things that can have the 

maximum positive impact in reducing the ability of people to take 

advantage of our financial system, in this case. And this is one example. 

Now, you’re concerned about the effect this would have on local 

law enforcement officials, particularly in the really major cities’ 

largest law enforcement operations in the country; and I am optimistic we can find a way to try to address those concerns. Of 

course, in our proposal, we’re preserving direct access for them to 

the resources of FinCEN. But, I understand your concerns, and I 

think we can work with you to try to mitigate those. 

Senator DURBIN. Senator Moran. 

Senator MORAN. Mr. Chairman, thank you. 
30 

IRAN SANCTIONS

I’m not exactly sure—Mr. Kirk—I think his conversation with 

you is—was about the World Bank. I did want to make certain that 

you understand the importance of enforcement—strict and strong 

enforcement—of the Comprehensive Iran Sanctions and Accountability Act that the Congress passed several years ago. And I assume that you would tell us that you’re taking your job very seriously. 

Secretary GEITHNER. Absolutely. We are taking it very seriously. 

And again, we had a very powerful program. The law the Congress 

passed gave us much more power. And it’s had a dramatic impact 

on our capacity to make sure that other countries around the world 

joined us in tightening the constraints on the Government of Iran. 

But, as Senator Kirk reminded us, and as I said, this is an ongoing challenge, and it requires a relentless focus to try to make sure 

you catch every opportunity for evasion, and stay on it. And again, 

we’ve got some incredibly talented people with a great record in 

this area. And we work every day to try to make sure we can do 

a better job. And the Congress gave us much more powerful tools. 

Senator MORAN. There’s no additional—there’s no need for additional—authority, statutory authority, or—you have the tools that 

you need? 

Secretary GEITHNER. I don’t think so. I think our big challenge, 

as you know, is to try to get other countries to come with us. You 

know, we don’t do material business, really, now, and—but much 

of the rest of the world does. And so, what we’ve been successful 

doing with these new powers is to tighten the net by getting other 

countries to come with us. But, you know, we’ve got some more 

work to do not that front. 

ADDITIONAL COMMITTEE QUESTIONS

Senator LAUTENBERG. Mr. Chairman, thank you. 

Mr. Secretary, thank you for your consideration. 

[The following questions were not asked at the hearing, but were 

submitted to the Department for response subsequent to the hearing:] 

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

Question. The Appropriations Subcommittee on Financial Services and General 

Government maintains jurisdiction over the annual appropriations for the Office of 

Foreign Assets Control (OFAC), a Department of the Treasury office dedicated to 

administering and enforcing economic and trade sanctions. On February 25, 2011, 

President Obama signed an Executive order freezing Libyan assets in United States 

banks, significantly limiting Muammar Gaddafi’s ability to access funds to support 

attacks on his own people. The Washington Post reported that OFAC quickly identified $32 billion in Libyan assets and that United States banks began freezing funds 

within minutes of the Executive order going into place. 

What authority does Treasury have to freeze foreign assets when there is a threat 

of a humanitarian and/or national security crisis? How is this decision made? 

Answer. In issuing an Executive order imposing economic sanctions, the President 

generally invokes the authority of the International Emergency Economic Powers 

Act, and declares a national emergency to deal with a particular threat to the national security, foreign policy, or economy of the United States. Treasury’s OFAC 

then acts under delegated Presidential national emergency powers to implement 

provisions of the Executive order, which can include blocking targeted assets under 

U.S. jurisdiction. 
31 

Question. How is OFAC ensuring that U.S. financial institutions are complying 

with the directive to freeze Gaddafi’s assets? What are the consequences of noncompliance? 

Answer. OFAC uses a variety of tools to ensure compliance by U.S. financial institutions. In the case of a new sanctions program, OFAC immediately posts notice of 

the sanctions’ legal requirements via several electronic means to the United States 

and international financial community. By law, holders of blocked assets must report to Treasury within 10 days after blocking assets, although they typically will 

report major blockings within 2 to 4 days. OFAC has the authority to impose civil 

penalties if appropriate. OFAC also works very closely with Federal and State financial regulators, which require financial institutions to maintain adequate programs 

to ensure compliance with OFAC regulations. OFAC is actively engaged with U.S. 

financial institutions to address implementation issues and it may issue subpoenas 

to obtain information when there is an indication that a financial institution has 

failed to act properly. 

Question. What happens to these funds after they are frozen? Will they be made 

available to the Libyan people when the political situation is stabilized in that country? 

Answer. In taking action to block Libyan Government assets under the President’s Executive order, the United States has protected those assets from misappropriation by the Gaddafi regime, and is depriving the regime of the use of those assets for its ongoing campaign of violence against the Libyan people. On July 15, 

2011, the United States recognized the Transitional National Council (TNC) as the 

legitimate governing authority for Libya. To assist the TNC and the Libyan people 

during this time of transition, we are working with the State Department to make 

a portion of the frozen assets available to the TNC as soon as possible. We are keenly focused on the humanitarian and other essential needs of the Libyan people, and 

we are working closely with our international partners to address those needs. To 

that end, on August 25, the United Nations Security Council’s Libya Sanctions Committee agreed to a United States ‘‘extraordinary expenses’’ request facilitating the 

issuance of United States licenses to authorize the release of up to $1.5 billion in 

Libyan assets for humanitarian and other essential needs. Consistent with TNC instructions and State Department guidance, we have authorized the release of funds 

for humanitarian and other urgent needs. These efforts are being negotiated carefully to provide for adequate oversight and transparency in how the funds will be 

used. Going forward, we will continue to work closely with the State Department, 

the TNC and our international partners to determine an appropriate plan for releasing assets in light of the situation on the ground as it evolves. While we seek to 

provide the TNC with the resources necessary to address humanitarian and other 

essential needs, we also will work with the State Department, the TNC and our 

international partners to continue safeguarding these assets for the Libyan people 

in a manner consistent with our United Nations obligations. 

Question. The Comprehensive Iran Sanctions, Accountability, and Divestment Act 

of 2010 (Public Law 111–195) tightened economic sanctions on Iran in response to 

its nuclear weapons program, focusing in particular on Iran’s petroleum industry. 

The administration has also taken steps through the Treasury Department and the 

United Nations Security Council to tighten sanctions even further against Iran. 

In 2010, The New York Times reported that over the last decade, the Federal 

Government awarded more than $107 billion in contract payments, grants, and 

other benefits to foreign and multinational American companies while they were 

doing business in Iran—including nearly $15 billion paid to companies that defied 

United States sanctions law by making large investments that helped Iran develop 

its oil and gas reserves. 

What steps has Treasury taken to enforce these sanctions, especially with regard 

to recipients of Federal funds? What further steps does Treasury plan to take? 

Answer. Treasury’s Office of Terrorism and Financial Intelligence has been engaged in an aggressive campaign to implement the Comprehensive Iran Sanctions, 

Accountability, and Divestment Act of 2010 (CISADA), reaching out to countries 

around the world through travel and correspondence. 

Treasury’s outreach on CISADA has had a tremendous effect, and the great majority of financial institutions with which we have engaged have chosen to close 

their correspondent accounts with United States-designated, Iranian-linked financial institutions, thus shutting down avenues that Iran’s designated banks had relied upon to engage in financial activities. 

Treasury aggressively implements and enforces sanctions against entities and individuals subject to such sanctions. Since the adoption of United Nations Security 

Council Resolution 1929 in June 2010, Treasury has designated dozens of Iranian 

entities and individuals for involvement in Iran’s proliferation-related activities or 
32 

for being responsible for human rights abuses in Iran. Actions taken pursuant to 

Executive Order 13382, which targets WMD proliferation networks and their supporters, have included designations of affiliates of the Islamic Revolutionary Guard 

Corps and the Islamic Republic of Iran Shipping Lines; Tidewater, an Iranian port 

operator; entities subordinate to Iran’s Aerospace Industries Organization; and additional Iranian-linked financial institutions, including Europaisch-Iranische 

Handelsbank, Post Bank of Iran, Bank Refah, and the Bank of Industry and Mine, 

bringing the total number of designated Iranian-linked financial institutions to 21. 

Treasury also continues to work with international partners to implement robust 

international sanctions on Iran so that Iran feels pressure not only from U.S. actions but also from increasing isolation from the international financial system. 

On September 28, 2010, the President signed Executive Order 13553, authorizing 

the freezing of assets of officials of the Government of Iran or persons acting on behalf of the Government of Iran who are responsible for or complicit in, or responsible for ordering, controlling, or otherwise directing, the commission of serious 

human rights abuses against persons in Iran or Iranian citizens or residents, among 

others. The Annex to Executive Order 13553 listed eight Government of Iran officials for their involvement in human rights abuses. Treasury has since designated 

additional Government of Iran officials for their involvement in serious human 

rights abuses. 

The State Department enforces the energy-related provisions of the Iran Sanctions Act, as amended by CISADA, and as a result, I must defer to the State Department on questions regarding the energy-related sanctions. 

Question. Over the last decade, the Treasury Department has granted nearly 

10,000 licenses for commerce involving countries listed as state sponsors of terrorism—using loopholes for humanitarian and agricultural aid to sell items such as 

cigarettes, chewing gum, hot sauces, weight loss remedies, and even sports rehabilitation equipment for the institute that trains Iran’s Olympic athletes. 

What steps has Treasury taken to ensure that only agricultural and humanitarian 

goods are waived into countries such as Iran? What more can be done? 

Answer. Under the Trade Sanctions Reform and Export Enhancement Act of 2000 

(TSRA), Congress requires Treasury to grant licenses to U.S. companies seeking to 

export agricultural commodities, medicines, and medical devices to certain sanctioned countries. By the terms of the statute, OFAC is limited in its ability to deny 

licenses for goods that fall within the categories as defined in the statute. For example, TSRA takes its definition of ‘‘agricultural commodities’’ from section 102 of the 

Agricultural Trade Act of 1978 (7 U.S.C. 5602). In interpreting the definition of ‘‘agricultural commodities,’’ Treasury looks to the Department of Agriculture, which is 

better equipped to determine what qualifies under the definition. Similarly, TSRA 

relies on section 201 of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 321) 

to define medicine and medical devices. Circumstances for denying TSRA licenses 

include when the importing entity ‘‘promote[s] international terrorism’’ or when it 

is unlawful to export to an entity that is subject to any restriction for its involvement in weapons of mass destruction or missile proliferation. 

Question. When United States companies attempt to do business in Africa, they 

are often at a disadvantage due to competition from foreign governments who operate outside of the Organisation for Economic Co-operation and Development arrangement, notably the Chinese. Often African buyers prefer the quality of American products but are attracted to the inexpensive, flexible concessional financing offered by the Chinese and others. United States companies complain that United 

States Government tools to level the playing field in the face of these Chinese tactics, including Export-Import Bank’s War Chest, are too restrictive. 

What steps has Treasury taken to level the playing field in overseas markets for 

United States companies facing Chinese concessional financing and other tactics? 

Answer. China’s accession to the international arrangement that disciplines the 

provision of official export credits, thereby subjecting China’s export credit and tied 

aid activity to clear financing and transparency rules, is a top priority for the administration. Senior Treasury offices and I have raised this issue with our Chinese 

counterparts, and, at the recent May Strategic and Economic Dialogue meetings, the 

United States and China ‘‘recognize[d] the importance of transparency and fairness 

in providing export credits’’ and ‘‘agree[d] to exchange views on the importance of 

the export credit system.’’ We will continue to engage the Chinese on this important 

issue. 

The Ex-Im Bank War Chest is available to match tied aid that violates the international rules or that is a threat to long-run U.S. market share/access in emerging 

markets. Separate from the War Chest, Ex-Im also has the legal authority to match 

Chinese export credits, whether or not they are consistent with the international 

rules. This authority was recently used in a Pakistan rail transaction, where Ex- 
33 

Im provided matching financing to a United States company competing against a 

Chinese company with Chinese Government financing that did not conform to international standards and practices. 

Question. The Treasury Department is 1 of 20 U.S. Government agencies represented on the Trade Promotion Coordinating Committee. What is the Treasury 

Department currently doing to coordinate and boost American export promotion and 

financing operations? 

Answer. In addition to Treasury’s general efforts to support the administration’s 

work to increase exports, Treasury is responsible for promoting balanced and strong 

growth in the global economy through the G–20 Financial Ministers’ process and 

other appropriate mechanisms. 

Treasury has advocated for a rebalancing of global demand, which is an essential 

part of achieving a strong and long-lasting global economic recovery. Faster domestic demand growth abroad, particularly by countries with trade surpluses, will enable countries with trade deficits to boost their exports, and narrow or eliminate 

their current account deficits. A more evenly balanced global economy will contribute to a more sustainable global recovery. 

Question. In addition to Treasury’s role, which executive agency should and 

which, if any, is leading the interagency process on this effort? 

Answer. The President’s National Export Initiative is being coordinated by the 

Commerce Department under the umbrella of the Trade Promotion Coordinating 

Committee. 

DOMESTIC FINANCE

Question. In January 2011, news reports raised concerns about several banks that 

were found to have taken advantage of servicemembers by overcharging for mortgages and improperly starting foreclosure proceedings. These banks violated the 

Servicemembers Civil Relief Act (SCRA) and added financial stress to the already 

stressful lives of military families. JP Morgan Chase alone sent refunds to 4,000 

servicemembers who were overcharged for mortgages or against whom the company 

improperly started foreclosure proceedings. JP Morgan Chase admitted that it overcharged military personnel on their mortgages and wrongfully foreclosed on 14 active-duty families, despite SCRA and its prohibition on foreclosures against 

servicemembers. 

What can the Treasury Department do to prevent violations of SCRA from happening in the future, including wrongful foreclosures and violations of the mortgage 

interest cap? 

How can Treasury promote proper training on Servicemembers Civil Relief Act 

(SCRA)? 

Answer. The Office of Servicemember Affairs (OSA), located within the Consumer 

Financial Protection Bureau (CFPB), will play an important role in educating 

servicemembers on the protections afforded by the , as well as ensuring that any 

SCRA-related complaints filed with the CFPB are handled in an efficient and timely 

manner. Although the Department of Justice (DOJ) and the prudential regulators 

enforce the statute, the CFPB will help raise awareness of the law and its protections, both within the military community and within the financial community. To 

that end, the OSA recently signed a joint Statement of Principles with the Judge 

Advocate Generals of the Army, Navy, Air Force, Marine Corps and Coast Guard, 

and will work with them and the DOJ on this mission. After alleged violations of 

the SCRA came to light earlier this year, Holly Petraeus, Assistant Director for the 

OSA, wrote a letter to the CEOs of the Nation’s 25 largest banks, asking them to 

review their policies and procedures to ensure that they were complying with the 

SCRA. Assistant Director Petraeus has also been engaging the military community 

across the country to raise awareness of the unique financial protections available 

to military families, including those afforded by the SCRA. 

QUESTIONS SUBMITTED BY SENATOR BEN NELSON

DOMESTIC FINANCE

Question. I continue to hear from both banks and home builders in Nebraska that 

examiners are turning regulatory guidance on commercial real estate (CRE) lending 

into hard caps. 

For example, it’s my understanding that community banks are being told they 

can’t give home builders loans because the bank has reached its 100 percent of capital threshold on construction loans. This cap is being enforced in areas of high 

housing demand. Builders still can’t get a loan. Is it true that regulators are not 
34 

1 See, e.g., FDIC FIL–104–2006, Commercial Real Estate Lending (Joint Guidance), December 

12, 2006. 

allowing these loans to be made to creditworthy builder borrowers with viable 

projects because a bank has reached the 100 percent of capital CRE threshold? 

Answer. Treasury does not regulate community banks. However, Treasury does 

have a policy interest in ensuring that banks continue to provide credit to small 

businesses, including home builders, consistent with safety and soundness, in order 

to support economic recovery and market stability. 

Policy guidance issued jointly by Federal banking regulatory agencies in 2006 1 set 

supervisory criteria for significant CRE concentration: 

—total reported loans for construction, land development, and other land (often 

called for acquisition, construction, and development [ACD]) represent 100 percent or more of the institution’s total capital; or 

—total commercial real estate loans as defined in the Guidance represent 300 percent or more of the institution’s total capital and the outstanding balance of the 

institution’s CRE loan portfolio has increased 50 percent or more during the 

prior 36 months. 

These criteria are explicitly intended neither as limits nor safe harbors, but rather 

as preliminary steps to identify institutions that may have CDE concentration risks, 

and this policy remains in effect. The policy states that the effectiveness of an institution’s risk management practices will be a key component of the supervisory evaluation of the institution’s CRE concentrations. Examiners will engage in a dialogue 

with the institution’s management to assess CRE exposure levels and risk management practices. Institutions that have experienced recent, significant growth in CRE 

lending will receive closer supervisory review than those that have demonstrated a 

successful track record of managing the risks in CRE concentrations. 

In recent years many banks did exceed these concentration criteria and encountered financial difficulties. Some of these banks are no longer in business. Troubled 

banks are subject to stringent regulatory restrictions based on each bank’s circumstances. It is our understanding that very few banks are currently above, at or 

near the 100 percent ACD benchmark. 

While it is regulatory policy to encourage prudent lending, including to small 

home builders, such credit may be more challenging to obtain now than previously. 

Among other factors, some lenders have tightened their own credit standards, some 

builders have less financial strength, lower property values provide less collateral, 

and housing market conditions remain weak or fragile in many areas. 

Question. I continue to hear from home builders in Nebraska that they are unable 

to obtain financing to build homes for qualified home buyers. These builders are 

typically small businesses building 25 or fewer homes a year that rely primarily on 

commercial banks and thrifts as their primary source of construction loan financing. 

A common complaint I hear from such builders is that overly restrictive actions 

by Federal banking regulators and examiners go well beyond the steps needed to 

ensure safety and soundness. Have your institutions noted any specific regulatory 

obstacles to your ability to lend to small businesses including home builders? 

Answer. Treasury does not regulate community banks. However, Treasury does 

have a policy interest in ensuring that banks continue to provide credit to small 

businesses, including home builders, consistent with safety and soundness, in order 

to support economic recovery and market stability. 

Policy guidance issued jointly by Federal banking regulatory agencies in 2006 1 set 

supervisory criteria for significant CRE concentration: 

—total reported loans for construction, land development, and other land (often 

called for acquisition, construction, and development [ACD]) represent 100 percent or more of the institution’s total capital; or 

—total commercial real estate loans as defined in the Guidance represent 300 percent or more of the institution’s total capital and the outstanding balance of the 

institution’s CRE loan portfolio has increased 50 percent or more during the 

prior 36 months. 

These criteria are explicitly intended neither as limits nor safe harbors, but rather 

as preliminary steps to identify institutions that may have CDE concentration risks, 

and this policy remains in effect. The policy states that the effectiveness of an institution’s risk management practices will be a key component of the supervisory evaluation of the institution’s CRE concentrations. Examiners will engage in a dialogue 

with the institution’s management to assess CRE exposure levels and risk management practices. Institutions that have experienced recent, significant growth in CRE 

lending will receive closer supervisory review than those that have demonstrated a 

successful track record of managing the risks in CRE concentrations. 
35 

In recent years many banks did exceed these concentration criteria and encountered financial difficulties. Some of these banks are no longer in business. Troubled 

banks are subject to stringent regulatory restrictions based on each bank’s circumstances. It is our understanding that very few banks are currently above, at or 

near the 100 percent ACD benchmark. 

While it is regulatory policy to encourage prudent lending, including to small 

home builders, such credit may be more challenging to obtain now than previously. 

Among other factors, some lenders have tightened their own credit standards, some 

builders have less financial strength, lower property values provide less collateral, 

and housing market conditions remain weak or fragile in many areas. 

Question. It is my understanding that through economic sanctions the United States has been able to freeze nearly $33 billion in Libyan assets. I understand that 

other nations have been able to freeze Libyan assets as well. 

How will the United States and NATO dispense with these frozen assets? 

Answer. As of June 15, approximately $37 billion of cash and securities under 

U.S. jurisdiction have been blocked pursuant to Executive Order 13566. This 

amount includes assets of the Central Bank of Libya and the Libyan Investment 

Authority, among others. In taking action against Libyan Government assets under 

the President’s Executive order, the United States has protected those assets from 

misappropriation by Colonel Muammar Gaddafi and his associates and deprived the 

Gaddafi regime of the use of those assets for its ongoing campaign of violence 

against the Libyan people. On July 15, 2011, the United States recognized the Transitional National Council (TNC) as the legitimate governing authority for Libya. To 

assist the TNC and the Libyan people during this time of transition, we are working 

with the State Department to make a portion of the frozen assets available to the 

TNC as soon as possible. We are keenly focused on the humanitarian and other essential needs of the Libyan people, and we are working closely with our international partners to address those needs. To that end, on August 25, the United Nations Security Council’s Libya Sanctions Committee agreed to a United States ‘‘extraordinary expenses’’ request facilitating the issuance of United States licenses to 

authorize the release of up to $1.5 billion in Libyan assets for humanitarian and 

other essential needs. Consistent with TNC instructions and State Department 

guidance, we have authorized the release of funds for humanitarian and other urgent needs. These efforts are being negotiated carefully to provide for adequate oversight and transparency in how the funds will be used. Going forward, we will continue to work closely with the State Department, the TNC and our international 

partners to determine an appropriate plan for releasing assets in light of the situation on the ground as it evolves. While we seek to provide the TNC with the resources necessary to address humanitarian and other essential needs, we also will 

work with the State Department, the TNC and our international partners to continue safeguarding these assets for the Libyan people in a manner consistent with 

our United Nations obligations. 

Question. Is there a precedent for how to dispense with such assets? 

Will Treasury coordinate with the Department of State in this process? 

Is there any consideration to use these funds to either offset military operations 

in Libya or to help rebuild Libya in the aftermath of the current conflict? 

Answer. While we do not have a precedent for making funds available on this 

scale, consistent with TNC instructions and State Department guidance, we have 

authorized the release of funds for humanitarian and other urgent needs. Treasury 

is coordinating with the State Department regarding U.S. efforts to make a portion 

of the frozen assets blocked pursuant to Executive Order 13566 available to the 

TNC as soon as possible. The funds are not being considered as a means to offset 

military operations, but would be used to address humanitarian and other essential 

needs, as well as support the Libyan people as they chart a democratic, prosperous, 

and secure future for their country. 

Question. To date, what has been discussed and what is possible regarding the 

use of these funds? 

Does Treasury anticipate needing any new authorities to handle these assets? 

If new authorities aren’t required, what existing authorities will be used to dispense with these funds? 

Is there anything that Congress can do to facilitate proper disposal of these assets? 

Answer. As of June 15, approximately $37 billion of cash and securities under 

U.S. jurisdiction have been blocked pursuant to Executive Order 13566. This 

amount includes assets of the Central Bank of Libya and the Libyan Investment 

Authority, among others. In taking action against Libyan Government assets under 

the President’s Executive order, the United States has protected those assets from 

misappropriation by Colonel Muammar Gaddafi and his associates and deprived the 
36 

Gaddafi regime of the use of those assets for its ongoing campaign of violence 

against the Libyan people. On July 15, 2011, the United States recognized the Transitional National Council (TNC) as the legitimate governing authority for Libya. To 

assist the TNC and the Libyan people during this time of transition, we are working 

with the State Department to make a portion of the frozen assets available to the 

TNC as soon as possible. We are keenly focused on the humanitarian and other essential needs of the Libyan people, and we are working closely with our international partners to address those needs. To that end, on August 25, the United Nations Security Council’s Libya Sanctions Committee agreed to a United States ‘‘extraordinary expenses’’ request facilitating the issuance of United States licenses to 

authorize the release of up to $1.5 billion in Libyan assets for humanitarian and 

other essential needs. Consistent with TNC instructions and State Department 

guidance, we have authorized the release of funds for humanitarian and other urgent needs. These efforts are being negotiated carefully to provide for adequate oversight and transparency in how the funds will be used. Going forward, we will continue to work closely with the State Department, the TNC and our international 

partners to determine an appropriate plan for releasing assets in light of the situation on the ground as it evolves. While we seek to provide the TNC with the resources necessary to address humanitarian and other essential needs, we also will 

work with the State Department, the TNC and our international partners to continue safeguarding these assets for the Libyan people in a manner consistent with 

our United Nations obligations. 

QUESTIONS SUBMITTED BY SENATOR JERRY MORAN

Question. There is an aerospace industry issue which has come to my attention 

that I’d like to get your thoughts on. It is in reference to trade finance and our ability to provide defensive competitive matching in instances of Government financing 

from the official export credit agencies of other countries. I understand that this is 

a looming issue for aircraft manufacturers and I further understand that the administration has at its disposal an existing provision in U.S. law (section 1912 of the 

Export-Import Bank Act Amendments of 1978) that could be used to address this 

competitive situation. It appears to me that the Congress instituted a competitive 

matching tool for these exact circumstances—one of its supporters, Senator Adlai 

Stevenson, stated very clearly on the Senate floor during debate: ‘‘The [Section’s] 

purpose . . . is not to declare or to accelerate a credit war. Its purpose is to put 

the United States in a position to end a credit war.’’ And, on the House side, Representative Hannaford declared: ‘‘These circumstances demand an appropriate response from our own government. The Export-Import Bank can and should be the 

instrument of our response.’’ 

Does the administration have any intentions to deploy this tool in the fight 

against such lending practices in support of the aerospace industry and its hundreds 

of thousands of workers, as well as for all U.S. industries who are or will be facing 

similar competitions in the near-future. 

Answer. Section 1912 is a provision that allows Treasury to authorize Ex-Im Bank 

to provide matching financing when it determines that foreign noncompetitive official export credits are being offered into the United States that are inconsistent 

with certain standstills, arrangements or practices. Upon receipt of information that 

foreign noncompetitive official exports are being offered, Treasury would initiate an 

inquiry as to whether the statutory criteria under section 1912—which would be 

fact specific and depend on the scope of an individual case—have been met. 

DOMESTIC FINANCE

Question. Recognizing the distinct differences between large banking institutions 

and insurance companies with small bank subsidiaries, Congress included language 

in the Dodd-Frank Act stating the Volcker Rule should ‘‘appropriately accommodate 

the business of insurance.’’ Is it your understanding that these provisions allow for 

insurance companies to continue to sponsor and invest in private equity pursuant 

to this insurance exception? Do you anticipate any further clarification of this question in any proposed rule? 

Answer. The Volcker Rule includes specific provisions to accommodate the business of insurance. Only two types of insurance companies are subject to the Volcker 

Rule: 

—insurance companies that are affiliates of insured banks or thrifts; and 

—non-bank financial companies supervised by the Federal Reserve Board. 

Under the Volcker Rule, activity for the general account is permitted if the activity is already in compliance with State insurance investment law, regulation, and 
37 

guidance; and the appropriate Federal banking agencies, after consultation with the 

Financial Stability Oversight Council and the relevant State insurance commissioners, have not jointly determined that such investment laws, regulations, and 

written guidance are insufficient to protect the safety and soundness of the banking 

entity, or of the financial stability of the United States. These permitted activities 

are subject to a prudential ‘‘backstop’’ that prohibits such activity if it would result 

in a material conflict of interest, material exposure to high-risk assets or high-risk 

trading strategies, a threat to the safety and soundness of the banking entity, or 

a threat to the financial stability of the United States. 

The rulemaking agencies are currently drafting the regulations that will implement the Volcker Rule and it is likely that a forthcoming Notice of Proposed Rulemaking will further clarify this accommodation of the business of insurance. 

Question. As you are aware, the Dodd-Frank Act allows for an insurance expert 

to serve on the Financial Stability Oversight Council (FSOC). When do you think 

the President will have a nominee for that position, and do you expect that the nomination will be submitted before any regulations that may affect the insurance industry are voted on by the FSOC? 

Answer. The FSOC is progressing in a prudent and informed way in its decisionmaking, and is relying on the considerable expertise already extant among its members to ensure that it benefits from a wide variety of views. 

On June 27, 2011, the President nominated Mr. Roy Woodall as the independent 

member of the FSOC. Mr. Woodall brings extensive experience and insurance expertise to the FSOC. He served as the Senior Insurance Policy Analyst at the Department of the Treasury from 2002 to 2011, and has served as President of the National Association of Life Companies and former Commissioner of Insurance for the 

Commonwealth of Kentucky over the span of his distinguished career. 

The FSOC also benefits from the service of Mr. John Huff, the Director of the Missouri Department of Insurance, Financial Institutions and Professional Registration, 

who was selected as a member by the State insurance commissioners. Mr. Huff offers a breadth of knowledge and the important perspective of the primary functional 

insurance regulators. 

Secretary Geithner has appointed Mr. Michael McRaith as the director of the Federal Insurance Office (FIO). Mr. McRaith, who joined the FIO as director in June 

2011, was previously the director of the Illinois Department of Insurance. He brings 

significant experience and judgment to the FIO and as a member of the FSOC. 

CONSUMER FINANCIAL PROTECTION BUREAU (CFPB)

Question. Can you please describe for me how the CFPB’s budget will be audited 

upon its standing up in July of this year? Who will perform the audits and how will 

the results of the audits be made public? 

Answer. The CFPB is required to have two independent audits in 2011. The first 

is an audit of the financial transactions of the Bureau, which is being performed 

by the Comptroller General of the United States. Under the Dodd-Frank Act, the 

Comptroller General shall submit to the Congress a report of this audit, which is 

typically made available to the public on the Web site of the Government Accountability Office. The CFPB is also required to order an annual independent audit of 

the CFPB’s operations and budget under section 1016A of the Department of Defense and Full-Year Continuing Appropriation Act of 2011. The CFPB will publish 

its audited financial statements and the annual independent audit on its Web site. 

QUESTIONS SUBMITTED BY SENATOR MARK KIRK

DOMESTIC FINANCE

Question. In a recent conversation with Chicago’s City Treasurer, she reminded 

me that a downgrade in U.S. debt would not only effect borrowing by the Federal 

Government, but would cascade down to the States. Keeping last week’s downgrade 

of Spain’s and Greece’s debt in mind, I believe that the Federal Government’s fiscal 

discipline initiatives will both help States control their interest costs and prove that 

the United States continues to be a model for the rest of the world. How can the 

United States demonstrate national and global leadership for spending reforms and 

debt reduction? 

Answer. Addressing the challenges we face in the short term to revive our economy and in the long-term economic path to growth requires fiscal responsibility. We 

need to reduce annual deficits, now roughly 10 percent of GDP, to the point where 

the overall debt burden begins to fall as a share of the economy. This must be a 
38 

multi-year process, with cuts phased in over time, so as not to risk our economy as 

it emerges from the recession. 

Our objective is to build a bipartisan consensus on a comprehensive, and balanced 

fiscal reform plan. We must reduce Government spending while financing productive 

investments in areas critical to future economic growth, along with generating more 

revenue and reducing the rate of growth in spending on health care and retirement 

security. 

We must take a balanced approach that includes shared sacrifice in order for our 

Government to live within its means. I remain optimistic that we can address our 

fiscal challenges in a bipartisan manner that sets an example for the world, renews 

investor confidence, and demonstrates to the American people that we can work together to improve the well-being of our economy and our country. 

Question. On January 21, the Treasury’s official blog wrote that, ‘‘Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name, since the world would recognize it 

as a failure by the U.S. to stand behind its commitments.’’ If a State fails to make 

timely payments of obligations, for example, if it delays payment of Federal education funds to local schools, would the State be considered in default under your 

definition? If failure to stand behind commitments would constitute a default for a 

State government, what responsibility would Treasury have to stand behind a 

State’s legal obligations? 

Answer. Where a State has a legal obligation to make payments at a specified 

time, nonpayment would be recognized by investors and others as a failure by that 

State to meet its commitments. The resulting damage to that State’s creditworthiness would likely be severe. However, Treasury does not have a general responsibility to stand behind a State’s legal obligations. 

Question. I would like to ask you about a State that has been becoming more of 

a rogue player on the international stage—Argentina. At least one member of the 

House has asked for review of Argentina’s GSP status. There have been reports that 

Argentina has discussed overlooking Iranian ties to terrorists’ attacks on Argentina’s soil in order to get some economic concessions. All of this is going on while 

the Republic of Argentina has been negotiating with the Paris Club to repay the 

$9 billion in debt that resulted from Argentina’s 2001 sovereign debt default. Of this 

$9 billion, about $360 million is owed to the United States. Private U.S. creditors 

are still owed $3.5 billion—nearly 10 times as much as the debt the U.S. Government is seeking to recover. Currently, Argentina holds more than $54 billion in foreign reserves. What is Treasury’s office of International Affairs doing to recover 

these funds, which Argentina is clearly able to pay? What is the message that we 

send to Argentina and other States by allowing it to get away with incendiary economic behavior? 

Answer. I can assure you that the Treasury Department is carefully monitoring 

several problem areas associated with Argentina’s conduct toward United States investors and unfulfilled obligations to international agreements and institutions. We 

are pressing the Government of Argentina to uphold its international commitments 

as a member of the G–20, International Centre for Settlement of Investment Disputes, International Monetary Fund (IMF), and other multilateral fora, and normalize relations with its creditors. Specifically, with regard to the Paris Club, the 

Treasury Department has sought and will continue to seek full repayment from Argentina on behalf of U.S. taxpayers. 

Question. The President’s budget claims Treasury’s funding ‘‘Enables the implementation of critical reforms to the U.S. financial regulatory system through support for the Dodd-Frank Wall Street Reform.’’ What safeguards and oversight exist 

to ensure that this funding is used effectively and that the new programs implemented under Dodd-Frank are being used effectively and efficiently? I am advocating a set a principles based on quantitative metrics to use in evaluating appropriations bills that can measure Dodd-Frank’s effectiveness: 

—Programs must be subject to rigorous performance evaluation requirements and 

oversight/enforcement that includes quantitative metrics and goals; 

—New regulatory measures must not duplicate existing ones; and 

—Programs that cannot minimize fraud and abuse should not be considered for 

expanded funding. 

Answer. On January 18, 2011, President Obama issued Executive Order 13563, 

‘‘Improving Regulation and Regulatory Review,’’ directing executive agencies to 

streamline and simplify regulations, seeking to ensure cost-effective, evidence-based 

regulations that are compatible with economic growth, innovation, job creation, and 

competitiveness. 

On July 11, 2011, he also issued Executive Order 13579, ‘‘Regulation and Independent Regulatory Agencies,’’ which calls upon independent agencies, to the extent 
39 

permitted by law, to comply with provisions of Executive Order 13563. This includes 

the Executive Order 13563 provision that asks agencies to develop a plan under 

which the agency will periodically review its existing significant regulations to determine whether any such regulations should be modified, streamlined, expanded, 

or repealed so as to make the agency’s regulatory program more effective or less 

burdensome in achieving the regulatory objectives. The implementation of DoddFrank provides financial regulators with both an opportunity and a responsibility 

to implement the most efficient and effective rules for the financial system, to avoid 

duplicative or conflicting rules, and to eliminate those that are outdated. 

Question. What is the status of Treasury investigations into additional violations 

of the Iran Sanctions Act of 1996 (ISA) and the 2010 Comprehensive Iran Sanctions, 

Accountability, and Divestment Act (CISADA)? How many companies and/or banks 

is the Treasury Department currently investigating for violations of the ISA and 

CISADA? Can you provide a timeframe of when additional designations are to be 

expected? 

Answer. As a matter of longstanding policy, Treasury does not comment on any 

possible or pending investigations, including possible sanctions. Accordingly, it 

would not be appropriate for me to comment on any particular financial institutions 

that may be under investigation until a final determination has been made regarding sanctions. 

Since the enactment of CISADA on July 1, 2010, and the publication of the Iranian Financial Sanctions Regulations on August 16, 2010, Treasury has been engaged in an aggressive campaign, involving dozens of foreign countries and scores 

of financial institutions, to explain the choice put to foreign financial institutions by 

CISADA between continued direct access to the United States financial system or 

continued involvement with Iran’s proliferation efforts, its support for terrorism, 

and sanctioned Iranian-linked parties such as United States-designated banks and 

the Islamic Revolutionary Guard Corps. The response to Treasury’s outreach has 

had a tremendous effect, and the great majority of financial institutions with which 

we have engaged have chosen to close their correspondent accounts with United 

States-designated, Iranian-linked financial institutions, thus closing off avenues 

that Iran’s designated banks had relied upon to engage in financial activities. 

CISADA, in short, has proven to be a very powerful tool to further isolate and pressure Iran. Nonetheless, Treasury has concerns that a limited number of foreign financial institutions may be continuing to engage in activities that could result in 

a finding under CISADA. We are actively investigating those situations. 

The State Department is responsible for implementing the Iran Sanctions Act and 

the energy-related provisions of CISADA, and as a result, I must defer to the State 

Department questions regarding the energy-related sanctions. 

Question. Given that Spain appears like the next domino to fall in the European 

sovereign debt crisis, are you concerned that additional United States taxpayer 

funds may be required to support the IMF? Since the Congressional Research Service (CRS) estimates that Spain may need more than $500 billion for international 

bailout, do you anticipate that the IMF will need to utilize and/or expand the recently activated New Arrangements to Borrow (NAB), to which the United States 

has pledged more than $100 billion to date? 

Answer. The IMF has sufficient resources at this time to meet its members’ needs 

for balance of payments support. 

With the activation of the NAB in April, IMF resources currently available for 

new lending programs total almost $400 billion. 

Currently, no additional Eurozone members are requesting IMF support. It is important to keep in mind that the bulk of the financing for European crisis countries 

has been provided by Europe, and that in these cases the IMF typically has only 

provided about one-third of the total financial support. 

Question. On March 29, out of profound concern that the administration is not 

fully and faithfully enforcing CISADA, Senators Kyl, Lieberman, and I sent an unclassified letter to Secretary Clinton and to you with a 54-page classified annex detailing additional sanctions violations of which we are aware. Can you commit to 

a date when we can expect a response to this letter? 

Answer. In addition to the unclassified response letter sent on May 2, my staff 

provided a classified briefing on CISADA matters on May 19. 

Question. As you know, section 104 of CISADA ‘‘urges the President, in the 

strongest terms, to consider immediately using the authority of the President to impose sanctions on the Central Bank of Iran.’’ According to CRS, authorities for such 

a designation ‘‘could include section 311 of the USA PATRIOT Act (31 U.S.C. 

5318A), which authorizes designation of foreign banks as ‘‘of primary money laundering concern.’’ Do you plan to impose sanctions on the Central Bank of Iran (CBI)? 
40 

Answer. United States financial institutions are prohibited, with very limited exceptions, from doing any business directly or indirectly with all Iranian banks, including the CBI. Treasury recognizes that section 104 of CISADA urges us to consider imposing sanctions on CBI, and along with our colleagues in the administration, has been considering a range of possible actions. This follows on several years 

of intense focus by Treasury on the CBI. We have, for example, highlighted our concerns regarding the CBI’s conduct in FinCEN advisories on two occasions. Treasury 

also has noted previously that the CBI and Iranian commercial banks have requested that their names be removed from global transactions to make it more difficult for intermediary financial institutions to determine the true parties in the 

transaction, and we remain concerned that the CBI may be facilitating transactions 

for sanctioned Iranian banks. That said, designating a central bank would be a very 

significant step, with ramifications that may well extend far beyond a similar action 

against a commercial bank. For such an action to have the desired effect, it is essential that we obtain the cooperation of our allies to ensure that it increases the pressure on Iran. We continue to monitor the activities of the CBI and to work closely 

with our allies on the full range of pressures we can bring to bear on Iran. 

SUBCOMMITTEE RECESS

Senator DURBIN. Thank you, Senator Moran. 

And thank you, Mr. Secretary. 

The record of this hearing remains open for a period of 1 week, 

until noon on Tuesday, April 12. Subcommittee members may submit statements or questions for the Secretary to consider. 

And this hearing of the subcommittee stands recessed. 

[Whereupon, at 11:25 a.m., Tuesday, April 5, the subcommittee 

was recessed, to reconvene subject to the call of the Chair.] 
(41) 

MATERIAL SUBMITTED SUBSEQUENT TO THE 

HEARING 

[CLERK’S NOTE.—The following testimony(ies) were received subsequent to the hearing for inclusion in the record.] 

PREPARED STATEMENT OF POLICYLINK, THE FOOD TRUST, AND THE REINVESTMENT

FUND

Chairman and distinguished Senators of the subcommittee, thank you for the opportunity to share our support for a Healthy Food Financing Initiative (HFFI). 

PolicyLink is a national research and action institute advancing economic and social 

equity by Lifting Up What Works®; The Food Trust is a nonprofit organization 

working to ensure that everyone has access to affordable, nutritious food; and The 

Reinvestment Fund is a Community Development Financial Institution (CDFI) that 

creates wealth and opportunity for low-wealth people and places through the promotion of socially and environmentally responsible development. 

Our three organizations, along with a diverse coalition of stakeholders, which includes representatives from the grocery industry, health, civil rights, agriculture 

and the community development finance community, support the creation of HFFI 

to address the problem of ‘‘food deserts’’ in urban and rural areas across the Nation. 

This problem can be solved in many communities using a successful model that is 

underway in the State of Pennsylvania and is now being replicated throughout the 

country. 

HFFI is a program worthy of investment as it promotes health, creates jobs, and 

sparks economic development. HFFI will provide loan and grant financing to attract 

grocery stores and other fresh food retail to underserved urban, suburban, and rural 

areas, and renovate and expand existing stores so they can provide the healthy 

foods that communities want and need. Over time, with continued investment, HFFI 

could solve the problem of food deserts in urban and rural communities across the 

country. 

For decades, low-income communities, particularly communities of color, have suffered from a lack of access to healthy, fresh food. USDA research determined that 

more than 23.5 million Americans are living in communities without access to highquality, fresh food. Studies repeatedly show that residents of many low-income 

neighborhoods must travel long distances for healthy food, or rely on corner stores 

and fast food outlets offering high-fat, high-sugar foods. For instance, a recent 

multistate study found that low-income census tracts had half as many supermarkets as wealthy tracts, and four times as many smaller grocery stores. Another 

multistate study found that 8 percent of African Americans live in a tract with a 

supermarket, compared to 31 percent of whites. Nationally, low-income ZIP codes 

have 30 percent more convenience stores, which tend to lack healthy food, than middle income ZIP codes. 

And, a nationwide analysis found there are 418 rural food desert counties where 

all residents live more than 10 miles from a supermarket or a supercenter—this is 

20 percent of rural counties. In rural communities, inadequate transportation can 

be a particular challenge. In Mississippi, which has the highest obesity rate of any 

State, more than 70 percent of food stamp eligible households travel more than 30 

miles to reach a supermarket. Adults living in rural Mississippi food desert counties 

are 23 percent less likely to consume the recommended fruits and vegetables than 

those in counties that have supermarkets, controlling for age, sex, race, and education. 

Controlling for population density, rural areas have fewer food retailers of any 

types compared to urban areas, and only 14 percent the number of chain supermarkets. For instance, in New Mexico, rural residents have access to fewer grocery 

stores than urban residents, pay more for comparable items, and have less selection. 

The same market basket of groceries costs $85 for rural residents versus $55 for 

urban residents. 
42 

The results of this lack of healthy food options are grim—these communities have 

significantly higher rates of obesity, diabetes, and other related health issues. Over 

the past decade, obesity rates have more than doubled in children and tripled in 

adolescents. In 2010, PolicyLink and The Food Trust conducted a review of more 

than 130 studies on the issue of access to healthy food and found a direct correlation 

between diet-related diseases and access. A California study found that obesity and 

diabetes rates were 20 percent higher for those living in the least healthy ‘‘food environments.’’ In Indianapolis, a study found that BMI values corresponded with access to supermarkets and fast food restaurants. Researchers estimated that adding 

a new grocery store to a high-poverty neighborhood translates into a 3-pound weight 

decrease. 

Fortunately, changing access changes eating habits. For every additional supermarket in a census tract, produce consumption increases 32 percent for African 

Americans and 11 percent for whites, according to a multistate study. A survey of 

produce availability in New Orleans’ small neighborhood stores found that for each 

additional meter of shelf space devoted to fresh vegetables, residents eat an additional .35 servings per day. In fact, of 14 studies that examine food access and consumption of healthy foods, all but one of them found a correlation between greater 

access and better eating behaviors. This is also true for food stamp recipients. Proximity to a supermarket was found to be associated with increased fruit and vegetable consumption. 

The problems associated with lack of access go beyond health. Low-income communities are cut off from all the economic development benefits that come with a 

local grocery store: the creation of steady jobs at decent wages and the sparking of 

complementary retail stores and services nearby. Grocery stores operate as important economic anchors for communities, providing a vital service and bringing customers that can also support other nearby business. Securing new or improved local 

grocery stores can improve local economies and create jobs. 

President Barack Obama’s proposed fiscal year 2012 budget includes a proposal to invest $330 million, including $250 million in New Markets Tax Credits, in a national HFFI. Specifically, the Initiative would provide: —$35 million through USDA’s Office of the Secretary, with additional ‘‘other 

funds of Rural Development and the Agricultural Marketing Service available 

to support the USDA’s portion of the Healthy Food Financing Initiative’’; —$25 million through the Treasury Department’s CDFI Fund 

—$20 million through Health and Human Services 

—$250 million through the Treasury Department’s New Markets Tax Credits Program. 

An HFFI would attract investment in underserved communities by providing critical loan and grant financing. These one-time resources will help fresh food retailers 

overcome the higher initial barriers to entry into underserved, low-income urban 

and rural communities, and would also support renovation and expansion of existing 

stores so they can provide the healthy foods that communities want and need. The 

program would be flexible and comprehensive enough to support innovations in 

healthy food retailing and to assist retailers with different aspects of the store development and renovation process. 

Grocery industry representatives find that there are obstacles to grocery store development in underserved low-income communities, but also that those obstacles 

can be overcome. The development process for building a new grocery store is 

lengthy and complex, and retailers often find that stores in low-income communities 

have high start-up costs, appropriate sites are hard to find, and securing financing 

is difficult. Grocery operators in both urban and rural areas cite lack of access to 

flexible financing as one of the top barriers hindering the development of stores in 

underserved areas. 

HFFI is modeled after the successful Pennsylvania Fresh Food Financing Initiative (FFFI), a public/private partnership launched in 2004. Using a State investment of $30 million, the program has led to: 

—projects totaling more than $190 million; 

—88 stores built or renovated in underserved communities in urban and rural 

areas across the State; 

—improved access to healthy food for more than 400,000 residents; 

—more than 5,000 jobs created or retained; 

—increased local tax revenues; and 

—much-needed additional economic development in these communities. 

Stores range from full-service 70,000 square foot supermarkets to 900 square foot 

food shops; and from traditional grocery stores to farmers’ markets, cooperatives, 

and corner stores selling healthy food. Approximately two-thirds of the projects were 

in rural areas and small towns with the remainder in urban areas. 
43 

HFFI is a viable, effective, and economically sustainable solution to the problem 

of limited access to healthy foods. It can bring triple bottom-line benefits, achieving 

multiple goals: reducing health disparities and improving the health of families and 

children; creating jobs; and, stimulating local economic development in low-income 

communities. 

HFFI would incorporate the key components that allowed the Pennsylvania program to be so effective at attracting private dollars, garnering the commitment of 

store operators, getting fresh food retail stores and markets successfully developed, 

and stimulating local economies. 

The Pennsylvania FFFI has been cited as an innovative model by the U.S. Centers for Disease Control and Prevention; the National Conference of State Legislatures; Harvard’s Kennedy School of Government; and the National Governors Association. There is significant momentum in many States and cities across the country 

to address the lack of grocery access in underserved communities. Several States 

and/or cities are in the process of replicating the successful Pennsylvania FFFI Program, and many others have begun to examine the needs and opportunities in their 

communities. For example: 

—The State of New York has launched the Healthy Food, Healthy Communities 

Initiative, a business financing program to encourage supermarket and other 

fresh food retail investment in underserved areas throughout the State that will 

provide loans and grants to eligible projects. New York City has launched a 

complementary FRESH Program that will encourage supermarket development 

through tax and zoning incentives and a single point of access to city government for supermarket operators. 

—The City of New Orleans recently launched the Fresh Food Retailer Initiative 

Program (FFRI) that will provide direct financial assistance to retail businesses 

by awarding forgivable and/or low-interest loans to grocery stores and other 

fresh food retailers. 

—The California Endowment, NCB Capital Impact, and other community, supermarket industry, and government partners have been working to create a supermarket financing program in California that is expected to be launched in 

the first half of 2011. 

A national HFFI could amplify the impact in each of these States and leverage 

the work already underway to ensure swift implementation. Moreover, a national 

HFFI would ensure that all State and communities could solve their food desert 

problems with new stores and other healthy food retail projects. 

In the midst of our current economic downturn, the need for a comprehensive Federal policy to address the lack of fresh food access in low-income is critical. We urge 

the subcommittee to support full funding for a Healthy Food Financing Initiative, 

for the benefit of communities across the Nation. Thank you for the opportunity to 

share our perspectives with you today. 

(45) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2012 

WEDNESDAY, MAY 4, 2011 

U.S. SENATE, SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS, Washington, DC. 

The subcommittee met at 10:17 a.m., in room SD–138, Dirksen 

Senate Office Building, Hon. Richard J. Durbin (chairman) presiding. 

Present: Senators Durbin, Lautenberg, and Moran. 

COMMODITY FUTURES TRADING COMMISSION 

STATEMENT OF HON. GARY GENSLER, CHAIRMAN 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

Senator DURBIN. Good morning. I’m pleased to convene this hearing to consider the fiscal year 2012 funding request of two key Federal regulatory agencies within the jurisdiction of the Senate Committee on Appropriations Subcommittee on Financial Services and 

General Government—the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). 

Before I go further, let me apologize for being a few minutes late, 

but I opened a session this morning and it took a few minutes to 

get that started. 

I welcome my distinguished Ranking Member, Senator Jerry 

Moran, other colleagues who’ve joined me on the dais today, and 

others that may arrive during the course of the proceeding. 

Joining us today to present testimony on the critical work of 

these agencies; to share how they’ve used the resources provided 

over the past several years; and to explain the details of their 

budgetary needs for the next fiscal year, are the Honorable Gary 

Gensler, chairman of the CFTC, and the Honorable Mary L. 

Schapiro, chairman of the SEC. 

The subcommittee has received a statement for the record from 

Colleen M. Kelley, president of the National Treasury Employees 

Union, regarding the funding for the SEC. And if there’s no objection, I ask that it be included in the record of these proceedings. 

CRITICAL MARKET OVERSIGHT

The CFTC and the SEC both occupy pivotal positions at the forefront of stimulating and sustaining economic growth and prosperity 

in America, while protecting the marketplace from fraud and ma-
46 

nipulation. Market users, financial investors, and the U.S. economy 

rely on the vigilant oversight of these two agencies in today’s rapidpaced, evolving, and often volatile, global marketplace. 

It’s clear that Chairman Gensler and Chairman Schapiro, their 

fellow commissioners, and their respective staff, have invested inestimable hours in paving the way toward a more reliable regulatory 

foundation—one that will safeguard the stability and integrity of 

the futures and securities markets. Particularly at this time in history, we depend on their foresight and leadership to implement 

promptly, prudently, and transparently the array of comprehensive 

reforms designed to strengthen our regulatory framework. 

CFTC MISSION

The CFTC carries out market surveillance, compliance, and enforcement in the futures arena. It detects, deters, and punishes 

abusive trading activity and the manipulation of commodity prices 

which could have a negative impact on consumers and the economy. 

Adding to the challenge of the CFTC’s mission is a significantly 

transformed, globalized, electronic, around-the-clock, and highly diversified marketplace. With the enactment of the Dodd-Frank Act 

financial regulatory reform, the CFTC’s mission was substantially 

expanded to embrace oversight of the swaps marketplace, the vast, 

once-in-the-shadows world of over-the-counter (OTC) derivatives. 

To grasp the vast scope of the CFTC’s additional responsibility, 

it’s useful to consider the long-regulated U.S. futures marketplace, 

historically policed by the CFTC, that has the notional value of approximately $40 trillion—enormous by anyone’s calculation. It 

pales in comparison to the U.S. OTC derivatives marketplace now 

coming under the CFTC’s purview, with a notional value not of $40 

trillion, but $300 trillion—nearly eight times the amount of the 

regulated futures market. 

SEC MISSION

As the investor’s advocate, the SEC is responsible for maintaining fair, orderly, and efficient stock and securities markets. The 

SEC conducts day-to-day oversight of major market participants, 

monitors corporate disclosure of information to the public, and investigates and pursues civil and criminal enforcement actions. 

To fulfill its market oversight and investor protection functions, 

the SEC must monitor 1,800 investment advisers, 7,500 mutual 

funds, and more than 5,000 broker-dealers with more than 160,000 

branch offices. The SEC reviews the disclosures and financial statements of approximately 10,000 reporting companies, oversees approximately 500 transfer agents, 15 national securities exchanges, 

9 clearing agencies, and 10 nationally recognized statistical rating 

organizations. 

With the enactment of the Dodd-Frank Act last July, the SEC’s 

responsibilities grew dramatically. Now the SEC is in the driver’s 

seat for issuing 100 new rules; creating 5 new offices; producing 

more than 20 studies and reports; overseeing OTC derivatives markets and hedge fund advisers; registering municipal advisers and 

security-based swap market participants; enhanced supervising of 

Nationally Recognized Statistical Rating Organizations and clear-
47 

ing agencies; regulating asset-backed securities; and creating a new 

whistleblower program. 

BUDGETARY NEEDS

I welcome the opportunity today to look at the critical budgets 

of these two very, very important agencies. I am pleased that during the past several years that I’ve been honored to chair the subcommittee we have substantially and dramatically increased the 

funding of both of these agencies. In terms of resources in recent 

years, since fiscal year 2007 funding for the CFTC has increased 

from $97.9 million to the $202.6 million recently enacted in the fiscal year 2011 continuing resolution—a 107 percent hike in funding 

over a 4-year period. The SEC’s funding has grown from $892 million in fiscal year 2007 to $1.185 billion in fiscal year 2011—a 33 

percent hike in funding in that time span. 

Compared to the allocation available to the subcommittee last 

July when we prepared our recommendations, we experienced a 

significantly reduced overall level for purposes of funding the decisions for the recently enhanced fiscal year 2011 full year continuing resolution. Encountering a substantial reduction in our 

available funds of more than $3.5 billion, representing a 13 percent 

cut below what we had to work with last July, was far from ideal. 

It also meant an overall decrease of $2.35 billion, or 10 percent 

below a freeze at the fiscal year 2010 enacted level, making for 

some tough choices. The fiscal year 2012 forecast does not look 

rosy. I fully expect to face equally complicated and challenging 

funding requirements. 

PREPARED STATEMENT

I’m going to ask that the remainder of my statement be placed 

in the record, and I’d like to now turn it over to my Ranking Member, Senator Moran of Kansas, for any opening remarks he might 

have. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR RICHARD J. DURBIN

Good morning. I am pleased to convene this hearing to consider the fiscal year 

2012 funding requests of two key Federal regulatory agencies within the jurisdiction 

of the Appropriations Subcommittee on Financial Services and General Government: 

the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). 

I welcome my distinguished ranking member, Senator Jerry Moran, and other colleagues who have joined me on the dais today, and others who may arrive during 

the course of these proceedings. 

Joining us today to present testimony on the critical work of their agencies, to 

share how they have used the resources provided over the past couple years, and 

to explain the details of their budgetary needs for fiscal year 2012 are the Honorable 

Gary Gensler, Chairman of the CFTC and the Honorable Mary L. Schapiro, Chairman of the SEC. 

The CFTC and the SEC both occupy pivotal positions at the forefront of stimulating and sustaining economic growth and prosperity in our country—while protecting the marketplace from fraud and manipulation. 

Market users, financial investors, and the U.S. economy rely on vigilant oversight 

by these two agencies in today’s rapid-paced, evolving, and often volatile global marketplace. 

It is clear that both Chairman Gensler and Chairman Schapiro, their fellow Commissioners, and their respective staff have invested inestimable hours in paving the 

way toward a more reliable regulatory foundation—one that will safeguard the sta-
48 

bility and integrity of the futures and securities markets. Particularly at this time 

in history, we depend on their foresight and leadership to promptly, prudently, and 

transparently implement the array of comprehensive reforms designed to strengthen 

our regulatory framework. 

The CFTC carries out market surveillance, compliance, and enforcement programs 

in the futures arena. The CFTC detects, deters, and punishes abusive trading activity and manipulation of commodity prices, which could have negative impacts on 

consumers and the economy. 

Adding to the challenge of the CFTC’s mission is a significantly transformed, 

globalized, electronic, round-the-clock, and highly diversified marketplace. With the 

enactment of Dodd-Frank financial regulatory reform, the CFTC’s mission was substantially expanded to embrace oversight of the swaps marketplace—the vast ‘‘oncein-the-shadows’’ world of over-the-counter (OTC) derivatives. 

To grasp the vast scope of the CFTC’s additional responsibilities, it is useful to 

consider that the long-regulated U.S. futures marketplace historically policed by the 

CFTC has a notional value of approximately $40 trillion. Enormous—by anyone’s 

calculation. But it pales in comparison to the U.S. OTC derivatives marketplace now 

coming under the CFTC’s purview—with a notional value estimated at $300 trillion—nearly eight times the notional amount of the regulated futures markets. 

As the ‘‘investors advocate,’’ the SEC is responsible for maintaining fair, orderly, 

and efficient stock and securities markets. The SEC conducts day-to-day oversight 

of the major market participants, monitors corporate disclosure of information to the 

investing public, and investigates and pursues civil and criminal enforcement actions against securities law violations. 

To fulfill its market oversight and investor protection functions, the SEC must 

monitor 1,800 investment advisers, 7,500 mutual funds, and more than 5,000 

broker-dealers with more than 160,000 branch offices. The SEC reviews the disclosures and financial statements of approximately 10,000 reporting companies, oversees approximately 500 transfer agents, 15 national securities exchanges, 9 clearing 

agencies, 10 nationally recognized statistical rating organizations (NRSROs), as well 

as the Public Company Accounting Oversight Board, Financial Industry Regulatory 

Authority, Municipal Securities Rulemaking Board, and the Securities Investor Protection Corporation. 

With the enactment of the Dodd-Frank Act last July, the SEC’s responsibilities 

grew considerably. Now the SEC is in the driver’s seat for issuing 100 new rules, 

creating five new offices, producing more than 20 studies and reports, overseeing 

the over-the-counter derivatives market and hedge fund advisers; registering municipal advisers and security-based swap market participants; enhanced supervising of 

NRSROs and clearing agencies; regulating asset-backed securities; and creating a 

new whistleblower program. 

I welcome the opportunity today to conduct critical oversight of these two agencies 

through a candid discussion of where they are today, where they need to be, and 

how we can work to provide resources they need to satisfy their vital missions. 

I am pleased that over the past several years, this subcommittee has been able 

to substantially boost the funding approved for the CFTC and the SEC to help address pressing resource needs. 

In terms of resources in recent years, since fiscal year 2007, funding for the CFTC 

has increased from $97.981 million to the $202.675 million recently enacted in the 

fiscal year 2011 continuing resolution, a 107 percent hike in funding. The SEC’s 

funding has grown from $892.6 million in fiscal year 2007 to $1.185 billion in fiscal 

year 2011, a 33 percent hike in funding over the time span. 

Compared to the allocation available to this subcommittee last July when we prepared our fiscal year 2011 recommendations, we experienced a significantly reduced 

overall level for purposes of funding decisions for the recently enacted fiscal year 

2011 full-year continuing resolution. Encountering a substantial reduction in our 

available funds of more than $3.5 billion, representing a 13 percent cut, below 

where we were last July was far from ideal. It also meant an overall decrease of 

$2.35 billion, or 10 percent, below a freeze at the fiscal year 2010 enacted level— 

making for many tough choices and painful sacrifices. 

The fiscal year 2012 forecast does not look rosy. I fully expect to face equally complicated and challenging funding decisions as we prepare our bill for the ensuing 

fiscal year. 

Looking ahead, for fiscal year 2012, the President seeks funding of $308 million 

for the CFTC, an increase of $105 million (52 percent) more than the fiscal year 

2011 enacted level of $206.7 million, which itself is an increase of $33.98 million, 

a 20 percent hike, above the fiscal year 2010 enacted level of $168.8 million. 

For the SEC, the President’s fiscal year 2012 budget seeks base funding of $1.407 

billion. This is an increase of $222.5 million (19 percent) above the fiscal year 2011 
49 

enacted level of $1.185 billion, not including an additional $33 million in prior-year 

unobligated balances. The fiscal year 2011 base funding represents an increase of 

$74 million, or 7 percent, more than the fiscal year 2010 enacted level of $1.111 billion. 

Oversight Responsibility.—The Congress probably exercises its most effective oversight of agencies and programs through the appropriations process. It allows an annual check-up and review of operations and spending. Today’s hearing provides a 

valuable opportunity to ask some key questions: 

—Are the CFTC and the SEC keeping pace with developments in the markets 

particularly the emerging prevalence of new-fangled, more complex financial 

products? 

—Do these agencies have the right mix of talent and specialized expertise to be 

vigilant watchdogs rather than timid lap dogs? 

—Are they ahead of the curve, rather than trailing behind, when it comes to stopping unscrupulous, greed-driven schemers who pursue selfish gain at the expense of the unwary and unwitting? 

—Do they have nimble, state-of-the-art, sophisticated information technology to 

augment and support their human capital? 

—What are the likely consequences of budget belt-tightening and possibly reduced 

resources? 

I look forward to hearing more about what each of these agencies have been able 

to accomplish since our last hearing, what resource gaps remain to be filled to make 

them more robust, responsive regulators, and how do we best get there amid growing deficits and spending cut sentiments. 

It will be helpful to hear from both Chairmen their honest appraisals about the 

resources they will require to achieve their missions, keep pace with change, and 

becomes as sophisticated as, if not more so, than the entities they monitor—while 

responsibly managing taxpayer dollars. 

STATEMENT OF SENATOR JERRY MORAN

Senator MORAN. Chairman Durbin, thank you very much. Thank 

you for your kindness and your graciousness to me, and thank you 

for calling this hearing. 

And I welcome the two chairmen, Chairman Gensler and Chairman Schapiro. 

As we review the budget submissions for the CFTC and the SEC 

for fiscal year 2012, I look forward to hearing the details of your 

requests, your plans to carry out your core missions, and how you 

propose to implement the Dodd-Frank Act. 

Chairman Gensler, as you have said, derivative markets and effective oversight of those markets matter to corporations, farmers, 

homeowners, and small businesses. We all benefit from effective 

oversight that promotes fair and orderly derivative markets. 

However, to promote such markets and to assist the businesses 

that are dependent upon them, we must also have an orderly and 

transparent process which outlines how they should work. 

I have heard many concerns expressed that the CFTC is moving 

too quickly and has not adequately established the cost of new regulations, valuing speed over deliberation. I was pleased to see the 

CFTC acted last week to give the public more time to comment on 

the new regulations that you are proposing. While I welcome this 

extension, I also think that rules have been proposed in a sequence 

that has created some confusion. 

I’ve heard Chairman Gensler’s recent comment about how the 

CFTC has revealed its mosaic of rules. However, I think a roadmap 

for implementation, rather than a random mosaic of rules, would 

be more helpful in getting us on the path to a fair and orderly marketplace and help us establish appropriation priorities. This call for 

a roadmap is intended to foster transparency and broaden under-
50 

standing, and for any new regulatory framework to be effective, everyone involved must have a clear appreciation of their roles and 

responsibilities in the new system and how these changes will 

evolve in a logical sequence. 

In reviewing the budget requests of both the CFTC and the SEC, 

we recognize that protecting investors is important as first-time investors have turned to markets to help secure their retirements, 

pay for homes, and send their children to college. We also understand that your agencies are faced with innovations in the financial 

services arena that present regulators with increasingly complex 

markets to regulate. However, we’re all aware of our budget deficit 

and fiscal constraints that will require all agencies to make decisions as to how best to allocate resources. 

Technological solutions will be necessary to keep up with the 

next generation of trading platforms and systems that operate at 

record-breaking pace. Staffing levels will have to be carefully considered so that they do not become unsustainable. This is not a 

new challenge. All agencies should be making strategic decisions on 

resource allocations driven by the agency’s mission responsibilities, 

and grounded in analysis of their workload and their human capital resources and needs. Simply increasing funding does not ensure that an agency can successfully achieve its mission. 

In addition to making wise decisions about how to strike a balance between investments in new technology and staffing levels, 

agencies also must make sound decisions about what type of staff 

to hire and how best to utilize those positions. In reviewing the recent Inspector General (IG) report on the CFTC rulemaking process, I have concerns about how the CFTC has chosen to utilize staff 

the last year. For instance, as discussed in the IG report, the CFTC 

has ineffectively used its Office of the Chief Economist. Not only 

was this office left unfilled for nearly a year, but the CFTC went 

on a hiring spree for new lawyers during the same time. The IG 

report suggests that unless the CFTC can make a wiser hiring decision and engage in meaningful economic analysis, the Congress 

may need to provide additional direction on how the commission 

can spend money on hiring and how it should utilize its staff. 

In addition to the budget concerns I have another one is that the 

CFTC, despite tight budget deficits, has engaged in rulemakings 

that are discretionary and unnecessary according to the CFTC—the 

only economic analysis available. For example, proposed 

rulemakings on position limits and core principles are not required 

by the Dodd-Frank Act. This is not necessary for the CFTC to immediately move toward these rulemakings. Furthermore, the only 

reliable quantitative data available from the CFTC is a staff report 

that suggests such rules are unnecessary and, at most, premature. 

Pursuit of position limits and core principle rulemakings are direct 

examples of how the CFTC has failed to listen to the economist and 

failed to prioritize rulemakings under existing budget constraints. 

PREPARED STATEMENT

Chairman Gensler and Chairman Schapiro, you both have challenges—significant ones—in front of you. You must improve transparency in our securities market and uncover fraud and deception, 
51 

while not over-regulating our markets and hindering our economic 

recovery. 

Chairman Durbin, I look forward to working with you as we consider the fiscal year 2012 budget requests for the CFTC and the 

SEC. Thank you. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR JERRY MORAN

Mr. Chairman, thank you for calling this hearing. Chairman Gensler and Chairman Schapiro, welcome. 

As we review the budget submissions for the Commodity Futures Trading Commission’s (CFTC) and the Security and Exchange Commission (SEC) for fiscal year 

2012, I look forward to hearing the details of your requests, your plans to carry out 

your core missions, and how you propose to implement the Dodd-Frank Act. 

Chairman Gensler, as you have said, ‘‘derivatives markets and effective oversight 

of those markets matters to corporations, farmers, homeowners and small businesses.’’ We all benefit from effective oversight that promotes fair and orderly derivatives markets. However, to promote such markets and assist the businesses that 

are dependent on them, we must also have an orderly and transparent process 

which outlines how they should work. I have heard many concerns expressed that 

the CFTC is moving too quickly and has not adequately established the cost of new 

regulations, valuing speed over deliberation. I was pleased to see that the CFTC 

acted last week to give the public more time to comment on the new regulations 

you are proposing. While I welcome this extension, I also think rules have been proposed in a sequence which has created confusion. I have heard Chairman Gensler’s 

recent comment about how the CFTC has revealed its ‘‘mosaic’’ of rules. However, 

I think a roadmap for implementation, rather than a random mosaic of rules, would 

be more helpful in getting us on the path to a fair and orderly marketplace and help 

establish appropriations. 

This call for a road map is intended to foster transparency and broaden understanding. For any new regulatory framework to be effective, everyone involved must 

have a clear understanding of their roles and responsibilities in the new system and 

how those changes will evolve in a logical sequence. 

In reviewing the budget request of the both the CFTC and the SEC, we recognize 

that protecting investors is important as first-time investors have turned to the 

markets to help secure their retirements, pay for homes, and send their children to 

college. We also understand that your agencies are faced with innovations in the 

financial services arena that present regulators with increasingly complex markets 

to regulate. 

However, as we are all aware, our budget deficit and fiscal constraints will require all agencies to make decisions as to how to best allocate resources. Technological solutions will be necessary to keep up with next generation trading platforms 

and systems that operate at a record-breaking pace. Staffing levels will have to be 

carefully considered so that they do not become unsustainable. This is not a new 

challenge. All agencies should be making strategic decisions on resource allocation 

driven by the agency’s mission responsibilities, and grounded in analysis of their 

workload and their human capital resources and needs. Simply increasing funding 

does not ensure that an agency can successfully achieve its mission. 

In addition to making wise decisions about how to strike a balance between investments in new technology and staffing levels, agencies must also make sound decisions about what type of staff to hire and how best to utilize those positions. In 

reviewing a recent Inspector General (IG) report on the CFTC rulemaking process, 

I have concerns about how the CFTC has chosen to utilize staff over the last year. 

For instance, as discussed in the IG report, the CFTC has ineffectively used the Office of the Chief Economist. Not only was this office left unfilled for nearly a year, 

but the CFTC went on a hiring spree for new lawyers during the same time. The 

IG report suggests that unless the CFTC can make wiser hiring decisions and engage in meaningful economic analysis, the Congress may need to provide additional 

direction about how the CFTC can spend money on hiring and how it should utilize 

its staff. 

An addition to budget concern I have is that the CFTC, despite tight budgets, has 

engaged in rulemakings that are discretionary and unnecessary, according to the 

only the CFTC economic analysis available. For example, proposed rulemakings on 

position limits and core principles are not required by Dodd Frank. Thus, it is not 

necessary for the CFTC to immediately move forward with these rulemakings. Furthermore, the only reliable quantitative data available from the CFTC is a staff re-
52 

port that suggests such rules are unnecessary and at most premature. Pursuit of 

position limits and core principle rulemakings are direct examples of how the CFTC 

has failed listen to its economists and failed to prioritize rulemakings under existing 

budget constraints. 

Chairman Gensler and Chairman Schapiro, you both have challenging tasks in 

front of you. You must improve transparency in our securities markets and uncover 

fraud and deception, while not over-regulating our markets and hindering our economic recovery. 

Chairman Durbin, I look forward to working with you as we consider the fiscal 

year 2012 budget requests of the CFTC and the SEC. 

Senator DURBIN. Thank you Senator Moran. 

Senator Lautenberg. 

STATEMENT OF SENATOR FRANK R. LAUTENBERG

Senator LAUTENBERG. Mr. Chairman, thanks very much for holding the hearing and I ask for unanimous consent that my full statement will be included in the record. 

Senator DURBIN. Without objection. 

Senator LAUTENBERG. And I take a moment of that time to just 

say that, how pleased I am to see each of you in your positions. 

And how delighted I am—delight’s the wrong word—how satisfied 

I am that we’re on to something, that we’re going to change the 

way we did business in the past as a result of the finance reform 

legislation, to make sure that companies understand that there are 

obligations that they’re going to have to meet. 

And I look at history. I used to run a company, a very big company—ADP. ADP does the Bureau of Labor statistics every month 

now, and the company pays more than 35 million people their paychecks and has fresh data to work from. And I learned something 

as the CEO of that company. As the company grew, I learned that 

the most satisfied investors are those who see a transparent approach to what’s going on in the company. And I see that, the 

shortcuts to increased compensation without regard for the performance of the company or of the need of the employees. 

I furnished the Columbia Business School, my alma mater, with 

a chair. The chair was endowed in 2001, when I was out of the 

Senate for 2 years, and the chair was to say that we have to pay 

more attention to business ethics and corporate governance. And I 

point out without patting myself too hard on my, on the shoulder, 

that, that was in 2001, my friends. It was 2001, which preceded 

2008 by a long time. 

PREPARED STATEMENT

And so, I’m pleased to see that we’re finally going to say—hey, 

you can’t get away with the kinds of things that you did before. 

The public’s entitled to know what happens when they put money 

into an investment, and its our responsibility to help guide them— 

and not worry so much about whether we’re overburdening, but I 

worry about whether we’re underburdening the, your respective 

agencies and letting things go back to where they were. That 

should never happen again in America. And I’m going to fight like 

the devil to make sure you have the resources to do your job with. 

[The statement follows:] 
53 

PREPARED STATEMENT OF SENATOR FRANK R. LAUTENBERG

Mr. Chairman, each week brings another reminder that our country is slowly— 

but steadily—recovering from the worst economic downturn since the Great Depression. 

Letting Wall Street regulate itself helped trigger this crisis, sending millions of 

Americans to the unemployment line and causing their retirement accounts to 

shrink. 

Under President Obama’s leadership, we’re rebuilding the economy from the 

ground up—laying a foundation that will make our country stronger and better prepared for the future. 

The cornerstone of this effort is last year’s Wall Street reform law, which includes 

critical safeguards to protect the economy from another meltdown. 

This new law reins in the recklessness of the big banks and creates a watchdog 

to look out for consumers and make sure financial institutions follow the rules. 

In addition, these reforms ensure that ordinary investors get the information they 

need to make sound decisions—and bring the secretive derivatives market out of the 

shadows and into the sunlight. 

Unfortunately, House Republicans have been persuaded by their friends on Wall 

Street that the financial industry can regulate itself. 

They are trying to stop Wall Street reform by gutting funding for the new law. 

Make no mistake: without these new reforms and the funding to carry them out, 

Wall Street will return to its reckless ways, which will threaten our economic recovery and undermine our ability to create jobs. 

As a former CEO, I understand the need for a strong financial sector. 

But nothing is more important than putting people back to work and making sure 

that our economy is never again threatened by the risky bets of Wall Street gamblers. 

So I look forward to hearing from today’s witnesses about how we can make sure 

the reform law works the way it was designed and protects the American economy 

and the American people. 

Senator LAUTENBERG. Thank you very much. 

Senator DURBIN. Thanks a lot, Senator Lautenberg. 

And we’d like to invite our guests to make an opening statement 

if they’d care to. 

Mr. Gensler. 

SUMMARY STATEMENT OF GARY GENSLER

Mr. GENSLER. Good morning. Thank you, Chairman Durbin, 

Ranking Member Moran, and members of the subcommittee. I 

thank you for inviting me to testify on behalf of the CFTC about 

the 2012 budget request. 

I’m honored also to testify along with SEC Chair, Mary L. 

Schapiro, with whom we’ve worked very closely to implement the 

Dodd-Frank Act, and many other matters. 

The CFTC is a good investment for the American public. And 

though the CFTC is not a price-setting agency, rising prices for 

basic commodities, agriculture, energy and the like, highlight the 

importance of having effective market oversight to ensure integrity 

and transparency. 

Each part of our Nation’s economy relies on a well-functioning 

derivatives marketplace. It’s essential, as producers, merchants, 

and other end-users manage their risk. In essence what it does is 

allows a company to lock in a price at some future date. That’s at 

the core of what we oversee. 

This price certainly allows companies to better invest and plan 

for their business. The business certainty that derivatives markets 

can provide exists to the degree only that people have confidence 

in the integrity of the markets, however. And the CFTC was created to oversee futures markets—first in the agriculture markets, 
54 

later other commodities. But, of course, in the 1980s came along 

the swaps marketplace, and this new type of derivatives remained 

unregulated until the Dodd-Frank Act. With the passage of the 

Dodd-Frank Act, the U.S. swaps market, as the chairman noted— 

nearly $300 trillion in size, or roughly seven times the size of what 

we currently oversee—largely comes under our jurisdiction. Some 

of it, of course, is over at the SEC. 

So, we’re working deliberately and efficiently, and I believe 

transparently, to put in place the rules that the Congress directed 

us to do. We’ve now at this point substantially completed that process. And as the Ranking Member said, we have the mosaic out, and 

we are allowing the public to look at that whole mosaic. We’ll only 

move forward with final rules after we summarize the comments— 

and with 16,000 comments in, that’s going to take some time to 

summarize and get commissioner feedback—but I think we’ll be 

moving on final rules throughout the summer and into the fall of 

this year. As relates to the budget request of $308 million that the President put forward, there are many priorities. I’d like to just highlight, very quickly, four. One is technology. The budget request 

builds upon the support of this subcommittee that gave us $37 million in technology this year, to move up to $66 million. The swaps 

marketplace being seven times the size of the futures marketplace, 

we need that information. And though the Dodd-Frank Act established something called Swap Data Repositories, we’re faced with 

the responsibility of aggregating futures data with swaps data and 

bringing it together. And what’s more—there may be more than 

one data repository by asset class. And so we’ll have to aggregate 

that information so that we can police the markets, and we need 

the technology to make sure that we can do that. 

Second, is the swap dealers themselves. The Dodd-Frank Act, for 

the first time, calls for comprehensive regulation of swaps dealers. 

To accomplish this, the CFTC will establish a new swap dealer and 

intermediary oversight program, or actually, division. We’ll be moving some people over into this. But this area will need about 30 

more staff, building upon a base of about 80 people that we currently have in that effort. 

Third, is clearinghouses. The Dodd-Frank Act requires a mandate that swaps that are standardized enough, be in central clearing. We currently oversee about 15 clearinghouses. We think that 

will grow to 20 or 21. With that roughly 50 percent increase of 

clearinghouses and an eight-fold increase in the underlying product, we’re asking for about 30 new staff, bringing the staff in our 

clearing oversight from 40 up to 70. 

And then, last, among these four key priorities is transparency. 

The Dodd-Frank Act has real-time price reporting. It also has oversight of a new market mechanism called Swap Execution Facilities 

(SEFs). We’re not entirely sure how many there will be. We think, 

our best estimate is at least 30 or 40 of these new SEFs. We believe that we need at least 60 additional staff, to oversee the markets. That jump is to about 100 in this area, but it’s for real-time 

reporting and transparency. 

Now, this is not to say we don’t have other priorities—enforcement, overseeing position limit authority, market surveillance—but 
55 

overall it’s bringing our staff up from about 720, where we think 

we’ll end this year, with your help with this $202 million, to a request for 983 people. 

PREPARED STATEMENT

We recognize this budget deficit for the Nation presents enormous challenges for this subcommittee and the Congress and the 

public, but we cannot forget that the 2008 crisis was very real, and 

it still is very real. Reform will only be effective once we’ve completed final rules, but, yes, also only after we have significant resources to fulfill this extended mission. 

So, I thank you. 

[The statement follows:] 

PREPARED STATEMENT OF GARY GENSLER

Good morning Chairman Durbin, Ranking Member Moran and members of the 

subcommittee. I thank you for inviting me to today’s hearing on the Commodity Futures Trading Commission’s (CFTC) fiscal year 2012 budget request. I am pleased 

to testify on behalf of the Commission. 

CFTC MISSION

The CFTC is a good investment for the American public, overseeing vast markets 

with a relatively small staff. At its core, the mission of the CFTC is to ensure the 

integrity and transparency of derivatives markets so that hedgers and investors 

may use them with confidence. Derivatives emerged as tools to allow producers and 

merchants to be certain of the prices of commodities that they planned to use or 

sell in the future. Derivatives markets are used to hedge risk and discover prices 

and work best when they are transparent and free from fraud and manipulation. 

The CFTC historically has been charged with overseeing one part of the derivatives market—the commodity futures markets. These markets have been around for 

more than a century. Initially, there were futures on agricultural commodities, such 

as wheat, corn, and cotton. The markets have grown to include contracts on energy 

and metals commodities, such as crude oil, heating oil, gasoline, copper, gold and 

silver, and contracts on financial products, such as interest rates, stock indexes, and 

foreign currency. These markets—and our regulatory oversight—affect tens of thousands of farmers, ranchers, oil producers, corporations, municipalities, pension 

funds, and anybody else who wants to hedge a risk and get the benefits of transparent pricing in competitive markets. 

Each part of our Nation’s economy relies on a well-functioning derivatives marketplace. It is essential so that producers, merchants, and other end-users can manage 

their risks. It allows those companies to lock in prices for the future. Such price certainty allows companies to better make essential business decisions and investments. Thus, it is critical that market participants have confidence in the integrity 

of these price discovery markets. 

Though the CFTC is not a price-setting agency, rising prices for basic commodities—agricultural and energy—highlight the importance of having effective market 

oversight that ensures integrity and transparency. 

The CFTC fulfills its statutory mandate through market surveillance, industry 

oversight and enforcement. We pursue fraud, such as Ponzi schemes, and market 

manipulation. We oversee futures exchanges and clearinghouses. We process registration applications, rule reviews, appellate filings, and examinations of exchanges 

and clearinghouses. The CFTC is a cop on the beat that protects markets in commodities and derivatives from fraud, manipulation, and other abuses. 

CFTC SCOPE

The CFTC and its predecessors have overseen the commodity futures markets 

since the 1920s. A new type of derivatives called swaps, however, came around in 

the 1980s and remained unregulated until the passage of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act (Dodd-Frank). That legislation expanded the CFTC’s oversight to, for the first time, include both the futures and 

swaps markets. It also gave the CFTC new regulatory responsibilities. The Securities and Exchange Commission (SEC) will have similar jurisdiction over the securities-based swaps markets. 
56 

The swaps market that Dodd-Frank tasks the CFTC with regulating has a notional amount roughly seven times the size of that of the futures market and is significantly more complex. The notional value of the U.S. futures market in December 

was approximately $36 trillion. Based upon figures compiled by the Office of the 

Comptroller of the Currency, the largest 25 bank holding companies currently have 

$277 trillion notional amount of swaps. 

Further, Dodd-Frank expands the CFTC’s regulatory authority to include new 

types of entities, such as swap dealers, swap execution facilities (SEFs), and swap 

data repositories (SDRs). The swaps market is more complex than the futures markets because it includes customized bilateral hedging arrangements. Whereas all futures trade on exchanges, some swaps will continue to be traded over-the-counter. 

IMPLEMENTING THE DODD-FRANK ACT

The CFTC is working deliberatively, efficiently, and transparently to implement 

the Dodd-Frank Act. At this point, as we have substantially completed the proposal 

phase of our rule-writing to implement the Dodd-Frank Act. Since the President 

signed the Dodd-Frank Act last July, the CFTC has promulgated rules covering all 

of the areas set out by the act for swaps regulation, with the exception of the 

Volcker Rule, for which the act set a different timeline. 

With the substantial completion of the proposal phase of rule-writing, the public 

now has the opportunity to review the whole mosaic of rules. This will allow market 

participants to evaluate the entire regulatory scheme as a whole. 

To further facilitate this process, last week the CFTC approved reopening or extending the comment periods for most of our Dodd-Frank proposed rules for an additional 30 days. 

This time will allow the public to submit any comments they might have after 

seeing the entire mosaic at once. As part of this, I am hopeful that market participants will continue to comment about potential compliance costs as well as phasing 

of implementation dates to help the agency as we go forward with finalizing rules. 

We will begin considering final rules only after staff can analyze, summarize and 

consider comments, after the Commissioners are able to discuss the comments and 

provide feedback to staff, and after the CFTC consults with fellow regulators on the 

rules. 

One component that we have asked the public about is phasing of rule implementation. Over the last 2 days, CFTC staff has worked with the SEC staff to host a 

roundtable to hear directly from the public about the timing of implementation 

dates of Dodd-Frank rulemakings. We also opened a public comment file last month 

to hear specifically on this issue. The roundtable and public comments help inform 

the CFTC as to what requirements can be met sooner and which ones will take a 

bit more time. 

FISCAL YEAR 2012 BUDGET REQUEST

The President’s budget proposes that $308 million be appropriated for the CFTC 

for fiscal year 2012 to remain available until expended through fiscal year 2013. 

This funding level would enable the Commission to perform its responsibilities both 

in the oversight of commodity futures markets and in beginning to oversee the 

swaps markets. 

In 2008, both the financial system and the financial regulatory system failed the 

test for the American public. Though there were many causes to the crisis, the unregulated swaps market played a central role. The President’s budget request asks 

for $106 million more than our fiscal year 2011 funding level because the 2008 financial crisis was very real, and the Congress mandated that regulation be brought 

to the swaps market. An investment in the CFTC is warranted, because, as we saw 

in 2008, without oversight of the swaps market, billions of taxpayer dollars may be 

at risk. 

The CFTC’s resources are used primarily on staff and technology. 

The CFTC peaked in staff in 1992 at 634, but staff levels were cut nearly 25 percent in the early 2000s to our lowest level of approximately 440 in 2007 and 2008. 

With the help of the Congress, CFTC staffing levels just this past year returned to 

our levels of the late 1990s—the level needed to oversee the commodity futures markets at that time. 

At the end of fiscal year 2010, the CFTC employed 682 thoughtful, experienced, 

and hardworking staff. In the last 10 years, however, futures trading volume has 

increased more than fourfold. The number of actively traded futures and options 

contracts increased more than ninefold. We have moved from an environment with 

open-outcry pit trading to highly sophisticated electronic markets. 
57 

The recently passed continuing resolution appropriates approximately $202 million to the CFTC, which would allow the Commission to grow modestly to approximately 720 employees. The President’s fiscal year 2012 budget request would provide funding for 983 employees. Though we are asking for an increase in funding 

to support approximately 37 percent more staff, it is in light of a congressional mandate that expands our scope more than sevenfold. 

Effective oversight of the markets requires that we invest in both staff and technology. We need staff to process registration applications, conduct surveillance, and 
58 

rule enforcement reviews, investigate fraud and manipulation, and perform many 

other functions that computers alone cannot. But we also need technology to pursue 

automated surveillance to oversee the markets and to make our oversight more efficient. 

Despite rapid advances in technology and the increased size of regulated derivatives markets, funding for the CFTC has lagged behind the growth of the markets. 

While market participants have the technology to automate their trading, we do not 

yet have the resources to employ modern technology to automate our surveillance. 

Last year, we used about 18 percent of our budget—$31 million—on technology 

initiatives. The continuing resolution requires that we allocate $37.2 million toward 

technology in fiscal year 2011. The CFTC needs to make further investment in technology to efficiently oversee both the futures and swaps markets. Only through investment in the CFTC will we be able to adequately oversee the commodity futures 

and swaps markets and protect the American public. The President’s fiscal year 

2012 budget provides for $66 million to be used on technology, which would increase 

the proportion of our budget used on technology to more than 21 percent. 

To put the CFTC’s funding request in perspective, I might note that the CFTC’s 

fiscal year 2010 year-end staff of 682 compares to approximately 800,000 people employed by U.S. brokerage firms, according to the Department of Labor’s Bureau of 

Labor Statistics. That is out of a financial industry that employs 5.6 million people. 

Furthermore, the CFTC’s funding request of $308 million compares to approximately $814 billion in annual revenues of the top 25 bank holding companies according to industry filings with the Federal Reserve. The CFTC’s technology budget 

of approximately $31 million during fiscal year 2010 compares to about $20–25 billion spent by U.S. broker/dealers on technology initiatives per year, according to a 

presentation recently given to the CFTC’s Technology Advisory Committee by the 

TABB Group. 

DETAILED FUNDING REQUEST

The requested funding increase to cover statutory authorities includes resources 

to accomplish the following goals: 

Modernizing Information Technology and Establishing a New Group for 

Data.—The CFTC’s fiscal year 2012 budget request includes $66 million for 

technology. The requested budget includes $41 million to fulfill our pre-DoddFrank information technology requirements. This increase allows the CFTC to 

invest in technology in an effort to keep pace with the futures marketplace that 

is becoming increasingly populated by algorithmic and high-frequency traders. 

Technology will play a critical role in leveraging financial and human resources as the CFTC executes its expanded oversight and surveillance responsibilities pursuant to the Dodd-Frank Act. Accordingly, the CFTC will establish 

a new group for the collection, management, and analysis of data. This group 

will facilitate improved oversight and enforcement in the derivatives markets 

through the use of technology and data. It also will serve as the primary interface for market participants in adapting to the new data standards and reporting requirements for market data required under Dodd-Frank. 

The CFTC’s fiscal year 2012 budget request includes $25 million for technology needed to implement Dodd-Frank. The resources requested are necessary 

for the CFTC to invest in direct data links to SDRs that are being established 

in the United States and internationally. The CFTC also must have the technology to aggregate and summarize the data for purposes of oversight and surveillance. 

Establishing and Staffing a New Swap Dealer and Intermediary Oversight 

Program.—Dodd-Frank creates two new categories of registrants: ‘‘swap dealer’’ 

and ‘‘major swap participant.’’ Staff will be needed to regulate them for robust 

business conduct standards, record-keeping and reporting requirements, and 

capital and margin requirements. To effectively oversee swap dealers and major 

swap participants, the CFTC will create a new oversight program for these registrants. 

Initial estimates are that there could be approximately 300 entities—compared to 127 Futures Commission Merchants (FCMs) that are currently registered with the CFTC (though other intermediaries are registered with the 

Commission, such as commodity trading advisers and commodity pool operators, 

the Commission only reviews FCMs due to resource constraints)—that will seek 

to register as swap dealers, FCMs or retail foreign exchange dealers. 

Given the resource needs of the CFTC, we are working very closely with selfregulatory organizations, including the National Futures Association (NFA), to 

determine what duties and roles they can take on in the swaps markets. In par-
59 

ticular, we proposed rules that swap dealers would be required to be members 

of the NFA. This could facilitate the NFA taking on responsibilities related to 

registration and examination of swaps dealers. Nevertheless, the CFTC has the 

ultimate statutory authority and responsibility for overseeing these markets. 

Therefore, it is essential that the CFTC have additional resources to reduce risk 

and promote transparency in the swaps markets. 

The CFTC had 82 staff at the end of fiscal year 2010 responsible for overseeing intermediaries relating to pre-Dodd-Frank authorities. An additional 30 

full-time equivalent (FTE) staff are requested for the new Swap Dealer and 

Intermediary Oversight Program for fiscal year 2012, for a total of 112 FTE. 

The requested FTE resources will be essential to fulfill significant responsibilities related to registrants. 

Clearing of Standardized Swaps Through CFTC-registered Derivatives Clearing Organizations (DCOs).—The Dodd-Frank Act requires that standardized 

swaps be cleared through CFTC-registered DCOs. It also requires that the 

CFTC review and examine systemically important DCOs for compliance on a 

yearly basis, which we do not currently have the resources to do. Clearing has 

lowered risk in the futures marketplace since the 1890s. As of the end of the 

last fiscal year, the CFTC oversaw 14 DCOs. Based on information we have received from potential new clearinghouses, we anticipate a 50 percent increase 

in DCOs to 20 or 21. The CFTC currently has 40 FTE allocated to clearing oversight and risk surveillance. We are requesting an increase of 30 FTE during fiscal year 2012 for that team to address the significant increase in the number 

of DCOs, the more complex nature of the swaps markets and the Congressional 

mandate that we annually examine systemically important DCOs. This would 

bring total staffing levels to 70. The requested FTE resources will be essential 

to fulfill responsibilities related to clearing. 

Oversight of SEFs and Designated Contract Markets (DCMs).—The CFTC will 

need additional staff to implement many new provisions related to the oversight 

of swaps trading activity as well as to oversee futures trading activities. These 

include procedures for the review and oversight of an entirely new regulated 

market category: SEFs. Staff in the Division of Market Oversight must establish and implement procedures for the review of new SEF applications and for 

the annual examination of the operations of SEFs, as well as any DCMs that 

offer swaps for trading. While the CFTC currently oversees 16 DCMs, based on 

industry comments, we that anticipate 30–40 entities will apply to register as 

SEFs. 

Further, additional staff is necessary to evaluate data on swaps trading activity to implement the Dodd-Frank Act’s real time reporting provisions and to establish appropriate block trade levels. At the end of fiscal year 2010, the CFTC 

had 40 staff responsible for our pre-Dodd-Frank responsibilities to oversee futures exchanges. The President’s request would increase that level to 62 FTE 

while adding 38 FTE to implement new Dodd-Frank Authorities during fiscal 

year 2012 for a total of 100 FTE. 

Market Surveillance, Position Limits, and SDRs.—The Dodd-Frank Act substantially expanded the responsibilities of the CFTC’s Market Surveillance Unit 

in a number of critical ways. The Market Surveillance Unit currently administers a CFTC-set position limit regime for a total of nine agricultural futures 

contracts listed on DCMs. Under the Dodd-Frank Act, resources must be dedicated to implementing and enforcing new aggregate position limits that are required to be adopted that will cover both the futures market and some portion 

of the swaps market. These limits would apply to 28 agricultural, energy, and 

metals commodities. 

The CFTC also must establish and implement new procedures and monitoring 

mechanisms to ensure that swaps data is appropriately reported to SDRs. Such 

data must be properly monitored, maintained and made available to the CFTC 

and other regulators. In addition, the Commission must have sufficient resources to analyze swaps data, detect and prevent market abuses and systemic 

problems, and to prepare semi-annual reports on the swaps markets mandated 

by the Dodd-Frank Act. Initial estimates are that the CFTC will receive at least 

five SDR applications upon the general effective date of Dodd-Frank. 

The CFTC requests resources for 42 FTE to implement these new authorities 

during fiscal year 2012. The CFTC also is requesting 105 FTE to carry out preDodd-Frank authorities in the areas of market surveillance, trade practice surveillance and data management, and analysis responsibilities. This would bring 

total FTE for these functions to 147 FTE. 

Enhanced Enforcement Authority.—The CFTC’s enforcement program is operating with approximately 167 FTE. The Dodd-Frank Act significantly enhanced 
60 

and expanded the CFTC’s responsibility to police the markets for fraud, manipulation, and other abuses and will result in a substantial increase in the Commission’s workload. The CFTC requires 68 additional FTE for the enforcement 

program in fiscal year 2012 over fiscal year 2010 levels to reach a total of 235 

FTE. 

Enhancing Consumer Education.—To enhance consumer protection, the CFTC 

will reorganize the Commission’s current consumer education and protection 

functions into a single office. This group will focus on the design, implementation, and oversight of the CFTC’s customer education and outreach program. 

This program will allow a significant increase in the CFTC’s consumer outreach 

and education. In addition, we will establish a program to implement and administer the whistleblower requirements of the Dodd-Frank Act. 

Enhancing Legal Analysis.—As novel and complex legal and economic issues 

arise in the development and application of rules to implement Dodd-Frank, the 

Office of General Counsel need to grow from a fiscal year 2010 level of 50 FTE 

to 70 FTE during fiscal year 2012. This staffing level is essential to support all 

of its programs. 

Regulating Foreign Boards of Trade.—Currently, the Chief Counsel’s Office in 

the CFTC’s Division of Market Oversight has a single FTE dedicated to the 

processing of no-action requests from foreign boards of trade (FBOTs) seeking 

to permit direct access to their trading platforms by members based in the 

United States. Currently, 20 FBOTs operate in the United States based upon 

no-action letters dating back to 1999. We expect those 20 FBOTs to register 

with the CFTC, plus an additional 6 to 10 FBOTs who have recently expressed 

an interest in becoming registered. The Dodd-Frank Act’s establishment of the 

new category of registered FBOTs requires an increase of two FTE dedicated 

to FBOT matters to raise the total to three FTE. 

Ensuring U.S. Interests in the Global Marketplace.—The Office of International Affairs, which currently has 9 staff, requires 4 additional professional 

staff to address the increasing global reach of the futures and swaps markets 

for a total of 13 staff. Dodd-Frank specifically mandates that the CFTC consult 

and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation of swaps and futures. Additional staff is required to negotiate memoranda of understanding 

with other regulatory authorities. 

Broadening Economic Analyses.—Swaps vary substantially in terms of economic structure and will require expanded economic analyses. The Office of the 

Chief Economist, which employed 14 FTE at the end of fiscal year 2010, requires 6 additional FTE for a total of 20 to expand the use of econometric and 

analytic techniques to the swaps marketplace to gauge the effects of market activities and the regulation of those activities. 

CONCLUSION

Financial markets are complex, global and interconnected, and they perform essential functions for American businesses. The derivatives markets allow producers, 

merchants, corporations, municipalities, nonprofit organizations, pension funds, and 

other end-users to lower their risk by locking in prices and rates in the future. This 

helps promote a vibrant economy. 

We recognize that the budget deficit presents significant challenges to the Congress and the American public. But we cannot forget that the 2008 financial crisis 

was very real. Thus the Congress responded and said that the swaps market must 

be regulated and overseen, significantly expanding the scope of the CFTC. It is important that we align the CFTC’s funding with its expanded mission. 

The CFTC looks forward to working with the Congress and the administration to 

address the challenges outlined here and to secure the necessary funding to 

strengthen market integrity, lower risk, protect investors, promote transparency, 

and continue to restore health to the economy. 

Senator DURBIN. Thank you Chairman Gensler. 

Chairman Schapiro. 
(61) 

SECURITIES AND EXCHANGE COMMISSION 

STATEMENT OF HON. MARY L. SCHAPIRO, CHAIRMAN 

Ms. SCHAPIRO. Chairman Durbin, Ranking Member Moran, and 

Senator Lautenberg. Thank you for the opportunity to testify in 

support of the President’s fiscal year 2012 budget request for the 

SEC. And I am, of course, pleased to appear with my colleague, 

Chairman Gensler. 

The $1.4 billion that we are requesting will allow us to adequately staff the SEC to fulfill our core mission of protecting investors, expand our information technology systems so that we can realize operational efficiencies and better keep pace with increasingly 

sophisticated financial market participants, and carry out our new 

responsibilities over hedge funds, derivatives and credit rating 

agencies. 

As you know, we have worked tirelessly to make the SEC a more 

vigilant, agile, and responsive agency over the past 2 years. And 

we continue moving forward on multiple fronts designed to enhance 

our effectiveness and ensure robust oversight of the markets. 

In addition, we’ve embarked on a vigorous rulemaking agenda 

addressing critical issues, including equity market structure, 

money market fund resiliency, asset-backed securities, consolidated 

audit trail, and municipal securities disclosure. I believe we’ve 

made a number of necessary changes and accomplished a great 

deal. 

But this year we find ourselves at a critical juncture, and that 

is because the Congress has challenged us not only to continue our 

reform efforts and to carry out our core responsibilities, but also to 

fulfill the significant new responsibilities given to the SEC under 

the Dodd-Frank Act. 

As you know, separate and apart from that legislation, the SEC 

is responsible for essential market—financial market activities, 

such as pursuing fraud; reviewing public company disclosures; inspecting the activities of investment advisers, investment companies, and broker dealers; and ensuring fair and efficient markets. 

Over the past decade, the size and complexity of the securities 

markets have grown at a rapid pace. Indeed, during the past decade trading volume more than doubled, listed equity market volume alone now averages approximately 8.5 billion shares a day, the 

number of investment advisers grew by 50 percent, and the assets 

they manage increased to $38 trillion. Today, the SEC has responsibility for approximately 35,000 entities, including direct oversight 

of more than 11,000 investment advisers, 7,500 mutual funds, 

5,000 broker dealers with more than 160,000 branch offices. 

We also review the disclosures and financial statements of approximately 10,000 reporting companies, and we oversee transfer 

agents, exchanges, clearing agencies and credit rating agencies. Indeed, we oversee some financial firms that regularly spend many 
62 

1 A copy of the SEC’s FY2012 Budget Congressional Justification can be found on our Web 

site at http://www.sec.gov/about/secfy12congbudgjust.pdf. 2The views expressed in this testimony are those of the Chairman of the Securities and Exchange Commission and do not necessarily represent the views of the President or the full Commission. 

times more just on their technology operations than the SEC’s entire budget. 

And because of the new legislation, we are taking on considerable new responsibilities for oversight of the OTC derivatives market and hedge fund advisers, registration of municipal advisers and 

security-based swap market participants, enhanced supervision of 

credit rating agencies, heightened regulation of asset-backed securities, and the creation of a new whistleblower program. A budget of $1.4 billion would allow us to hire the experts and 

acquire the technology we need to effectively carry out both our 

core responsibilities and to begin to implement the Dodd-Frank 

Act. Of the 2012 requested amount, we estimate that $123 million 

will be allocated to begin implementing the provisions of the new 

law. 

This funding request also will support information technology in- vestments of $78 million, including vital new technology initiatives 

ranging from data management and integration to internal accounting and financial reporting. It will permit the SEC to continue 

development of risk analysis tools to help us triage and analyze 

tips, complaints, and referrals. And it will permit us to complete 

a digital forensics lab that enforcement staff will use to recreate 

data from computer hard drives and cell phones, to capture evidence of sophisticated frauds. 

PREPARED STATEMENTS

Finally, it is important to note that under the Dodd-Frank Act 

the SEC’s fiscal year 2012 funding request will be fully offset by 

matching collections of fees on securities transactions. Beginning 

with 2012, the SEC is required to adjust its fee rates so the 

amount collected will match the total amount appropriated for the 

SEC by the Congress. Because of this mechanism, the SEC funding 

will be deficit neutral. 

I thank the subcommittee for your support, and I look forward 

to working with you to improve the SEC’s performance of its core 

mission, to implement our new responsibilities, and to continue 

protecting investors. And I am, of course, happy to answer any 

questions that you have. 

[The statements follow:] 

PREPARED STATEMENT OF MARY L. SCHAPIRO

Chairman Durbin, Ranking Member Moran, members of the subcommittee: Thank 

you for the opportunity to testify in support of the President’s fiscal year 2012 budget request for the Securities and Exchange Commission (SEC).1 I welcome this opportunity to answer your questions and provide you with additional information on 

how the SEC would make effective use of the $1.407 billion that is requested for 

the coming fiscal year.2

Over the past 2 years, we have worked tirelessly to make the SEC more vigilant, 

agile, and responsive, and are moving on multiple fronts to enhance the Commission’s effectiveness and provide robust oversight of the financial markets. We have 

new senior leadership in all key positions and have embarked on a vigorous rulemaking agenda, addressing areas such as equity market structure, investment ad-
63 

viser custody controls, money market fund resiliency, asset-backed securities, large 

trader reporting, pay-to-play, and municipal securities disclosure. 

In addition to carrying out our longstanding core responsibilities, last year’s enactment of the Dodd-Frank Act has added significantly to the SEC’s workload. In 

the short term, it requires the SEC to promulgate more than 100 new rules, create 

five new offices, and produce more than 20 studies and reports. The law assigns the 

SEC considerable new responsibilities that will have a significant long-term impact 

on the Commission’s workload, including oversight of the over-the-counter (OTC) derivatives market and hedge fund advisers; registration of municipal advisers and security-based swap market participants; enhanced supervision of nationally recognized statistical rating organizations (NRSROs) and clearing agencies; heightened 

regulation of asset-backed securities (ABS); and creation of a new whistleblower program. 

My testimony will provide an overview of the SEC’s actions and initiatives during 

the past year. I will then discuss the fiscal year 2012 budget request and the activities that these resources would make possible. 

NEW LEADERSHIP, ORGANIZATIONAL REFORM, AND EXPERTISE

Without a doubt, the most critical element to our success in improving the SEC’s 

operations is the Commission’s talented staff. Over the past 2 years, we have installed new management across the major divisions and offices of the SEC. These 

new senior managers are playing a vital role in our efforts to transform the Commission. 

During my first year, we brought in new leadership to run the four largest operating units—the Division of Enforcement, the Office of Compliance Inspections and 

Examinations (OCIE), the Division of Corporation Finance, and the Division of 

Trading and Markets. We also created a new Division of Risk, Strategy, and Financial Innovation to re-focus the SEC’s attention on—and response to—new products, 

trading practices, and risks. 

This past year, we brought on board a new director to oversee the Division of Investment Management, and hired deputy directors in the Divisions of Trading and 

Markets and Corporation Finance. We also brought on board key leaders to help improve internal operations. This includes the creation of a new Chief Operating Officer position; the hiring of a new Chief Financial Officer to oversee the SEC’s budget, 

accounting, and financial reporting; the hiring of a new Chief Information Officer 

to oversee the SEC’s information technology program; and the hiring of the SEC’s 

first Chief Compliance Officer. At all levels we have focused on hiring individuals 

with key skill sets that reflect the rapidly changing markets under our supervision. 

We’re continuing to make significant progress in reforming how the SEC operates. 

Since 2009, the SEC has carried out a comprehensive review and restructuring of 

its two largest programs—enforcement and examinations—to ensure effective performance. The Enforcement Division has streamlined its procedures to bring cases 

more swiftly, removed a layer of management, created national specialized units, 

and added new staff with new skills to pursue complex fraud and market abuses. 

The SEC’s examinations unit restructured its exam program after a top-to-bottom 

review, becoming more risk-based in its approach, enhancing staff training, and installing better systems to support examiners. And more recently, we have begun 

analyzing and implementing recommendations from the Boston Consulting Group, 

Inc., which the SEC retained to perform an independent organizational assessment 

pursuant to section 967 of the Dodd-Frank Act. 

Also during the past year, to the extent permitted by available resources, we 

worked to improve training and education of SEC staff, to establish a deeper reservoir of experts throughout the SEC, and to modernize information technology, including a centralized system for tips and complaints, enforcement and examination 

management systems, risk analysis tools, and financial management systems. 

ENFORCING THE LAW

Enforcement of the securities laws is the foundation of the SEC’s mission. Swift 

and vigorous proceedings directed at those who have broken the law are at the 

heart of the SEC’s efforts to protect investors. 

In the past year, the SEC has continued our structural reforms of the enforcement 

program. We have created five national specialized investigative groups dedicated 

to high-priority areas of enforcement; adopted a flatter organizational structure to 

permit more staff to be allocated to front-line investigations; and created a new Office of Market Intelligence (OMI) to serve as the hub for the effective handling of 

tips, complaints, and referrals. 
64 

The Dodd-Frank Act substantially expands the SEC’s authority to compensate 

whistleblowers who provide the Commission with high-quality information about 

violations of the Federal securities laws. Last November, the SEC proposed rules 

mapping out the procedure for would-be whistleblowers to provide information to 

the Commission. The proposed rules describe how eligible whistleblowers can qualify for an award through a transparent process that provides them an opportunity 

to assert their claim to an award. Pending the adoption of final rules, enforcement 

staff has been reviewing and tracking whistleblower complaints submitted to the 

SEC. 

We also have added a series of additional measures to encourage corporate insiders and others to come forward with evidence of wrongdoing. These new cooperation 

initiatives establish incentives for individuals and companies to fully and truthfully 

cooperate and assist with SEC investigations and enforcement actions. This program will encourage ‘‘insiders’’ with knowledge of wrongdoing to come forward early, 

thus allowing us to shut down fraudulent schemes earlier than would otherwise be 

possible. 

These reforms, which were intended to maximize our use of resources and permit 

the SEC to move more swiftly and strategically, are already showing improvements. 

Over the past calendar year, court-ordered disgorgements are up 20 percent, while 

the amount of monetary penalties has almost tripled. Of course, numbers alone 

don’t fully capture the complexity, range, or importance of our enforcement accomplishments. During the past year, the SEC: 

—Brought significant actions involving issues arising from the financial crisis, including actions against the former Chief Executive Officer and other executives 

of Countrywide Financial; Citigroup and its former Chief Financial Officer and 

Head of Investor Relations, Morgan Keegan; Goldman Sachs; State Street Bank; 

former executives of New Century Financial and IndyMac Bancorp; Brookstreet 

Securities; and ICP Asset Management and its president; 

—Obtained multi-million dollar settlements with Tyson Foods, Alcatel-Lucent, 

Technip, General Electric, and Johnson & Johnson for violations of the Foreign 

Corrupt Practices Act; 

—Filed our first case against a State involving municipal securities; 

—Brought accounting fraud cases against Dell, Diebold, DHB Industries, and 

Satyam Computer Services; 

—Charged a corporate attorney and Wall Street trader with insider trading in advance of at least 11 merger and acquisition announcements involving clients of 

the law firm where the attorney worked; 

—Charged a Food and Drug Administration (FDA) chemist with trading on confidential information about upcoming announcements of FDA drug approval decisions; 

—Brought a significant case alleging inappropriate use of confidential customer 

information by a proprietary trading desk at Merrill Lynch and an action 

against AXA Rosenberg in the challenging and rapidly evolving area of computer-based quantitative investment management; 

—Filed a variety of cases to halt Ponzi scheme operators and perpetrators of offering frauds, including those brought in conjunction with the Financial Fraud Enforcement Task Force’s Operation Broken Trust sweep—indeed, in each of the 

past 2 fiscal years we have filed more than twice as many Ponzi cases as we 

filed in fiscal 2008; 

—Brought actions alleging illegal trading on confidential information obtained 

from technology company employees moonlighting as expert network consultants and illegal trading by major hedge funds based on illegal tips; and 

—Brought an action alleging a $1.5 billion mortgage securities fraud scheme to 

defraud the U.S. Treasury’s Troubled Asset Relief Program. 

STRENGTHENING OVERSIGHT

Strong regulation is essential to the fair, orderly, and efficient operation of markets. A vigorous examination program not only reduces the opportunities for wrongdoing and fraud, but also provides early warning about emerging trends and potential weaknesses in compliance programs. 

This past year, the SEC reorganized the Commission’s national examination program in response to rapidly changing Wall Street practices and lessons learned from 

the Madoff and Stanford frauds. The SEC strengthened the national exam program 

to provide greater consistency and efficiencies across our 11 regions and to focus 

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

We also implemented new policies requiring examiners to routinely verify the existence of client assets with third-party custodians, counterparties, and customers. Ad-
65 

ditionally, the exam unit now assembles individual specialists with the appropriate 

skill-sets for the firm they are examining or the issues on which they are focusing. 

Finally, the SEC has also worked to enhance the training of examiners and bring 

on board specialists in risk management, trading, and complex structured products. 

These reforms are helping to deliver results in the exam program’s work to evaluate risks, inform policy, and identify potential wrongdoing. In fact, in January 2011 

alone, the Enforcement Division brought three significant cases stemming directly 

from exams. And going forward, the national exam program will continue to conduct 

sweeps in critical areas from trading practices to market manipulation to structured 

products. 

IMPROVING MARKET STRUCTURE

No discussion of the SEC’s actions over the past year would be complete without 

a discussion of May 6, 2010—the day our markets dropped more than 500 points 

in a matter of minutes, only to bounce back minutes later. That event reinforced 

the importance of our ongoing review of market structure, which we had launched 

months earlier with a concept release inviting comment on regulation of the changing financial markets. 

The U.S. equity market structure has changed dramatically in recent years. A 

decade ago, most of the volume in stocks was executed manually, whether on the 

floor of an exchange or over the telephone between traders. Now nearly all orders 

are executed by fully automated systems at great speed. The fastest exchanges and 

trading venues are now able to accept, execute, and send a response to orders in 

less than one-thousandth of a second. 

Speed is not the only thing that has changed. As little as 5 years ago, the great 

majority of U.S. equities capitalization was traded on a listing market—the New 

York Stock Exchange (NYSE)—that executed nearly 80 percent or more of volume 

in those stocks. Today, the NYSE executes approximately 22 percent of the volume 

in its listed stocks. The remaining volume is split among 15 public exchanges, more 

than 30 dark pools, 3 electronic communication networks, and more than 200 internalizing broker-dealers. Currently, more than 30 percent of the volume in U.S.-listed equities is executed in venues that do not display their liquidity or make it generally available to the public, reflecting an increase over the last year. 

The evolution of trading technologies has dramatically increased the speed, capacity, and sophistication of the trading functions that are available to market participants. The new electronic market structure has opened the door for entirely new 

types of professional market participants. Today, proprietary trading firms play a 

dominant role by providing liquidity through the use of highly sophisticated trading 

systems capable of submitting many thousands of orders in a single second. These 

high-frequency trading firms can generate more than 1 million trades in a single 

day and now account for more than 50 percent of equity market volume. 

Over the past year, the SEC has engaged in a dedicated effort to study and learn 

from the experiences of May 6, with the aim of taking action to preserve the benefits 

of the current structure while minimizing its downsides. The SEC worked with Financial Industry Regulatory Authority (FINRA) and the exchanges to develop rules 

that trigger circuit breakers for certain individual stocks, clarify up front how and 

when erroneous trades would be broken, and effectively prohibit ‘‘stub quotes’’ in the 

U.S. equity markets. We adopted a rule that prohibits broker-dealers from providing 

their clients with unfiltered access to exchanges, and proposed the creation of a 

large trader reporting system that would enhance our ability to identify large market participants, collect information on their trades, and analyze their trading activity. 

We also proposed a new rule that would require the creation of a consolidated 

audit trail that would enable regulators to track information about trading orders 

received and executed across the securities markets. Today, there is no standardized, automated system to collect data across the various trading venues, products, 

and market participants. Each market has its own individual and often incomplete 

data collection system, and as a result, regulators tracking suspicious activity or reconstructing an unusual event must obtain and merge an immense volume of disparate data from a number of different markets. And even then, the data does not 

always reveal who traded which security, and when. To obtain individual trader information, the SEC must make a series of manual requests that can take days or 

even weeks to fulfill. In brief, the SEC’s tools for collecting data and surveilling our 

markets are wholly inadequate to the task of overseeing the largest equity markets 

in the world. 
66 

KEY RULEMAKING

Over the past year, the SEC has pursued an active rulemaking agenda aimed at 

making our financial markets more secure, providing investors with more and better 

information, finding ways to make securities markets less volatile and more transparent, and promoting effective corporate governance. Even before passage of the 

Dodd-Frank Act, the SEC was in the midst of a productive period of rulemaking on 

diverse topics. Among the key ongoing and recently completed rulemakings are the 

following: 

Municipal Securities.—The SEC adopted rules that provide market participants with more meaningful and timely information regarding the health of municipal securities. In addition, as discussed below, we adopted rules to curtail 

pay-to-play practices by investment advisers seeking to manage public pensions. 

Proxy Enhancements.—The SEC adopted rules to facilitate exercise of shareholders’ traditional State law right to nominate directors to corporate boards. 

We also improved disclosure relating to risk and compensation and revised the 

e-proxy rules so that additional materials could be provided to shareholders 

with the company’s notice. And, we issued a concept release requesting public 

input on the mechanics of proxy voting and shareholder communications. 

Investment Adviser Disclosure.—In order to ensure that investors receive clear 

and accurate information from their advisers, the SEC adopted rules requiring 

advisers to provide clients with brochures that plainly disclose their business 

practices, fees, conflicts of interests, and disciplinary information. 

Mutual Funds Fees and Marketing.—The SEC proposed rules to create a 

more equitable framework for mutual fund marketing fees, known as 12b–1 

fees. We proposed rules to help clarify the meaning of a date in a target date 

fund’s name, as well as enhance information in fund advertising and marketing 

materials. 

Target Date Funds.—The SEC proposed rules that are intended to provide enhanced information to investors concerning target date retirement funds and reduce the potential for investors to be confused or misled regarding these funds. 

Money Market Funds.—The SEC took action to permit investors, for the first 

time, to access detailed information that money market funds now file with the 

Commission, including their ‘‘shadow NAV’’ (net asset value). While the SEC 

uses this information in its real-time oversight of money market funds, public 

disclosure can provide investors and market analysts with useful insight for 

their evaluation of funds. We also tightened the quality standards that apply 

to the funds’ investments and are working with our regulatory colleagues to assess the various options for making sure these funds are as safe and resilient 

in the face of market stresses as investors are led to believe. 

Asset-backed Securities.—The SEC proposed rules that would revise the disclosure, reporting and offering process for ABS to better protect investors in the 

securitization market. 

Market Access.—The SEC took an important step to promote market stability 

by adopting a new market access rule. Broker-dealers that access the markets 

themselves or offer market access to customers will be required to put in place 

appropriate pre-trade risk management controls and supervisory procedures. 

The rule effectively prohibits broker-dealers from providing customers with 

‘‘unfiltered’’ access to an exchange or alternative trading system. The rule 

should prevent broker-dealers from engaging in practices that threaten the financial condition of other market participants and clearing organizations, as 

well as the integrity of trading on the securities markets. 

Pay-to-Play.—The SEC adopted in June of last year a new rule to address socalled ‘‘pay-to-play’’ practices in which investment advisers make campaign contributions to elected officials in order to influence the award of contracts to 

manage public pension plan assets and other government investment accounts. 

The rule, adopted in response to a growing number of reports of such activities 

across the country, is intended to combat pay-to-play arrangements at the State 

and local government level in which advisers are chosen based on their campaign contributions to political officials rather than on merit. 

In addition to these items, enactment of the Dodd-Frank Act added significant 

new work to the SEC’s agenda, including more than 100 rulemaking provisions applicable to the SEC. To date, the SEC has issued 34 proposed rule releases, 7 final 

rule releases, and 2 interim final rule releases in connection with the Dodd-Frank 

Act. We have received thousands of public comments, held hundreds of meetings 

with market participants, completed seven studies, and hosted five roundtables. Key 

rulemakings under the Dodd-Frank Act include regulations for the supervision of 

OTC derivatives, private fund advisers, asset-backed securities, credit rating agen-
67 

cies, corporate governance, rewards for whistleblowers, and specialized disclosure 

provisions related to conflict minerals, mine safety, and resource extraction. 

SEC RESOURCES

This year finds the SEC at an especially critical juncture in its history. Not only 

does the Dodd-Frank Act create significant additional work for the SEC, both in the 

short and long term, but the Commission must also continue to carry out its longstanding core responsibilities. These responsibilities—pursuing securities fraud, reviewing public company disclosures and financial statements, inspecting the activities of investment advisers and broker-dealers, and ensuring fair and efficient markets—remain essential to investor confidence and trust in financial institutions and 

markets. 

Over the past decade, the SEC has faced significant challenges in maintaining a 

staffing level and budget sufficient to carry out its core mission. The SEC experienced 3 years of frozen or reduced budgets from fiscal year 2005 to 2007 that forced 

a reduction of 10 percent of the Commission’s staff. Similarly, the SEC’s investments in new or enhanced information technology (IT) systems declined about 50 

percent from fiscal year 2005 to 2009. 

As a result of increased funding levels in fiscal year 2009 and fiscal year 2010, 

current SEC staffing levels have only recently returned to the level of fiscal year 

2005, despite the enormous growth in the size and complexity of the securities markets since then. During the past decade, for example, trading volume has more than 

doubled, the number of investment advisers has grown by 50 percent, and the assets 

they manage have increased to $38 trillion. Six years ago, the SEC’s funding was 

sufficient to provide 19 examiners for each $1 trillion in investment adviser assets 

under management. Today, that figure stands at 12 examiners per $1 trillion. A 

number of financial firms spend many times more each year on their technology 

budgets alone than the SEC spends on all of its operations. 

Today, the SEC has responsibility for approximately 35,000 entities, including direct oversight of 11,800 investment advisers, 7,500 mutual funds, and more than 

5,000 broker-dealers with more than 160,000 branch offices. We also review the disclosures and financial statements of approximately 10,000 reporting companies. The 

SEC also oversees approximately 500 transfer agents, 15 national securities exchanges, 9 clearing agencies, 10 NRSROs, as well as the Public Company Accounting Oversight Board, FINRA, Municipal Securities Rulemaking Board, and the Securities Investor Protection Corporation. 

In addition to our traditional market oversight and investor protection responsibilities, the enactment of the Dodd-Frank Act has added significant new responsibilities to the SEC’s workload. These new responsibilities include a parallel set of 

responsibilities to oversee the OTC derivatives market, including direct regulation 

of participants such as security-based swaps dealers, venues such as swap execution 

facilities, warehouses such as swap data repositories, and clearing agencies set up 

as long-term central counterparties. In a similar fashion, under the Dodd-Frank Act 

the SEC has been given responsibilities for hedge fund advisers that are similar to 

those that the Commission has long overseen with respect to traditional asset managers. These hedge fund advisers include those that trade with highly complex instruments and strategies. Additionally, the SEC has new responsibility for registration of municipal advisers, enhanced supervision of NRSROs, heightened regulation 

of asset-backed securities, and the creation of a new whistleblower program. 

FISCAL YEAR 2011 BUDGET

Under the agreement that was recently approved by the Congress and signed by 

the President, the SEC’s fiscal year 2011 appropriation is $1.185 billion, an increase 

of $74 million more than the fiscal year 2010 enacted level. While the SEC is still 

working to finalize an operating budget for the balance of the year that will make 

effective use of these funds, I want to provide you with some insight into some of 

the Commission’s priorities for the remainder of fiscal year 2011. Specifically, the 

fiscal year 2011 funding level provided by the Congress will allow the SEC to fill 

vacancies to meet key strategic needs, perform tasks required by the Dodd-Frank 

Act, and continue to improve Commission operations. 

It will permit us to address important staffing needs, particularly within the Division of Trading and Markets, Division of Enforcement, and OCIE, which will permit 

us to partially address the SEC’s significant staffing capacity gap. These needs include revitalizing core programs such as enforcement and inspections activities, as 

well as addressing new responsibilities such as enhancing oversight of credit rating 

agencies and adding staff with expertise in critical areas such as derivatives. 
68 

Additionally in the last 5 months of fiscal year 2011, we plan to make needed investments in the development, modernization, and enhancement of information 

technology that can lead to additional savings or aid staff productivity. We will be 

making key investments in general IT infrastructure modernization, including refreshing old technology and system hardware and software to avoid loss of productivity, facilitating the migration of the SEC’s financial systems to a shared service 

provider, increasing system capacities to accommodate data growth, and increasing 

operational efficiencies through better monitoring of system performance. We will 

also continue making needed investments in systems and technologies needed to facilitate reporting of information required by the Dodd-Frank Act. 

Finally, in fiscal year 2011 we will also continue to advance the SEC’s efforts to 

improve Commission operations. I have recently submitted a reprogramming request to improve efficiency by consolidating the functions of the Office of the Executive Director into the Office of the Chief Operating Officer. Also in fiscal year 2011, 

we expect to undertake major reforms in the Office of Information Technology and 

Office of Human Resources, which provide critical back-office support to all SEC divisions and offices. The SEC also plans significant investment in the current fiscal 

year to respond to the recommendations made by the BCG as part of its recent independent assessment of SEC operations and organizational structure. 

FISCAL YEAR 2012 REQUEST

The SEC is requesting $1.407 billion for fiscal year 2012, an increase of $222 million more than the new fiscal year 2011 appropriation level. If enacted, this request 

would permit us to add about 780 positions by the end of fiscal year 2012 for both 

improvements to base operations and implementation of the SEC’s new responsibilities. 

It is important to note that the SEC’s fiscal year 2012 funding request would be 

fully offset by matching collections of fees on securities transactions. Currently, the 

transaction fees collected by the SEC are approximately 2 cents per $1,000 of transactions. Under the Dodd-Frank Act, beginning with fiscal year 2012, the SEC is required to adjust fee rates so that the amount collected will match the total amount 

appropriated for the Commission by the Congress. Under this mechanism, SEC 

funding will be deficit-neutral, as any increase or decrease in the Commission’s 

budget would result in a corresponding rise or fall in offsetting fee collections. 

The fiscal year 2012 request is designed to provide the SEC with the resources 

required to achieve several high-priority goals: to adequately staff the Commission 

to fulfill its core mission; to continue to implement the requirements of the DoddFrank Act; and to expand the Commission’s IT systems and management infrastructure to serve the needs of a more modern and complex organization. For purposes 

of my testimony today, I would like to summarize the request in each of these priority areas: 

Reinvigorating Core SEC Programs.—Forty percent (312) of the new positions 

would be used to strengthen and support core SEC operations, including protecting investors, maintaining orderly and efficient markets, and facilitating 

capital formation. As mentioned before, SEC staffing levels are just now returning to fiscal year 2005 levels, even as the Commission’s responsibilities have 

grown along with the size and complexity of the securities markets. To help restore core capabilities, this budget request would permit us to add 49 positions 

to the enforcement program that would grow the 5 new specialized investigative 

units, bolster the agency’s litigation program, and expand the new OMI which 

conducts risk assessment and handles thousands of tips, complaints, and referrals. In our examination program, this request would allow us to add 55 personnel to augment risk assessment, monitoring, and surveillance functions and 

to conduct additional adviser and fund inspections. The request would also permit 37 staff to be added to the Division of Corporation Finance primarily to conduct more frequent disclosure reviews of the largest companies, 15 additional 

staff to the Division of Investment Management primarily to enhance oversight 

of money market funds and specialized products, and 11 new positions to be 

added to the Division of Risk, Strategy, and Financial Innovation to better 

equip the SEC to identify and address emerging risks and long-term issues of 

critical importance. 

Implementing the Dodd-Frank Act.—Sixty percent (468 positions) of the new 

positions would be used to implement the Dodd-Frank Act. Many of these new 

positions would be used to hire experts in derivatives, hedge funds, data analytics, credit ratings, and other new or expanded responsibility areas, so that 

the SEC may acquire the deeper expertise and knowledge needed to perform effective oversight. These new positions would support 157 new positions focused 
69 

on the derivatives markets; 102 focused on hedge fund advisers; 43 to expand 

investigations of tips received from whistleblowers; 35 focused on municipal securities and examinations of newly registered municipal advisers; 33 focused on 

clearing agencies, including annual reviews of those determined to be systemically important; and 26 focused on NSRSOs principally to perform the annual 

examinations required by the act. Also in fiscal year 2012, the SEC would invest in technology to facilitate the registration of additional entities and capture 

and analyze data on the new markets. 

The total fiscal year 2012 costs to implement the Dodd-Frank Act through 

these new positions and technology investments will be approximately $123 million. In addition to the new positions requested in fiscal year 2012, we also anticipate that about 300 additional positions and additional technology investments will be required in fiscal year 2013 for full implementation of the DoddFrank Act. 

Investing in Information Technology.—The SEC’s budget request for fiscal 

year 2012 will support information technology investments of $78 million. This 

level of funding would support vital new technology initiatives including data 

management and integration, document management, EDGAR modernization, 

market data, internal accounting and financial reporting, infrastructure functions, and improved project management. This funding will permit the SEC to 

develop risk analysis tools to assist with triage and analysis of tips, complaints, 

and referrals and to complete a digital forensics lab that enforcement staff can 

use to recreate data from computer hard drives and cell phones to capture evidence of sophisticated frauds. The budget request would also permit the hiring 

of additional staff in the Office of Information Technology, including experienced business analysts and certified project managers to oversee IT projects 

and staff to address financial statement and information technology deficiencies 

identified by the Government Accountability Office (GAO). 

Improving the SEC’s Management Infrastructure.—The SEC’s fiscal year 2012 

request would permit the Commission to make further improvements to the 

Commission’s basic internal operations and to bring administrative and support 

services capabilities into alignment with the requirements of today’s SEC, and 

ensure that the Commission manages its resources wisely and efficiently. The 

budget request would permit the strengthening of the newly established Office 

of the Chief Operating Officer, including the development of a more robust operational risk management program and the build-out of a data management program. The budget request also contemplates an appropriate expansion of the 

SEC’s administrative support functions, including the Offices of Financial Management, human resources, administrative services, and Freedom of Information Act and records management. The request also includes the necessary 

space rent and other noncompensation expenses necessary to support the level 

of staffing requested for fiscal year 2012. Additionally, the SEC is devoting significant management attention to improving program and management controls, including in response to audits and assessments by the Office of the Inspector General, the GAO, and management’s own internal assessments. 

Addressing Material Weaknesses in Internal Controls.—In November 2010, 

the SEC completed its Performance and Accountability Report, the equivalent 

of a company’s annual report. A GAO audit found that the financial statements 

and notes included in the report were presented fairly and in conformity with 

U.S. GAAP. It also, however, identified two material weaknesses in internal 

controls over financial reporting: one in information systems, and a second in 

financial reporting and accounting processes. The root causes of these weaknesses are gaps in the security and functionality of the SEC’s financial system, 

resulting from years of underinvesting in financial system technologies. 

These material weaknesses are unacceptable. Rather than try and solve each 

particular deficiency in piecemeal fashion, the SEC has committed to investing 

the time and resources to implement a long-term, comprehensive solution. To 

avoid the development risks of creating new technology and systems, the SEC 

is switching to a Shared Service Provider approach, migrating the Commission’s 

financial system to the Department of Transportation (DOT). Other agencies, 

including the GAO, have migrated to DOT, and they have had very positive results, with clean audits free of material weaknesses. This will be a significant 

undertaking, which, assuming adequate funding, will culminate in the cutover 

to the new system in April 2012. 
70 

CONCLUSION

Thank you, again, for your support for the SEC’s mission, and for allowing me 

to be here today to present the President’s budget request. I am happy to answer 

any questions that you might have. 

PREPARED STATEMENT OF COLLEEN M. KELLEY, PRESIDENT, NATIONAL TREASURY

EMPLOYEES UNION

For a decade now, the National Treasury Employees Union (NTEU) has represented the men and women who work at the Securities and Exchange Commission 

(SEC). When the NTEU first began to represent the employees, we were able to help 

make great strides forward in improving the efficiency and effectiveness of the agency. The NTEU supported Investors and Capital Markets Relief Act gave the SEC 

the authority to develop a personnel system best suited to the Commission’s needs 

and curtailed the staff turnover crisis that vexed the Commission. Employee morale 

and retention improved dramatically. 

However, starting in fiscal year 2005, the SEC began to take a wrong turn. It suffered through 3 years of frozen or reduced budgets resulting in a 10 percent reduction in staff as well as a failure to fully fund merit pay and retirement benefits 

which both labor and management agreed were needed to attract a workforce with 

the desired skills and experience. Some employees wondered if the leadership really 

supported strong and meaningful action against those who would engage in fraud 

and deception toward consumers and investors. 

Under Chairman Mary L. Shapiro, we believe there is a renewed commitment to 

rigorous protection of consumers. This protection is also enhanced by the DoddFrank Wall Street Reform and Consumer Protection Act which will help give the 

SEC the resources, tools, and authority it needs so that the staff can effectively protect investors. The NTEU had strongly supported passage of this legislation. We are 

also pleased that recent funding improvements at the SEC have now restored staffing to the 2005 levels. 

However, the job is far from done. During the recent period of almost flat funding 

for the SEC, trading volume more than doubled. Since 2003, the number of investment advisers has grown by roughly 50 percent, as have the number of funds they 

manage. A $33 trillion industry of 35,000 separate entities is policed for fraud and 

illegal activities by a mere 3,800 employees of the SEC. 

With insufficient funding for even its historic duties, the SEC now has significant 

new duties under the Dodd-Frank Act. The NTEU believes that the President’s request of $1.4 billion is the minimum needed to make sure that the SEC is able to 

do its job effectively. We ask that the Senate fund the SEC at an amount no less 

than the President’s request. 

We understand these are difficult financial times both for the Federal Government and the American public. Therefore, several facts need to be understood. First, 

while the SEC is an appropriated agency, its funding is offset by fees collected from 

the securities industry. Because these fees offset the entire SEC budget, proper 

funding of the SEC does not contribute to the deficit. Second, as American families 

struggle in the current economic downturn, the SEC has returned billions of dollars 

to cheated investors. In 2010, the SEC distributed double its budget ($2.2 billion) 

to these innocent victims. The Congress should not be penny wise and pound foolish 

when it comes to protecting the investments of American consumers, only to see the 

victimized lose retirement investments or like time savings. 

During the difficulties in passing the fiscal year 2011 budget, the public already 

saw the flaws of an underfunded SEC. Operating under the fiscal restrictions of the 

continuing resolution, it was not possible to pursue some quality tips and investigations of potential misconduct, while other investigations were slowed down or delayed. The SEC suffered under a reduced ability to hire expert witnesses for trial 

and to take testimony of certain witnesses. Funding limitations lessened the number of exams that could be conducted of high-risk registrants, thus increasing the 

risk of undetected violations. 

Rather than a hiring freeze, as was put into place at the SEC during the continuing resolution, the SEC should have funding to hire needed new personnel to 

implement the provisions of the Wall Street Reform and Consumer Protection Act, 

as well as to be able to offer a competitive compensation package which allows the 

SEC to retain and attract staff with skill sets vital to keeping pace with rapidly 

changing markets and to identify systemic risks that may be created by entities subject to the SEC regulation. The SEC must have a budget that will fully fund its 

merit pay program as well as agreed-upon retirement benefits. 
71 

The NTEU remains ready to work with the subcommittee and the SEC management to help meet the goals needed so employees can do their job of protecting the 

American consumer and investor. 

RULE-WRITING TIMETABLE

Senator DURBIN. Thank you, Chairman Schapiro, and Chairman 

Gensler, as well. 

I don’t think it’s any surprise that the tables have turned politically here on Capitol Hill since the passage of the Dodd-Frank Act. 

And with the new Republican majority in the House of Representatives and a larger Republican presence in the Senate, some of the 

critics of the Dodd-Frank Act and those who voted against it now 

are questioning not only whether it was a good decision, but whether or not it’s being implemented fairly and effectively. 

And they have gone so far—many of them—as to just flat out 

say, ‘‘We want to delay this’’—for 1 year, 18 months, maybe longer. 

In the instance of one issue that I’m involved in—21⁄2 years they 

want to put off the implementation of some of the Dodd-Frank Act 

provisions. So this go-slow approach is being argued and justified 

as necessary because the Dodd-Frank Act, in their opinion, either 

did the wrong thing or, whatever they did, did it too fast, and can’t 

be implemented effectively. 

Now, I take a look at some of the comments that have been 

made, Chairman Gensler, about this, and wonder if you would comment on whether or not the timetable in the Dodd-Frank Act for 

the new rules, the comment periods and the promulgation of these 

rules, is in fact one that you can live with, that you can produce 

a good work product with. 

Second, I look at the report of your IG which, who said back in 

April, just a few weeks ago, that it was their office’s feeling that 

you were focusing too much on the legal side of these rules and not 

enough on the economic or cost-benefit side of these rules. And that 

is a legitimate question that I think you should address as well. So 

could you address those two issues? 

Mr. GENSLER. I thank you, Mr. Chairman. 

I think that the financial crisis was very real. There are still 7 

million people probably out of work because of it, and millions who 

have homes that are worth less than their mortgages, and pensions 

that aren’t securing their futures. And I think part of it was the 

derivatives market. It’s not the only reason for the crisis, but it was 

a key part of it. Let us not forget AIG. 

In terms of our rule-writing, I think that we’ve been very deliberate. We’ve been very public. We’ve had, I think, close to a dozen 

roundtables and 14 public hearings. We had more than 700 meetings that we posted on our Web site with market participants and 

investors and the like, and end-users. And we have now out for 

comment these roughly 50 rules that will be the whole mosaic, and 

people will come in and give us comments on them. 

In terms of the time schedule, the Congress did lay out 1 year. 

We’ll not complete the task in 1 year. We’ve done the proposal 

phase in roughly 9 months, working closely with the SEC. I think 

that we’ll only take up final rules as we summarize those comments, get commissioner feedback, regulatory feedback, Congres-
72 

sional feedback. And I think it will take us well through the summer and fall to finalize the rules. 

In terms of implementation, we had 2 days of public roundtables. 

We have a public file on how to implement and phase in the implementation. It will significantly lower the cost to the American public if we phase in the implementation. A big bang at one date 

doesn’t work. 

But I think a delay is being considered elsewhere in the Congress. A delay of the effective date to the end of 2012, I think, 

would be a delay that would put the American public at risk—at 

risk of markets that are still dark by and large, at risk of a market 

that’s unregulated by and large. The reforms only come into being 

if we actually get these rules finalized. 

INSPECTOR GENERAL REPORT

In terms of the IG report, we welcomed it. We seriously considered, as we moved to final rules, to incorporate recommendations 

that the IG has made to us. We do have a very fine Office of the 

Chief Economist with a staff of about 14 economists. We are wishing in this budget request to grow it to 20. But there are also a 

lot of economists in the rule-writing teams that aren’t in the Office 

of Chief Economist. 

COST OF UNREGULATED DERIVATIVES

Senator DURBIN. So, I agree with your premise—that the recession that we’re still living through can be traced to many sources, 

and one of those was an unregulated derivatives market. 

Can you give me any examples of what you saw in that market 

that showed that the lack of regulation, the lack of oversight, led 

to decisions which were ultimately negative for our economy, and 

for many families and investors? 

Mr. GENSLER. Well, at the core was a lightly regulated, ineffec- tively regulated insurance company called AIG that had about a $2 

trillion derivatives book. And that book had a lot of product called 

credit default swaps. And then the American public ended up bailing out AIG with $180 billion. 

That wasn’t the only piece of the crisis, because, also, derivatives 

make these large financial institutions very interconnected. I believe there should be a freedom to fail—that large financial institutions should be allowed to fail—but the derivatives marketplace so 

ties them, like in a spider’s web, that it’s hard for a government, 

whether it’s the Federal Reserve or the Treasury, to allow that. 

And so, the solution that the Congress passed was—bring transparency to the marketplace, ensure that what can be brought to 

clearinghouses—a mechanism that’s worked more than 100 years— 

is done, and also to make sure that dealers are well-capitalized and 

well-regulated. 

Senator DURBIN. So who would benefit, if we would either repeal 

the Dodd-Frank Act when it came to this derivatives market, or if 

we would delay indefinitely the oversight and regulation which the 

Dodd-Frank Act calls for? 

Mr. GENSLER. I think the American public would be put at great 

risk. I think that a $300 trillion marketplace—$20 for every $1 in 

our economy—would still be a dark market. So I don’t think many 
73 

people benefit. There may be some who would benefit and rationally would like a darker market, where they’re in the financial 

community. But the tens of thousands of end-users of these products need to have confidence in a marketplace where they can rely 

on that marketplace, see the pricing in the market place. Whether 

it’s a farmer, rancher, a corporation hedging an interest rate risk— 

they’ll benefit from this being well-regulated. 

Senator DURBIN. If I can ask you one last question more specific, 

and one of the criticisms is that, instead of investing in the technology which the CFTC needs, you’re in fact adding employees. 

Would you comment on that? I know you testified that you’re requesting more money for technology. 

TECHNOLOGY

Mr. GENSLER. The request for 2012 is about doubling technology, 

and about 35 percent more staff. So, we believe technology is the 

only way for us to really do this. But since we’re taking on a market that’s about seven or eight times the size, asking for 35 percent 

more staff we think is relevant. 

Again on technology, at $66 million we’ll be a fraction of Wall 

Street. It’s estimated by the TABB Group, investment banks spent 

$20 billion to $25 billion per year on technology. So we’re, you 

know, we’re kind of coming with a pea shooter here, frankly, to a 

sophisticated market that has a lot more than pea shooters. 

Senator DURBIN. When you talk in most general terms about 

what we’re trying to achieve here with the Dodd-Frank Act, if we’re 

going to have regulatory oversight in a market place that was 

clearly unregulated and led, at least partially led to the decline of 

the American economy and the loss of so many jobs, the way to 

stop that reform is to fail to fund an agency like your own, to make 

sure there are no cops on the beat. And I think that’s a serious 

mistake. 

I think what we’ve got to do is to push forward on this law, to 

give you the time you need to promulgate these rules, and to give 

you the resources to enforce them. Otherwise we invite a similar 

disaster to the one we went through just a few years ago in our 

economy. 

Senator Moran. 

Senator MORAN. Mr. Chairman, thank you. 

First of all, I’d follow up on your question, because I wasn’t certain that I understood Chairman Gensler’s answer about—I guess 

criticism perhaps is a too strong a word, but a belief that the CFTC 

has focused on hiring individuals to the workforce as compared to 

investing in technology. 

And I think what Chairman Durbin asked you to do was to explain your rationale and to respond to that criticism. 

Mr. GENSLER. Well, I think we need both. I think that we can’t 

oversee markets just with computers. You can’t send a computer 

into a judge to plead a case. I’m not aware of any court that allows 

that. So we really do need humans, as well. On a market that’s 

seven times the size of the markets we currently oversee, we need 

humans, as well, to answer the questions. We think there may be 

as many as 200 swap dealers that will look to us for regulatory 

guidance, interpretations, and so forth. So, in terms of staffing 
74 

we’re just about back to where we were in the 1990s. We had been 

shrunk, actually by 23 percent. And then with this subcommittee’s 

help, we grew back. 

But on this base of about 680 people that we had at the end of 

2010, we believe that to oversee the markets we need to grow at 

the budget request to 983. But technology is absolutely critical. 

And technology spending is the larger increase percentage-wise. 

Senator MORAN. Mr. Chairman, you and I had a conversation in 

the Banking Committee about the mosaic. I think there’s been a 

call for a road map. How do you see the difference between those 

two terms? Your mosaic and perhaps my, or, an industry request 

for a road map, so that we know what the sequencing is of the 

rules? 

That the mosaic, as I understand the word, would be a set of 

puzzle pieces that, we’re not certain how they all fit together, as 

compared to, this is the sequence in which we will implement rules 

under the Dodd-Frank Act at the CFTC. 

PHASE IN

Mr. GENSLER. I think they’re both important. We’ve now substantially completed the proposal phase, though we have to address 

ourselves to the Volcker Rule. What we’ve asked is the public to 

give us comments on how to implement the, or phase, the effective 

dates. And we put out last Friday—and I’m glad to meet with you 

and go through it—the staff put out 13 concepts in a 4-page document as to how to phase in the implementation. Some people might 

call it a road map. Some might not. 

But those concepts, for instance, say that the clearinghouses, the 

execution platforms, the dealers have to be open for business, so to 

speak, have their rulebooks in place at a certain time. The first, 

the most important thing is that they are compliant with the DoddFrank Act and they’re open for business. And then market participants would be phased later, like a clearing mandate, later. And 

we actually laid out in this concept piece how to bucket that into 

sort of three or four different buckets and how to phase that. 

But we’re hoping to get more public comment. We have a public 

comment file through June 10 on this. And then based upon that, 

the CFTC, working with the SEC, would think about how to phase 

the implementation, which I think will go well into 2012, the phasing of this. 

Senator MORAN. Does the concept that you’re talking about 

speak to each individual rule as to what the sequence is for its implementation, or just within that rule the phase in of that rule? 

Mr. GENSLER. The concepts take the entire rule set. So, it speaks 

to some of them individually, but it was trying to give the public 

a sense for the entire rule set, so that clearinghouses, execution facilities, and dealers would have to be, sort of, open for business. 

The concept even said, if we finish for rules, they have to be open 

for business by December 31 of this year, for instance. But then the 

transaction compliance would follow later. It laid out six different 

chapter headings with regard to that. So it was, it wasn’t all the 

way into the granular level, but it was pretty detailed. 

Senator MORAN. Would there be information in that concept that 

would be valuable to us as a subcommittee to determine priorities 
75 

in funding, so that we could make decisions about the level of funding necessary to implement this series of rules over the period of 

time that you’re contemplating? 

Mr. GENSLER. I think it would be helpful to have that dialogue, 

though I would say our request is anticipating that we would complete our rules during the course of the calendar 2011 and that 

we’d be able to be hiring people to actually oversee these markets 

over fiscal 2012. 

There’s a commitment that our President made back in September 2009—the G20 commitment—that all of this would be completed and implemented by the end of 2012. We think the Congress, when they said to finish the rules by July 2011, had in mind 

that this was a very real crisis, and second, that the market needs 

to lower uncertainty. Our rule-writing creates some uncertainty. To 

the extent we can finish that, it helps lower uncertainty, and people get on with their work to implement it. 

Senator MORAN. Chairman, I appreciate that statement. I think 

that has great significance. I think one of the real challenges we 

have for economic recovery is all the uncertainty that’s out there 

in regard to new rules and regulations. And certainty would be a 

good thing, although we need to make certain that we’re doing it 

in the appropriate manner. So, I share that, in my view there’s a 

balance between getting an answer to the industry, but also making sure it’s the right answer. 

Finally, let me ask about position limits and core principles. It’s 

a conversation that we’ve had at every opportunity, both in my 

days in the House and on the Banking Committee, and now here 

in the Appropriations Subcommittee. Those are not required rules 

and regulations. Is there a different priority placed at the CFTC on 

rulemaking that is not mandatory but discretionary? 

POSITION LIMITS AND CORE PRINCIPLES

Mr. GENSLER. What we’re doing is trying to bring together the 

whole package. On position limits, the Congress says specifically 

that we shall. The word S-H-A-L-L, shall, is in there. Some of the 

comment letters have come back in and people debate what was 

the Congress’s intent. But there were numerous Congressional 

hearings. So we put out a proposed rule on position limits, we believe, following Congressional mandate. 

In terms of core principles for clearinghouses and for exchanges, 

we think that we really need to move forward on this because it’s 

the only way that the clearinghouses will be safe. There’s a mandate that hundreds of trillions of dollars of swaps have to come into 

these clearinghouses. And so, our rule-writing in that regard is to 

make sure the clearinghouses are up to international standards, 

and that the Europeans will recognize United States clearinghouses. 

So I think that, though we can debate whether the Congress said 

‘‘shall’’ or ‘‘may’’ in that regard, I think if we didn’t write the rules 

on the clearinghouses, that we wouldn’t be up to international 

standards. 

Senator MORAN. My understanding is that the law does say 

‘‘shall, as appropriate.’’ And so the question about what’s appropriate, and, as I understand the law, when you read ‘‘as appro-
76 

priate’’ in context of the Commodity Exchange Authority, it requires the CFTC to make a finding that excessive speculation 

caused an unwarranted or unreasonable price fluctuation in particular commodity markets. 

And I, we’ve had this conversation before. I keep waiting for the 

finding by the CFTC. You have an old staff report that somewhat 

addresses this issue, but I’ve yet to see the finding by the CFTC 

that excessive speculation was found in the markets. 

Mr. GENSLER. Well, we are not a price-setting agency. But what 

the agency has used since the 1930s is position limits, as the Congress has mandated since the 1930s, to ensure that the markets 

have a diversity of actors. Basically that, bona fide hedgers don’t 

come under this, but speculators don’t get so concentrated. 

We actually had position limits in the energy markets working 

with exchanges in the 1980s and 1990s. In 2001, the exchanges 

backed away from that to something called accountability levels, 

which, on a very regular basis market participants go over the accountability levels. They’re no longer stop signs. They’re not even 

yield signs, really. They’re just, maybe, honk if you go by it. 

And so we’ve re-proposed, in essence, position limits. We’re going 

to hear from the public. We’ve gotten 11,000 comments on this. Of 

our total 16,000, this is where the largest number of comments are. 

And I think that’s partly because of high energy prices and high 

agricultural prices right now. But it’s something the public very 

much wants us to get right, as you do. And we’re going to sort 

through those 11,000 comments. 

Senator MORAN. Thank you, Mr. Chairman. 

Senator DURBIN. Senator Lautenberg. 

Senator LAUTENBERG. Thanks, Mr. Chairman. 

Again, I welcome each of you here to change the game that has 

been played in the past, and ultimately responsible for the financial disaster, in my view, that we’ve seen. 

IMPACT OF REDUCED FUNDING

Now, Chairman Schapiro, the House recently passed a budget 

that would reduce funding to 2008 levels. You discuss it in your 

comments. That would put the SEC funding at $0.5 billion, below 

the President’s request. And yet the SEC expenses, as you mentioned, fully offset by industry fees, and therefore don’t add anything to the budget deficit. If the budget was, wound up that way, 

with that cut to 2008 level, what, in summary, what might that do 

to prevent you from fully doing the job that you’re assigned to do? 

Ms. SCHAPIRO. Senator, going back to the 2008 level would have 

a very profound impact on the agency. It would take our appropriation back to about $906 million. And even after major cuts and factoring in attrition, we would probably have to reduce our staff by 

more than 740 full-time equivalents to meet the $906 million number. And if the cuts didn’t happen until perhaps January 2012, the 

reduction in staff would exceed 1,000 people on a base of about 

3,800. So it would be enormous. 

We would have to also eliminate all of our new information technology investment, which is really critical to getting this agency in 

a position to do the kind of market surveillance and market monitoring that I think we should be doing. 
77 

We would do fewer examinations. We would detect fewer violations of the law. We would bring fewer enforcement cases. And our 

enforcement program brings lots of money back to harmed investors. Last year, we returned—on a $1 billion budget—$2.2 billion 

to harmed investors directly, as well as hundreds of millions of dollars to the United States Treasury. 

We would have to suspend development of new systems, like the 

Tips, Complaints and Referrals system, which is allowing us to 

bring together the massive numbers of tips and complaints the 

agency receives, track those, triage them and handle them in a 

more professional and diligent way than has been done historically. 

And then, with respect to some of our internal operations—for 

example, the movement of our financial management systems, 

which have been flawed over the last several years, to a Federal 

shared service provider—efforts like that would have to be put on 

hold. 

So, I think it would have a devastating impact on the agency’s 

ability to protect the public from financial fraud. 

Senator LAUTENBERG. This, to me it looks like we might wind up 

back in the 2008 situation if we had to restrict ourselves to the 

things that you’re now planning to do and improve the supervision 

and the reliability of the marketplace. So it, by no means, in my 

view, can help to cut the budget or, as I said earlier, to cut staffing 

when so much is needed. 

MADOFF SCAM AND OTHER PONZI SCHEMES

If we look back at 2008 and even earlier, a whistleblower brought 

information to the SEC about the evidence, with evidence of the ultimate public swindle, the Madoff scam, stole billions of dollars 

from investors. And the SEC apparently did very little or almost 

nothing to pay attention to that opportunity, to learn and to adjust. 

And I wonder whether any of that was caused by a limited number 

of people on the staff, or a smaller agency. 

Is there a view, Ms. Schapiro, about what might have put the 

SEC in that kind of a static position, where nothing was done? 

Ms. SCHAPIRO. Senator, I think resources, perhaps, was a contributing factor. But I really can’t blame the SEC’s failure to catch 

Madoff much earlier on in his fraud and shut it down, solely on a 

lack of resources. There were a lot of institutional issues within the 

agency over a long period of time—a lack of cooperation and coordination between enforcement and examinations; a lack of expertise 

and understanding of the information, perhaps, that the whistleblower brought to the SEC; the lack of tools and supervision of the 

front-line examiners in getting the job done. 

We’ve done, as you know, an enormous amount of work to try to 

ensure that we can prevent anything like that from ever happening 

again, including the new Tips, Complaints and Referrals system, 

which didn’t exist then, but—— 

Senator LAUTENBERG. But which might—forgive me, but which, 

all of which can be considerably improved if we put through the 

budget as the President requested. 

Ms. SCHAPIRO. Absolutely. Not just the technology, but also the 

ability to bring in people with deeper expertise; the ability to train 

our employees in deeper and more cutting-edge ways; our ability to 
78 

have more people bring more cases and shut down more Ponzi 

schemes faster. Over the last 2 years we’ve brought twice as many 

Ponzi scheme cases as we did the prior 2 years before I arrived at 

the agency. So resources, absolutely, would help. 

But I just, I don’t want to say that the Madoff failures at the 

SEC are solely the result of inadequate resources. 

CORPORATE COMPENSATION

Senator LAUTENBERG. Yes. I note the effort that would be put 

forth to make sure that transparency really is there in all kinds of 

situations. 

One of them that’s disturbed me—and, again, I come with a corporate background. I spent 30 years with a giant, a company that 

turned out to be a giant company. And the shareholders very often 

are not kept up to date with what’s taking place. 

And one of the most significant, in my view, is the variation in 

the relationship between the CEO compensation and the average 

worker in these companies. In 1980, it was a ratio of about 40 to 

1. And now we’re well more than 300 at times. And the difference 

in wages is incredible. I mean, the CEO, if the average wage was 

$40,000 in 1980, the CEO might earn, then, $1.6 million. And now, 

if that same situation took place, it’s well more than $13 million. 

And that maladjustment, in my view—and I speak to, as a longtime executive, a long-time member of the board of directors, and 

still a member of the board of directors at the Columbia Business 

School—that one of the things that’s so problematic is that our society is getting lopsided here. And any way that we can produce 

evidence of what’s, the changes that are taking place, is incredibly 

valuable. 

And I thank you, Mr. Chairman, and we have, I have other questions, which I’d like to submit for the record. 

Senator DURBIN. Thanks, Senator Lautenberg. Of course, those 

questions will be submitted in writing. 

GASOLINE PRICES

There are, Chairman Gensler, there are a variety of rites of 

spring in America—the opening of the baseball season; Seder dinners, which I shared this year with Senator Lautenberg; the Easter 

bunny; and an obscene run-up in gasoline prices, which seems to 

come about every spring. And Members of Congress—Senate and 

the House—get into a high state of excitement and anxiety as they 

hear from their constituents about what these gasoline prices are 

doing to families and businesses. 

Now, over the years I’ve developed a very careful watchdog of 

gasoline prices—my wife. And I called her this morning, and she 

says, ‘‘It’s up to $4.20 a gallon in Springfield. What are you doing 

about it?’’ 

And I said, ‘‘Luckily, Chairman Gensler is going to be testifying 

today, and I’m going to ask him a question about it.’’ 

And the question comes down to this: I understand, when we 

talk about the futures markets and the oil prices, that speculation 

is not illegal, and it serves as a necessary ingredient to add liquidity to the market. But oil prices have risen to $113 a barrel over 

the last few months—a one-third increase in price, right before the 
79 

summer driving season, surprise, surprise. And unrest in the Middle East and North Africa has been blamed, though the countries 

involved represent a very tiny fraction of the sources of oil in 

America. 

The President has called for this integrated look at whether or 

not there are problems related to speculation and fraud and the 

like. Your CFTC Commissioner, Bart Chilton, indicated that hedge 

funds and other speculators have increased their positions in energy markets by 64 percent since June 2008, to the highest level 

on record. When it comes to speculation, can the CFTC differentiate between normal speculation, excessive speculation, and manipulation? 

Mr. GENSLER. Let me say I share with your wife’s view. Last 

night, I filled up on Connecticut Avenue for $84 for the tank. So 

I, it’s on my mind, too. 

We’re not a price-setting agency. But, as an agency, we’re to 

make sure that these markets, that hedgers and speculators meet 

in a marketplace that’s transparent, it’s open, it’s competitive, free 

of manipulation and fraud, and also using position limits, that 

there’s some diversity, a lack of concentration in these speculators. 

That’s why I think it’s so important that we continue to move forward on the rules. The Congress gave us new anti-fraud and antimanipulation authority. We’ve proposed rules to implement that. 

We’re yet to finalize the rules, but that broader authority is very 

important. We do use our current authority, but the broader authority is important. And—— 

Senator DURBIN. So, the Dodd-Frank Act gives you more tools to 

deal with—— 

Mr. GENSLER. Absolutely. 

Senator DURBIN [continuing]. Market speculation and manipulation, as it relates to oil prices. And, looking at this from the other 

side of the coin, efforts to slow down or stop your agency’s implementation of the Dodd-Frank legislation will limit the availability 

of those tools when it comes to things like oil prices speculation. 

MARGINS

Mr. GENSLER. Mr. Chairman, that is absolutely correct. 

Senator DURBIN. I’m glad you said that. 

Now let me ask about margins. I understand that oil speculators 

provide 6 percent of the value of a futures contract up front when 

they buy a stock. And some have argued that increasing the margin requirement will reduce the volatility, but still allow for some 

speculation in the industry. What is your thought? 

Mr. GENSLER. The Dodd-Frank Act also addressed margin. Our 

authorities are limited. They’re just to set margin with regard to 

cleared swaps, as it relates to the safety and soundness of the 

clearinghouse, and for uncleared swaps, the safety and soundness 

of the dealers, the financial system as the dealers. And we’ve put 

proposed rules out with regard to that. 

So it doesn’t necessarily address Mr. Chairman’s question, but 

the Dodd-Frank Act’s pretty clear that it’s about the safety and 

soundness of the clearinghouses or the dealers themselves when we 

set these margins. 
80 

Senator DURBIN. Thank you, Chairman Gensler. I have to leave 

and be in a meeting in the House. But Senator Lautenberg has 

said he’ll preside through the close of questions from Senator 

Moran and himself. 

And I thank you both for coming today. We’ll submit some questions in writing for you, and I hope you get a chance to respond 

to them in a timely fashion. 

Senator Moran. 

Senator MORAN. Mr. Chairman, thank you. 

I, too, will submit a number of questions in writing. 

I just have one follow-up question, and then a general question 

for both chairpersons. 

I want to go back to our position limit conversation. You said 

that you put the position limit rule out for comment—in my view, 

what you were telling me is for, to determine its appropriateness. 

I was suggesting that position limits are to be determined, are to 

be under rulemaking where appropriate. And I would just make 

the point that whether or not it’s appropriate is a determination to 

be made by the economists. And this goes back to the IG report— 

that determination about the appropriateness should be done by 

economists, not by lawyers. 

And to date, to my knowledge, the only report you have from 

economists is the 2008 staff report that found no connection between excessive speculation and unwarranted price fluctuations. 

So, I’d be glad to have this ongoing conversation with you in, in 

that regard. 

SAVINGS

And then, just generally, for both of you, are there any examples 

of where you and your agency are finding savings—reduced spending—for purposes of helping us offset the increased costs that 

you’re requesting? 

Chairman Schapiro. 

Ms. SCHAPIRO. I’d be happy to do that, yes. We have a new leadership team in our technology group and a new chief operating officer of the SEC, and one of the charges I’ve given them is to look 

for those opportunities to save—particularly when we were under 

the continuing resolution for such a long period of time. 

And so, particularly in the technology space, we’ve been able to 

retire some old equipment and utilize more efficient, more cost-effective technologies. That’s an opportunity. We are moving to more 

risk-based approaches with respect to our examination program, so 

that we are using less of a broad sweep and check the box mentality, and a more focused, deeper dive into those regulatees that 

might actually present the greatest risk to the investing public. 

We are trying to deploy knowledge management systems and ediscovery tools that will allow us again to leverage technology, 

rather than necessarily having to bring on a lot of human resources 

to do certain functions that technology does very well. 

And if I can give you one sort of quirky example, we learned that 

at our alternative data center, we could save $375,000 a year on 

an investment of $120,000, simply by changing our power configuration. So, it gives you a very micro idea of what we’re looking at. 
81 

But we are trying to go through the SEC very carefully and look 

for every opportunity to find savings that we can then re-deploy to 

higher value uses that we think will do more to protect the investing public and to ensure that the markets are operating with efficiency. 

That also includes leveraging other entities like self-regulatory 

organizations as we develop the consolidated audit trail. There will 

be costs for the SEC in that, but the great majority of the costs will 

be borne by the exchanges and FINRA, that will have to develop 

the plan for the consolidated audit trail, set up the repository for 

the data, and then we’ll develop our own tools to access that data. 

We’re leveraging the Public Company Accounting Oversight Board, 

we’re leveraging private accounting firms—anywhere we can leverage third parties with rigorous oversight by the SEC, we look at 

those as opportunities to both do a better job, and to find some savings that we can then re-deploy. 

Senator MORAN. If you can quantify that, I’d welcome the piece 

of paper that demonstrates those savings within the SEC. 

Ms. SCHAPIRO. We’d be happy to do that. 

Senator MORAN. Thank you. 

[The information follows:] 

COST-SAVINGS INITIATIVES 

Opportunity description Savings opportunity Potential cost savings 

Total upfront 

cost (spend 

to save) 1

Data storage system and retirement and replacement.Reduce data storage maintenance costs by purchasing 

new equipment.

$1.4 million over 3 years ............. $470,000 

Server virtualization and storage .. Eliminate number of physical 

severs.

$18.6 million over 3 years ........... $9,100,000 

Operational monitoring and 

metrics management.

Eliminate 30 contractor FTEs ....... $5.3 million over 6 years ............. $3,900,000 

Power savings at SEC alternative 

data center.

Eliminate dedicated power circuits through consolidation at 

Equinix.

$380,000 each year after first 

year.

$10,000 

HQ building and 11 regional 

buildings facilities access control contract.

Replace contract for electronic 

facilities access control system 

and surveillance systems with 

less expensive contract.

$6 million over 5 years ................ ( 2 ) 

Delegate section 31 fee 

verification.

Opportunity as noted in BCG 

study: rather than utilizing 

OCIE examination resources, 

redirect to SROs compliance 

costs for ensuring SROs are 

paying SEC the correct amount 

in section 31 transaction fees.

Current process uses 10 FTE for 

4 months.

( 3 ) 

1 Cost projections are estimates and thus are subject to change. 

2 Not applicable. 

3 To be determined. 

Senator MORAN. Chairman Gensler. 

Mr. GENSLER. Similar to Chair Schapiro’s answer, through the 

continuing resolution, we did. We’re only just people and technology, by and large with, of course, some real estate. So, there 

were a number of savings. Unfortunately, in technology we cut so 

much that I think that, you know, we need to really, as we earlier 

talked about, go the other way, to leverage technology to be more 

efficient. 
82 

One of the significant things we’ve been looking at is, what duties, can we ask the self-regulatory organization, the NFA to do, 

particularly in terms of registering the new swap dealers, examining the new swap dealers, and we’ve worked very closely with 

them as to how they can stand up. They’re probably going to have 

to stand up between 100 and 200 new people to do that, rather 

than us doing it. But we’re working very closely with them. 

In terms of technology, it’s really, how can we leverage off of 

what’s in the Dodd-Frank Act and these new data repositories so 

that as much as possible can be picked up by the data repositories? 

They will charge fees for that, by the way. But it won’t be through 

the taxpayers. And that, we then get direct data access. And we’ve 

already had our chief of technology be, in direct dialogue with each 

of the data repository aspirants—they’re not yet registered—as to 

how we can link up the systems and leverage off of their data. 

Senator MORAN. Well, Chairman Gensler you, too, if there’s a 

piece of paper that you could present to me, or to the subcommittee, that outlines the cost savings that are occurring. What 

I’m looking for is that you would be asking for more money from 

us, but for these savings within your agency that you’ve developed 

for fiscal year 2012. 

[The information follows:] 

CHECKLIST OF COMMODITY FUTURES TRADING COMMISSION COST-CUTTING

INITIATIVES

The Commodity Futures Trading Commission (CFTC) is committed to reducing its 

operating costs. Over the last 2 fiscal years, more than $65 million over the next 

15 years in cost reductions were achieved using proactive contracting practices. The 

results are presented below. 

RENEGOTIATE SPACE LEASES

The estimated negotiated savings cited below totals approximately $48.4 million: 

—The CFTC expanded and extended its existing D.C. lease to produce an estimated saving of $42 million over 15 years when compared to the estimated cost 

to relocate. 

—The CFTC expanded and extended its existing Chicago lease resulting in an estimated savings estimated of $6.4 million over 12 years versus the estimated 

cost to relocate. 

NEGOTIATE COST REDUCTIONS ON ACTIVE CONTRACTS

The estimated negotiated savings cited below totals approximately $17.6 million 

over 5 years. 

A brief summary focusing on negotiated cost savings: 

IT Support Services.—Estimated savings associated with the award of five 

contracts totals approximately $15 million over 5 years. 

IT Hardware.—Estimated savings associated with the award of two contracts 

totals approximately $700,000. 

Software.—Estimated savings associated with the award of one contract totals 

approximately $106,000. 

HR Benefits and Support Services.—Estimated savings associated with the 

award of two contracts totals approximately $1.5 million over 5 years. 

RENEGOTIATE ON-LINE LEGAL RESEARCH SERVICE RATES

Negotiated rate reductions for online services in the amount of $259,000. Future 

savings are expected to exceed this amount on an annual basis. 

LEVERAGE NASA GOVERNMENT-WIDE ACQUISITION CONTRACT

The estimated negotiated savings cited below totals approximately $688,000. 

Administrative Support Services.—Estimated savings associated with the 

award of two contracts totals approximately $400,000. 
83 

Saved $235,000 in the purchase of routers by converting a proposed GSA 

schedule purchase to a competitive buy. Saved $53,000 in the purchase of blade servers by converting a GSA schedule 

purchase to a competitive buy. 

CONVERT SOFTWARE LICENSES TO ENTERPRISE AGREEMENTS

Negotiated an enterprise license for law office services that saved the CFTC $145,000 compared to the price of individual licenses. 

The CFTC is committed to reducing its operating costs. Over the last 2 fiscal years CFTC estimates it saved at least $500,000 in cost reductions were achieved 

by changing its operating practices. 

—Reduce travel costs; 

—Use more teleconferencing and web technology; 

—Modernize travel policies to use restricted fares where appropriate; 

—Centralize employee registration and negotiate larger discounts with conference vendors; and 

—Recover State lodging taxes inadvertently paid by CFTC travelers; and 

—Consolidate purchases for common goods and services; 

—Implemented 4-digit dialing eliminating the long distance charges on calls made 

between CFTC offices; 

—Put more documents online to cut back on FOIA requests; and 

—Set shared printer default settings for ‘‘two-sided printing’’. 

Senator MORAN. I thank you for your testimony today and look 

forward to our ongoing conversation. Thank you. 

Mr. Lautenberg. 

USER FEES

Senator LAUTENBERG. Thanks. 

And just a couple of things that I’d like to get answers to. Mr. 

Gensler, the CFTC, the only financial regulator that does not offset 

a portion of the cost through industry user fees. Now, if the derivatives traders don’t pay fees to defray the costs of the market oversight, then the taxpayers are the ones who pay the bill. Should the 

traders continue to—it’s always in the way—should the traders 

continue to get a free ride while the taxpayers foot the bill? 

Mr. GENSLER. We think to fulfill our mission, we look forward to 

working with the Congress in any way that the Congress sees fit 

to help fulfill the mission and secure the funding. The President’s 

request did put forward a concept of user fees with regard to the 

swaps marketplace, and if that’s beneficial to this subcommittee for 

us to work with you on that, we’d look forward to doing that, whatever the Congress thinks is the best way to secure the funding. 

Senator LAUTENBERG. What would you recommend? 

Mr. GENSLER. I’d recommend that we work with you in any way 

that helps secure the funding. 

Senator LAUTENBERG. Thank you. 

Ms. Schapiro, credit rating agencies play an influential role in 

helping investors to make decisions. Part of the SEC’s budget request is devoted to closely regulating and examining these agencies. But credit rating agencies continue to be paid by the very people whose products the agencies are evaluating. 

What might the SEC do to address this, what I see as a fundamental conflict of interest? 

Ms. SCHAPIRO. Senator, there is a conflict of interest there, and 

so the Dodd-Frank Act did a couple of things to help us address 

that. One is that we’re required to examine credit rating agencies 

on an annual basis, regardless of the risk a particular agency presents. And so part of our budget request is staffing for the credit 
84 

rating agency examination team. We’re also required to set up an 

independent office of credit rating agencies, reporting directly to 

me. 

In addition, we have about 10 different rules that we’re required 

to do under the Dodd-Frank Act to address conflicts of interest, 

governance, enhanced public disclosure about the performance of 

ratings, and so forth. And we’re working on those rules right now. 

I think to get directly to your question, though, there is a requirement for three different studies on credit rating agencies, one 

of which is to study the feasibility of a wholly different model for 

credit rating agencies when they’re rating structured assets. So 

that there would be a model potentially where the rating agency 

would be assigned, by the SEC or by a self-regulatory organization, 

to the issuer of the structured product, rather than the issuer of 

the structured product picking the rating agency and perhaps creating a very real conflict of interest. 

That study is not due until July 2012. But we’re just about to 

go out with our request for comment to get that study launched. 

And that will, I think, give us some other ideas about alternative 

compensation structures that might get at this very important conflict of interest issue. 

Senator LAUTENBERG [presiding]. Thank you. 

In New Jersey we have a nationally known philosopher whose 

name is Yogi Berra. And Yogi has an expression that I think is appropriate at the moment. Because if we continue to look at the cost 

side without the benefit side of putting additional staff to work, of 

investing in additional technology, it’s going to be, as Yogi would 

say, de ́ja` vu all over again. So, I’d recommend care, thought, and 

investments that can really pay off handsomely for the future. 

With that, I thank, in the words of our chairman, all of you 

who’ve participated in preparing for the hearing. I appreciate hearing from the top officials of these two pivotal agencies about their 

implementation activities and funding needs. And it’s fair to say 

that today’s discussion has provided helpful insights into these 

agency operations, which will be instructive as we further consider 

the budget proposals and develop our fiscal year 2012 bill over the 

coming months. 

ADDITIONAL COMMITTEE QUESTIONS

The hearing record, as Senator Durbin said, will be, remain open 

until next Wednesday, May 11, at 12 noon for subcommittee members to submit statements and/or questions to be submitted to the 

witnesses for the record. 

And with that, I thank Senator Moran for his contribution. 

[The following questions were not asked at the hearing, but were 

submitted to the Department for response subsequent to the hearing:] 

QUESTIONS SUBMITTED TO GARY GENSLER

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

ADAPTING OPERATIONS TO EXPANDED RESPONSIBILITIES

Question. The Commodity Futures Commission (CFTC) regulates a futures and 

options industry that increased from 580 million contracts in 2000 to more than 3.1 
85 

billion contracts in 2010—a change of more than 434 percent. During that same decade, customer funds held in Futures Commission Merchants accounts increased 

from $56.7 billion to more than $170.1 billion, and the value of these contracts is 

notionally estimated at $40 trillion. With the Dodd-Frank Act signed into law last 

July, the CFTC is tasked with regulating the swaps markets with an estimated notional value of approximately $300 trillion—roughly 7 to 8 times the size of the regulated futures markets. 

How will your staffing and organization need to adapt to keep pace with this 

growth surge? 

Answer. The CFTC must be adequately resourced to police the markets and protect the public. The CFTC is taking on a significantly expanded scope and mission. 

By way of analogy, it is as if the agency previously had the role to oversee the markets in the State of Louisiana and was just mandated by the Congress to extend 

oversight to Alabama, Kentucky, Mississippi, Missouri, Oklahoma, South Carolina, 

and Tennessee. 

With seven times the population to police, far greater resources are needed for 

the public to be protected. Without sufficient funding for the agency, our Nation 

cannot be assured of effective enforcement of new rules in the swaps market to promote transparency, lower risk and protect against another crisis. It would hamper 

our ability to seek out fraud, manipulation, and other abuses at a time when commodity prices are rising and volatile. 

Until the CFTC completes its rule-writing process and implements and enforces 

those new rules, the public remains unprotected. 

Question. Does CFTC’s current organizational structure allow you to meet the 

challenge? 

Answer. The CFTC has been meeting the challenge of writing rules to implement 

Dodd-Frank though its existing structure supplemented by rule writing teams 

whose members cut across divisions. As the agency moves out of the rule-writing 

phase to ongoing oversight of the futures and swaps markets, some changes to the 

existing organizational structure will be needed to meet the need to oversee new entities such as swaps dealers and better utilize technology. 

Question. Are you contemplating restructuring your operations? How? By when do 

you expect to realign the organization? 

Answer. Yes, the agency is undertaking a staff reorganization to effectively implement the Dodd-Frank Act, oversee an increasingly electronic marketplace and manage and utilize agency resources. The agency plans to create two new groups reporting to the chairman’s office: a Division of Swaps and Intermediary Oversight and 

an Office of Data and Technology. Some realignment will occur within existing Divisions and Offices. Further changes are noted in the attached memoranda. The CFTC 

is planning for the realignment to become effective October 9, 2011. Notice of this 

planned staff reorganization was provided to the Congress by letter on May 6, 2011, 

presented below. 

COMMODITY FUTURES TRADING COMMISSION, 

Washington, DC, May 6, 2011. 

Hon. DANIEL K. INOUYE, 

Chairman, Senate Committee on Appropriations, Washington, DC. 

Hon. THAD COCHRAN, 

Vice Chairman, Senate Committee on Appropriations, Washington, DC. 

Hon. HAROLD ROGERS, 

Chairman, House of Representatives Committee on Appropriations, Washington, DC. 

Hon. NORM DICKS

Ranking Member, House of Representatives Committee on Appropriations, Washington, DC. 

DEAR SENATORS INOUYE AND COCHRAN AND REPRESENTATIVES ROGERS AND DICKS: 

The Commodity Futures Trading Commission is undertaking a staff reorganization 

to effectively implement the Dodd-Frank Wall Street Refoun and Consumer Protection Act, oversee an increasingly electronic marketplace, and manage and utilize 

agency resources. We are providing this notice pursuant to the Department of Defense and Full-Year Continuing Appropriations Act, 2011. 

The enclosed document describes the details of the reorganization. Please do not 

hesitate to contact me if you have any questions. 

Sincerely yours, 

GARY GENSLER, 

Chairman. 

Enclosure 
86 

CFTC REORGANIZATION

AUTHORITY: 

Title 5, United States Code (USC) 

Commodity Exchange Act 

Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) 

CFTC FY 2011–2015 Strategic Plan 

GPRA Modernization Act of 2010 (OMB Memorandum M–I1–17, April 14, 2011) 

Recommended CFTC Reorganization 

The Commodity Futures Trading Commission (CFTC) is undertaking reorganizing, effective October 9, 2011, to structure its stall for implementation oldie 

Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act); 

oversee an increasingly electronic marketplace; and plan for, manage and utilize 

agency resources. The changes are consistent with the CFTC FY 2011–2015 Strategic Plan approved February 28, 2011. 

Create New Groups Reporting to the Chairman’s Office 

Create a Division of Swap Dealer and Intermediary Oversight (DS10). 

Create a new Office of Data and Technology (ODT). 

Realign Within Existing Divisions and Offices 

Division of Market Oversight (DMO). 

Division of Clearing and Intermediary Oversight (DCIO) into the Division of 

Clearing and Risk (DCR). 

Office of the Executive Director (OED). 

Other 

Rename the Office of Equal Employment Opportunity the Office of Diversity and 

Inclusion. 

Set up a process fir determining the organizational assignment of whistleblower 

and consumer outreach functions. 

Functions 

Division of Swap Dealer and Intermediary Oversight (DSIO) 

With an expanded mission due to the Dodd-Frank Act mandate to regulate the 

swaps markets, the CFTC will take on new responsibilities, including the registration and oversight of new categories of registrants such as swap dealers and major 

swap participants. Staff will be needed to regulate them for robust business conduct 

standards, record-keeping and reporting requirements and capital and margin requirements. To effectively oversee swap dealers and major swap participants, the 

CFTC will create a new oversight program for these and other registrants. 

The primary focus of this new Division will be to oversee the regulation of swap 

dealers, future commission merchants and other intermediaries to ensure they have 

adequate financial resources and standards of conduct. This new Division initially 

Will be staffed through reassignment of employees currently responsible for intermediary oversight in DCIO. 

Office of Data and Technology (ODT) 

Effective oversight of the highly electronic derivatives marketplace requires a 

technology organization at the program level directly accountable to the Chairman. 

Increased mission scope over a broader and more complex data-centric marketplace 

requires an enterprise-wide, integrated data and technology strategy. Elevating the 

CFTC technology program to the office level reporting directly to the Chairman recognizes its importance in achieving agency strategic and operational goals and 

brings focus and transparency to program priorities as addressed in the FY 2011– 

2015 Strategic Plan. This reprioritization of functions will align the ODT Director, 

as Chief Information Officer, with the CFTC division and program leadership to foster a shared strategic CFTC technology portfolio, assets and budget. The ODT will 

have two branches: 

Data Management Branch (DMB).—This branch is crucial to effective oversight of an increasingly electronic marketplace. All CFTC mission programs are 

fundamentally dependent on the timely capture and management of and access 

to quality and meaningful data. The DMB will ensure a CFTC information architecture based on data integration, integrity and quality. Working across all 

divisions, DMB will establish agency-wide data needs and an effective CFTC 

data strategy. 

Technology Services Branch (TSB).—The existing functions performed by the 

Office of Information and Technology Services (OITS), currently located in the 
87 

Office of the Executive Director (OED), will be reassigned to ODT to partner 

with DMB and the program divisions/offices to implement technology solutions 

within a secure and stable IT environment. The Technology Services Branch 

will maintain the CFTC hardware and software platforms and deliver storage, 

security and redundancy capacity and capabilities. 

Division of Market Oversight (DMO) 

With the evolution of the markets and the fundamental changes made to the U.S. 

financial regulatory system, including new obligations with respect to the oversight 

of the swaps markets, the CFTC will have increased market monitoring responsibilities over new entities, such as swap execution facilities (SEFs) and swap data repositories (SDRs). Furthermore, the Dodd-Frank Act adds to the CFTC’s authorities 

with regard to real time reporting of swaps transactions, review of new products, 

aggregate position limits and appropriate block trade levels. Restructuring DMO 

will enable the CFTC to implement oversight requirements of these new entities 

and authorities to ensure that the markets operate with a robust surveillance and 

compliance review system. 

Division of Clearing and Risk (DCR) 

The Dodd-Frank Act mandates that standardized swaps be cleared through 

CFTC-registered derivatives clearing organizations (DCOs.) It also requires that the 

CFTC review and examine systemically important DCOs for compliance with CFTC 

regulations on a yearly basis, which the CFTC does not currently do. Based on information received from interested parties, a 50 percent increase in the number of 

DCOs is anticipated. The Division of Clearing and Risk will consist of staff currently 

assigned to DCIO. It will conduct risk surveillance and examination of DCOs for 

swaps and futures as well as assess compliance with statutory Core Principles. In 

addition, it will create an organizational focus on the review and assessment of overthe-counter swaps and other derivatives instruments to determine their suitability 

for clearing. 

Office of the Executive Director (OED) 

OED reorganization will facilitate improved agency management and rationalize 

the structure of new functions that it absorbs, including planning, business management, physical security, Privacy Act compliance, intranet content management and 

the Office of the Secretariat. Changes also will accommodate increased compliance 

standards, including records management, personnel security and contingency planning, as well as the transfer of the technology program. This includes standardizing 

and formalizing business processes and decision-making to support the operational 

and management activities of the Commission. 

Ensuring that the agency has the capacity and capability to effectively manage 

an expanded mission requires the establishment of one new functional program and 

the consolidation of a number of functions. These changes will reduce the number 

of Executive Director direct reports from eight to five. The direct reports will now 

consist of Business Management and Planning; Financial Management; Human Resources; Records Management; and Diversity and Inclusion. 

Office of Diversity and Inclusion 

The Office of Equal Employment Opportunity will be renamed the Office of Diversity and Inclusion to accurately reflect the programmatic responsibilities of the Office. In addition to handling complaints filed pursuant to 29 CFR 1614, the current 

EEO Office ensures that the CFTC has a positive and progressive affirmative employment program that will assist the agency in attracting a diverse workforce. The 

Office will continue to assess and evaluate the CFTC environment and identify any 

potential barriers to inclusion, including reviewing practices and policies. The proposed name change is consistent with the names of other Federal agencies (e.g., 

Federal Reserve Board, Department of Treasury and Office of Personnel Management). 

Consumer Outreach Program 

The Dodd-Frank Act establishes the CFTC Customer Protection Fund (Fund). The 

Fund is to be available for payments to whistleblowers who provide information in 

connection with violations of the Commodity Exchange Act (the Act) and to finance 

education initiatives designed to help customers protect themselves against fraud 

and other violations of the Act. A Consumer Outreach Program Working Group of 

Commission staff will make recommendations by May 31, 2011, for the appropriate 

organizational structure of the outreach effort. 
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Question. What resources will this require? 

Answer. The President’s budget proposes $308 million for the CFTC for fiscal year 

2012 to remain available until expended through fiscal year 2013. This funding level 

would enable the Commission to perform its responsibilities both in the oversight 

of commodity futures markets and in beginning to oversee the swaps markets. 

The fiscal year 2012 budget request would provide funding for 983 employees. 

Though increased funding will support approximately 37 percent more staff, it is in 

light of a congressional mandate that expands the CFTC’s scope by more than seven 
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times. The request also includes $66 million for technology, of which $41 million 

would be used to fulfill pre-Dodd-Frank Act information technology requirements. 

This increase would allow the CFTC to invest in technology in an effort to keep pace 

with the futures marketplace that is increasingly populated by algorithmic and 

high-frequency traders. 

Question. Chairman Gensler, in your prepared remarks, you mentioned the proposal for setting up a new group for the collection, management, and analysis of 

data for improved oversight and enforcement in the derivatives markets and as the 

primary interface for market participants in adapting to the new data standards 

and reporting requirements for market data required under the Dodd-Frank Act. 

When do you anticipate this being launched? 

Answer. It is anticipated that the Office of Data and Technology and its Data 

Management Branch will be launched as part of the staff reorganization discussed 

above on October 9, 2011. 

TECHNOLOGY MODERNIZATION INVESTMENTS

Question. As emphasized in the CFTC’s 2011–2015 strategic plan, ‘‘effective oversight can only be accomplished if the regulator has access to all revelant activity 

in the markets.’’ 

The volume of information and data is vast. Promptly collecting, synthesizing, 

managing, and analyzing all of it is paramount in your surveillance work and realtime public reporting. Without question, enhanced cutting-edge technology is essential to the CFTC’s capacity to leverage financial and human resources to execute not 

only your core mission, but for fulfilling the expanded responsibilities under DoddFrank reforms. 

During the period of successive short-term continuing resolutions (October 1–April 

15), the budget for the Office of Information Technology Services was reduced 36 

percent in order to preserve existing CFTC staffing levels. 

What is your vision for the critical role of technology and automation in policing 

the futures and swaps marketplaces? 

Answer. The CFTC’s fiscal year 2012 budget request includes $66 million for technology. This will allow us to pursue automated surveillance to oversee the markets 

and to make our oversight more efficient. 

Despite rapid advances in technology and the increased size of regulated derivatives markets, funding for the CFTC has lagged behind the growth of the markets. 

While market participants have the technology to automate their trading, we do not 

yet have the resources to employ modern technology to automate our surveillance. 

In fiscal year 2010, we used about 18 percent of our budget—$31 million—on technology initiatives. The continuing resolution requires that we allocate $37.2 million 

toward technology in fiscal year 2011. The CFTC needs to make further investment 

in technology to efficiently oversee both the futures and swaps markets. Only 

through investment in the CFTC will we be able to adequately oversee the commodity futures and swaps markets and protect the American public. The President’s 

fiscal year 2012 budget provides for $66 million to be used on technology, which 

would increase the proportion of our budget used on technology to more than 21 percent. 

Question. How would you characterize the CFTC’s current state as compared to 

the industry you regulate? 

Answer. The CFTC’s fiscal year 2010 year-end staff of 682 compares to approximately 800,000 people employed by U.S. brokerage firms, according to the Department of Labor’s Bureau of Labor Statistics. That is out of a financial industry that 

employs 5.6 million people. Furthermore, the CFTC’s funding request of $308 million compares to approximately $814 million in annual revenues of the top 25 bank 

holding companies according to industry filings with the Federal Reserve. The 

CFTC’s technology budget of approximately $31 million during fiscal year 2010 compares to about $20–25 billion spent by U.S. broker/dealers on technology initiatives 

per year, according to a presentation recently given to the CFTC’s Technology Advisory Committee by the TABB Group. 

Question. What new investments are called for? 

Answer. Technology will play a critical role in leveraging financial and human resources as the CFTC executes its expanded oversight and surveillance responsibilities pursuant to the Dodd-Frank Act. Accordingly, the CFTC will establish a new 

group for the collection, management, and analysis of data. This group will facilitate 

improved oversight and enforcement in the derivatives markets through the use of 

technology and data. It also will serve as the primary interface for market participants in adapting to the new data standards and reporting requirements for market 

data required under the Dodd-Frank Act. 
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The CFTC’s fiscal year 2010 budget request includes $25 million for technology 

needed to implement the Dodd-Frank Act. The resources requested are necessary for 

the CFTC to invest in direct data links to swap data repositories that are being established in the United States are internationally. The CFTC also must have the 

technology to aggregate and summarize the data for purposes of oversight and surveillance. 

Question. What is your timetable for enhancing the CFTC’s automated capabilities? 

Answer. The President’s budget request for fiscal year 2012 would support $66 

million in information technology spending for the CFTC. Of that amount $25 million will be required to begin the implementation of Dodd-Frank Act rules. The 

CFTC will begin developing a number of technology solutions in fiscal year 2011 and 

2012. This includes: automated surveillance of commodity futures, options and swap 

markets; ensuring that the CFTC data is compatible with industry data; identifying 

fields that describe transactions and transacting entities; associating swaps market 

data with futures market data; and implementing a number of other technology priorities. The technology implementation timetable will be driven by the sequence and 

phasing of the effective dates of final rulemakings. In fiscal year 2011 and 2012, 

the focus will be support for registration and compliance filings, providing 

connectivity for direct access to SDRs, addressing margin requirements and assimilating data needed for determining and enforcing position limits. The CFTC plans 

to update automated surveillance systems and integrate swaps and futures data and 

systems. 

Question. What can reasonably be accomplished this year? 

Answer. The fiscal year 2011 information technology (IT) program budget is $37.2 

million. The largest percentage of the CFTC IT budget supports the ongoing operations of mission-essential systems and infrastructure for all divisions. With this 

funding, the CFTC can meet emerging business requirements, determine business 

requirements for new technology solutions, implement new technology solutions, and 

provide operations support. 

Question. When you testified before the subcommittee a year ago, you stressed 

that ‘‘timely reporting of quality and meaningful market information is not possible 

with current legacy systems (one with position data and one with trade data)’’. Has 

anything changed on that front? 

Answer. The CFTC has continued to improve the quality of the trade data that 

it receives by migrating additional exchanges to a standards-based data feed. We 

expect to complete the migration for exchanges with relatively low volume by the 

end of fiscal year 2011. Overall, the quality of futures trade and position data is 

improved. Challenges remain regarding a consistent ability to correlate trade and 

position data, but we have begun work on the high-level design of the IT architecture needed to solve them. 

Question. What impediments does the CFTC currently face in becoming—and remaining—as sophisticated and savvy as possible when it comes to technological support for your work? 

Answer. The swaps marketplace is seven times the size of the futures marketplace, and technology is necessary to manage our regulatory responsibilities. The 

CFTC will require significantly more resources to undertake regulation of the swaps 

market, to assimilate and analyze data from SDRs and to respond in a timely fashion to inquiries from market participants. 

RULEMAKING

Question. Before the ink was dry on the Dodd-Frank Act last July, the CFTC hit 

the ground running to comport with explicit statutory timetables for issuance of proposed rules and studies for the governance of the swaps marketplace and other components of the comprehensive reform. 

Under your leadership, Chairman Gensler, the CFTC established 31 discrete staff 

teams concentrated on specific aspects of the array of rules. As of today, the CFTC 

has issued more than 40 proposed rules for public comment and has demonstrated 

laudable transparency in making available on its Web site the public comments it 

has received as well as information about meetings held with external stakeholders 

and interested persons. 

The staff of the CFTC has assumed an unprecedented workload and uninterrupted schedule to develop the rule proposals. 

What are the lessons learned since July as you have pursued the rulemaking 

challenge? 

Answer. Since July, the CFTC has issued more than 50 notices of proposed rulemaking to implement the Dodd-Frank Act. During that time, Commissioners and 
93 

CFTC staff have held hundreds of meetings with the public and market participants 

and have received more than 20,000 comments. From these meetings and comments, the CFTC has learned a great deal about existing market structures, including how swaps are transacted and how market participants structure their clearing 

and credit arrangements. This information has been extremely valuable in crafting 

proposed rules and will be important in finalizing those rules. 

Question. What benefits do you expect to derive from extending and reopening the 

comment period on the proposed rules? 

Answer. In late April, the CFTC voted to reopen the comment period on most of 

the Dodd-Frank proposed rules for an additional 30 days to give market participants 

another opportunity to comment on the entire mosaic of the rulemakings. The additional comment period allowed the CFTC to gain further insights from market participants and the public regarding proposed rules and their interaction. 

Question. What guidance has emerged from the 2-day session the CFTC and the 

Securities and Exchange Commission (SEC) jointly held this week for how the final 

rules will be phased-in? 

Answer. On May 2 and 3, the CFTC and SEC jointly held a staff roundtable to 

obtain the views of the public and market participants concerning the implementation of title VII of the Dodd-Frank Act. During those sessions, participants described 

what steps they would need to take to implement proposed Dodd-Frank rules. Participants also provided information about the interdependencies of various parts of 

title VII, including clearing, trading and reporting, and advised the CFTC about 

how implementation might be logically phased. 

Question. What’s next on your agenda? 

Answer. The CFTC will consider final rules through the summer and fall months. 

To that end, the CFTC has scheduled five Commission meetings thus far: two in 

July, one in August and two in September. 

Question. When do you project that the full mosaic of rules will be finalized? 

Answer. The CFTC is beginning to take up final rules this summer and expects 

to continue finalizing rules through the fall. 

Question. Is there a nexus between your timetable for finalizing the rules and 

having the trained staff on board and supportive technology in place to ensure that 

transactions are monitored and rules enforced? 

Answer. We anticipate issuing final rules to implement the Dodd-Frank Act 

through the summer and fall and bringing on necessary staff and technology improvements throughout fiscal year 2012 and fiscal year 2013. We have begun the 

process to fill many important positions. 

POSITION LIMIT REQUIREMENTS AND OIL SPECULATION TASK FORCE

Question. In 2008, as energy and grain prices set new records, speculators in derivatives were blamed by some for price volatility and for price levels that many observers believed were not justified simply by the underlying economic fundamentals 

of supply and demand. The CFTC maintained that markets were functioning normally and that the price discovery process was not being distorted. 

The enactment of Dodd-Frank included several provisions designed to insulate 

commodity prices from the impact of excessive speculation and manipulation. For 

example, under section 737, the CFTC is directed to establish position limits—a cap 

on the size of the bets—for both swaps and futures. 

January 22, 2011, was the statutory deadline for the new position limit rules. It 

is my understanding that the CFTC has delayed the rules issuance in order to collect more data. 

With oil and gas prices soaring daily, there’s mounting concern about the role of 

speculators in driving the price surge, and questions being raised about what needs 

to be done to curb it. 

A few weeks ago, President Obama announced the formation of a new inter-agency working group led by Attorney General Holder to examine the gas price situation. 

Representatives of both the CFTC and SEC are among the membership of this task 

force. Among the topics to be explored are fraud in the oil markets, developments 

in the commodity markets, investor practices, supply and demand factors, and the 

role of speculators and index traders in the futures markets. 

A similar interagency task force was formed back in 2008. The CFTC also conducted its own study of swap dealers and index traders to determine if their activity 

was affecting prices in crude oil and agricultural markets. In neither of these studies was a connection made between speculative trading and rising prices. 

If speculation is not illegal and serves as a necessary ingredient that adds liquidity to the markets, are there not other mechanisms, such as position limits, margin 
94 

requirements, and other expectations that could—or should—be invoked to address 

this situation? 

Answer. The CFTC fulfills its mission to oversee the futures markets through 

market surveillance, industry oversight, and enforcement. The CFTC pursues fraud 

and market manipulation and oversees futures exchanges and clearinghouses. The 

CFTC is a cop on the beat that protects markets in commodity derivatives from 

fraud, manipulation, and other abuses. 

A critical reform of the Dodd-Frank Act relates to position limits. Position limits 

have served since the Commodity Exchange Act (CEA) passed in 1936 as a tool to 

curb or prevent excessive speculation that may burden interstate commerce. 

Importantly, the Dodd-Frank Act directs the CFTC to establish position limits for 

both futures and swaps in a very specific manner. First, the act directs the CFTC 

to establish position limits, as appropriate, for futures contracts for agricultural 

commodities and exempt commodities (including crude oil, gasoline, and other energy commodities). Second, the act directs that the CFTC concurrently establish position limits on swaps that are economically equivalent to those futures contracts. 

Third, the act requires the CFTC to establish aggregate limits across the futures 

and swaps markets. On January 26, the CFTC published a proposed rule to implement these statutory directives. The comment period closed on March 28. The CFTC 

will evaluate the comments received before proceeding to a final rulemaking. It is 

essential to complete the task of implementing the aggregate position limits regime, 

congressionally mandated to guard against the burdens of excessive speculation. 

Question. Chairman Gensler, when do you expect the CFTC to act on the requirement for strict position limits on the amount of oil speculators could trade in the 

energy futures? 

Answer. On January 26, the CFTC published a proposed rule to set position limits 

for crude oil contracts and other physical commodities. The comment period closed 

on March 28, and the CFTC received more than 12,000 comments. The CFTC will 

thoroughly review these comments and proceed to developing a final rule. 

ENFORCEMENT: PRESERVING MARKET INTEGRITY AND PROTECTING MARKET USERS

Question. Detecting and deterring against illegitimate market forces requires 

CFTC’s steady vigilance and swift response. In fiscal year 2010, the CFTC filed 57 

enforcement actions ¥14 percent more than in fiscal year 2009 and 43 percent more 

than in fiscal year 2008. The enforcement filings involve allegations of manipulation, fraud, abuse, and other violations of the CEA. 

Furthermore, the CFTC opened 419 investigations of potential violations of the 

CEA and CFTC regulations. That’s an all-time high, far exceeded the target, and 

is a 66 percent increase more than the 251 investigations opened in fiscal year 2009. 

In addition, in fiscal year 2010, The CFTC obtained $200 million in restitution, 

disgorgement, and civil monetary penalties in previously filed or existing cases. 

Let me preface my questions by saying that these statistics are impressive. You 

and your staff are to be commended. However, does this mean there is more illicit 

activity going on or that the CFTC is becoming more adept at rooting it out? 

Answer. A combination of factors contributed to increased enforcement activity by 

the CFTC. For example, during the past 2 fiscal years the Division of Enforcement 

hired additional staff attorneys and investigators to keep up with the demands of 

the docket; the Division has received a larger number of referrals over the past 2 

fiscal years from a variety of lead sources (ranging from customer complaints to referrals from other financial regulators), which increased the number of investigations opened; and the CFTC has been granted new oversight authority (for example, 

the CFTC filed 13 cases in January 2011 based upon new FOREX registration obligations imposed earlier this fiscal year). 

Question. What’s projected for fiscal year 2011? Are you on track to build on last 

year’s successes? 

Answer. Yes. With less than two-thirds of fiscal year 2011 complete, the CFTC 

has filed 70 enforcement actions—already more than the number of cases for fiscal 

year 2010. Approximately 300 new investigations have been opened during this fiscal year. 

Question. How well is the CFTC able to measure the deterrent effect of these enforcement actions? Is there a message to fraudsters? 

Answer. In response to violations of the CEA and CFTC regulations, the Commission has the authority to seek restitution, disgorgement, imposition of civil monetary 

penalties, trading restrictions, and registration bans. These remedies are designed 

to ensure that wrongdoers are punished, and they also serve a deterrent effect. In 

appropriate cases, the CFTC refers matters to the Department of Justice (DOJ) for 

criminal prosecution. The CFTC publicly discloses all enforcement actions by posting 
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each case filing on the Commission’s Web site and issuing press releases in connection with every action filed and judgment obtained. The message to wrongdoers is 

clear: actions that harm customers or markets will be prosecuted. 

Question. How rapidly are you able to collect restitution, disgorgement of ill-gotten gains, and civil monetary penalties imposed against violations of the Federal 

commodities laws? What is the recovery rate? 

Answer. Since fiscal year 2002 more than $1.6 billion has been imposed in restitution and disgorgement orders. Judgments entered in CFTC enforcement actions for 

restitution and disgorgement have been imposed to compensate victims for their 

losses and direct violators to pay the victims. As a result, restitution and 

disgorgement are not collected by the Government. 

From fiscal year 2002 to March 2011, more than $1.7 billion in civil monetary 

penalties (CMP) have been imposed. Of that amount, more than $500 million has 

been collected and deposited in the U.S. Treasury. All CMP debts are handled by 

the Department of the Treasury for collection actions and resolution. If the Department of the Treasury is unsuccessful in expeditiously collecting the CMP debt and 

there is sufficient reason to conclude that full or partial recovery of the debt can 

best be achieved through litigation, the CFTC refers the debt to the DOJ for enforced collection and resolution as appropriate. 

Question. What has been the impact of more sophisticated information technology 

to monitor and detect fraud more readily given the complexity of transactions? How 

well is the eLaw Program working? 

Answer. The Divisions of Market Oversight and Enforcement employ a variety of 

nonpublic investigative methods to monitor and evaluate trading activity. The Division of Enforcement’s eLaw Program has proven effective as a comprehensive litigation management program, which is currently being upgraded. The eLaw Program 

has facilitated information sharing across the Division of Enforcement and increased 

the efficiency of document and audio search and review, as well as data analysis. 

eLaw also has increased the efficiency and organization of case development and 

management, including investigations and litigation, reduced the duplication of research and analysis, enhanced coordination with other agencies and provided the 

Division with expanded capacity to retain significant historical data. 

The eLaw Program’s addition of a computer forensics capability has increased the 

efficiency of electronic evidence preservation, collection and analysis. With the addition of in-house computer forensics, the Enforcement Division no longer has to incur 

high-vendor costs or delays from outsourcing the work. This includes the addition 

of a forensics lab that facilitates proper storage and control of electronic evidence 

for chain of custody purposes. The forensics program has provided a foundational 

framework for ensuring that electronic evidence to be used in enforcement matters 

is admissible in court. 

The workload for the eLaw Program has grown exponentially since its inception. 

Additional staffing and resources will facilitate the timely and effective services provided by the systems and personnel upon which the program relies. In addition, as 

derivatives markets expand and become more sophisticated, and as the CFTC’s authority to regulate those markets expands, the updated eLaw Program will ensure 

that personnel can undertake the sophisticated analyses necessary for efficient enforcement investigations. 

Question. Are there any statutory or administrative impediments that prevent the 

CFTC from doing more to combat fraud? What tools do you lack? 

Answer. In the coming months, the CFTC will begin integrating a broad range 

of enforcement tools, such as increased fraud, manipulation, and disruptive trading 

practices authority authorized by the Dodd-Frank Act. The CFTC’s proposed antimanipulation rule would set in place a broad new ability to effectively combat fraud 

and manipulation. The proposed rulemaking promotes fair and efficient markets, for 

the first time allowing the CFTC to explicitly act against fraud-based manipulation. 

The Congress also gave the CFTC authority to prohibit trading practices that are 

disruptive of fair and equitable trading. With adequate resources, these and other 

authorities will be used by the CFTC to promote and ensure fair and orderly trading, free from fraud, manipulation, and other abuses. 

AUDIT FREQUENCY

Question. The CFTC regulates the activities of 64,700 registrants who handle customer funds, solicit or accept orders, or give trained advice. Among these registrants 

are commodity pool operators, futures commission merchants, floor brokers, floor 

traders, and associated persons (salespersons). The CFTC delegates oversight authority to the National Futures Association, a self-regulatory organization (SRO). 
96 

The CFTC is limited to conducting reviews of Commission registrants, on average, 

just once every 3 years, thereby diluting the ability to check compliance. The CFTC 

also would prefer to perform regular and direct reviews of all exchanges and intermediaries and to assess their compliance with the CEA rather than relying on designated SROs for these reviews. 

What would be the advantages of performing more frequent reviews, (e.g., annual 

ones)? 

Answer. Direct examination of market intermediaries is a key component of the 

oversight program for SROs and registrants. Direct examinations are essential to 

assessing the effectiveness and thoroughness if an SRO’s financial surveillance program. They also provide independent verification of audit work completed by SRO’s 

staffs. Direct examinations also allow the CFTC to take immediate action when necessary to assess compliance with the CFTC’s financial requirements to protect customers and ensure orderly markets. As registration and other requirements for 

swap dealers and major swap participants come into effect, these examinations will 

provide CFTC staff with critical information about the operation of these entities 

and their compliance with CFTC requirements. 

Question. Would more frequent reviews require adding staff with expertise in 

trading and build CFTC’s knowledge base of how exchanges’ various electronic trading platforms operate and how violations may occur on and across electronically 

traded markets? 

Answer. More frequent reviews would require adding staff with trading expertise. 

Having staff with expertise regarding how exchanges’ electronic trading platforms 

operate is key to assessing exchanges’ self-regulatory programs and compliance with 

core principles, as well as understanding how violations can occur across markets. 

In the past, exchanges typically did not trade the same products. However, in the 

past few years, exchanges have been listing and trading similar products. For example, some metals trade at both NYSE Liffe and COMEX and ELX trades; Eurodollar 

futures and Treasury Note futures—products that trade on CME and CBT, respectively. Protecting the public interest requires that the CFTC understand how all of 

the exchanges’ electronic trading platforms work and how a trade on one exchange 

can be executed to facilitate a trading violation at another exchange. 

Question. To what extent do you believe there is a risk that an ineffective selfregulatory program may go undetected or a systemic risk may not be identified if 

frequency of reviews remains triennial? 

Answer. More frequent reviews will allow the CFTC to have current information 

on the effectiveness of surveillance programs and to identify and address potential 

issues on a timelier basis. The number of entities that must be assessed is expected 

to increase considerably as a result of the Dodd-Frank Act. Swap dealers and major 

swap participants will be required to register and to comply with applicable requirements regarding business conduct, reporting and record-keeping, capital, and margin. These entities will be subject to review by the CFTC or an SRO with respect 

to their compliance with the applicable requirements. Resources will be necessary 

to establish and implement programs for direct review by CFTC staff of these new 

registrants and for oversight of SROs that may have primary responsibility for review of these entities. 

COST-BENEFIT ANALYSIS ISSUE

Question. In the CFTC’s draft 2011–2015 Strategic Plan, the agency declares that 

the Commission will adopt as policy President Obama’s Executive order signed January 18, 2011, entitled ‘‘Improving Regulation and Regulatory Review’’ and apply 

that standard to all future and ending rulemakings under Dodd-Frank and seek to 

streamline existing rules and regulations as well. 

There’s been criticism of late that suggests that the CFTC is not adhering to this 

Executive order. I suspect some of that hype may be a stalling tactic to put the 

brakes on Dodd-Frank reforms. 

I think CFTC has made it abundantly clear that as an independent agency, the 

CFTC is exempted from the Executive order, and that the CFTC follows its statutory mandate that require the consideration of the costs and benefits of the actions 

before issuing a rulemaking. 

Section 15(a) of the CEA enumerates five broad areas of market and public concern that shall be taken into account in evaluating costs and benefits. These are: 

—protection of market participants and the public; 

—efficiency, competitiveness, and financial integrity of markets; 

—price discovery; 

—sound risk management practices; and 

—other public interest considerations. 
97 

The CFTC has discretion to give greater weight to any one of these criteria, and 

could determine that, notwithstanding the costs, a particular rule is necessary or 

appropriate to protect the public interest or accomplish any of the purposes of the 

law. 

Can you explain your approach to rulemaking and help dispel the myth that you 

are deviating from the spirit of the Executive order when it comes to conducting regulatory cost-benefit analysis as you roll-out the implementation of the Dodd-Frank 

regulations? 

Answer. The CFTC’s practices are consistent with the Executive order’s principles. 

The CFTC conducts cost-benefit analyses in its rulemakings as prescribed by the 

Congress in section 15(a) of the CEA. The statute includes particularized factors to 

inform cost-benefit analyses that are specific to the markets regulated by the CFTC. 

Thus, we will continue to fulfill the CEA’s statutory requirements. 

The CFTC has benefited from public comments relating to the costs and benefits 

of proposed rules. To further facilitate this process, the CFTC approved reopening 

or extending the comment periods for most of our Dodd-Frank proposed rules for 

an additional 30 days through June 3, 2011. Commissioners and staff have met extensively with market participants and other interested members of the public 

about our rulemakings. CFTC staff hosted a number of public roundtables so that 

rules could be proposed in line with industry practices, minimizing compliance costs 

while fulfilling the Dodd-Frank Act’s statutory requirements. Information about 

each of these meetings, as well as full transcripts of the roundtables, is available 

on the CFTC’s Web site. 

PROMOTING MARKET TRANSPARENCY THOROUGH PUBLICIZED INFORMATION

Question. Each week, the CFTC publishes its ‘‘Commitments of Traders’’ (COT) 

report. This provides a breakdown of each Tuesday’s open interest for markets in 

which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. Since September 2009, the reported data has been 

disaggregated to break out managed money and swap dealer activity in the futures 

and option markets. The CFTC also produces an index investment data report, 

which summarizes index investment activity in commodity markets, a bank participation in futures and option markets report, and a Cotton On-Call report. 

All of these efforts to make information available to the public are important. 

What are your plans to continue similar efforts to promote transparency in the 

swaps market through the development and publication of reports for that market? 

Answer. The CFTC currently publishes COT reports that include aggregate data 

from futures and options exchanges. Pending the outcome of Dodd-Frank 

rulemakings and the availability of adequate resources, similar transparency efforts 

will be undertaken with respect to the swaps market. The CFTC’s proposed rule requiring the reporting of positions in certain swaps will provide crucial data that will 

be incorporated in COT reports. 

Question. What other efforts are underway—or planned—at the CFTC to heighten 

access to information and thus promote more open government? 

Answer. The CFTC is committed to promoting transparency of both the markets 

and the agency. We have posted on our Web site a list of all meetings held with 

outside organizations related to Dodd-Frank rulemakings. This allows the public to 

see what information is provided to the agency during the rulemaking process. 

Further, we plan to implement new transparency initiatives in the coming weeks. 

Specifically, we will release data sets that provide information on the daily volume 

of trading that represents changes in daily net market exposure. The CFTC also 

seeks to make COT data more user-friendly. At present, users are presented with 

a fixed list of reports. Proposed changes will present options from which users can 

choose to generate the reports and formats that come closest to serving their needs. 

Question. The amount and detail of trade data collected and analyzed at the 

CFTC is unprecedented among regulatory financial agencies. The backbone of the 

CFTC’s market surveillance program is the large trader reporting system. I understand that the SEC is exploring a similar system. Based on your experience at the 

CFTC, what best practices or lessons learned might benefit what Chairman 

Schapiro is contemplating? 

Answer. Trader identification that permits aggregation according to common ownership and control, and that allows for meaningful classification of traders would 

ease analysis and formatting of published reports. We are working closely with the 

SEC to share our experience with large trader reporting. 
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WORKING WITH SWAP EXECUTION FACILITIES (SEF)

Question. Currently the CFTC oversees 17 Designated Contract Markets (DCMs) 

for trading in futures. It is my understanding that the CFTC anticipates that some 

30–40 entities will apply to become SEF, potentially tripling the CFTC’s oversight 

requirements. New responsibilities include routine monitoring and surveillance to 

screen for potential market manipulation, disruptive trading practices, and violations, as well as changing market conditions and developments. 

Is the range of 30–40 still your projected estimate on the growing universe over 

which the CFTC will need to exercise vigilance? 

Answer. The range of 30–40 possible SEFs was an estimate based on the number 

of entities that expressed interest in establishing SEFs. The CFTC staff continue 

to receive inquiries from entities that may register as SEFs. The actual number of 

entities that ultimately will file applications is uncertain. 

Question. What additional resources will be required for CFTC to even minimally 

satisfy its new oversight in the swaps arena? 

Answer. The CFTC will need additional staff to implement many new provisions 

related to the oversight of swaps trading activity. These include procedures for the 

review and oversight of an entirely new regulated market category: SEFs. Staff in 

the Market and Product Review and Market Compliance units must establish and 

implement procedures for the review of new SEF applications and for the annual 

examination of the operations of SEFs. The CFTC has requested a total of 62 FTE 

to fulfill its pre-Dodd-Frank responsibilities. A total of 56 FTE are requested to implement new Dodd-Frank Authorities. This includes an additional 38 FTE for fiscal 

year 2012 and an additional 18 FTE for fiscal year 2013. 

Question. What does the CFTC consider to be the optimum frequency for conducting ‘‘rule enforcement reviews’’ (RERs) of DCMs and eventually SEFs as well? 

Answer. Annually. 

Question. What resource needs does that necessitate? 

Answer. The President’s budget request for fiscal year 2012 would support the expenditure of $16.6 million for market oversight. This would provide the resources 

necessary to increase the frequency of reviews. 

QUESTIONS SUBMITTED BY SENATOR BEN NELSON

Question. With the ongoing volatility in the marketplace, I think we can all agree 

on the necessity of implementing the Dodd-Frank Act in a sound and reasonable 

timeframe to avoiding reckless speculation. 

However, I also want us to be mindful that we achieve regulation without strangulation. 

Dodd-Frank contained critical protections to ensure that nonfinancial end-users 

who use future contracts in a legitimate matter to hedge against higher prices are 

not hampered by unnecessary regulations. 

Specifically when it comes to the Commodity Futures Trade Commission’s (CFTC) 

implementation of rules relating to the definition of a swap dealer, the end user exception, and position limits. 

Chairman Dodd and Chairwoman Lincoln drafted a letter to the CFTC urging the 

Commission to be mindful of these specific protections in its implementation of the 

law, which I would like to introduce for the record. 

Is the CFTC following congressional intent when it comes to protecting commercial end users so they are not adversely impacted by the Dodd-Frank’s regulatory 

framework? 

Answer. To ensure the financial integrity of swap dealers and security-based swap 

dealers, the Congress directed that prudential regulators, the Security and Exchange Commission (SEC) and the CFTC establish capital and margin requirements. The Dodd-Frank Act also requires that standardized swaps be cleared by 

central counterparties to lower risk. The CFTC’s proposed rules would not require 

clearing or margin for uncleared swaps to be paid or collected on transactions involving nonfinancial end-users hedging or mitigating commercial risk. 

Question. As I mentioned in my opening statement, the run up in commodity 

prices, in particular oil and gas prices are having a major impact on Nebraska families, farmers, and businesses that rely on affordable fuel for personal commuting, 

farming, and conducting day-to-day commerce. 

In 2008, the CFTC found that the oil record was partly driven by speculators driving up prices. Does the CFTC believe this to be the case again with the run up in 

commodity prices? How much has this speculation inflated oil and gas prices? 

What steps is the CFTC taking to address this? 
99 

Answer. The CFTC fulfills its mission to oversee the futures markets through 

market surveillance, industry oversight, and enforcement. The CFTC pursues fraud 

and market manipulation and oversees futures exchanges and clearinghouses. The 

CFTC is a cop on the beat that protects markets in commodity derivatives from 

fraud, manipulation and other abuses. 

A critical reform of the Dodd-Frank Act relates to position limits. Position limits 

have served since the Commodity Exchange Act passed in 1936 as a tool to curb 

or prevent excessive speculation that may burden interstate commerce. 

Importantly, the Dodd-Frank Act directs the CFTC to establish position limits for 

both futures and swaps in a very specific manner. First, the act directs the CFTC 

to establish position limits, as appropriate, for futures contracts for agricultural 

commodities and exempt commodities (including crude oil, gasoline, and other energy commodities). Second, the act directs that the CFTC concurrently establish position limits on swaps that are economically equivalent to those futures contracts. 

Third, the act requires the CFTC to establish aggregate limits across the futures 

and swaps markets. On January 26, the CFTC published a proposed rule to implement these statutory directives. The comment period closed on March 28. The CFTC 

will evaluate the comments received before proceeding to a final rulemaking. It is 

essential to complete the task of implementing the aggregate position limits regime, 

congressionally mandated to guard against the burdens of excessive speculation. 

Question. In the current fiscal climate we are faced with many difficult questions 

when it comes to funding. 

While were able to boost the CFTC budget by $34 million more than fiscal year 

2010 levels for the remainder of fiscal year 2011, it appears we face an even more 

difficult situation for funding fiscal year 2012. 

Can you speak to the limitations the CFTC would have in regulating contracts 

and providing oversight and transparency to the over-the-counter derivatives swaps 

trading market if we are merely able to maintain fiscal year 2011 levels in fiscal 

year 2012? 

What would the impact be if were faced with the prospect of being able to only 

provide fiscal year 2008 levels or the level the House recently passed in their fiscal 

year 2012 budget proposal? 

Answer. A return to the CFTC’s fiscal year 2008 funding level would represent 

a 45 percent reduction from current levels. Had such a level been enacted for the 

CFTC mid-way through fiscal year 2011, CFTC staffing would have had to be reduced by 442 FTE—a 65 percent reduction. 

If the CFTC’s funding returned to the fiscal year 2008 level, the Commission 

would be unable to fulfill its statutory mission. Every program would be affected, 

including market surveillance, industry oversight and enforcement. We would be unable to pursue fraud, such as Ponzi schemes, and market manipulation. We would 

inevitably develop a backlog of registration applications, rule reviews and appellate 

filings. This would leave significant uncertainty in the marketplace. 

Question. Over the Easter recess, President Obama directed Attorney General 

Eric Holder to create an Oil and Gas Price Fraud Working Group to ‘‘monitor oil 

and gas markets for potential violations of criminal or civil laws to safeguard 

against unlawful consumer harm.’’ 

It is my understanding that in addition to the Department of Justice the group 

is composed of representatives from the Federal Trade Commission (FTC), the Department of the Treasury, and the CFTC. 

I was hoping you could speak to the role CFTC is play in this working group and 

what we hope to accomplish with this new working group. 

Answer. The CFTC serves as a co-chair of the Oil and Gas Fraud Working Group, 

whose membership also includes State Attorneys General, the FTC, the Departments of Energy, Agriculture and the Treasury, the SEC, the Board of Governors 

of the Federal Reserve System and the Federal Bureau of Investigations. On May 

6, 2011 Attorney General Holder, as chairman of the group, informed the members 

that the ‘‘[w]orking Group will enable us to formalize our collaborative effort, share 

current oversight activities, avoid duplication, and combine our resources and expertise.’’ Members are actively working toward these goals, covering topics such as confidential information sharing between agencies, evaluating lessons learned from 

prior fraud enforcement involving multiple regulator collaboration and coordination, 

and continued discussions regarding market fundamentals, trends and oversight. 

QUESTIONS SUBMITTED BY SENATOR JERRY MORAN

Question. The recently enacted continuing resolution states that of the funding 

provided, ‘‘not less than $37.2 million shall be for the highest-priority information 
100 

technology (IT) activities in the Commission’’ to address important IT needs such 

as automated surveillance, collecting order and trade data, integrating technology 

across swaps and futures markets, improving data transparency and linking the 

Commodities Futures Trading Commission (CFTC) with Swap Data Repositories 

(SDR). Please identify the highest-priority IT activities that will be funded from 

within this amount. 

The highest priority of the CFTC IT budget is to support the ongoing operations 

of mission-essential systems and infrastructure for all divisions. With this funding, 

the CFTC can meet existing business requirements, provide operations support, collect business requirements for new technology solutions and implement new technology solutions. The major services provided in this area include: 

—Establishment of a technology roadmap with the capability and capacity to integrate futures and swaps data and market oversight; 

—Market and financial surveillance; 

—Enforcement litigation support, data discovery and forensics; 

—Automated surveillance modeling; and 

—Large trader data, financial data and trade data receipt, loading and mining. 

Question. As the full-year continuing resolution has been enacted, please provide 

details to the subcommittee as to how the CFTC plans to spend remaining fiscal 

year 2011 funding. According to the Chairman’s prepared testimony, the CFTC is 

prepared to hire approximately 40 additional staff in fiscal year 2011. Please provide the subcommittee with specific information on the basis of the Chairman’s hiring figure and the CFTC’s intended deployment of the additional personnel. In addition to information about hiring plans, please also provide specific information as 

to the impact those hiring decisions will have on the staffing increases requested 

by the CFTC for fiscal year 2012. 

Answer. The fiscal year 2011 spending plan allocates $202,269,650 across 2 fiscal 

years, the majority of which will be obligated before September 30, 2011. 

The CFTC expects to have about 720 staff on-board by September 30 and to utilize 667 full-time equivalent staff-years. Twelve of the new positions will implement 

the CFTC’s reorganization. The remaining hires will be used to fill critical staffing 

needs across the CFTC. The display below identifies the expected distribution of 

CFTC staff at the end of fiscal year 2011. 

DISTRIBUTION OF CFTC STAFF 

Division/office 

2011 distribution 

by division at 

720 FTE level 

Percentage of staff 

Division of Enforcement ........................................................................................................ 172 23 .9 

Division of Market Oversight ................................................................................................ 126 17 .5 

Division of Clearing and Risk .............................................................................................. 59 8 .2 

Division of Swaps Oversight ................................................................................................. 79 11 .0 

Office of Data and Technology ............................................................................................. 88 12 .2 

Office of the Executive Director Office of General Counsel ................................................. 69 9 .6 

Office of Chairman and Commissioners .............................................................................. 50 6 .9 

Office of the Chief Economist Office of Proceedings .......................................................... 42 5 .8 

Office of International Affairs Office of Consumer Outreach .............................................. 15 2 .1 

Total ......................................................................................................................... 720 100 .0 

Question. Please provide more details regarding the CFTC’s fiscal year 2012 request for its technology budget, including specific information as to breakdown of 

the budget request for the newly proposed of Office of Technology. 

Answer. The following table breaks down the request. 

[In millions of dollars] 

Description Amount 

Investments in CFTC SDR data aggregation, order Data Collection and Standardization, Implement Advanced Computing Platforms for High-Frequency, Algorithmic Trading Surveillance, and Enforcement ...... 10 

Systems integration of existing large trader and trade systems with swaps data, for systems enhancement 

such as aggregated position limit surveillance, and significant upgrades to the FILAC systems for SEFs 

and SDRs ......................................................................................................................................................... 9 

Capital equipment and software purchases ....................................................................................................... 14 

Telecommunication services ................................................................................................................................ 5 
101 

[In millions of dollars] 

Description Amount 

Support services such as financial and legal information services, operations and maintenance, systems 

analysis for ISS, TSS, eLaw, as well as other smaller mission-supporting systems and general operational support ................................................................................................................................................ 24 

IT supplies, operations, and maintenance including intra-governmental payments or cross-services agreements with other government agencies for Internet access and Web site maintenance, personnel payroll 

system, GSA telephone services and COOP facilities ..................................................................................... 4 

Answer. The CFTC’s fiscal year 2012 budget request includes $66 million for technology. Of that amount $25 million will be required to begin the implementation of 

Dodd-Frank Act rules. The CFTC will begin developing a number of technology solutions in fiscal year 2011 and 2012. This includes: automated surveillance of commodity futures, options and swap markets; ensuring that CFTC data is compatible 

with industry data; identifying fields that describe transactions and transacting entities; associating swaps market data with futures market data; and implementing 

a number of other technology priorities. The technology implementation timetable 

will be driven by the sequence and phasing of the effective dates of final 

rulemakings. In fiscal year 2011 and 2012, the focus will be support for registration 

and compliance filings, providing connectivity for direct access to SDRs, addressing 

margin requirements and assimilating data needed for determining and enforcing 

position limits. The CFTC plans to update automated surveillance systems and integrate swaps and futures data and systems. 

Despite rapid advances in technology and the increased size of regulated derivatives markets, funding for the CFTC has lagged behind the growth of the markets. 

While market participants have the technology to automate their trading, we do not 

yet have the resources to employ modern technology to automate our surveillance. 

In fiscal year 2010, we used about 18 percent of our budget—$31 million—on technology initiatives. The continuing resolution requires that we allocate $37.2 million 

toward technology in fiscal year 2011. The CFTC needs to make further investment 

in technology to efficiently oversee both the futures and swaps markets. Only 

through investment in the CFTC will we be able to adequately oversee the commodity futures and swaps markets and protect the American public. With an appropriation to support $66 million to be used on technology, the CFTC would increase 

the proportion of its budget used on technology to more than 21 percent. 

Question. The CFTC has recently notified the subcommittee of its intent to undertake a reorganization, effective October 9, 2011, to restructure its staff, creating a 

new Division of Swap Dealer and Intermediary Oversight, a new Office of Data and 

Technology, and realigning other divisions and offices including the Division of Market Oversight, the Division of Clearing and Intermediary Oversight and the Office 

of the Executive Director. The CFTC’s fiscal year 2012 budget request did not reflect 

this reorganization. Please provide the subcommittee with details on the new spending plan the CFTC is proposing for fiscal year 2012, including the impact of the reorganization on staffing. 

Answer. The reorganization will require the same FTE level as previously requested. The attached document details the breakdown of FTE utilization under 

both the fiscal year 2012 budget request and under the planned reorganization. 

Department Employees 

Fiscal year 2010 budget current organizational structure: 

DOE .............................................................................................................................................................. 235 

DMO ............................................................................................................................................................. 250 

DCIO ............................................................................................................................................................ 182 

OITS ............................................................................................................................................................. 92 

OED .............................................................................................................................................................. 73 

OGC ............................................................................................................................................................. 70 

CH/COMM .................................................................................................................................................... 38 

OCE .............................................................................................................................................................. 20 

PRO .............................................................................................................................................................. 10 

OIA ............................................................................................................................................................... 13 

CP/WB .......................................................................................................................................................... ........................

Total ........................................................................................................................................................ 983 
102 

Department Employees 

Fiscal year 2012 budget proposed (February) organizational structure: 

DOE .............................................................................................................................................................. 235 

OSEF&STDCM 1 ............................................................................................................................................ 100 

MTPS&DMA 2 ................................................................................................................................................ 147 

FBOT 3 .......................................................................................................................................................... 3 

Subtotal .................................................................................................................................................. 250 

SDIO 4 .......................................................................................................................................................... 112 

CORS 5 ......................................................................................................................................................... 5 70 

Subtotal .................................................................................................................................................. 182 

OITS ............................................................................................................................................................. 92 

OED .............................................................................................................................................................. 73 

OGC ............................................................................................................................................................. 70 

CH/COMM .................................................................................................................................................... 38 

OCE .............................................................................................................................................................. 20 

PRO .............................................................................................................................................................. 10 

OIA ............................................................................................................................................................... 13 

CP/WB .......................................................................................................................................................... ........................

Total ........................................................................................................................................................ 983 

fiscal year 2012 budget proposed (May) organizational structure (effective October 2011): 

DOE .............................................................................................................................................................. 235 

DMO ............................................................................................................................................................. 1 229 

DCR ............................................................................................................................................................. 74 

DSIO ............................................................................................................................................................. 108 

ODT .............................................................................................................................................................. 1 113 

OED .............................................................................................................................................................. 73 

OGC ............................................................................................................................................................. 70 

CH/COMM .................................................................................................................................................... 38 

OCE .............................................................................................................................................................. 20 

PRO .............................................................................................................................................................. 10 

OIA ............................................................................................................................................................... 13 

CP/WB .......................................................................................................................................................... ( 2 ) 

Total ........................................................................................................................................................ 983 

1 Oversight of Swap Execution Facilities and Swaps Trading on DCMS located on page 8 of the electronic version of the CFTC fiscal year 

2012 President’s budget. 2Market and Trade Practice Surveillance; Data Management and Analysis located on page 8 of the electronic version of the CFTC fiscal 

year 2012 President’s budget. 3 Foreign Boards of Trade located on page 9 of the electronic version of the CFTC fiscal year 2012 President’s budget. 

4 Swap Dealer and Intermediary Oversight located on page 7 of the electronic version of the CFTC fiscal year 2012 President’s budget. 5 Clearing Oversight and Risk Surveillance located on Page 7 of the electronic version of the CFTC fiscal year 2012 President’s budget. 6 ODT Total FTE is comprised of 92 OITS FTE and 21 FTE transferred from DMO’s Information Group. 

7 Appropriate organization structure to be determined. 

Question. During the question and answer portion of our hearing, you referenced 

that you have economists working on each of the rule-writing teams. Specifically, 

you said: ‘‘We do have a very fine staff of economists. It’s about 14. We are wishing 

in this budget request to grow to 20, but there are also a lot of economists in the 

rule writing teams that aren’t in the Office of Chief Economist.’’ Beyond the 14 

economists working in the Office of Chief Economist, could you please list the names 

of each of the economists dedicated to the rule-writing teams and list the rules they 

have worked on? 

Answer. When the Dodd-Frank Act was enacted, we established 30 rulemaking 

teams made up of staff from across divisions. An additional team was added to deal 

with necessary conforming changes to existing CFTC regulations. Below is a list of 

these teams and lead divisions with the subject of their rule writing responsibility. 

For each team the names of economists who are not part of the Office of Chief Economist are listed, along with their job titles and divisions. 
103 

RULEMAKING TEAMS 

Team Title 

Team 1—Registration (SD and MSPs) ................................................................................... ( 1 ) 

Team 2—Entity definitions: 

Kuserk, Gregg ................................................................................................................. Senior Economist 

Seong, Somi .................................................................................................................... Economist 

Troia, Rosario .................................................................................................................. Financial Economist 

Team 3—Business Conduct Standards—Counterparties ...................................................... ( 1 ) 

Team 4—Business Conduct Standards—Internal: 

Rothenberg, John Paul .................................................................................................... Economist 

Team 5—Capital and margin for non-banks: 

Rothenberg, John Paul .................................................................................................... Economist 

Team 6—Segregation and bankruptcy cleared—DCIO .......................................................... ( 1 ) 

Team 7—DCO Core Principles—DCIO .................................................................................... ( 1 ) 

Team 8—Process of Review, Mandatory Clearing—DCIO ..................................................... ( 1 ) 

Team 9—Governance—DCIO .................................................................................................. ( 1 ) 

Team 10—System Important DCO Rules, Title VIII—DCIO ................................................... ( 1 ) 

Team 11—End-User Exemptions—OGC: 

Horn, Marshall ................................................................................................................ Director, Market Surveillance 

Branch 

Team 12—DCM Core Principles—DMO: 

Forkkio, John ................................................................................................................... Supervisory Industry Economist 

Kass, David ..................................................................................................................... Industry Economist 

Leonova, Irina ................................................................................................................. Financial Economist 

Price, Gregory .................................................................................................................. Industry Economist 

Benton, Steven ................................................................................................................ Industry Economist 

Murray, Martin ................................................................................................................ Supervisory Economist 

Team 13—SEF Registration Requirements—DMO: 

Benton, Steven ................................................................................................................ Industry Economist 

Kass, David ..................................................................................................................... Industry Economist 

Leonova, Irina ................................................................................................................. Financial Economist 

Price, Gregory .................................................................................................................. Industry Economist 

Team 14—FBOT Registration Requirements—DMO: 

Colling, Phillip ................................................................................................................ Industry Economist 

Team 15—Rule Certification and Approval—DMO: 

Babula, Ronald ............................................................................................................... Economist 

Murray, Martin ................................................................................................................ Supervisory Economist 

Team 16—SDR Registration Standards—OGC: 

Schubert, Anne ............................................................................................................... Economist 

Team 17—Swap Data Recordkeeping and Reporting—DMO: 

Irina Leonova .................................................................................................................. Economist 

Kuserk, Gregory ............................................................................................................... Senior Economist 

Pullen, George ................................................................................................................. Economist 

Rothenberg, John Paul .................................................................................................... Economist 

Schubert, Anne ............................................................................................................... Economist 

Larry Grannan ................................................................................................................. Economist 

Team 18—Real Time Reporting—DMO: 

Leahy, Thomas ................................................................................................................ Chief, Product Review Branch 

Pullen, George ................................................................................................................. Economist 

Team 19—Agricultural Swaps and Commodity Options—DMO: 

Lachenmayr, Christa ....................................................................................................... Economist 

Murray, Martin ................................................................................................................ Supervisory Economist 

Team 20—Retail Forex—DCIO ............................................................................................... ( 1 ) 

Team 21—Product Definitions—OGC: 

Kuserk, Gregory ............................................................................................................... Senior Economist 

Seong, Somi .................................................................................................................... Economist 

Troia, Rosario .................................................................................................................. Financial Economist 

Team 22—Portfolio Margining Procedures—DCIO ................................................................. ( 1 ) 

Team 23—Anti-Manipulation—ENF: 

Cusimano, Jeremy ........................................................................................................... Economic Advisor to the Director 

Kass, David ..................................................................................................................... Industry Economist 

Team 24—Disruptive Trading Practices—ENF: 

Cusimano, Jeremy ........................................................................................................... Economic Advisor to the Director 

Kass, David ..................................................................................................................... Industry Economist 

Team 25—Whistleblowers—ENF ............................................................................................ ( 1 ) 

Team 26—Position Limits—DMO: 

Danger, Kenneth ............................................................................................................. Industry Economist 
104 

RULEMAKING TEAMS—Continued 

Team Title 

Kass, David ..................................................................................................................... Industry Economist 

Littlefield, Thomas .......................................................................................................... Economist 

Sherrod, Stephen ............................................................................................................ Acting Director of Market Surveillance 

Outen, James .................................................................................................................. Industry Economist 

Team 27—Investment Advisor Reporting—DCIO ................................................................... ( 1 ) 

Team 28—Volker Rule—DCIO ................................................................................................ ( 1 ) 

Team 29—Alternatives to Relying on Credit Ratings—OGC ................................................. ( 1 ) 

Team 30—Fair Credit Reporting Act and GLB—OGC ........................................................... ( 1 ) 

Team 31—Conforming Rules—DCIO: 

Choo Lee-Ken .................................................................................................................. Industry Economist 

1 Any Economists on these teams are from the Office of the Chief Economist. 

In addition, DMO is the lead staff division for eight of the rulemaking teams. The 

division director is Richard Shilts, who is an economist. 

QUESTIONS SUBMITTED TO MARY L. SCHAPIRO

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

CREDIT RATING AGENCIES

Question. Under the Dodd-Frank regulatory reform law enacted last July, Federal 

agencies are required to scrub their rule books of references to credit ratings, forcing 

them to find alternative measures for creditworthiness. 

During the credit boom, banks and other investors put great stock in the prime 

ratings given to mortgage bonds that later soured. The Congress was concerned 

that, by referencing ratings in its rules, the Federal Government may have been 

putting its imprimatur on the ratings. 

Recently, the Securities and Exchange Commission (SEC) issued a proposed rule 

to eliminate references to credit ratings from the so-called ‘‘net capital rule’’ that 

requires a brokerage firm to maintain sufficient liquid assets against its proprietary 

securities in order to protect customers in case it fails. Currently, this rule allows 

brokerages to hold less capital against certain securities that hold high ratings from 

at least two registered credit-rating firms. 

The SEC proposal would replace the former credit rating with a brokerage’s own 

internal assessment of the securities’ creditworthiness. This change would affect 

about 480 brokerages that hold proprietary securities, some of which will have to 

incur costs to come up with an in-house process that serves as a replacement for 

outside ratings. 

One of your fellow Commissioners contends that this change would harm investors and force the SEC to spend more resources on its broker examinations to ensure brokerages are complying with the rules. 

What mechanisms does the SEC plan to put into place to ensure that the substitute credentialing by brokerages are sound and reliable? 

If the rating determination is left up to each brokerage won’t that spawn an array 

of varied and inconsistent standards? 

Wouldn’t it be more prudent and efficient for the SEC to design an objective 

standard? 

Answer. On April 27, 2010, the SEC proposed to remove references to credit ratings of Nationally Recognized Statistical Rating Organizations (NRSROs) in certain 

rules under the Securities Exchange Act of 1934, including the Commission’s net 

capital rule for broker-dealers. 

Under the proposal, the SEC sets forth a list of factors that a broker-dealer could 

consider when determining the net capital treatment of preferred stock, nonconvertible debt, and commercial paper. The factors are intended to facilitate a determination by a broker-dealer as to whether a security is subject to a ‘‘minimal amount 

of credit risk.’’ If it is, the security could qualify for more favorable net capital treatment than securities of lesser credit quality. The range and type of specific factors 

considered would vary depending on the type of securities subject to review. A 

broker-dealer’s process for establishing creditworthiness and its written policies and 

procedures documenting that process would be subject to review in regulatory examinations by the SEC and self-regulatory organizations (SROs). A broker-dealer 

that does not establish, maintain, and enforce written policies and procedures rea-
105 

sonably designed to assess creditworthiness would be subject to disciplinary action 

for noncompliance with the rule and could be required to recalculate its net capital. 

This is not the first time the SEC has proposed to remove references to credit ratings in Commission rules. The SEC issued a concept release in 1994 on the general 

idea of removing references to NRSROs in its rules. In 2003, the SEC again sought 

comment on whether it should eliminate the NRSRO designation from Commission 

rules, and, if so, what alternatives could be adopted to meet the Commission’s regulatory objectives. Most recently, in July 2008, the SEC made specific proposals to 

remove rule references to ratings by NRSROs. In response, the SEC received many 

comments that raised serious concerns about removing the credit rating references. 

In October 2009, the SEC adopted several of the proposed reference removals and 

re-opened for comment the remaining proposals. In each of these concept releases 

and rule proposals, commenters generally did not support the removal of references 

to NRSRO ratings from SEC rules and provided few possible regulatory alternatives. 

The SEC recognizes the concerns raised by commenters that replacing credit ratings—which provide an objective benchmark—with more subjective approaches 

could increase costs to broker-dealers and the Commission. Accordingly, in the current proposal, the SEC seeks comment on the potential impact of moving from an 

objective standard to a more subjective standard and whether alternate and more 

reliable means of establishing creditworthiness exist. 

Question. Do you think that it is possible to restore the reputation of credit rating 

agencies? What enhanced role does SEC play in regulating credit rating agencies? 

Answer. The Dodd-Frank Act augmented the SEC’s oversight authority for credit 

rating agencies registered as NRSROs and mandated that the Commission adopt 

rules in a number of areas with respect to NRSROs. The SEC began the process 

of implementing these mandates with the adoption of a new rule in January 2011 

requiring NRSROs to provide a description of the representations, warranties, and 

enforcement mechanisms available to investors in an offering of asset-backed securities—as well as how those representations, warranties, and enforcement mechanisms differ from those of similar offerings. On May 18, 2011, the SEC proposed 

new rules and amendments to existing rules that would implement the balance of 

the Dodd-Frank Act’s NRSRO rulemaking mandates. The proposals would enhance 

the SEC ’s existing rules governing ratings and rating agencies by, among other 

things, requiring NRSROs to: 

—report on internal controls; 

—protect against conflicts of interest; 

—establish professional standards for credit analysts; 

—provide public disclosure about the credit rating and methodology used to determine the credit rating, when publishing a rating; and 

—enhance their public disclosures about the performance of their credit ratings. 

In addition, as required by the Dodd-Frank Act, the SEC has begun conducting 

annual exams of NRSROs. 

SEC ORGANIZATIONAL STRUCTURE STUDY

Question. In response to a directive in section 967 of the Dodd-Frank Act, the SEC 

retained the services of an independent consultant to analyze the Commission’s 

structure and operation, and to suggest reforms. The Boston Consulting Group 

(BCG) was hired. Among the recommendations outlined in the March 10 report are 

that the SEC should ‘‘hire staff with high-priority skills,’’ ‘‘invest in technology systems,’’ and ‘‘improve oversight over self-regulatory organizations.’’ 

Has the SEC evaluated the BCG findings and recommendations? 

What has been the internal response to the report? 

Is the SEC unified in its reaction? 

What steps are being taken to address the recommendations? 

What is the estimated cost of implementing the reforms the BCG recommended? 

To what extent will resources made available for fiscal year 2011 be utilized to 

move forward with any of the changes recommended? 

Although the President’s fiscal year 2012 budget was submitted about 6 weeks before the BCG report, to what extent does the spending proposed for next year incorporate any aspects that would address the BCG findings? 

Answer. The BCG report has provided the SEC with valuable insights into how 

the SEC might continue its efforts to ensure a vigilant, agile, and responsive organization. Because the scope of the BCG report’s recommendations touch on virtually 

every aspect of the SEC’s operations and offices, determining the appropriate course 

of action to take in response and implementing those actions will require careful internal coordination and a significant commitment of staff and other resources. 
106 

1The SEC’s fiscal year 2012 budget seeks 424 additional FTE for the enforcement program 

(130); the examinations program (148); Corporation Finance (38); Trading and Markets (58), Investment Management (24); and RiskFin (26). 

Both during the period of study by the BCG and now with regard to the final report, the SEC has been committed to the concept of this independent assessment. 

We welcome the opportunity to review our structure, processes, and the full range 

of our business operations with the goal of improving their efficiency and effectiveness to meet our mission objectives. Accordingly, I believe that the overall response 

within the SEC to the BCG report has been a positive one, and Commission management is unified in its commitment to excellence. 

Since the report’s issuance the SEC has been moving rapidly to evaluate, 

prioritize, and implement many of the BCG findings and recommendations. I have 

designated our Chief Operating Officer, Jeff Heslop, to manage the logistics of the 

follow-up process. We’ve divided the BCG recommendations into two dozen discrete 

work-streams, each of which has been assigned to a division or office director or 

other senior executive tasked to lead the follow-up work. Initially, we are analyzing 

the recommendations to determine whether we agree with them and, if so, to develop an implementation plan and schedule. We have also established an Executive 

Steering Committee to provide critical oversight, to review implementation plans, 

and decide how best to prioritize, sequence, and coordinate the significant followup work resulting from the two dozen work-streams. Further, we have established 

a dedicated Program Management Office that is responsible for tracking and reporting on the SEC’s implementation efforts. These efforts are being funded to the extent permitted by the SEC’s overall fiscal year 2011 appropriation. 

In a number of cases, we are already taking follow-up actions. For instance, we 

have agreed with the recommendation to consolidate the functions of the Office of 

the Executive Director and the Office of the Chief Operating Officer and received 

reprogramming approval from our House and Senate Appropriations Subcommittees 

to take this action. 

The BCG has estimated that approximately $42 million to $55 million in up-front 

costs will be required to implement the recommendations, in addition to the costs 

associated with the significant commitment of SEC management and staff time. A 

significant portion of these implementation costs ($21 to $28 million) would be for 

additional investments in information technology systems. The SEC did not have 

the opportunity to consider the costs of implementing the BCG recommendations in 

developing its fiscal year 2012 budget request, which as you note was submitted to 

the Congress more than a month before the SEC received the BCG’s final report. 

One of the key findings from the BCG report is that the SEC does not have sufficient human resources to complete the requirements of Dodd-Frank while maintaining its activities as currently performed. We would note that the BCG’s estimate of 

the size of this staffing ‘‘capacity gap’’ is generally consistent with the SEC’s own 

estimate as reflected in our fiscal year 2012 budget request. Specifically, the BCG 

estimates that, in fiscal year 2012, the SEC’s five major divisions and examinations 

program collectively will experience a capacity gap of at least 400 to 450 full-time 

equivalent (FTE). This is consistent with our budget request for these programs for 

fiscal year 2012, which seeks an increase of 424 FTE for these programs compared 

to fiscal year 2011.1

RESPONSIVENESS TO TIPS, COMPLAINTS, AND REFERRALS (TCRs)

Question. What has the SEC accomplished in the past year to address concerns 

that the Commission was historically woefully unresponsive to TCRs submitted to 

the Commission citing potential violations of the rules and securities laws? 

Answer. In January 2010, the Division of Enforcement established the Office of 

Market Intelligence (OMI) to be the central intake point of all TCRs sent to the SEC 

by the public. The OMI has established policies, procedures, and workflow processes 

to analyze and research TCRs and assign out those TCRs that merit further assessment by investigative or exam staff. 

Question. Are all of the incoming TCRs presently channeled to one centralized 

destination within the SEC for review regardless of the mode of transmission (e.g., 

e-mail, letter, hotline, etc.) or substantive nature of the issue? 

Answer. All tips and complaints, regardless of the mode of transmission or the 

substantive nature of the issue, are entered into the TCR Intake and Resolution 

System. The system centralizes TCRs and provides work flow and audit capabilities 

such that all tips and complaints can be tracked from entry to disposition. With respect to referrals, we have a legacy system that we are in the process of incor-
107 

porating into the TCR Intake and Resolution System. As a result, referrals are not 

yet centralized in the TCR Intake and Resolution System. 

Question. Which office within the SEC is primarily responsible for managing 

TCRs? 

Answer. The OMI in the Division of Enforcement and the Office of Compliance 

Inspections and Examinations (OCIE) are the two offices within the SEC that review all TCRs. These two offices coordinate review processes to ensure that tips and 

complaints receive similar analysis. Investor complaints that do not concern violations of the Federal securities laws are handled by the Office of Investor Education 

and Assistance. 

Question. Do you have an automated intake system in place at this time? 

Answer. Yes. Tips and complaints can be entered by the public into the SEC’s online electronic questionnaire located at www.sec.gov. The information entered automatically populates an internal database of tips and complaints—the TCR Intake 

and Resolution System. The public may also send tips and complaints via email, letter, or fax. Tips and complaints received by email, letter, or fax are entered by SEC 

staff into the same internal database of tips and complaints. 

Question. Does the system track and monitor the tips? 

Answer. Yes. The TCR Intake and Resolution System has the capability to track 

all tips and complaints from entry to disposition. 

Question. Does it provide a means to link and search for multiple similar complaints against a single entity? 

Answer. Yes. The TCR Intake and Resolution System has search capabilities that 

enable staff to link and search for similar complaints against a single entity. 

Question. Does the system generate an acknowledgment to the individual or firm 

that submitted the TCR? 

Answer. If the tip or complaint is entered through the SEC’s Web site using the 

online questionnaire, the submitter will receive an acknowledgment of receipt as 

well as a reference number associated with his or her submission. If the tip or complaint is mailed or emailed, the staff will send a letter or email acknowledging receipt of the tip or complaint. 

Question. That additional resources are required to further strengthen the SEC’s 

capacity to acquire and manage an effective and functional automated TCR? 

Answer. The TCR Intake and Resolution System was designed with the ability to 

add additional functionality such as an automated triage engine and other analytical tools. We are currently pursuing triage functionality to enhance our capabilities. 

Question. To what extent does SEC management interface with your Inspector 

General (OIG) to cross-match complaints and tips and referrals that may be routed 

to each of you to identify redundancy and duplication? If that is not occurring, 

would doing so pose any issues? 

Answer. All tips and complaints received by the SEC are required to be entered 

into the TCR system. Staff in the OIG will forward tips and complaints that they 

receive to the OMI for entry into the system. Prior to entry, the staff’s protocol requires a search of the system to determine whether the tip or complaint has already 

been entered. 

STRENGTHENING EXAMS AND OVERSIGHT—FREQUENCY OF REVIEWS

Question. A vigorous exam program serves as a vital early warning system and 

weakness detector. 

I understand that the SEC employs a ‘‘risk-based’’ strategy for conducting exams 

of investment advisers. Under this approach, resources are concentrated on those 

firms and practices that have the greatest potential risk of securities law violations 

that can harm investors. 

Your fiscal year 2012 budget justification materials indicate that the SEC examined only about 9 percent of the investment advisers in fiscal year 2010 down from 

14 percent in 2008. 

Is that level sufficient or acceptable, in your judgment? 

What are the drawbacks of sporadic inspections of a limited universe? 

What would it take to increase the number and frequency of reviews? 

Does the percentage decline from fiscal year 2008 to fiscal year 2010 suggest that 

the SEC is reviewing fewer entities or have the number of advisers grown such that 

you are actually conducting more exams? (e.g., 14 percent of 1,000 = 140; 9 percent 

of 1,600 = 144). 

Are you at least conducting initial screenings of the entire universe to identify the 

highest-risk ones? 

Are you potentially missing some high-risk reviews because you are not able to 

examine 91 percent of them? 
108 

Your data also reflect that SEC exams identify deficiencies in 72 percent of the 

firms that are reviewed and that 42 percent of the ones with deficiencies are categorized as ‘‘significant’’ suggesting a high potential to cause harm or reflect recidivist conduct. It is also noteworthy that SEC intends to use more rigorous exam protocols this year and, coupled with growth in the number of regulated entities, SEC 

expects even lower percentages of registrants being examined. 

Isn’t it conceivable with new entities coming under regulatory purview that more 

exams are in order rather than fewer? 

What resources would you need to expand exam staffing and support? 

Is it possible to require more detailed and rigorous self-exams and reporting requirements imposed? 

In response to the Madoff scandal and the revelation of the embarrassing ineptitude that delayed catching this criminal, what new mandates are now in place? Are 

SEC examiners now routinely verifying the existence of client assets in the custody 

of third parties, counterparties, and customers? 

Answer. Current examination resources can indeed only cover a small portion of 

the registered investment advisers (IAs) that we are responsible for examining. 

Moreover, several factors are increasing the strain on our examination resources: 

—increased development and use of new and complex products, including derivatives and exchange-traded funds; 

—growth of technology to facilitate such activities as high-frequency trading; and 

—growth of ‘‘families’’ of financial service firms with integrated operations that 

include both broker-dealer and IA affiliates. 

In addition to these industry factors, the examination program now routinely 

verifies with third parties the assets held by IAs, an important, but labor-intensive 

process. As a consequence of all of these factors, fewer IA examinations were conducted in fiscal year 2010 than in fiscal year 2008, even as the population of IA registrants increased during that period. 

Although we expect that, under the Dodd-Frank Act, States will assume responsi- bility for examining most IAs with less than $100 million in assets under management by early 2012, the act also expanded the SEC’s examination-related responsibilities to include municipal advisors, new categories of securities-based swap registrants, advisers to private funds, and other new registrants. Overall, absent any 

increase in resources, the expected size of the SEC-regulated community in fiscal 

year 2012 will dwarf the size of the current examination program to an even greater 

extent than is the case today. 

In light of these resource constraints and in order to more effectively carry out 

our regulatory responsibilities, the OCIE is pursuing a more risk-based approach to 

the examination program. Key elements of this approach include: 

—An initial screening of IAs, through the review of all Form ADV filings. We 

have developed a wide range of metrics to help us identify high-risk firms and 

improve the chances that our examination resources are focused on the right 

firms. 

—Sharing the results of this initial risk assessment with regional offices, which 

add their localized knowledge of firms to develop a more refined list of highrisk firms. 

—Analysis of additional sources of information, including past examinations; SEC 

filings; third-party information; information from other regulators; and information gathered from other examinations. 

—Analysis of other risk-related information, including the size or interconnectedness of a firm; opportunities for fraud (e.g., direct access to customer funds); financial concerns about the firm; other characteristics of a firm; and the date 

of last exam. 

Once we have selected a candidate for an examination, we will focus the scope 

of the examination based on a thorough understanding of the registrant’s business, 

affiliations and potential conflicts of interest, and a high-level review of the firm’s 

management controls and compliance systems. 

For each function included in the scope of the examination, we will conduct further review of key risk management, compliance and control functions, and test selected control processes the registrant has in place to manage compliance and fraud 

risk. This gives us a better sense of whether the registrant has an effective ‘‘culture 

of compliance,’’ and may also encourage firms to have more rigorous compliance and 

self-examination programs. 

While we have been working diligently to improve our exam program, we need 

more examiners, expertise, and further technological resources. With the addition 

of approximately 200 FTE positions sought in the 2012 budget, we will be able to 

conduct more examinations and improve our overall coverage of the industry, as 

well as better fulfill our new responsibilities under the Dodd-Frank Act. We also 
109 

2 Commissioner Walters issued a separate statement in which she supported the second option—authorizing an SRO to oversee investment advisers. See http://www.sec.gov/news/speech/ 

2011/spch011911ebw.pdf. 

should be able to improve our risk analysis approach so that those examinations 

will be more likely to focus on the areas in greatest need of attention. 

The SEC recently released a staff report to the Congress on enhancing investment 

adviser examinations. The study, required by section 914 of the Dodd-Frank Act 

(914 Study), concludes that the SEC’s investment adviser examination program requires a source of funding sufficiently stable to prevent examination resources from 

being outstripped by future growth in the number of registered advisers (i.e., that 

the resources are scalable to any future increase—or decrease—in the number of 

registered investment advisers). The 914 Study identified three options for the Congress to consider: 

—Impose ‘‘user fees’’ on SEC-registered investment advisers that could be retained by the Commission to fund the investment adviser examination program; 

—Authorize one or more SROs to examine, subject to SEC oversight, all SEC-registered investment advisers; or 

—Authorize Financial Industry Regulatory Authority (FINRA) to examine dual 

registrants for compliance with the Advisers Act. 

The SEC expressed no view as to the advisability of any of these three options.2

CIRCUIT BREAKER RULES IN RESPONSE TO MAY 2010 FLASH CRASH

Question. One year ago this week, the now notorious May 6 ‘‘flash crash’’ sent the 

Dow Jones industrial average plunging some 700 points in minutes, exposing flaws 

in the electronic marketplace dominated by high-speed trading. 

In response, the SEC instituted new trading curbs last June as a pilot program. 

These single-stock circuit breakers apply to securities in the S&P 500 Index and 

Russell 1000 Index as well as certain exchange-traded funds. 

Under the existing circuit breaker pilot, trading in a stock pauses across the U.S. 

equity markets for a 5-minute period if the stock experiences a 10 percent change 

in price over the preceding 5 minutes. The pause gives the markets the opportunity 

to attract new trading interest in an affected stock, establish a reasonable market 

price, and resume trading in a fair and orderly fashion. I understand that the circuit 

breaker pilot is currently set to expire on August 11, 2011. 

A month ago (April 5, 2011), the SEC announced that national securities exchanges and the FINRA filed a proposal to establish a new ‘‘limit up-limit down’’ 

mechanism to address extraordinary market volatility in U.S. equity markets. If approved by the SEC, the new limit up-limit down mechanism would replace the existing single-stock circuit breakers 

This proposed ‘‘limit up-limit down’’ mechanism would prevent trades in listed equity securities from occurring outside of a specified price band, which would be set 

at a percentage level above and below the average price of the security over the immediately preceding 5-minute period. For stocks currently subject to the circuit 

breaker pilot, the percentage would be 5 percent, and for those not subject to the 

pilot, the percentage would be 10 percent. 

The percentage bands would be doubled during the opening and closing periods, 

and broader price bands would apply to stocks priced below $1. To accommodate 

more fundamental price moves, there would be a 5-minute trading pause—similar 

to the pause triggered by the current circuit breakers—if trading is unable to occur 

within the price band for more than 15 seconds. 

Have the circuit breakers performed as intended? If not, why not? 

Answer. One of the key purposes of the trading pauses imposed under the circuit 

breaker pilot was to provide an opportunity for trading interest to normalize after 

a stock has been subject to substantial price moves in a short period of time. In a 

number of instances when the circuit breakers have been triggered, the ensuing 

trading pause has had this intended effect. However, there may be room for improvement in terms of the actual mechanism that is used to guard against excessive 

volatility. In particular, because the circuit breakers are triggered only after a trade 

occurs outside of the applicable percentage threshold, there has been a propensity 

for the circuit breakers to be triggered by erroneous trades. 

Question. What advantages or improvements do you expect to gain by replacing 

the circuit breakers with the limit up/limit down mechanism? 

Answer. In contrast to the single-stock circuit breaker, which may be triggered 

by an erroneous trade, a limit up-limit down mechanism, which would prevent 

trades in individual securities from occurring outside of a specified price band, 

would help to prevent erroneous trades from occurring in the first place. 
110 

In addition, unlike the single-stock circuit breaker, the limit up-limit down mechanism will feature a 15-second ‘‘limit state’’ that is triggered before a trading pause 

may be initiated. Once triggered, the market for that security may exit the limit 

state in 1 of 2 ways. If the quotation that triggered the limit state (i.e., an offer 

at the lower price band, or a bid at the upper price band) is either cancelled or executed against in its entirety, the market for that security will exit the limit state 

and return to regular trading. If the quote is not cancelled or executed against in 

its entirety, then a trading pause is initiated for that stock once the 15-second period has run. In instances where the limit state was triggered by an erroneous quote 

or a momentary gap in liquidity, as opposed to a more fundamental price move, the 

‘‘limit state’’ feature thus allows the market to quickly correct itself by cancelling 

or executing against the quotation that triggered the limit state, allowing regular 

trading to resume instead of automatically initiating a trading pause. 

Question. What’s the timetable for action on the limit up/limit down proposal? 

Answer. The proposed limit up-limit down National Market System (NMS) Plan 

was published in the Federal Register on June 1, 2011, and the 120-day period for 

SEC approval ends on September 29, 2011 (although the period for approval or disapproval may be extended to 180 days). If the SEC approves the plan, the plan participants have proposed that the initial date of plan operations be 120 days following 

publication of the approval order in the Federal Register. In particular, plan participants proposed that once the plan is operational, it will be implemented in two 

phases. Phase I will be launched on the initial date of plan operations, and will 

cover stocks in the S&P 500, the Russell 1000, and a list of select exchange-traded 

products. Phase II of the plan, which will apply to all remaining NMS securities, 

will be implemented 6 months thereafter. 

MARKET MAKER QUOTING OBLIGATIONS

Question. What other initiatives or market structure measures has the SEC pursued in response to the flash crash? 

Answer. One of the phenomena that occurred on May 6, 2010 was that trades 

were executed at irrational prices as low as one penny or as high as $100,000. These 

trades occurred as a result of so-called ‘‘stub quotes’’, which are quotes generated 

by market makers (or the exchanges on their behalf) at levels far away from the 

current market in order to fulfill continuous two-sided quoting obligations even 

when a market maker has withdrawn from active trading. In the following months, 

the SROs filed, and the SEC approved, proposals establishing minimum quoting obligations for market makers. Specifically, for stocks that are in the S&P 500, Russell 

1000, and a select list of exchange-traded products, market makers must submit a 

quote for one round lot of shares at 8 percent away from the National Best Bid or 

Offer (NBBO) between the hours of 9:45 a.m. and 3:35 a.m. For quotes in these securities that are submitted between 9:30 and 9:45 a.m., and between 3:35 and 4 

p.m., this quoting obligation changes to 20 percent away from the NBBO. For securities that are not included in the S&P 500, Russell 1000, or the select list of exchange-traded products, market makers must submit a quote at 30 percent away 

from the NBBO. 

In connection with the recently filed proposals to extend the single-stock circuit 

breaker pilot to all remaining NMS securities, using either a 30 percent threshold 

(for securities in that group that are trading at or above $1) or a 50 percent threshold (for securities in that group that are trading below $1), the SROs proposed corresponding changes to the market maker quoting obligations. If those proposals are 

approved, market makers would be obligated to quote one round lot at 28 percent 

away from the NBBO for those securities trading at or above $1 (and thus subject 

to the 30 percent circuit breaker threshold), and 30 percent away from the NBBO 

for those securities trading below $1 (and thus subject to the 50 percent circuit 

breaker threshold). 

In each of these cases, a market maker’s quote may ‘‘drift’’ an additional 1.5 percent away from the NBBO before a new quote within the applicable band must be 

entered. 

CLEARLY ERRONEOUS PILOT PROGRAM

Another initiative following May 6 was the approval of a pilot program establishing uniform clearly erroneous standards. To provide market participants more 

certainty as to which trades will be broken and allow them to better manage their 

risks, the national securities exchanges and FINRA proposed new trade break procedures, which were approved by the SEC on a pilot basis in September 2010. 

These rules clarified the process for breaking erroneous trades. The rules will 

make it clearer when, and at what prices, trades will be broken by the exchanges 
111 

and FINRA. Specifically, for stocks that are subject to the circuit breaker program, 

trades are broken at specified levels depending on the stock price: —For stocks priced $25 or less, trades are broken if the trades are at least 10 

percent away from the circuit breaker trigger price. —For stocks priced more than $25 to $50, trades are broken if they are 5 percent 

away from the circuit breaker trigger price. —For stocks priced more than $50, trades are broken if they are 3 percent away 

from the circuit breaker trigger price. 

Where circuit breakers are not applicable, the exchanges and FINRA will break 

trades at specified levels for events involving multiple stocks depending on how 

many stocks are involved: 

—For events involving between 5 and 20 stocks, trades are broken that are at 

least 10 percent away from the ‘‘reference price,’’ typically the last sale before 

pricing was disrupted. 

—For events involving more than 20 stocks, trades are broken that are at least 

30 percent away from the reference price. 

On May 6, the markets only broke trades that were more than 60 percent away 

from the reference price in a process that was not transparent to market participants. By establishing clear and transparent standards for breaking erroneous 

trades, the new rules help to provide clarity in advance as to which trades will be 

broken, and allow market participants to better manage their risks. 

Other Initiatives 

Revision of the Market-wide Circuit Breakers.—The SEC is working with the Commodity Futures Trading Commission (CFTC), as well as with the securities and futures exchanges, to develop a framework for SRO rule proposals to implement 

changes to the current market-wide circuit breakers originally implemented in 1988 

(and last revised in 1998). The goal is to modify these circuit breakers to better address the type of volatility experienced on May 6, 2010, and to better conform with 

today’s market structures and trading dynamics. 

Expansion of the Circuit Breaker Pilot To Cover all NMS Securities.—On May 6, 

2011, the SROs filed proposed rule changes to extend the single-stock circuit breaker pilot program to all remaining NMS securities. The triggering percentage would 

be 30 percent for securities in this group that are trading at or above $1, and 50 

percent for securities in this group that are trading below $1. Absent the SEC extending the timeframe, the deadline for approving or disapproving these filings is 

June 26, 2011. 

Market Access Rules.—The compliance date for Rule 15c3–5, which imposes restrictions on sponsored and direct market access, is July 14, 2011, although some 

market participants have requested a short extension of the compliance date for 

some aspects of the rule. This rule contains regulatory risk management procedures 

that may assist in reducing erroneous trades. 

Other Initiatives.—The SEC continues to consider the recommendations made by 

the Joint CFTC–SEC Advisory Committee on Emerging Regulatory Issues in its 

Summary Report. The SEC also continues to work toward implementing a consolidated audit trail for the U.S. equity market. 

Question. What lessons were learned as a result of May 6, 2010? 

Answer. From the extreme price movements observed on May 6, a number of key 

lessons emerged. One key lesson is that under stressed market conditions, the automated execution of a large sell order can trigger extreme price movements, especially if the automated execution algorithm does not take prices into account. Moreover, the interaction between automated execution programs and algorithmic trading strategies can quickly erode liquidity and result in disorderly markets. As the 

events of May 6 demonstrate, especially in times of significant volatility, high-trading volume is not necessarily a reliable indicator of market liquidity. 

May 6 was also an important reminder of the inter-connectedness of our derivatives and securities markets, particularly with respect to index products. The nature 

of the cross-market trading activity was confirmed by extensive interviews with 

market participants, many of whom are active in both the futures and cash markets 

in the ordinary course, particularly with respect to ‘‘price discovery’’ products such 

as the E-Mini and SPY. 

Another key lesson from May 6 is that many market participants employ their 

own versions of a trading pause—either generally or in particular products—based 

on different combinations of market signals. While the withdrawal of a single participant may not significantly impact the entire market, a liquidity crisis can develop 

if many market participants withdraw at the same time. This, in turn, can lead to 

the breakdown of a fair and orderly price-discovery process, and in the extreme case 

trades can be executed at stub-quotes used by market makers to fulfill their contin-
112 

uous two-sided quoting obligations. As demonstrated by the CME’s Stop Logic 

Functionality that triggered a halt in E-Mini trading, pausing a market can be an 

effective way of providing time for market participants to reassess their strategies, 

for algorithms to reset their parameters, and for an orderly market to be re-established. 

A further observation from May 6 is that market participants’ uncertainty about 

when trades will be broken can affect their trading strategies and willingness to 

provide liquidity. In fact, in interviews with staff of the SEC, many participants expressed concern that, on May 6, the exchanges and FINRA only broke trades that 

were more than 60 percent away from the applicable reference price, and did so 

using a process that was not transparent. 

Finally, the events of May 6 clearly demonstrate the importance of data in today’s 

world of fully-automated trading strategies and systems. This is further complicated 

by the many sources of data that must be aggregated in order to form a complete 

picture of the markets upon which decisions to trade can be based. Varied data conventions, differing methods of communication, the sheer volume of quotes, orders, 

and trades produced each second, and even inherent time lags based on the laws 

of physics add yet more complexity. Whether trading decisions are based on human 

judgment or a computer algorithm, and whether trades occur once a minute or thousands of times each second, fair and orderly markets require that the standard for 

robust, accessible, and timely market data be set quite high. Although the SEC and 

CFTC staff did not believe that significant market data delays were the primary factor in causing the events of May 6, the analyses of that day reveal the extent to 

which the actions of market participants can be influenced by uncertainty about, or 

delays in, market data. 

IT WEAKNESSES

Question. Today, there is no standardized, automated system to collect data across 

the various trading venues, products, and market participants. Each market has its 

own individual and often incomplete data collection system, and as a result, regulators tracking suspicious activity or reconstructing an unusual event must obtain 

and merge an immense volume of disparate data from a number of different markets. And even then, the data does not always reveal who traded which security, 

and when. 

To obtain individual trader information, the SEC must make a series of manual 

requests that can take days or even weeks to fulfill. In brief, the SEC’s tools for 

collecting data and surveilling our markets are wholly inadequate to the task of 

overseeing the largest equity markets in the world. 

How can we get a handle on this situation? 

What kind of system is needed? 

Have there been cost estimates of what it would take to create and deploy such 

a system? 

Answer. As you noted, there currently is no standardized, automated system to 

collect order and trading data across the various trading venues and market participants. To track suspicious activity or to reconstruct an unusual event in the marketplace such as last year’s May 6 market disruption, regulatory staff at the SEC , the 

exchanges and FINRA currently must merge an immense volume of disparate data 

from a number of different markets and often must make a series of manual requests, a process that can take days or even months to complete. 

In order to address this situation, in May 2010, the SEC proposed a rule to require the exchanges and FINRA to create and implement a consolidated audit trail 

that would electronically capture customer and order information for all orders for 

equities and options, across all markets, for the entire life of an order. Under the 

proposal, the SEC and the SROs would have access to consolidated audit trail data 

for surveillance and other regulatory purposes. I believe that this consolidated audit 

trail would enhance the ability of the SEC and the SROs to detect and assess potentially illegal activity. 

The estimated costs, as well as the estimated benefits, are discussed in the SEC 

release proposing the consolidated audit trail. Most of the costs for the creation and 

implementation of the consolidated audit trail would be borne by the industry. However, I anticipate that the SEC would need to incur costs in order to make full use 

of the consolidated audit trail. For example, SEC staff would need the technology 

infrastructure to access and run analyses on the consolidated audit trail data. If the 

SEC approves the consolidated audit trail proposal, I expect that a portion of our 

fiscal year 2012 budget will be used to begin to develop the Commission’s capacity 

to use the information to be collected by such an audit trail. 
113 

Does your proposal to spend $78 million (about 5.5 percent) of the $1.407 billion 

budget you are seeking for fiscal year 2012 include initiatives to address these IT 

deficiencies? 

Answer. In addition to the Consolidated Audit Trail, the proposal to spend $78 

million for fiscal year 2012 also includes some initiatives to address the SEC’s IT 

deficiencies; however, most of the SEC’s IT infrastructure and security deficiencies 

are planned to be addressed through initiatives from the fiscal year 2011 budget 

and process improvements. 

Question. I note that the CFTC is proposing to devote 21 percent of its proposed 

$307 million fiscal year 2012 budget to information technology enhancements? What 

is your view on whether devoting a mere 5 percent to IT is sufficient given the circumstances? 

Answer. The budget request for the CFTC would dedicate 21 percent of its fiscal 

year 2012 budget to information technology, both for operations and maintenance 

and for enhancements. For the SEC, the equivalent figure for technology spending 

in fiscal year 2012 would be about 12 percent of its requested appropriation. When 

combined with expected technology spending out of the SEC’s Reserve Fund, the 

total percentage is 14 percent. We believe this amount would be sufficient to continue modernizing the SEC’s technology environment and advance key initiatives, 

such as the TCR system; the migration of our financial system to a Federal Shared 

Service Provider (SSP); the Consolidated Audit Trail system; EDGAR and SEC.gov 

modernization; and Dodd-Frank Act deployments. 

TACKLING MATERIAL WEAKNESSES IN INTERNAL CONTROLS

Question. A Government Accountability Office (GAO) audit of the SEC’s November 

2010 Performance and Accountability Report identified two material weaknesses in 

internal controls over financial reporting: one in information systems, and a second 

in financial reporting and accounting processes. 

These are not new findings, but have been identified by the GAO in several previous audits. Chairman Schapiro, I note that you fully and freely acknowledge these 

material weaknesses are unacceptable. 

I understand that the SEC has decided to invest the time and resources to implement a long-term, comprehensive solution. Instead of creating new technology and 

systems, the SEC is switching to a SSP approach, migrating the SEC’s financial system to the Department of Transportation (DOT). 

Other agencies, including the GAO, have migrated to the DOT, and they have experienced very positive results, with clean audits free of material weaknesses. This 

will be a significant undertaking, which, assuming adequate funding, will culminate 

in the cutover to the new system in April 2012. 

What do you estimate it will cost to migrate to a SSP? 

Will the plan involve annual payments to the DOT for providing the service? 

What will it save in the long run? 

Are you planning to take steps immediately using fiscal year 2011 resources to 

prepare for the transition? 

Answer. In its fiscal year 2010 financial audit of the SEC, the GAO found that 

the SEC’s financial statements were presented fairly, in all material respects, and 

in conformity with U.S. generally accepted accounting principles. The GAO noted 

two material weaknesses: one in information systems and a second in financial reporting and accounting processes. You correctly note that I find these material 

weaknesses to be unacceptable. 

The SEC is working this fiscal year on a number of fronts to correct the deficiencies noted by the GAO. In order to make its internal controls strong and sustainable over the long term, the SEC has decided to move its financial system and 

transaction processing to a Federal SSP, the DOT’s Enterprise Services Center. 

After a planning phase was completed in January 2011, the implementation phase 

of the project began in February 2011 and will culminate in the cutover to the new 

system in April 2012. 

The total budget for the initial deployment, including for the design and setup of 

the system and the conversion of the SEC’s data, is $25 million, of which the SEC 

will need about $12 million in fiscal year 2011 and $13 million in fiscal year 2012. 

Once the SEC cuts over to the DOT’s financial system, the SEC will make annual 

payments for operations and maintenance, equal to about $5.5 million per year. Although the SEC did not undertake this initiative primarily for cost savings, the SEC 

does expect that its ongoing, annual costs will be lowered by about $1.4 million per 

year after the migration. 
114 

BROKER DEALER AND INVESTMENT ADVISERS STANDARDS OF CONDUCT

Question. Brokers and dealers and investment advisers have been held to different standards of conduct in their dealings with investors. In very general terms, 

a broker-dealer is held to a suitability standard, and an investment adviser is held 

to a fiduciary duty standard. 

The ‘‘suitability’’ standard requires that brokers and dealers assess their customers’ knowledge of securities and their financial situations and recommend securities that are suitable for their customers. Courts have imposed on a fiduciary an 

affirmative duty of ‘‘utmost good faith, and full and fair disclosure of all material 

facts,’’ as well as an affirmative obligation ‘‘to employ reasonable care to avoid misleading’’ one’s clients. 

Section 913 of the Dodd-Frank Act entitled ‘‘Study and Rulemaking regarding Obligations of Brokers, Dealers, and Investment Advisers,’’ is the major provision setting out a new approach for defining standards of conduct for these financial industry professionals. It requires the SEC to conduct a study to evaluate the effectiveness of the current legal or regulatory standards of care for brokers, dealers, and 

investment advisers and whether there are legal gaps, shortcomings, or overlaps in 

the standards, and enumerates 14 areas of consideration for this study. 

Has this study been conducted? If not, when do you expect it to commence and 

conclude? 

Answer. Yes, the study required under section 913 (‘‘Study on Investment Advisers and Broker-Dealers’’) was completed and submitted to the Congress in January 

2011. 

Question. Chairman Schapiro, do you believe that when investors receive similar 

services from similar financial service providers that those providers—irrespective 

of their particular title—should be held to the same standard of conduct? 

Answer. Yes, I believe that when investors receive similar services from similar 

financial service providers, they should receive similar protections—regardless of 

the label applied to that financial service provider. As the staff’s Study on Investment Advisers and Broker-Dealers notes, we know that the difference between an 

investment adviser and a broker-dealer is often lost on an investor. What remains 

difficult to justify is why there should be different rules and standards of conduct 

for the two roles—especially when the same or substantially similar services are 

being provided. 

QUESTIONS SUBMITTED BY SENATOR BEN NELSON

Question. I understand the financial crisis raised a number of concerns about municipal securities markets. However, I believe the Securities and Exchange Commission’s (SEC) proposed rule to require municipal advisors to register with the SEC 

goes too far. 

While I do think that professional financial advisors should be registered, appointed members of municipal entities, like the ones I appointed in Nebraska as 

Governor, should not have to register as ‘‘municipal advisors.’’ 

In Nebraska these citizens are appointed by elected officials and are held accountable by those officials. I don’t believe the registration process is relevant to the activities of a public utility board or the members of a State educational finance 

authority’s board. 

Do you anticipate modifications to the final rule that would clarify that appointed 

members of municipal entities, like elected members, are considered ‘‘municipal employees’’ and are therefore excluded from the definition of a municipal advisor? 

Answer. As you know, on December 20, 2010, the SEC proposed for public comment rules that would govern the registration of municipal advisors and, among 

other things, proposed guidance and solicited comments on the appropriate treatment of appointed members of a governing body. We have received approximately 

1,000 comment letters on the proposal, including many that address this important 

issue, and we are reviewing them carefully. 

Section 15B(e)(4)(a) of the Securities Exchange Act, as added by the Dodd-Frank 

Act, provides that the term ‘‘municipal advisor’’ includes a person (who is not a municipal entity or an employee of a municipal entity) that ‘‘provides advice to or on 

behalf of a municipal entity or obligated person with respect to a municipal financial 

product or the issuance of municipal securities.’’ Accordingly, our proposal would 

only require nonemployee-appointed officials, such as board members of local public 

entities, to register if they provide advice with respect to a municipal financial product or an issuance of municipal securities to or on behalf of a municipal entity or 

obligated person, or if they undertake a solicitation of a municipal entity. 
115 

Public input is critically important to us in crafting rules. We will certainly give 

the comments we have received on this issue careful consideration before adopting 

a final rule. 

Question. In the current fiscal climate we are faced with many difficult decisions 

when it comes to the budget. 

While we were able to increase SEC funding by $74 million more than the fiscal 

year 2010 enacted level of $1.111 billion in the continuing resolution, I anticipate 

that providing additional funding in fiscal year 2012 will be even more difficult. 

Can you speak to the impact on the SEC’s ability to regulate markets and enforce 

securities laws if we are only able to maintain fiscal year 2011 levels in fiscal year 

2012? 

What would the impact be if the SEC were funded at fiscal year 2008 levels or 

the level the House recently passed in their fiscal year 2012 budget proposal? 

Answer. We greatly appreciate the subcommittee’s strong support in recent years. 

The additional $74 million provided in fiscal year 2011 will allow the SEC to fill 

vacancies to meet key strategic needs, begin to perform some of the agency’s new 

responsibilities, and continue to improve agency operations. 

For fiscal year 2012, it is first important to note that the SEC’s budget will be 

fully offset by matching collections of fees on securities transactions. Thus, the 

SEC’s fiscal year 2012 appropriation at any level would have no direct impact on 

the deficit. 

In addition, as I stated in my testimony, it is important to note that over the last 

20 years, the SEC’s budget and workforce have fallen far behind the growth in the 

size and complexity of the securities markets. During that time, the average value 

of securities transactions per day has risen by about 2,500 percent and the value 

of investment adviser assets has grown by about 3,070 percent. Although the SEC’s 

workforce grew over this period, it did not nearly keep pace. This mismatch between 

the changes in the markets and in the SEC has been exacerbated since 2005. Between 2005 and 2007, the SEC’s workforce and technology investments had to be 

cut back, and they are only now returning to 2005 levels. In 2005, the SEC’s funding was sufficient to provide 19 examiners for each $1 trillion in investment adviser 

assets under management. Now that figure stands at 12 examiners per $1 trillion. 

Today, the SEC has responsibility for approximately 35,000 entities, including direct oversight of 11,800 investment advisers, 7,500 mutual funds, and more than 

5,000 broker-dealers with more than 160,000 branch offices. We also review the disclosures and financial statements of approximately 10,000 reporting companies. The 

SEC also oversees approximately 500 transfer agents, 15 national securities exchanges, 9 clearing agencies, 10 Nationally Recognized Statistical Rating Organizations, as well as the Public Company Accounting Oversight Board, Financial Industry Regulatory Authority, Municipal Securities Rulemaking Board, and the Securities Investor Protection Corporation. In addition, last year the SEC received vast 

new or enhanced responsibilities to oversee derivatives, hedge fund advisers, municipal advisors, and credit rating agencies. 

The Boston Consulting Group’s (BCG) study, mandated by section 967 of the act, 

concluded that although there are opportunities for redirecting resources to the 

agency’s top priorities, the SEC still faces a ‘‘capacity gap’’ and needs significantly 

more staffing resources to effectively carry out its responsibilities. The BCG study 

estimated that this gap in fiscal year 2012 is equal to 400–450 additional staff in 

the agency’s five divisions and Office of Compliance Inspections and Examinations, 

in line with the President’s fiscal year 2012 request. 

Keeping the SEC’s fiscal year 2012 funding at the fiscal year 2011 appropriated 

level of $1.185 billion would have serious consequences for the SEC. The agency 

would be unable to hire expertise in new areas such as derivatives, hedge fund advisers, credit rating agencies, and others. The agency also would be unable to fulfill 

strategic staffing needs in our long-standing core programs, such as for enforcement 

investigations, investment adviser examinations, and enhanced reviews of disclosure 

filings of large companies. In addition, the SEC would face reductions in the technology investments needed to strengthen operations and effectively oversee the markets, at a time when technology is more important to the markets than ever before, 

and when the firms the SEC regulates annually spend many times more on technology than the entire SEC budget. 

Cutting the agency’s fiscal year 2012 funding to the levels of fiscal year 2008 

would be devastating. If the SEC were to receive an fiscal year 2012 appropriation 

reflecting its fiscal year 2008 level, reflecting the overall approach taken in the 

House’s fiscal year 2012 budget proposal, the agency’s funding would be $906 million, or $279 million less than our fiscal year 2011 appropriation—a 24 percent reduction. A reduction of this magnitude would make significant cuts in staff and IT 
116 

unavoidable and would undoubtedly dismantle most of the important achievements 

of the past 2 years to make the SEC more vigilant, agile, and responsive. 

Under this scenario, the SEC would need to take dramatic action to cut its workforce. Even after factoring in projected attrition, a 24 percent cut in the Commission’s budget would require a personnel reduction of approximately 1,120 additional 

FTE—nearly one-third of our workforce. To achieve this reduction through a RIF 

alone would require eliminating 1,760 positions outright. A furlough to achieve this 

reduction would have to cover the entire SEC workforce for approximately 85 workdays. The most dramatic impact would inevitably be on the largest programs—enforcement, examinations, and disclosure review. 

If the SEC were to cut IT investments to achieve a 24 percent reduction in the 

overall agency budget, the impact would be immediate and damaging. For example, 

the SEC would have to eliminate all new IT investments and suspend all ongoing 

development work on IT systems. Major technology initiatives would have to be 

halted, such as those to track tips, complaints, and referrals; strengthen the agency’s financial controls; enhance enforcement and examination management systems; 

and bolster data analytics capabilities. 

QUESTIONS SUBMITTED BY SENATOR THAD COCHRAN

Question. You mention recent challenges the Securities and Exchange Commission 

(SEC) faced in maintaining staffing levels and budgets sufficient to carry out its 

core mission. Following its investigation of Stanford Financial, the Office of the Inspector General (OIG) identified several problems at the SEC. However, none of 

these problems involved inadequate funding or inadequate staffing. This year the 

agency reorganized its national examination program in part as a response to lessons learned from the Stanford fraud. What changes did you make in this reorganization to ensure the problems identified by the OIG are being corrected? 

Answer. While the Stanford IG Report did not include recommendations directed 

to the Office of Compliance Inspections and Examinations (OCIE), its findings show 

a clear need for improved coordination between enforcement and the OCIE on investigations of potential violations of the Federal securities laws, particularly those investigations initiated by a referral from the OCIE to the Enforcement Division. The 

OCIE has undertaken specific policy changes in its National Examination Program 

and instituted procedures to improve coordination and communication between the 

Enforcement Division and the OCIE. 

Through a number of structural and process reforms, the OCIE and the Enforcement Division are working to identify misconduct earlier and to move to shut it 

down more rapidly. The OCIE and enforcement staff and leadership have been directed to evaluate potential referrals from the OCIE exam staff against enforcement’s programmatic priorities regularly and determine the disposition of referrals. 

If there is disagreement on a case at the regional level, exam staff has been instructed to escalate the matter to the attention of senior leadership in Washington. 

These processes ensure that concerns can be escalated in a timely manner to senior 

leadership of both the exam and enforcement programs for appropriate review and 

resolution. 

Exam and enforcement coordination with respect to particular matters is also the 

subject of periodic reviews. The OCIE policy now requires that the OCIE exam staff 

in each office hold quarterly Exam Reviews, in which the progress and status of 

every exam in the office is discussed and evaluated for several factors, including 

evaluating any significant issues with the firm that is the subject of the exam, determining whether more staff resources are needed on the exam and deciding if the 

exam is a potential referral to the Enforcement Division. These reviews are an opportunity to summarize and preview findings that appear likely to trigger possible 

Enforcement referrals, as well as to flag any potential differences in the assessment 

of urgency, potential harm to investors, or other issues that can then be raised at 

the joint regional meetings or to the OCIE senior management. 

Finally, the OCIE exam staff is working closely with Enforcement’s specialized 

units to identify key risks presented by entities registered with the SEC and key 

risks to the markets. As previously described, this partnership with the specialized 

units has already resulted in new approaches to joint efforts to identify risky firms 

that may warrant examination or an enforcement investigation. In addition, the 

OCIE recently announced the creation of several specialized working groups that 

will focus on areas where the OCIE plans to increase its specialization and market 

knowledge. 

We have recently received encouraging news about these reforms. On March 30, 

2011, the OIG issued the OCIE Regional Offices’ Referrals to Enforcement, Report 
117 

1This figure includes amounts claimed in lawsuits filed or intended to be filed by the receiver; 

actual recovery may vary depending on litigation outcome. 

No. 493 (Referral IG Report). This audit report suggests that our efforts at improved 

coordination are meeting with success. The report notes that a survey of all the 

OCIE examiners throughout the SEC’s regional offices concerning their view of Enforcement responses to examination-related referrals found that ‘‘when combining 

the responses for ‘completely satisfied’ and ‘somewhat satisfied’ for respondents, the 

majority of SEC regional offices had a combined level of satisfaction ranging from 

70 to 87 per cent.’’ The IG Report further found that where there was dissatisfaction 

with the referral process, the level of concern dramatically dropped over time and 

particularly in fiscal year 2010, with some respondents identifying enforcement’s 

newly created Asset Management Unit as having significantly assisted with the acceptance rate of the OCIE referrals. 

An additional issue raised by the OIG’s Stanford report, albeit one for which there 

were no specific recommendations, was a relative lack of coordination between the 

investment adviser exam team and the broker-dealer exam team in the Fort Worth 

Regional Office’s examinations of Stanford. Senior leadership of the National Examination Program recognizes that the past structure within the examination program 

has resulted in certain silo effects in the examination process. After giving this issue 

careful consideration, changes have been made to the structure of several regional 

offices. For example, some of the regional offices have restructured their examination program so that each subgroup contains both adviser examiners and brokerdealer examiners. These examiners report to the same immediate supervisor, which 

has strengthened collaboration in examining entities that are dually registered with 

the SEC as both an investment adviser and a broker-dealer such as Stanford. 

Question. I am very troubled by the OIG’s report, released last year, on Stanford 

Financial. Many Mississippians and other Americans lost their life savings by investing in what were freely marketed as safe, Certificate-of-Deposit investments. 

Dating back to 1997, the SEC’s Fort Worth Examination Group repeatedly requested that an enforcement action be brought against Stanford Financial. That was 

more than 12 years before the SEC actually brought an enforcement action. The 

OIG found serious managerial, cultural, and performance-based problems at the 

SEC, which led to this terrible failure. What are you doing to help compensate the 

victims of the Stanford Financial fraud? 

Answer. We are proceeding on several fronts. Most recently, on June 15, 2011, the 

SEC asked the Securities Investor Protection Corporation (SIPC) to initiate a court 

proceeding under the Securities Investors Protection Act (SIPA) to liquidate the 

broker-dealer. This decision was based on the totality of facts and circumstances in 

the case. A SIPA liquidation proceeding would allow investors with accounts at 

Stanford Group Company to file claims with a trustee selected by the SIPC. 

On the litigation front, the SEC’s focus is to hold wrongdoers accountable while 

providing maximum recovery available under the law to investors harmed by this 

egregious fraud. First, after filing its civil action in February 2009, the SEC filed 

a motion requesting that the district court appoint a receiver over the defendants’ 

assets to prevent waste and dissipation of those assets to the detriment of investors. 

Second, to complement the receiver’s efforts, the SEC, in coordination with the Department of Justice (DOJ), moved to freeze Securities and Investment Board assets 

held in international financial institutions. Freezing assets in international jurisdictions poses complex litigation challenges, but this step was crucial to ensure the protection of investor funds. Third, the SEC is working with the receiver, DOJ, and securities regulators and law enforcement agencies in the United Kingdom, Switzerland, Canada, Mexico, and in several countries throughout Central and South America, to identify, secure, and repatriate for the benefit of investors more than $300 

million in cash and securities held in non-U.S. bank accounts. 

In a status report filed February 11, 2011, the receiver identified several categories of major assets for possible distribution to harmed investors: —$94.7 million in cash on hand; 

—$30.4 million in private equity investments already recovered and liquidated; 

—$1 million in coins and bullion inventory; 

—$6 million in real estate sale proceeds, with an additional $11.7 million expected 

from sales of other identified properties; and —$594.9 million in pending fraudulent transfer and unjust enrichment claims.1

In conjunction with the SEC, the receiver is focused on identifying and liquidating 

the largest possible pool of obtainable assets for distribution to harmed investors. 

The SEC is closely monitoring the receiver’s costs to ensure optimal recovery for 

the victims of this massive fraud. We have strongly urged the receiver to stringently 

apply a cost-benefit analysis and pursue only those legal claims that could generate 
118 

maximum proceeds for the benefit of investors while minimizing the receiver’s legal 

fees and expenses. We also have cautioned the receiver that we are carefully scrutinizing all bills requesting payment for fees and expenses. In fact, on at least three 

occasions, the SEC has formally challenged the receiver’s bills. We will continue to 

do so where appropriate. 

QUESTIONS SUBMITTED BY SENATOR KAY BAILEY HUTCHISON

Question. The Madoff and Stanford Ponzi schemes represent what many view as 

two of the largest failures of the Securities and Exchange Commission (SEC). Investigative reports published by your own Inspector General (OIG) highlighted several 

areas where the SEC failed in its mandate to protect investors. Can you please explain how the additional funds you are requesting for fiscal year 2012 would have 

helped the SEC to prevent or respond better to shut down the Madoff or Stanford 

Ponzi schemes before thousands of American investors saw their finances so devastated? 

Answer. The SEC commends the work of the OIG investigating this matter and 

drafting the reports, Investigation of the SEC’s Response to Concerns Regarding 

Robert Allen Stanford’s Alleged Ponzi Scheme, OIG–526 (Stanford IG Report) and 

Investigation of the SEC’s Failure to Uncover Bernie Madoff’s Ponzi Scheme, OIG– 

509 (Madoff IG Report). In the Stanford IG Report, the OIG conducted an extensive 

investigation that clearly identifies missed opportunities for protecting investors, 

and no one should evade responsibility for the SEC’s handling of the Stanford matter. We deeply regret that the SEC failed to act more quickly to limit the tragic investor losses suffered by Stanford’s victims. In the Madoff IG Report, the OIG identified numerous red flags that the SEC missed in its examinations and investigation 

of Bernie Madoff’s hedge fund and trading practices. 

In particular, the Stanford IG Report, which was released last year, made important recommendations identifying areas for improvement throughout the SEC and 

both the Division of Enforcement and the Office of Compliance Inspections and Examinations (OCIE) have since instituted various measures to implement all of those 

recommendations. 

In addition to the OIG’s recommendations in the Stanford IG Report, under their 

new leadership both the Division of Enforcement and the OCIE have engaged in a 

top to bottom review within the last 2 years and have implemented measures to reform organizational processes and improve our effectiveness. We have streamlined 

management; put seasoned investigative attorneys back on the front lines; improved 

our examiners’ risk-assessment techniques; revised our enforcement and examination procedures to improve coordination and information-sharing; leveraged the 

knowledge of third parties; instituted new initiatives to identify fraud; expanded our 

training programs; hired staff with new skill sets; and revamped the way that we 

handle the tremendous volume of tips, complaints, and referrals that we receive annually. 

Although our reform efforts are ongoing, the OIG’s recent report, the OCIE Regional Offices’ Referrals to Enforcement, Report No. 493 (Referral IG Report), issued 

on March 30, 2011, indicates that enhanced coordination between Enforcement and 

the OCIE is proving effective, particularly in the area of handling referrals from the 

OCIE to Enforcement. In addition, strengthened collaboration between the OCIE 

and Enforcement has resulted in a number of notable enforcement actions in the 

past 2 years. 

Despite the many changes, more work remains. This will require commitment and 

creativity. While we must always efficiently use existing resources, additional resources will help us continue to implement organizational reforms underway in the 

Division of Enforcement and the OCIE. For example, additional resources will allow 

us to enhance our IT capabilities to allow enhanced data analytics and data mining 

in our Enforcement investigations, enabling us to identify patterns across suspicious 

conduct and generate meaningful investigative leads. Although we deeply regret the 

losses suffered by Stanford and Madoff investors, we embrace the challenges that 

lie ahead and are confident that our ongoing efforts will enhance investor protection 

and the integrity of our financial markets. 

Question. The Securities Investors Protection Act (SIPA) Trustee appointed to the 

Madoff case has reportedly recovered almost all the investors’ original principal to 

be distributed among the victims, while the SEC-appointed receiver in the Stanford 

case has so far recovered an estimated 2 cents per $1. Unlike the Securities Investor 

Protection Corporation (SIPC) appointed trustee who draws his fees from the SIPC, 

the SEC-appointed receiver draws his fees from the funds he has been able to recover. Ultimately, this lessens funds able to be distributed to Stanford investors. 
119 

Does the SEC still maintain that receivership was the appropriate course of action 

for the Stanford case? If so, why? 

Answer. Upon filing its civil action in February 2009, the SEC filed a motion requesting that the district court appoint a receiver over the defendants’ assets (including more than 100 Stanford-related entities operating around the world) to prevent waste and dissipation of those assets to the detriment of investors. While a receiver was a necessary tool in this case, the SEC has closely monitored the receivership to help maximize investor recovery. To complement the receiver’s efforts, the 

SEC, in coordination with the Justice Department, moved to secure assets held in 

international financial institutions. 

Securing assets in international jurisdictions poses complex litigation challenges, 

and those challenges have been magnified in this case by, among other issues, the 

appointment in Antigua of a competing receiver that has not cooperated with the 

SEC and that, in fact, has challenged various steps taken by the receiver, the SEC 

and the Justice Department. But securing international assets was crucial to ensure 

the protection of investor funds and we continue to work closely with the receiver, 

Justice Department, and securities regulators and law enforcement agencies in the 

United Kingdom, Switzerland, Canada, Mexico, and in several countries throughout 

Central and South America, to identify, secure, and repatriate for the benefit of investors more than $300 million in cash and securities held in non-U.S. bank accounts. 

In conjunction with the SEC, the receiver is focused on identifying and liquidating 

the largest possible pools of assets to prepare for a future distribution to harmed 

investors. In addition, the SEC has recently worked with other involved parties in 

the creation of an investor committee to provide an additional mechanism for investor input as to the receivership operations. 

Throughout this case, the SEC has worked closely with a court-appointed examiner to monitor the receiver’s costs and ensure maximum recovery to the victims of 

this massive fraud. These efforts have had tangible benefits. For example, the receiver and the professionals assisting him have reduced their customary fees by at 

least 20 percent and have capped the rates charged by senior lawyers. In addition, 

we carefully scrutinize the receiver’s bills for fees and expenses. In fact, in response 

to our objections, the district court has held back, on an ongoing basis, an additional 

20 percent from the receiver’s fees and expenses. We have strongly urged the receiver to stringently apply a cost-benefit analysis and pursue only those legal claims 

that could generate maximum proceeds for the benefit of investors while minimizing 

the receiver’s legal fees and expenses. 

As with our monitoring of the receiver’s fees and expenses, the SEC has intervened when it believed the receiver was pursuing inappropriate claims. For example, the SEC challenged the receiver’s lawsuits seeking net profits from innocent investors. Conversely, when the receiver properly pursues assets, we intervene in support of that effort where appropriate. For example, the SEC recently submitted an 

amicus brief in the Fifth Circuit supporting the receiver’s efforts to maintain a 

freeze more than approximately $24 million in accounts held by former Stanford financial advisers. We will continue to be closely involved with the receiver’s activities. 

Question. Currently, the Supreme Court forbids investors from going to court to 

compel SIPC to order a brokerage liquidation as it believes there are adequate safeguards in place to prevent a miscarriage of justice for investors. What options do 

investors have when they do not agree with the SEC’s or the SIPC’s interpretation 

of the SIPA? 

Answer. The SEC staff monitor situations in which SIPC member broker-dealers 

are in (or may be approaching) financial distress to determine whether a SIPA liquidation proceeding is appropriate for the protection of the firm’s customers. In addition, customers of SIPC member firms and their representatives can and do communicate with SEC staff and Commissioners when they believe that a member firm 

should be liquidated under the SIPA. In the Stanford case, for example, investors 

asked the SEC to direct SIPC to begin a liquidation under the SIPA of Stanford 

Group Company, a registered broker-dealer and member of SIPC. On June 15, 2011, 

the SEC asked SIPC to initiate a court proceeding under the SIPA to liquidate Stanford Group Company. In every case in which the SEC has concluded that a SIPC 

member firm should be liquidated under the SIPA, SIPC has agreed to do so. If 

SIPC were not to agree, section 11(b) of SIPA gives the SEC the right to file an 

action to compel SIPC to begin a liquidation proceeding to ensure that the protections provided by SIPA are available to the customers of the SIPC member firm. 

The SEC has authorized its Division of Enforcement to bring an action to compel 

SIPC to begin a SIPA liquidation of Stanford Group Company if SIPC refuses to do 

so. 
120 

In Securities Investor Protection Corporation v. Barbour, 421 U.S. 412 (1975), the 

Supreme Court held that customers of a SIPC member firm do not have an implied 

private right under SIPA to ask a court to require SIPC to begin a liquidation proceeding. Without deciding whether customers may challenge the SEC’s decision not 

to seek an order (under SIPA section 11(b)) compelling SIPC to begin a liquidation 

proceeding, the Court in Barbour noted that the SEC’s brief in that case indicated 

that such a decision ‘‘might be reviewable under the Administrative Procedure Act 

for an abuse of discretion.’’ Id. at 425 n.7. No customer has sought judicial review 

of an SEC decision not to request a court to order SIPC to begin a SIPA liquidation. 

QUESTION SUBMITTED BY SENATOR MARK KIRK

Question. Last year, the Congress passed significant new sanctions on Iran and 

others, including the United Nations and the European Union, also imposed sanctions. The result is that companies continuing to do business in Iran now face significantly more risk—the risk of direct sanctions; the risk that sanctions will make 

any business in Iran more difficult and more expensive; and the representational 

risk that comes with doing business with a regime that brutally suppresses its own 

people. Why has the Securities and Exchange Commission (SEC) failed to issue a 

specific regulation requiring companies, which face potential sanction under U.S. 

law for their activity in Iran, to disclose that information? 

Answer. Currently, our rules do not include a line-item requirement to disclose 

a company’s business activities in Iran. Instead, with regard to whether companies 

will be required to disclose information relating to activities in Iran, the general materiality analysis that governs disclosure obligations applies. Under our rules, a 

company would be required to provide some disclosure of its business activities in 

Iran if the company faces material risks, including material risks from possible 

sanctions violations, as a result of those activities. Generally speaking, information 

is considered material if there is a substantial likelihood that a reasonable investor 

would consider it important in deciding how to vote or make an investment decision, 

or, put another way, if the information would alter the total mix of available information. I recognize that this is a difficult judgment call, and may not result in disclosure in every case that some may think is appropriate. 

I note, however, that I have asked the Division of Corporation Finance to prepare 

a rule proposal for the SEC’s consideration on disclosure of activities that may subject a company to sanctions under the Iran Sanctions Act. In addition, based on a 

study of divestment activities, the Government Accountability Office has recommended that the SEC consider issuing a rule requiring companies that trade on 

U.S. exchanges to disclose their business operations tied to Sudan, as well as possibly other state sponsors of terrorism. The division has outlined the terms for a 

possible rule proposal for specific disclosure requirements regarding business and 

investment activities in Iran and Sudan, and has circulated this outline for the 

SEC’s consideration. 

SUBCOMMITTEE RECESS

Senator LAUTENBERG. The subcommittee hearing is hereby recessed. 

[Whereupon, at 11:22 a.m., Wednesday, May 4, the subcommittee 

was recessed, to reconvene subject to the call of the Chair.] 
(121) 

1 Exerpted from a statement Congressman Brad Sherman. 

1The ICI is the national association of U.S. investment companies, including mutual funds, 

closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). ICI seeks 

to encourage adherence to high ethical standards, promote public understanding, and otherwise 

advance the interests of funds, their shareholders, directors, and advisers. Members of ICI manage total assets of $13.1 trillion and serve more than 90 million shareholders. 

MATERIAL SUBMITTED SUBSEQUENT TO THE 

HEARING 

[CLERK’S NOTE.—The following testimonies were received 

sebsequent to the hearing for inclusion in the record.] 

PREPARED STATEMENT OF ENTERPRISE COMPLIANCE INTERNATIONAL

This writing follows our review of the Senate Appropriations Subcommittee on Financial Services and General Government hearing (May 4) deliberating another increase for the Commodity Futures Trading Commission (CFTC) and the Securities 

and Exchange Commission (SEC). What we heard in this subcommittee hearing 

pretty much echoed the comments of House Capital Markets and Government Sponsored Enterprises Subcommittee members who challenged the increase because 

these agencies are ‘‘bloated’’ and ‘‘over lawyered’’. Instead of getting into the politics, 

we supplied a solution to all of these problems—and that solution called for no increases at all; in fact, with the proper attention paid to the ‘‘culture’’ 1 within these 

agencies, we are able to make each and every one of these agencies self-sustaining. 

This is a synopsis and value proposition of benefits available to the SEC given 

use of Enterprise Compliance International’s Renaissance Excalibur Cost-Containment Package (RECCP)—which has been forwarded to the respective chairs of the 

Financial Services Committee and its House Capital Markets and Government 

Sponsored Enterprises Subcommittee, plus Ways and Means ranking member Representative Charles B. Rangel. 

RECCP was developed exclusively for use by the SEC to remove wasteful, inefficient, and outdated regulatory programs, as espoused by Representative Spencer 

Bachus and his House Capital Markets and Government Sponsored Enterprises subcommittee chairman Representative Scott Garrett. 

Please take notice that this management package requires a one-time $25 million 

investment in return for which it will remove at least $100 million per annum in 

program costs (paying for RECCP in 90 days or less). Continued use of RECCP will 

not only cut SEC program costs but will allow the agency to operate independent 

of taxpayer funded budgeting. 

At a very nominal monthly usage fee, the SEC (like the CFTC) will sustain itself. 

If we continue to delay remedies, the SEC will realize a $200 million net operating loss by fiscal year 2015 which will essentially shut the agency down. All of 

this is avoidable by funding RECCP as soon as possible. The $222 million increase 

now sought by Chairman Schapiro will barely cover this shortfall; ergo, we cannot 

solve these problems with more money, the culture is flawed and must include what 

can be done from within each agency to make it self-sustaining without giving our 

taxpayers the bill for shortsighted agency management. 

At the time of this writing (5/4/2011, 11:15 a.m. CDT), our national debt is 

$14.349347 trillion and rising. 

We seek immediate dialogue with Chairman Dick Durbin and Ranking member 

Jerry Moran. 

PREPARED STATEMENT OF THE INVESTMENT COMPANY INSTITUTE

The Investment Company Institute (ICI) 1 appreciates this opportunity to submit 

testimony to the subcommittee relating to the administration’s fiscal year 2012 ap-
122 

2Fund sponsors offer four types of registered investment companies in the U.S.-open-end investment companies (commonly called ‘‘mutual funds’’), closed-end investment companies, exchange-traded funds (ETFs), and unit investment trusts (UITs). 3Michael Bogdan, John Sabelhaus & Daniel Schrass, Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2010, Investment Company Institute Fundamentals 

19, no. 6 (September), available at http://www.ici.org/pdf/fm-v19n6.pdf. 4 Investment Company Institute, Investment Company Fact Book (51st ed. 2011). The Fact 

Book is available at http://www.icifactbook.org. 5 Id. 

6The SEC argues that it will need to add 468 positions to implement Dodd-Frank. See Congressional Justification fiscal year 2012 in Brief, at p. 3, available at http://www.sec.gov/about/ 

secfy12congbudgjust.pdf. 

propriations request for the Securities and Exchange Commission (SEC). In the 

past, the subcommittee has consistently sought to provide adequate resources for 

the SEC. For the reasons expressed below, we urge it to do so again this year. 

IMPORTANCE OF A WELL-FUNDED AND EFFECTIVE SECURITIES REGULATOR

Registered investment companies (RICs) 2 and their shareholders have a strong 

stake in an effective SEC. RICs are one of America’s primary savings and investment vehicles for middle-income Americans. All told, more than 91 million shareholders in more than 52 million U.S. households owned some type of registered fund 

in 2010.3 At year-end 2010, total RIC assets were approximately $13 trillion. These 

funds, and their millions of investors, benefit when the SEC conducts sound rulemaking and effective oversight. 

RICs are an integral part of our economy in another way, as well. In addition to 

their role as the investment vehicle of choice for millions of Americans, investment 

companies have been among the largest investors in the domestic financial markets 

for much of the past 15 years and held a significant portion of the outstanding 

shares of U.S.-issued stocks, bonds, and money market securities at year-end 2010.4

Indeed, investment companies as a whole were one of the largest groups of investors 

in U.S. companies, holding 27 percent of their outstanding stock at year-end 2010.5

As major participants in the stock, bond, and money markets, RICs and their shareholders benefit from strong regulatory oversight of these markets. 

STAFFING AND DODD-FRANK IMPLEMENTATION

The Congress is rightly concerned about Government spending. It also must be 

concerned that the SEC not lack resources it needs to successfully pursue its investor protection and market oversight functions, including the new responsibilities assigned to the agency by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). 

While we have no view on the specific levels of funding and staffing necessary for 

the SEC, we recognize that the new responsibilities assigned to the SEC by DoddFrank are substantial and will call for significant resources.6 These responsibilities 

include expanded regulatory authority over derivatives trading, hedge fund advisers, 

and municipal advisors. While expanding the SEC’s authority in these areas is important to fill significant regulatory gaps, it should not come at the risk of impairing 

the SEC’s pre-existing responsibilities with respect to mutual funds and other more 

‘‘traditional’’ products, nor compromising the interests of their millions of mainstream investors. 

In particular, we believe more can and should be done to develop the SEC’s economic research and analytical capabilities. There is a compelling need for the SEC 

to better inform itself about its regulated industry and market, as well as the economic consequences of its regulations. This is imperative if the SEC is to avoid regulatory approaches that could have the effect of making financial firms or products 

less competitive, less innovative, less attractive to talented professionals, and less 

available to investors. 

IMPROVEMENTS IN THE USE OF AVAILABLE RESOURCES

No matter what level of funding ultimately is authorized, it is vitally important 

that the SEC utilize the resources it has to their maximum effect. Chairman 

Schapiro is to be commended for taking significant steps over the past few years 

to improve the operational efficiency of the SEC, bringing in new leadership and 

senior management in many of the agency’s divisions, restructuring some key divisions, seeking to improve the agency’s risk assessment capabilities, and hiring more 

staff with specialized expertise and real world experience, among other things. Still, 

Chairman Schapiro herself admits that much work remains to improve the SEC’s 
123 

7See Testimony on Implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act by the U.S. Securities and Exchange Commission Before the United States Senate 

Committee on Banking, Housing, and Urban Affairs, Thursday, February 17, 2011. 8We also note that section 967 of Dodd-Frank directed the SEC to engage the services of an 

independent consultant to study a number of specific areas of SEC internal operations. That organizational study, by the Boston Consulting Group, was delivered to Congress on March 10. 

It is available at http://www.sec.gov/news/studies/2011/967study.pdf. 

internal operations.7 We strongly agree. We therefore strongly support the continued focus on internal reforms that will allow the SEC to work more efficiently and 

improve its performance. This includes, for example, conducting empirical research 

that informs major rulemakings, providing regulatory guidance that reflects a better 

understanding of the relevant regulated industry, better integrating activities of different SEC divisions and branch offices, and implementing new inspection strategies.8 The SEC also will have a tremendous amount of new data as a result of recent rulemakings, such as data from Form N–MFP (relating to money market 

funds) and proposed Form PF (relating to private funds). It should have adequate 

funding to acquire and implement the technology necessary to understand, utilize, 

and secure all of this data. 

CONCLUSION

The Congress must assure that the SEC has resources sufficient to adequately 

fund its staffing and to take other steps to fulfill its mission of protecting the Nation’s investors, including more than 91 million investors who own mutual funds 

and other registered investment companies, and that it deploys those resources to 

the best possible effect. These investors deserve the benefits of an SEC that can 

soundly, effectively, and efficiently regulate securities offerings, market participants, 

and the markets themselves. American taxpayers deserve every assurance that the 

SEC, indeed all agencies and departments of Government, husband their resources 

appropriately. 

Accordingly, we urge the Congress to provide the appropriations necessary to 

allow the SEC to appropriately fulfill its mission. 

We appreciate your consideration of our views. 

(125) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2012 

WEDNESDAY, MAY 25, 2011 

U.S. SENATE, 

SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS, 

Washington, DC. 

The subcommittee met at 10 a.m., in room SD–138, Dirksen Senate Office Building, Hon. Richard J. Durbin (chairman) presiding. 

Present: Senators Durbin, Moran, and Kirk. 

SMALL BUSINESS ADMINISTRATION 

STATEMENT OF HON. KAREN G. MILLS, ADMINISTRATOR, SMALL BUSINESS ADMINISTRATION 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

Senator DURBIN. Good morning. I’m pleased to convene this hearing of the Appropriations Subcommittee on Financial Services and 

General Government. Today we’re going to examine funding provided for small business and community development programs 

under our jurisdiction. 

I welcome my Ranking Member, Senator Jerry Moran of Kansas. 

And other colleagues may join us during the course of the hearing. 

Also, we welcome the Small Business Administrator, Karen G. 

Mills and the Director of the Department of the Treasury’s Community Development Financial Institutions Fund (CDFI), Donna J. 

Gambrell. I’ll welcome the second panel of witnesses in short order. 

In the face of recent pressure to reduce the deficit, we have tried 

to focus on those programs which make a difference and have an 

impact on communities. I have supported the Small Business Administration (SBA) and the CDFI Fund programs because I think 

they produce real outcomes. But, we continue to ask the hard questions and demand proof that is what is actually happening. 

For the SBA for fiscal year 2011, we were able to maintain funding at the 2010 level, despite the need to make some painful cuts 

in other parts of the budget. Put simply, small businesses, we believe, are the key to economic recovery. Small businesses create 

nearly 2 out of every 3 new jobs, employ one-half the Nation’s private sector workforce, and generate 44 percent of private payroll. 

The SBA has been on the front line of this economic crisis, working 

to help small business owners. Small businesses have faced some 

difficulty gaining access to capital, and turned to the SBA for help. 
126 

The SBA overseas a loan portfolio of $85 billion and, in a typical 

year, makes or guarantees more than $20 billion in loans. 

On our second panel, Mr. Warner Cruz will tell us about how the 

SBA helped his small business not only stay afloat during the credit crisis, but also helped him to make a major expansion of the 

business, including a renovation of an abandoned building in Rolling Meadows, Illinois. Mr. Cruz’s business, restoring damaged 

homes and businesses from flooding, fires, and storms—unfortunately, for the people who were owners, but fortunately for him— 

is now flourishing with 85 full-time staff and many part-time staffers. 

SBA programs also supported counseling services for budding entrepreneurs and small business owners. I’m concerned about proposed cuts in those programs, which we’ll talk about during the 

hearing. 

The budget request for 2012 for the SBA is $985 million. Now, 

that’s a $256 million, or 35 percent, increase in the current level. 

I said to my staff when they said that to me, ‘‘Can you be honestly 

realistic about that? A 35 percent increase in 1 year, in light of 

what we’re going through?’’ Much of the funding has become necessary for the SBA Business Loan Program and disaster loan programs to stay operational. Some of it reflects accounting realities, 

which we’ll get into here. We’ll talk about those. 

The CDFI Fund for fiscal year 2011 is provided $227 million. I 

placed a high priority on maintaining investment in this fund because of its unique ability to leverage private sector investment in 

community development, like affordable housing, retail development, and community centers, as well as lending to small businesses. Federal grants for the CDFI Fund have never been earmarked for specific projects. Instead, the Treasury makes competitive grants that can best demonstrate a capacity to help communities. 

With just a small amount of seed funding, the CDFI Fund can 

transform communities. Nationwide, the CDFI Fund leverages an 

average of $13 for every Federal $1 invested. In 2010, Federal 

grants helped to create or maintain more than 80,000 jobs. I’ve got 

quite a bit of information here about the impact of the CDFI Fund. 

I visited the King Legacy Apartments in a tough part of Chicago 

which used to be a vacant, pretty ugly lot—you get to see it here 

in before and after photos. I can tell you, from driving through the 

area surrounding it, that this really made a difference in terms of 

people’s attitudes toward their community, toward their neighborhood. And let me show one other example of a CDFI Fund investment in Illinois—before-and-after pictures of Wilson Yard, a major 

project in Chicago’s uptown area. It was built on the site of a 

former rail yard and is now a mixed-use development. And you’ll 

see, off to the right, a huge Target store, which took over that vacant lot, along with other businesses. And of course, former Mayor 

Daley’s pride and joy, rooftop greenery. We have a lot of that in 

Chicago. We’re very proud of it. And the CDFI Fund helped to 

make that a reality. 
127 

King Legacy Apartments area—before. 

King Legacy Apartments—after. 
128 

Wilson Yard—before. 

Wilson Yard—after. 
129 

Senator DURBIN. On our second panel, we’re going to hear, after 

we’ve listened to the testimony of our two first witnesses, from 

Warner Cruz, whom I mentioned earlier—he was the Illinois small 

business person of the year for 2010 and an SBA borrower; Calvin 

Holmes, president of the Chicago Community Loan Fund who will 

tell us about the impact of the CDFI Fund in Illinois; and Ray 

Moncrief, from Kentucky Highlands, an investment corporation 

based in London, Kentucky, will talk about participating in the 

CDFI Fund and the SBA microloan program. 

And at this point, I want to turn it over to my colleague Senator 

Moran, who told me he had three hearings at 9:30 a.m. and made 

this one a priority. 

Thank you. 

STATEMENT OF SENATOR JERRY MORAN

Senator MORAN. Mr. Chairman, thank you very much. 

I’ve already instructed my staff that next year we’re going to 

have visuals, as well. You have upped the ante. Although, I doubt 

any of ours will show greenery on the rooftops. 

I thank you for calling this hearing. And I welcome our witnesses. Nice to see both of you, and I look forward to your testimony. 

The American economy is facing many difficult challenges, and 

we need to get our country moving again. It seems to me, in two 

aspects of getting our financial house in order, moving toward balancing the budget, reducing our deficit spending is an important 

priority. At the same time, we need to grow our economy. And we 

need to make certain that the opportunities are there for small 

business and entrepreneurs to succeed. 

And so, while much of the discussion in the Congress today is 

about reduced spending—and I support that effort—there’s also another, in fact, perhaps more enjoyable way of helping us reduce our 

deficit, and that’s putting people to work. And so, I’m particularly 

interested in finding the right balance with your agencies to see 

that we don’t spend money that we shouldn’t be spending, that we 

don’t—that we’re not inefficient or waste money. But, I also want 

to make certain that the tools are there for business to grow to succeed and, in the process of pursuing that success, put lots of Americans to work and put food on families’ tables. 

So, I look forward to hearing your testimony. 

One of the things, Ms. Mills, that I’m particularly interested in 

is the role in regard to disasters. I just returned from Kansas over 

the weekend—Reading, Kansas—saw the tornado damage there; a 

small town of about 270 folks with half the homes destroyed. As 

a Member of the House of Representatives, I represented Greensburg, Kansas, a town totally destroyed by an F5 tornado, in which 

the SBA played a significant role in helping for recovery. And of 

course, Kansans, and all Americans, extend their sympathies and 

concerns to the people of Joplin and places across our country that 

have experienced tremendous storm damage. And so, I am interested in hearing your thoughts about your appropriations request, 

particularly as they relate to weather-related disasters that we’re 

currently experiencing. 
130 

And again, Mr. Chairman, thank you for the opportunity. I look 

forward to hearing the testimony. 

Senator DURBIN. Thank you, Senator. 

Both of our witnesses will have 5 minutes each for an opening 

statement. Administrator Mills, please start. 

SUMMARY STATEMENT OF KAREN G. MILLS

Ms. MILLS. Thank you. Chairman Durbin, Ranking Member 

Moran, and members of the subcommittee, I’m very pleased to be 

testifying before the subcommittee. 

Small businesses, as the Senators have just described, are the 

backbone of our economy. They create 2 out of every 3 jobs, and 

more than one-half of working Americans own or work for a small 

business. 

The SBA is a small agency, but we have a big mission. We put 

the maximum possible resources directly into the hands of small 

businesses, focusing on access to capital, contracts, counseling, and 

disaster assistance. Last year, we helped more than 50,000 small 

businesses get capital to grow and hire. We put about $100 billion 

in Federal contracts get into the hands of small businesses. We 

counseled more than 1 million small businesses in every State 

across the country. And as we speak, as the Senator from Kansas 

mentioned, SBA employees are on the ground, in Missouri, Kansas, 

Alabama, and elsewhere, assisting victims of the disasters, including some deployment that we just did overnight, to Oklahoma, 

where there were additional tornados. 

This is the worst tornado season, as you know, in nearly six decades. We are there to help homeowners, renters, and business owners with long-term, low-interest loans. And even if a business 

wasn’t damaged directly, but the customers are suffering and not 

coming into the business, the SBA can help with business interruption loans. 

We’re doing this efficiently. The turnaround times for disaster 

applications are about 10 days. After Hurricane Katrina, they were 

about 70 days. So, we’re down from 70 days to 10 days. 

We put these resources into the hands of small businesses while 

providing the taxpayers a big bang for their buck. For example, 

after credit froze in 2008, the American Recovery and Reinvestment Act (ARRA) and the Small Business Jobs Act allowed us to 

support more than $42 billion of SBA loan guarantees into the 

hands of small business, at a subsidy cost of $1.2 billion. Many 

small businesses suffered greatly from the recession, and our job is 

to support them as they grow and create jobs. 

This job is not done. The President’s proposed fiscal year 2012 

budget for the SBA of $985 million will support up to $27 billion 

in loan guarantees, as well as many other tools and resources to 

help small businesses across the country. At the same time, the 

budget reflects a commitment to tighten our belts, streamline our 

processes, and eliminate duplication. This includes ideas from the 

Congress. For example, we looked hard at our technical assistance 

programs to be sure that each one was unique and nonduplicative. 

As a result, we proposed eliminating the Program for Investment 

in Micro-Entrepreneurs program. With the work of our microlenders and new efforts to recruit community-based lenders, which 
131 

you will hear more about today, we can continue to provide technical assistance in a more cost-effective way. 

The largest increase in our budget, that the Senator referred to, 

reflects the fact that we have reached the statutory limit for fees 

that we can assess. The budget reflects the need for additional subsidy because losses, including those from loans approved when collateral, such as real estate was inflated, have pushed up subsidy 

costs. We will also request a legislative fix to return to near zero 

subsidy. The budget also builds on our strong efforts over the past 

2 years to remove fraud, waste, and abuse in our contracting programs. And it supports the new women’s contracting program. I 

know that both of these issues are a high priority for many Members of Congress. 

PREPARED STATEMENT

Overall, our priorities are twofold. We have placed a focus on the 

SBA programs that put money and support directly into the hands 

of small business owners in the places where they live. And we will 

continue to invest in oversight to preserve the integrity of these 

programs and to protect the interest of taxpayers. 

I look forward to working with you to ensure that small businesses can continue to grow, create jobs, and lead us to a full recovery. 

Thank you. 

[The statement follows:] 

PREPARED STATEMENT OF KAREN G. MILLS

Chairman Durbin, Ranking Member Moran, and members of the subcommittee. 

I’m pleased to testify before the subcommittee. 

Small businesses are the backbone of our economy. They create nearly 2 of every 

3 new jobs. And more than one-half of working Americans either own or work for 

a small business. 

The Small Business Administration (SBA) is a small agency, but we have a big 

mission. We put the maximum possible resources directly into the hands of small 

business, focusing on access to capital, contracts, counseling, and disaster assistance. Last year, we helped more than 50,000 small businesses get the capital to grow and hire. We helped put about $100 billion in Federal contracts in the hands of 

small businesses. And we counseled more than 1 million small businesses in every 

State across the country. 

As we speak, SBA employees are on the ground in Missouri, Kansas, Alabama, 

and elsewhere, assisting the victims of disasters, including those suffering after the 

worst tornado season in nearly six decades. We are there to help homeowners, renters, and business owners with long-term, low-interest loans. Even if a business 

wasn’t damaged directly, but customers are suffering and not coming in to the store, 

SBA can help with business interruption loans. 

And we’re doing this efficiently. Turnaround times for disaster loan applications 

are about 10 days, down from about 70 days in the weeks after Hurricane Katrina. 

We put these resources in the hands of small business while providing taxpayers 

a big bang for their buck. For example, after credit froze in 2008, the American Recovery and Reinvestment Act and the Small Business Jobs Act supported more than 

$42 billion in SBA loans at a subsidy cost of $1.2 billion. 

Many small businesses suffered greatly from the recession. Our job is to support 

them as they grow and create jobs. This job is not done. 

The President’s proposed fiscal year 2012 budget of for the SBA of $985 million 

will support up to $27 billion in loan guarantees as well as many other tools and 

resources to help our country’s small businesses. At the same time, this budget reflects a commitment to tighten our belts, streamline our processes, and eliminate 

duplication. This includes ideas from the Congress. 

For example, we looked hard at our technical assistance programs to be sure each 

was unique and nonduplicative. As a result, we propose eliminating the Program 
132 

for Investment in Micro-Entrepreneurs program. With the work of our microlenders 

and new efforts to recruit community-based lenders, we can continue to provide 

technical assistance in a more cost-effective way. 

The largest increase in this budget reflects that we have reached the statutory 

limit for fees that we can assess. This budget reflects the need for additional subsidy 

because losses—including those from loans approved when collateral such as real estate was inflated—have pushed up subsidy costs. We will also request a legislative 

fix to return to near zero-subsidy. 

The budget also builds on our strong efforts over the past 2 years to remove 

waste, fraud, and abuse in Federal contracting. And it supports the new women’s 

contracting program. I know that both of these issues are a high priority for many 

Members of Congress. 

Overall, our priorities are twofold. We have placed a focus on SBA programs that 

put money and support directly into the hands of small business owners, in the 

places they live. And, we will continue to invest in oversight to preserve the integrity of these programs and to protect the interest of taxpayers. 

I look forward to working with all of you to ensure that small businesses can continue to grow, create jobs, and lead us into full recovery. 

Senator DURBIN. Thank you, Administrator. 

Director Gambrell, your turn. 
(133) 

DEPARTMENT OF THE TREASURY 

COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS FUND

STATEMENT OF DONNA J. GAMBRELL, DIRECTOR 

Ms. GAMBRELL. Good morning, Chairman Durbin, Ranking Member Moran, and distinguished members of the Senate Appropriations Subcommittee on Financial Services and General Government. Thank you for inviting me to speak today about the CDFI 

Fund’s fiscal year 2012 budget request and the critical ways in 

which the CDFI Fund is creating jobs and transforming low-income 

communities across this country. 

I’ve been Director of the CDFI Fund for more than 3 years, during a time when our Nation has endured the most turbulent economy in generations. The financial crisis has had far-reaching consequences for our country, but nowhere has there been a more detrimental impact than on our low-income communities. My principal 

role as Director is to ensure that the CDFI Fund is doing everything possible to alleviate the economic burden on those at-risk 

communities, primarily through support of CDFIs. 

There are now almost 1,000 certified CDFIs across the Nation 

serving every State. These CDFIs take a variety of forms, including 

loan funds, credit unions, community banks, and venture capital 

funds. They serve local, regional, and even national markets to 

spur economic and community development in distressed areas, at 

the grassroots level. 

CDFIs have pioneered new financial education initiatives, encouraged the development of green industries in rural manufacturing, and invested in transit-oriented developments, charter 

schools, healthcare centers, and community facilities. And they’ve 

created thousands of jobs through the steady support of entrepreneurs and small businesses. 

As a vital component of the Treasury Department, the CDFI 

Fund closely aligns itself with the Treasury’s core priority of 

strengthening economic growth through its support of CDFIs. The 

CDFI Fund’s programs are designed to generate a maximum economic benefit to low-income communities with a minimum Federal 

cost. 

On average, a CDFI Fund awardee will take their initial grant 

and use it to attract private investment by a factor of 13. This 

unique ability will enable CDFIs to generate more than $1 billion 

worth of investment stemming from the $105 million in CDFI Program awards that I announced last year. 

Through strategic and targeted private and local partnerships, 

CDFIs have achieved remarkable success with their CDFI Fund 

grants. In fiscal year 2010, CDFI Fund awardees created or maintained more than 80,000 jobs, almost 30,000 of which were a direct 

result of new loans and investments. Awardees reported financing 
134 

more than 12,000 businesses and nearly 6,000 affordable housing 

units and provided financial literacy and other training to 140,000 

individuals. The CDFI Fund is critical to maintaining the growth 

of a strong community development finance industry, an industry 

that will make long-lasting and continual impacts across the Nation. 

CDFI Fund programs are consistently oversubscribed. For example, in this current round of the CDFI Fund program, 393 applicants requested almost $500 million when only $145 million is 

available. Due to this high demand, we’ve been forced to cap our 

rewards at lower levels in order to provide grants to as many highly qualified applicants as possible. The strong and continuous demand for CDFI Fund awards and the proven impact that these 

awards make and the capacity of CDFIs to increase loans, investments, and financial services in low-income and distressed communities, demonstrate that it’s essential to fully appropriate the President’s fiscal year 2012 budget request for the CDFI Fund. 

The President’s request guarantees our ability to continue our 

valuable programs, including the CDFI Program’s Financial and 

Technical Assistance Awards, the Healthy Food Financing Initiative, and our successful and much needed Native Initiatives. This 

request also includes funding for the new Bank on USA initiative 

and administrative requirements. Through the administration of 

these programs, the CDFI Fund will continue to serve our Nation’s 

lowest-income communities. 

PREPARED STATEMENT

The CDFI Fund has seen considerable support from this subcommittee in recent years for program development and appropriations. My deepest thanks go to its members and to Chairman Durbin for your unwavering confidence in the CDFI Fund and our important mission. 

Thank you. And I look forward to taking your questions. 

[The statement follows:] 

PREPARED STATEMENT OF DONNA J. GAMBRELL

INTRODUCTION

Good morning Chairman Durbin, Ranking Member Moran, and the distinguished 

members of the Senate Appropriations Subcommittee on Financial Services and 

General Government. My name is Donna J. Gambrell and I am the Director of the 

Department of the Treasury’s Community Development Financial Institutions 

(CDFI) Fund. Thank you for inviting me to speak today about the CDFI Fund’s fiscal year 2012 budget request and the critical ways in which the CDFI Fund is promoting economic development efforts throughout the country. 

I would like to start by expressing my deep appreciation to this subcommittee and 

to the Congress for its long history of support. The CDFI Fund’s programs stimulate 

the economy in communities often considered too risky for mainstream financial institutions. CDFIs are strategically positioned to help some of the most vulnerable 

populations in the Nation at a time when they are facing many financially challenging situations. CDFIs are often the only source of financing in underserved communities. CDFIs support productive small businesses, affordable housing for low-income Americans, high-quality community facilities, and provide retail banking services to the un-banked and others often targeted by predatory lenders. 

I have been Director of the CDFI Fund for more than 3 years, during a time when 

our Nation has endured the greatest recession in generations. The recession has had 

far-reaching consequences for our entire Nation, but nowhere has there been a more 

detrimental impact than on distressed and low-income communities. Many of these 
135 

1 In order to become certified, an organization must submit a CDFI certification application 

to the CDFI Fund for review and approval. The application must demonstrate that it meets each 

of the following requirements: 

—Be a legal entity at the time of certification application; 

—Have a primary mission of promoting community development; 

—Be a financing entity; 

—Primarily serve one or more target markets; 

—Provide development services in conjunction with its financing activities; 

—Maintain accountability to its defined target market; and 

—Be a nongovernment entity and not be under control of any government entity (tribal governments excluded). 

An eligible target market may consist of an: —Investment Area.—A geographic unit or contiguous geographic units that have a poverty 

rate of at least 20 percent; or an unemployment rate 1.5 times the national average; or 

a median family income at or below 80 percent of the statewide/metropolitan average; or 

is wholly located within an Empowerment Zone or Enterprise Community; or —Low-income Targeted Population.—A geographic unit comprised of individuals whose median family income is at or below 80 percent of the statewide/metropolitan average; or —Other Targeted Population.—An identifiable group of individuals who lack adequate access to capital and have been historically denied credit. 

same communities were already suffering before the financial crisis, and their recovery will now take much longer than in other parts of the country. 

My principal role as Director is to ensure that the CDFI Fund is doing everything 

possible to alleviate the economic burden on low-income communities, primarily 

through support of CDFIs and other institutions that focus their efforts on serving 

these at-risk communities. 

CDFIs are financial institutions that take a variety of forms—they are loan funds, 

credit unions, community banks, and venture capital funds. They are local, regional, 

and even national organizations that spur economic and community development in 

distressed areas from a grassroots level. CDFIs, as a class of financial institutions, 

have years of experience providing financial products and credit counseling services 

that permit borrowers to enter into and participate successfully in the financial 

mainstream. CDFIs fill a critical gap in the financial industry—they serve target 

markets that are historically underserved and they provide economic development 

services for niche areas that require specialization. The CDFI Fund encourages the 

growth and capacity of this valuable industry through a strategic deployment of resources. 

THE CDFI FUND’S ROLE

The United States Congress established the CDFI Fund as a bipartisan initiative 

under the Riegle Community Development and Regulatory Improvement Act of 1994 

(Public Law 103–325). Recognizing the need to bolster a fledgling industry that was 

making significant inroads in economic development in low-income communities, the 

bill’s authors designed the CDFI Fund to provide financial and technical support to 

CDFIs with the goal of improving economic conditions in low-income neighborhoods 

across the country. The mission of the CDFI Fund is to increase economic opportunity and promote community development investments for underserved populations and in distressed communities in the United States. 

As a vital component of the Department of the Treasury, the CDFI Fund closely 

aligns itself with the Treasury’s core priority of strengthening economic growth. The 

CDFI Fund’s programs are designed to generate a maximum economic benefit to 

low-income communities with a minimum Federal cost. 

It begins with CDFI certification. To be certified as a CDFI by the Treasury Department, organizations are required to meet a strict set of criteria, including having a primary mission of community development, as well as serving a target market that meets at least one of the CDFI Fund’s definitions of a distressed or lowincome community. One common type of target market is a Census tract that has 

a poverty rate of at least 20 percent, or an unemployment rate 1.5 times the national average, or a median family income at or below 80 percent of the statewide 

or metropolitan average.1 As organizations must be certified as CDFIs in order to 

be eligible for funding under many of the CDFI Fund’s programs, the certification 

criteria allow the Treasury to verify that awards are going to the neighborhoods 

that need them the most. Almost 200 CDFIs were certified or recertified in fiscal 

year 2010 alone, and as of April 2011 there are 949 certified CDFIs across the Nation and the United States territories. 

Once certified, the most common way for a CDFI to participate in the CDFI 

Fund’s programs is through our core program, the CDFI Program. The CDFI Program provides Financial Assistance and Technical Assistance awards to qualified 

CDFIs. These awards are intended as seed money to attract more private capital 
136 

2The other Federal agency participants in the 2010 Economic Development in Indian country 

workshops were the Department of Commerce, the Department of the Interior’s Office of Indian 

Energy and Economic Development, the Small Business Administration, and the Department of 

Agriculture,Rural Development. 

into CDFIs and their investments in distressed communities. The awards also allow 

CDFIs to leverage resources to increase the size of their service area and to build 

their own internal capacity so that they can better serve their target markets. 

Demand for CDFI program awards has significantly increased over the years. For 

the fiscal year 2011 award round, the CDFI Fund received 393 applications from 

CDFIs requesting a total of almost $465.9 million in assistance, nearly three times 

the $169.7 million available. Because of the continual high demand coupled with 

limited resources, the CDFI Fund capped the maximum award at $1 million in fiscal 

year 2009, and even lower at $750,000, in fiscal year 2010. 

Another CDFI Fund program, Native Initiatives, also continually faces demand 

well beyond its available resources. Native Initiatives provides Financial Assistance 

awards, Technical Assistance grants, and training to Native CDFIs and other Native entities proposing to become or create Native CDFIs. Through the Native American CDFI Assistance Program (NACA program) demand for financial and technical 

assistance continues to grow at a rate that eclipses available resources. In fiscal 

year 2011, the CDFI Fund received more applications than ever in the history of 

the NACA program, receiving 88 applications requesting $35 million—a 48 percent 

increase more than the $23.7 million requested in fiscal year 2010. Such an increase 

in demand demonstrates that Native Initiatives is successfully reaching and building the lending capacity in communities that have lacked such capabilities until 

now. The CDFI program and Native Initiatives are complemented by efforts to provide 

technical assistance and training to CDFIs. First, is Native Initiatives’ ‘‘Economic 

Developments in Indian Country’’ workshops, co-sponsored by the Federal Reserve 

Bank of San Francisco, Seattle branch. The 2010 workshop series featured presentations by four other Federal development agencies, and allowed the participants to 

network and brainstorm solutions to economic development difficulties in Native 

communities.2 Forty percent of the fiscal year 2011 NACA program applicants attended at least one of the workshop sessions in 2010. 

Second, the CDFI Fund’s Capacity Building Initiative provides support to all 

forms of CDFIs in areas of key business practices or economic development interests. The Capacity Building Initiative was designed based upon input received from 

CDFIs nationwide to significantly boost the ability of CDFIs to deliver financial 

products and services to underserved communities. The initiative has already had 

a phenomenal response from the industry. CDFIs have demonstrated a demand for 

the initial four capacity-building training and technical assistance tracks, which will 

allow them to build their own internal capacity and expand their expertise in key 

areas currently affecting the communities they serve, such as affordable housing, 

business lending, and providing financing for healthy food activities. In addition to 

training, the CDFI Fund has also commissioned a research project to review CDFI 

coverage in distressed communities across the Nation, which will allow CDFIs to determine where low-income communities are lacking access to CDFI services. 

One of the key drivers of the Capacity Building Initiative is that innovation and 

a nimble response to changing economic conditions are stalwart traits of the CDFI 

industry. CDFIs have demonstrated these traits time and time again during the uncertain economy of recent years. 

The CDFI Fund also administers other programs in support of community and 

economic development. The Bank Enterprise Award Program (BEA program) rewards banks for completing community development investments in eligible census 

tracts. To date, the CDFI Fund has made more than $336 million in awards under 

this program, supporting increases in investments in CDFIs and low-income communities across the Nation. Beginning in the fiscal year 2009 funding round, the CDFI 

Fund required that all BEA awardees use their BEA awards for future CDFI support and community development activities, as defined under the BEA program regulations. Awardees that receive awards more than $50,000 are required to report 

to the CDFI Fund on how the award was deployed. 

No overview of the CDFI Fund’s programs would be complete without the New 

Markets Tax Credit program (NMTC program), although it does not fall under the 

purview of this subcommittee. The NMTC program attracts investment capital to 

low-income communities by permitting individual and corporate investors to receive 

a tax credit against their Federal income tax return in exchange for making equity 

investments in Community Development Entities (CDEs). CDEs in turn make loans 

and investments in businesses and real estate projects in low-income communities. 
137 

CDEs must apply for the authority to issue New Markets Tax Credits to their investors. In any given application round, requests are generally 7 to 8 times higher than 

the available allocation authority. To date, NMTC investors have invested more 

than $20 billion into low-income, urban, and rural communities throughout the 

United States, approximately two-thirds of which has been invested in communities 

characterized by severe economic distress-census tracts with a poverty rate of 30 

percent or with a median income at or below 60 percent of the area median family 

income. 

IMPACT OF CDFIs 

CDFIs serve distressed and low-income communities through innovation, specialization, and targeted services. The customers of certified CDFIs, on average, are 70 

percent low income, 60 percent minority, and 52 percent female. These traditionally 

underserved target markets benefit from services provided by CDFIs that they could 

not receive from mainstream financial institutions. 

For example, Boston Community Capital, a CDFI headquartered in Massachusetts, has developed a new Stabilizing Urban Neighborhoods Initiative, where the 

CDFI partners with other organizations to buy foreclosed properties and sell them 

back to the original owners with a reduced mortgage payment, preventing displacement. As a result, low-income urban neighborhoods in Boston are at less risk of population loss due to unaffordable housing costs. 

Another organization, Access to Capital for Entrepreneurs (ACE), which is a certified CDFI as well as an SBA Microloan Intermediary and USDA Intermediary Relender, has done excellent work encouraging the growth of small business ventures 

in the rural Southeast. For example, an ACE microloan to Melissa Bennett allowed 

her to expand her cosmetics store to a second retail location in Georgia and to hire 

more help. The Dazzle Cosmetic Company now has eight employees in a rural area 

with a high poverty rate. 

CDFIs have pioneered new youth financial education initiatives; encouraged the 

development of green industries and rural manufacturing; invested in transit-oriented development, charter schools, healthcare centers and other community facilities; and have created thousands of jobs through the steady support of small businesses. After both Hurricane Katrina and the gulf coast oil spill, CDFIs were at the 

forefront of re-building the gulf coast region and providing support for small business owners who saw their livelihoods threatened. 

The CDFI Fund supports the growth of a stable community development financial 

institution industry that will make long-lasting and continual impacts across the 

Nation. 

THE PRESIDENT’S FISCAL YEAR 2012 BUDGET REQUEST

The CDFI Fund’s programs offer critically needed funding and resources that result in sustainable growth for the nationwide network of CDFIs. Due to the phenomenal track record of CDFIs leveraging the CDFI Fund’s awards with private investment, there is a clear benefit of a large local impact for a small Federal cost. 

In fact, CDFI Fund awardees leverage their awards with private investment by a 

factor of 13:1 on average, so it is possible that we may ultimately see more than 

$1 billion worth of investment stemming from the $104.8 million in CDFI program 

Financial and Technical Assistance awards that were announced in fiscal year 2010. 

The broad impact that the CDFI Fund’s awards make in low-income and distressed 

communities throughout the country is why the President’s 2012 budget request included funding for the CDFI Fund. 

The President’s 2012 budget request includes funding for Financial Assistance 

and Technical Assistance grants for the CDFI program. The stability inherent in a 

CDFI program Financial Assistance award provides the most patient capital available to CDFIs, which is one of the reasons why this program is in such demand. 

The continued oversubscription of this program guarantees that there will be a high 

demand for the full amount of funding requested in the President’s budget. In a 

similar vein, the funding proposed for Native Initiatives will support a growing economic development industry in Native communities that consistently request more 

funding than the CDFI Fund has available. 

Included in the CDFI program is grant funding for the Healthy Food Financing 

Initiative (HFFI). The HFFI is a multi-year, multi-agency effort to increase the 

availability of affordable, healthy foods in underserved urban and rural communities. Through HFFI, the CDFI Fund will provide competitively awarded grants to 

CDFIs that are improving access to healthy food in low-income and underserved 

communities, particularly through the development or equipping of grocery stores, 

farmers’ markets, and other healthy food retailers. 
138 

The CDFI Fund also requests administrative funding for fiscal year 2012. These 

funds will allow staff to meet the resource demands, and to address the significantly 

increased compliance monitoring requirements. The CDFI Fund anticipates increased information technology and research investment needs in order to continue 

serving and monitoring CDFIs effectively. 

The President’s 2012 budget request also supports the Bank on USA Initiative. 

Designed to address the troubling fact that more than 1 out of every 4 American 

households is unbanked or under-banked, the Bank on USA Initiative will promote 

access to affordable and appropriate financial services and basic consumer credit 

products for households without access to such products and services. Bank on USA 

will support community-based efforts to identify strategies for serving unbanked and 

under-banked populations, including the development and delivery of innovative 

products and services. 

The CDFI Fund has seen considerable support from this subcommittee in recent 

years for program development and appropriations. My deepest thanks go to its 

members and to Chairman Durbin for your unwavering confidence in the CDFI 

Fund and our programs. As the economy continues to recover, the CDFI Fund will 

continue to effectively administer its programs, so that the hardest-hit communities 

in the country have every opportunity for success and growth. 

Thank you and I look forward to continuing to work with you in the future. 

Senator DURBIN. Thank you very much. 

BUDGETING FOR DISASTERS

Administrator Mills, I visited a major insurance company in New 

York, and I’ve certainly visited a lot of them in Illinois. If they 

write property and casualty insurance, they focus more on weather 

than almost anything else. They make strategic decisions for their 

insurance companies as to whether they’re going to continue to 

write insurance in given parts of the country, based on their ideas 

of weather patterns. A lot of companies moved out of Florida, saying they think there are going to be more hurricanes, that they’re 

going to be increasingly expensive, and that, ‘‘We don’t want to run 

the risk.’’ 

So, what can we make of what we’re going through now, in terms 

of the Government’s role when it comes to disasters? I happen to 

think we’re seeing some changing weather patterns. That turns out 

to be a pretty hot political debate in Washington. But, insurance 

companies agree with me, in terms of what they’re doing, how 

they’re investing, and where they’re protecting homes and businesses. What should we be thinking, at the Federal level, as these 

changing weather patterns suggest that our vulnerability, our liability as a Government, may increase in the years to come? 

Ms. MILLS. Well, we stand, at the SBA, ready to help homeowners and small businesses in every State across the country. 

And, in fact, we have a state of readiness to go anywhere where 

we are needed. We have more than 2,000 ready reservists who are 

not paid—— 

Senator DURBIN. No, I understand that. What I’m asking you to 

join me in thinking about is a little bit of long-term thinking, which 

is hard for us in Government, even in business. But, I’m asking 

you—okay, look ahead—are you looking ahead? Do you see weather 

patterns and damage emerging that are just episodic—it’s going to 

come and go—or is this something that we need to be thinking 

about and planning for the future? 

Ms. MILLS. So, we look ahead. And, with National Oceanic and 

Atmospheric Association, we have briefings on what the assessments are for the coming seasons. I think it’s very difficult to say, 
139 

you know, for future years. But, certainly for the near-term hurricane seasons, we do take an assessment of how that is. 

That said, no—there was no prior indication that we were going 

to have the worst tornado season. And we have very often, in the 

past, had other extraordinary events. We’ve had flooding, we’ve had 

terrible hurricanes. And, as I said, we have established, after Hurricane Katrina, a much elevated level of readiness. And one of the 

things we did is put out this ready reserve so that if there is a 

pocket of geographic difficulty, as there is right now, we fly in resources to that geography—— 

Senator DURBIN. I guess—— 

Ms. MILLS [continuing]. And that allows us to be where others 

might not be. 

Senator DURBIN. I don’t question what we do. I’m just questioning about whether or not we have thought about the next year 

and the year after, and what it means, in terms of our thinking 

ahead, preparing resources for the eventuality. And maybe that’s 

just very difficult to predict. 

Ms. MILLS. Well, that’s a good question. 

COST OF SMALL BUSINESS LENDING

Senator DURBIN. Well, let me ask you this. When it comes to this 

35 percent increase in funds requested for the SBA—I think what 

you talked about here are actually defaults on loans, and you track 

that back to real estate values. And I don’t question that. I think 

everyone involved in the credit business in America knows that’s 

a major problem. One of the reasons businesses can’t borrow is that 

they can’t pledge the warehouse and the real estate as collateral, 

because there’s a question of the value. Now, that has not, at this 

point, bottomed out. We’ve been plumbing for the bottom here, on 

real estate values, and we’re still looking. And sadly, we have 

many people underwater in their home mortgages, and more foreclosures coming. So, is what we’re seeing this year in your budget 

request likely to be reflected in years to come as real estate values 

continue to be questionable and lead to more default? 

Ms. MILLS. As you mentioned, we’ve asked for $250 million in ad- ditional subsidy in this budget, which is an increase of $132 million 

from the prior year. And the reason for that is that we try to cover 

our subsidy costs with our fees, but our fees are capped. And we 

plan to come back, in future years, with a request to allow us the 

fee flexibility to cover subsidy costs. 

Senator DURBIN. Which means raising fees. 

Ms. MILLS. Yes, which means raising fees. That said, we are seeing the default rates that are causing the credit subsidy to go up. 

Those are from the 2005, 2006, and 2007 cohorts. So, those were 

the times when people borrowed against very inflated real estate 

costs. That piece is working its way through the system, and we 

are seeing it being more resolved—on the trend to being resolved 

rather than on the trend to increasing. 

BANK ON USA INITIATIVE

Senator DURBIN. I’m going to save, for the second round, some 

questions about counseling. But, Ms. Gambrell, I want to go to this 

Bank on USA Initiative, which means a lot to me. You cannot go 
140 

into the poorer sections of my State, in Springfield or Chicago, you 

name it, without seeing evidence of title loans, pawn shops, currency exchanges, the kind of predatory-lending practices and 

charges which really take advantage of people in low-income categories. It is almost a shock to know that 1 out of 4 people in 

America are unbanked; they have no access to banking services. 

And they really just survive on the street, paying exorbitant fees 

to cash checks and pay bills and the like. 

So, Bank on USA is trying to step in and make a difference. Can 

you give me any kind of numbers about what we have done, what 

it has cost, and what the need is? 

Ms. GAMBRELL. Thank you for the question, Chairman Durbin. 

And to your point, certainly we recognize that, when it comes to 

the unbanked and the underbanked in this country, we’re talking 

about, in many ways, an epidemic. We look at the impact that it’s 

having on low-income communities, minority communities, and others, and you see that—with alternative check-cashers and predatory lenders—that oftentimes these populations are being preyed 

upon, and there’s a devastating impact upon that community, and 

overall. 

The Bank on USA Initiative has multiple components to it. And 

what we want to do is really go beyond financial education. 

Senator DURBIN. What’s what I’m looking for is some kind of 

quantification—what we’re spending, what we serve, what the universe of need is. 

Ms. GAMBRELL. Okay. Thus far, with the Bank on USA Initiative, that program is not funded for fiscal year 2011. We are requesting funding and the President’s budget includes this request 

for 2012. So, thus far, we have not spent funding on the initiative 

itself. But, we certainly have worked with other partners, including 

bank regulatory agencies and others, to get a better handle of the 

program, to look at the research numbers, as well. 

Senator DURBIN. Can you point out any bank, or banks, or credit 

unions, that you think are making an extra effort to address this 

problem? 

Ms. GAMBRELL. Yes. And actually, I think, when you look at 

some of the banks in your State, as well as other parts of the country, you have community banks, you also have CDFIs that are not 

only community banks, but clearly focused on community development—that are focused on financial education programs, but also 

going beyond that. They’re looking for ways in which they can create affordable bank accounts and other types of affordable financial 

services and products for low-income communities. 

Senator DURBIN. I’m going to turn it over to my colleague, but 

I’d ask you to follow up on that. And if you could give me the 

names of some of these institutions—— 

Ms. GAMBRELL. Absolutely. 

Senator DURBIN [continuing]. I’d like to be in touch with them. 

[The information follows:] 

ACCION Chicago, 

Chicago, Illinois 

ACCION Texas, Inc., 

San Antonio, Texas 

ACCION USA, Inc., 

New York, New York 

African Development Center, 

Minneapolis, Minesota 
141 

Alternatives Federal Credit Union, 

Ithaca, New York 

Appalachian Community Enterprises, 

dba Access to Capital for 

Entrepreneurs, 

Cleveland, Georgia 

Aura Mortgage Advisors, 

Boston, Massachussetts 

Bethex Federal Credit Union, 

Bronx, New York 

Broadway Federal Bank, 

Los Angeles, California 

Columbus Housing Initiative, 

Columbus, Georgia 

Communicating Arts Credit Union, 

Detroit, Michigan 

Economic and Community Development 

Institute, 

Columbus, Ohio 

First Nations Oweesta, 

Rapid City, South Dakota 

Frontier Housing, Inc., 

Morehead, Kentucky 

Grow Iowa Foundation, Inc., 

Greenfield, Iowa 

Homewise, Inc., 

Santa Fe, New Mexico 

Hope Enterprise Corporation/Hope 

Federal Credit Union, 

Jackson, Mississippi 

Indianapolis Neighborhood Housing 

Partnership, Inc., 

Indianapolis, Indiana 

Kalamazoo Neighborhood Housing 

Services, Inc., 

Kalamazoo, Michigan 

Kentucky Highlands Investment 

Corporation, 

London, Kentucky 

La Fuerza Unida Community 

Development Corporation, 

Glen Cove, New York 

Latino Community Credit Union, 

Durham, North Carolina 

Latino Economic Development 

Corporation, 

Washington, District of Columbia 

Low Income Investment Fund, 

San Francisco, California 

Montana Community Development 

Corporation, 

Missoula, Montana 

Nebraska Enterprise Fund, 

Oakland, Nebraska 

Neighborhood Development Center, Inc., 

St. Paul, Minnesota 

Neighborhood Housing Services of Waco 

Inc., 

Waco, Texas 

New Hampshire Community Loan Fund 

Inc., 

Concord, New Hampshire 

New Mexico Community Development 

Loan Fund, 

Albuquerque, New Mexico 

Northeast Entrepreneur Fund, Inc., 

Virginia, Minnesota 

North Side Community Federal Credit 

Union, 

Chicago, Illinois 

Northwest Ohio Development Agency, 

Toledo, Ohio 

Northeast South Dakota Economic 

Corporation, 

Sisseton, South Dakota 

Opportunity Fund, 

San Jose, California 

Oregon Microenterprise Network, 

Portland, Oregon 

Pacific Community Ventures, Inc., 

San Francisco, California 

Premier Bancorp Inc., 

Wilmette, Illinois 

Rural Community Assistance 

Corporation, 

West Sacramento, California 

ROC USA Capital, 

Concord, New Hampshire 

Seedco Financial Services, 

New York, New York 

Self-Help Federal Credit Union, 

Durham, North Carolina 

St. Louis Community Credit Union, 

St. Louis, Missouri 

The Housing Assistance Council, 

Washington, District of Columbia 

The Housing Fund, Inc., 

Nashville, Tennessee 

TMC Development Working Solutions, 

San Francisco, California 

Valley Economic Development Center, 

Van Nuys, California 

Vermont Community Loan Fund, Inc., 

Montpelier, Vermont 

Western Massachusetts Enterprise Fund 

Inc., 

Holyoke, Massachusetts 

Wisconsin Women’s Business Initiative 

Corporation, 

Milwaukee, Wisconsin 

Wyoming Women’s Business Center, 

Laramie, Wyoming 

For more information please visit http://www.cdfifund.gov/docs/Financial%20 

Education%20and%20CDFIs%20062911.pdf 

Senator DURBIN. Senator Moran. 

Senator MORAN. Chairman, thank you. 
142 

CDFIs IN RURAL AMERICA

Ms. Gambrell, I want to bring the rural aspect to your attention—of what you do. My home State of Kansas has received only 

17 awards in the last 14 years, totaling $4.7 million. I think this 

comes from information that you provided. 

Ms. GAMBRELL. Correct. 

Senator MORAN. And, at this time, there’s only two certified 

CDFIs in Kansas, one in Topeka and one in Wichita. And my question is, What are you doing—what’s the agency doing to make certain that rural aspects of your mission are cared for, are provided 

for? 

Ms. GAMBRELL. Thank you, Senator Moran. The CDFI Fund is 

focused on both urban and rural populations in rural communities. 

And, in fact, when you look at the number of CDFIs that are serving rural markets, you’ll see that it’s somewhere close to 24 percent. In your State of Kansas, you’re right, about $4 million have 

been made through awards to organizations in Kansas. 

But, I would call your attention, as well, to the investments that 

happen in your State from those CDFIs that are not located in 

Kansas. And it’s close to about $10 million, I believe, where regional or other national organizations have looked at projects and 

initiatives within the State and said, ‘‘We’d like to make investments there.’’ 

Now, I’m not satisfied that there are such a low number of 

CDFIs in the State of Kansas. I’d like to remedy that. I think we 

can do better. And one of the things that we continue to do as an 

organization is to work with Members of Congress, but also look at 

ways in which we can address some of those gaps where there are 

not CDFIs in certain communities, and really look for ways in 

which we can build upon that. 

Senator MORAN. Is—are the—is the circumstance in Kansas—is 

it representative of rural America? 

Ms. GAMBRELL. No, not—— 

Senator MORAN. Or are we unique in what at least appears to 

me to be a low number of participants? 

Ms. GAMBRELL. You’re—you—Kansas may be a little unique. We 

certainly are seeing, in other rural communities, where there is a 

larger number of CDFIs. We’re also seeing where there are larger 

amounts of investment. Now, that’s not to say that in rural communities there are not challenges, as there are, I think, in all parts 

of the country. But, clearly, what we want to do is to build the capacity of those organizations and help reach out to the residents in 

those rural communities to identify, in a very targeted fashion, 

those initiatives and those projects that are actually going to help 

transform communities. 

Senator MORAN. I look forward to—assuming that you’re willing—to follow up with you and see if we can’t help in that regard. 

Ms. GAMBRELL. I look forward to that, Senator. Thank you. 

Senator MORAN. Thank you very much. 

BANKING REGULATIONS AND SMALL BUSINESS LENDING

Ms. Mills, a couple of questions. First of all, do you see a connection between what I believe, and what I hear from my bankers, is 
143 

an—my commercial bankers—is an increasing regulatory environment—the uncertainty of what’s next, kind of, in the financial regulatory world, that I think has a consequence upon ability to make 

loans? As a—if that’s true—if you agree with that, that there is an 

increasing regulatory environment upon financial institutions, is 

there a greater demand, then, for the SBA guarantee and loan programs to assist those banks to make those loans more likely? Is 

there an increasing demand, based upon the regulatory environment that financial institutions are facing? 

Ms. MILLS. Well, certainly—Senator, it certainly was the case in 

October 2008 when the credit markets froze, many, many banks 

faced increased scrutiny from their regulators, and that came down 

in a number of ways. As a result of that, many banks pulled back, 

and they were afraid to take risk. And they had to also put up 

greater capital reserves, and that, once again, did not allow them 

the latitude to back all the small businesses in their community. 

We saw—when we put out the ARRA grants and we increased 

our guarantees to 90 percent, we saw an enormous jump in our 

loan volumes. And, in fact, our loan volumes are back at 2008 levels. So, we have filled the gap that was created by many banks 

pulling back out of the market. 

We are seeing that ease, because we have pushed very hard on 

the regulators to be clear in their communications. And what bankers and small businesses don’t like is conflicting responses. So, we 

have made sure that the guidance that is given around small business lending has more and more clarity and that it opens up the 

opportunity for these banks, particularly community banks, to 

come back in the lending game, in addition to the way they’ve come 

back to the SBA. 

We’ve added 1,200 new community banks, who had not made an 

SBA loan since 2007, in ARRA and in the Small Business Jobs Act. 

Senator MORAN. Do you see that number flattening, continuing, 

or decreasing the number of those loans or the number of banks 

making those loans? 

Ms. MILLS. We see the number of banks—we have about 5,000 

of the 8,000 banks that are out there that now have some kind of 

SBA activity on their books. So, we have very strong penetration. 

What we are concerned about is that the recovery has gaps in it, 

and some of the gaps are in small loan sizes and in underserved 

markets. So, we have accelerated our efforts in those two areas 

with programs called ‘‘Small Loan Advantage’’ and ‘‘Community 

Advantage’’, which actually works, with CDFIs and other financial 

institutions, to reach places where we don’t have enough points of 

access now. 

SBA DISASTER LOANS

Senator MORAN. Tell me about the relationship between the SBA 

and the Federal Emergency Management Agency (FEMA). And do 

the requirements for SBA assistance following a disaster—do they 

mirror FEMA’s designation of a disaster area? 

Ms. MILLS. We work extremely closely with FEMA. And I have 

been traveling with Secretary Janet Napolitano and with the 

FEMA administrator, who has been just terrific. And we colocate, 

in almost every location, with FEMA, when we are jointly at disas-
144 

ters. There are occasions where it is not a Presidentially declared 

disaster, it is a State disaster, and the Governor—will be a smaller 

disaster—the Governor would ask me, at the SBA, to declare that 

disaster. And we would go in independently. And in that case, we 

would carry the burden of, you know, helping those homeowners 

and small businesses. But, in all of the ones you’re seeing right 

now, we are jointly active with FEMA. 

Senator MORAN. In the absence of a Presidential declaration, a 

Governor’s declaration of a disaster is sufficient for you to provide 

loan services to those affected by that disaster? 

Ms. MILLS. Correct. A certain number of houses and a certain 

number of businesses are damaged. The Governor will ask me to 

declare that area. And we also do the surrounding areas, because 

a business in one area might draw its business from surrounding 

counties. So, we include those, and then they become eligible for 

SBA, and we drop people into the location. 

Senator MORAN. You mentioned housing, and yet the word ‘‘businesses’’—it’s the SBA. What role do you play in assistance for housing following a disaster? 

Ms. MILLS. Because we are on the ground, and in order to avoid 

duplication of folks there, we also take on the responsibility for 

making home loans to people whose homes have been affected by 

the disaster. So, we make three kinds of loans: injury to homes, injury to businesses, and economic injury to businesses, where your 

roof is still fine, but your business is affected. And this was very 

true in the gulf area. So, we do all three. 

Senator MORAN. And the advantage to the person who suffers 

the disaster is the certainty of the availability of credit and a lower 

interest rate than would presumably be available elsewhere? 

Ms. MILLS. Correct. These are long-term, low-interest loans. And 

we tend to provide a broader set of insurance—broader set of financing than insurance will provide. So, insurance, when they get 

their insurance receipts, they repay the piece of the loan, but we 

will generally cover more. 

Senator MORAN. The recent Government Accountability Office report indicates that there is perhaps duplication between FEMA and 

SBA in programs. I assume that you’ve seen the report, read the 

report. Do you agree? Are there things that—are—that are duplicative in regard to your two agencies? 

Ms. MILLS. I have not actually seen that piece, but we will look 

into it. But, I do not believe—and I have been out in the field 

now—I’ve been to the flooding in Nashville; I’ve been to the tornados in Mississippi; I’ve been to the tornados in Alabama and to 

see, also, hurricane damage. And we operate side by side with 

FEMA. If someone does not qualify for an SBA loan, we refer them 

to FEMA, and they may qualify for FEMA grants. So, we actually 

are very highly aligned and not duplicative. 

LOAN SERVICING

Senator MORAN. My final question, Mr. Chairman, is I have 

heard, from Kansas bankers, some frustration with the level of 

services provided by the SBA. They attribute that to a consolidation of processing in—apparently, in a facility in Virginia. Is that 
145 

a complaint that you’re aware of? And is there something that’s 

being done? And are my bankers telling me the truth? 

Ms. MILLS. Senator Moran, I am aware of your Kansas bankers 

and their concerns. In—several years ago, we consolidated all of 

our loan approvals in centers around the country to ensure oversight and nonduplication. Before that, every single office had its 

own loan approval authority. And frankly, in order to save money 

and eliminate duplication and increase the quality of the credit decisions and the uniformity of the credit decisions, we centralized 

those functions some years ago. 

Many bankers and offices miss that ability to make a local decision. That said, we track very carefully the turnaround times. They 

are in days. And we are very, very good now at aiding customers 

and processing these loans across the country. And we are happy 

to talk further to your bankers to make sure they’re getting the 

service they need. 

Senator MORAN. I’ll do the same. I guess, my question is—I 

wanted to make certain that there is not an unnecessary delay in 

this consolidation. And I’ll be glad to have that conversation with 

you and my bankers, perhaps at the same time. 

Mr. Chairman, thank you very much. 

Senator DURBIN. Thanks a lot, Senator Moran. 

Senator Kirk. 

Senator KIRK. No questions. I’m waiting for the second panel. 

Senator DURBIN. Okay. If I can ask a follow-up question or two. 

SBA MICROLOANS

Administrator Mills, let’s talk about microloans for a second. The 

average microloan to small businesses is about $13,000. And I’m 

concerned, here, that your request for next year’s budget dramatically cuts, by 55 percent, the amount of money available to counsel 

microloan borrowers. Those would seem to be the small businesses 

most in need of counseling. They are looking for small loans. I 

would guess that many are startup businesses. And we know the 

failure rate of businesses in the early days. So, how can we justify 

cutting back on counseling when it comes to this level of lending? 

Ms. MILLS. The first thing I want to say is how much we appreciate your support of the Microloan Program. And, in fact, for next 

year, I want to emphasize that the actual amount of money going 

into the microloans is remaining at the current levels. We think 

this is a critical program. Our volumes are up, and we track it very 

carefully. And we have very, very good results from this program. 

We looked across this issue of duplication of counseling benefits, 

and one of the things that we found is that we think that counseling in the microloan arena is better done by our partners, and 

that our contribution really should be to create more loan product, 

more lending dollars, and make sure that the counseling, which we 

think is absolutely critical, is done by our lending partners who are 

on the ground. 

So, what we have done, in Community Advantage, is try to make 

a shift to doing what we do best and what we do the most efficiently, which is provide the dollars, and to work with them to 

make sure they take advantage, if not of the counseling and those 
146 

operations, the counseling in nearby women’s centers and small 

business development centers. 

Senator DURBIN. I was going to ask you, when you say ‘‘partners’’, to whom are you referring to? 

Ms. MILLS. Well, we have a set of counseling partners all across 

the country. And that involves 900 small business development 

centers, 110 women’s centers, and 12,000 Service Corps of Retired 

Executives (SCORE) members and 350 chapters. We want to focus 

on those, making sure that those programs are functioning, they’re 

cost effective, and that they’re not duplicative, and focus our attention, in the microloan arena, in the area where I think we really 

give a much better bang for the buck, which is providing loan capital. 

Senator DURBIN. So, let me ask you about that aspect. The 

Microloan program can accommodate up to 300 lenders. There are 

only 177 SBA-approved microloan lenders. In fact, in Illinois, 

there’s just one: ACCION Chicago. Many small businesses in the 

rest of Illinois don’t have easy access to SBA microloans. It appears 

to me, we need to increase the number of microlending partners, 

which mean that more small businesses will have access. What are 

we doing about that? 

Ms. MILLS. We actually have a program that was funded in the 

Jobs act. The request for additional lenders just went out for intermediaries. And we are looking to add to that. In addition, we implemented ‘‘Community Advantage,’’ where we take CDFIs and we 

allow them access to our 7(a) program. This is really powerful. And 

the community has been asking for this for many years, because 

the 7(a) program is a broad and powerful program with much stability. And we now allow CDFIs—many of whom are our microlending intermediaries, to come into that program. It gives them 

enormous capacity. 

CDFI HEALTHY FOODS

Senator DURBIN. Director Gambrell, one last question. And I 

thought Senator Moran was going to ask this. I’ll ask it instead. 

And it’s about the Healthy Foods program. In my hometown of 

East St. Louis, Illinois, it was literally a food desert for the 25,000 

or 30,000 people living there. There was just no place to shop. And, 

as a consequence, they were stuck with high prices, limited variety, 

and certainly not the healthiest alternatives, when it came to shopping. Then, along came Schnucks, a major grocery chain in St. 

Louis, opening up a store at 25th and State Street, my old neighborhood. And it transformed the town. They had a place to go. Everybody went shopping. 

Same thing happened in Chicago, on Roosevelt Road. There was 

a day when there were just no grocery stores in that area. And now 

there are a lot of them, which reflects a changing population and 

a commitment by these grocery chains. 

So, the First Lady and the President are pushing these healthy 

food alternatives, particularly for low-income families. And I know 

that they have an initiative that they’ve started. Can you tell me 

a little bit about what has been achieved to date and what you anticipate achieving in that regard? 
147 

Ms. GAMBRELL. Thank you, Senator. So, the Healthy Foods Financing Initiative is one that the Treasury Department is proud to 

be a partner with the Department of Health and Human Services, 

as well as the Department of Agriculture—three agencies that have 

committed to looking at ways in which to address issues in food 

deserts. 

For the Treasury’s part, the CDFI Fund is, again, a major partner. Thus far, we have sent out a healthy food supplemental questionnaire, as part of our competitive award round, under our Financial Assistance Awards, and we’ll be getting that back from 

those applicants that have said, ‘‘Yes, we want to be a part of this 

initiative, and this is how we can be’’—— 

Senator DURBIN. Who received the questionnaire? 

Ms. GAMBRELL. These are from the applicants that actually have 

already applied for Financial Assistance Awards and indicated that 

they had an interest in applying for a healthy food—— 

Senator DURBIN. Can you generally describe them? Are they 

farmers’ markets? Are they grocery chains? 

Ms. GAMBRELL. It really runs the gamut. And that, I think, is 

what we have certainly seen within the CDFI Fund industry, that 

we are looking for those CDFIs that are interested in bringing retail outlets, grocery stores, to those low-income communities. But, 

they are also involved in co-op markets, farm markets, distribution 

channels that actually transport food from local farmers into those 

food outlets, as well. So, it really does run the gamut. 

Senator DURBIN. Great. Thank you. Any other questions? 

Senator MORAN. Mr. Chairman, I apologize for not living up to 

your expectations. The food deserts are an important aspect—and 

again, I would—of something we’re trying to make certain it 

doesn’t continue. And there—I would just want to point out, once 

again, and—often thought of a food desert as an urban area. And 

we have those circumstances in Kansas. But, it’s also—very much 

a rural issue, as well. 

And I’d again just highlight my earlier emphasis on making certain that our programs are designed to reach all areas of the country. And nutrition—in my view, one of the best things we can do 

for improving the healthcare of Americans, and thereby saving 

healthcare costs, is related—are nutrition, diet, exercise, and just 

this general wellness. 

And so, these are important issues. And I didn’t want Chairman 

Durbin to be disappointed in my failure to express my views. But, 

more importantly, I want to make sure that we follow up and work 

together to figure out how we address this issue that’s apparently 

particularly Kansas oriented. 

And you maybe have been telling me that there are CDFIs in 

Kansas City, Missouri, who are providing services in Kansas, as I 

thought about your answer about other States. And that makes 

some sense to me—our significant urban area along the Missouri 

border. So, look forward to having that dialogue. 

Thank you. 

Ms. GAMBRELL. As do I, Senator. Thank you. 

Senator DURBIN. Senator Moran, thank you very much. 
148 

And as Senator Kirk and I can tell you, there are parts of Illinois, downstate, that look an awful lot like Kansas. So, we have 

communal interest in a lot of these issues. 

Thanks, to this panel. We appreciate your testimony. And we’ll 

be back in touch with some other follow-up questions as we prepare 

the budget for the next year. 

I’m going to welcome our second panel to the table and introduce 

them as they come up. Our first witness is Warner Cruz. He secured a loan, under an SBA program, to expand his business during the worst part of the recession. Mr. Cruz is a graduate of 

Augustana College, in Rock Island—which Senator Kirk just visited—and has a degree in international business administration 

and finance, minoring in Japanese. He worked for 3 years in 

Japan. And even while working in Japan, he stayed integrated in 

the company that his father had started. He’s now the president 

of J.C. Restoration, a small business that restores commercial and 

residential properties that suffered loss from fire, water, or storm 

damage. 

Next, we welcome Calvin Holmes, president of the Chicago Community Loan Fund, a Chicago CDFI. Mr. Holmes’ community development career spans 25 years—he looks too young for that, but 

that’s what it says—including work as a budget planner for rapid 

transit projects and property manager of a 200-unit assisted-living 

housing portfolio. Under his leadership, CCLFs lending has averaged nearly $1 billion in additional public and private sector capital in more than 55 lower wealth Chicagoland communities. He 

holds a master’s degree in urban regional planning from Cornell 

and a BA in African-American urban studies from Northwestern. 

Finally, we welcome Ray Moncrief. He’s the Executive Vice President and COO of the Kentucky Highlands Investment Corporation. 

He manages investing activities, including analyzing new investments. Mr. Moncrief has traveled nationally and internationally, 

speaking about the use of equity instruments as an economic development strategy. He sits on the board of several financial institutions and on the advisory boards for government agencies, to support community and small business development and venture capital. He’s a graduate of Louisiana Tech. 

We’re going to start with Mr. Cruz for an opening statement, 

allow that to the other two witnesses, and ask a few questions. 

Please be my guest. 

STATEMENT OF WARNER CRUZ, ILLINOIS SMALL BUSINESS PERSON 

OF THE YEAR, 2010, PRESIDENT, J.C. RESTORATION, ROLLING 

MEADOWS, ILLINOIS 

Mr. CRUZ. Good morning, Senator Durbin, Senator Moran, Senator Kirk, ladies and gentlemen. My name is Warner Cruz, and I 

am 38 years old. I am a husband, a father, and a proud owner of 

a successful family business that is overwhelmed with blessings. 

I’m here before this panel to testify about the tremendous impact 

the SBA’s 504 loan program had on my firm. In fact, I am confident that if it were not for the 504 blessing, I would not be here 

today. 

The name of my business is J.C. Restoration (JCR), located in 

the suburbs of Chicago. The ‘‘J.C.’’ stands for Jose Cruz, my father, 

who immigrated here from Guatemala in the early 1970s. With no 
149 

money, formal education, or the ability to speak English, he eventually incorporated the business in 1982. Today, JCR is an industry 

leader in the disaster restoration field. Our core business is to restore commercial and residential properties that have suffered loss 

from fire, water, or storm damage across the United States. 

In 2002, I purchased the business from Mom and Dad and became 100 percent owner. After 7 solid years of 25 to 35 percent average growth, I felt it was time for JCR to really expand. Thanks 

to the SBA 504, I was able to obtain a loan and more out—move 

our business from a 13,000 square foot warehouse to our current 

102,000 square foot, state-of-the-art facility. We invested more than 

$3 million on seven acres in transforming this once abandoned eyesore that sat dormant on seven—beautiful acres of land off of a 

major expressway. Our new building gleamed with a completely 

new energy efficient roof, light fixtures, and mechanicals, all designed with green in mind. Life was good. 

But, I haven’t told you about the blessing yet. By the end of the 

third quarter in 2009, JCR sales plummeted 9 months in a row, 

due to the economic recession. The shock of moving into our new 

facility with great hopes of being able to handle the overabundance 

of work from the previous years was quite unnerving. Our sales decreased 29.4 percent, and we had to go into our own disaster response mode. The hardest thing I had to do was lay off 19 of our 

employees. 

The true blessing was this: if it weren’t for the SBA 504 that sta- bilized my $2 million loan at a fixed rate of 4.4 percent over 20 

years, I don’t know what I would have done. The program preserved my working capital to where it was needed the most. I had 

great ease of mind knowing a conventional banker wasn’t going to 

call me to raise their rates or devalue my property. The SBA 504 

worked beautifully in the way the program was designed to protect 

me from inflationary pressures that I had never anticipated would 

happen. 

My testimony today is out of gratitude to the SBA. Not only did 

my business survive, today JCR is on pace to exceed sales of $20 

million, after having our best year, last year, at $13.8 million. We 

currently employ more than 150 full-time and part-time jobs. The 

SBA 504 loan program helped save my business. 

But, more powerful is, in 2010, JCR kept 67 businesses in business, including two hospitals and a major manufacturing plant that 

employs more than 300 workers, after they suffered a major disaster. The SBA should be proud in knowing they indirectly assisted 

in this creation and retention of hundreds of American jobs by 

blessing JCR with the 504 loan program. 

Thank you. 

Senator DURBIN. What a great story. I was just telling Senator 

Moran, we knew a little bit about your background, and it’s just 

wonderful that you can come and tell us that story. 

Calvin Holmes, your turn. 

STATEMENT OF CALVIN HOLMES, PRESIDENT, CHICAGO COMMUNITY 

LOAN FUND, CHICAGO, ILLINOIS 

Mr. HOLMES. Okay. Thank you, Sir. Good morning Chairman 

Durbin, Ranking Member Moran, and Senator Kirk. And thank 
150 

you, Chairman Durbin, for showcasing two of our recent investments in low-income communities in Chicago. 

It’s an honor to speak with you today about the critical and effective role that CDFIs play in promoting economic growth. Thank 

you for the opportunity and for your long-term support of the CDFI 

Fund, which is the critical permanent capital financier to CDFIs. 

I know that you’ve already heard from Director Gambrell, but I 

also want to thank her, because, in my humble opinion, she is the 

venture capitalist to the poor. 

I run the Chicago Community Loan Fund (CCLF), a private, nonprofit financial institution certified by the CDFI Fund and a member of the Opportunity Finance Network. Since 1991, CCLF has 

been investing in nonprofit and for profit community developers, 

providing flexible financing and—for economic initiatives, and filling gaps in the marketplace as they arise. At $28 million in capital, we are clearly dwarfed by regulated financial institutions. However, we have lent our dollars over and 

over again to help our borrowers attract more than $900 million in 

additional capital for their projects to make 222 loans, supporting 

6,400 units of housing, 1,300 jobs, and 2.1 million square feet of 

commercial and facility space. Historically, we have leveraged $20 

for every $1 we invest. Our cumulative charge-off rate, over all this 

time, remains below 1 percent. Without the CDFI Fund program 

investments, little of this would be possible. 

Given high unemployment rates in underserved communities, we 

are especially proud of two recent projects. One of them is on the 

board. Last July, one of our borrowers opened a $150 million Wilson Yard project that included 178 units of affordable housing, a 

Healthy Foods, new Target and Aldi stores, and additional retail 

space for more goods and services. Target hired 300 workers, 80 

percent of whom live within a 2-mile radius of the store. The 

CCLF’s $1 million predevelopment loan helped the project move 

forward. 

The CCLF is very involved in helping stabilize communities devastated by foreclosures, providing loans to small developers to 

rehab abandoned homes through the city of Chicago’s Neighborhood Stabilization Program (NSP). Our loans are not only stabilizing housing, but keeping small firms afloat during the housing 

market downturn. We estimate that more than 50 percent of the 

23 developers participating in the NSP might be out of business 

without the program, and 458 tradesmen and women have been 

kept employed. 

Simply, a lender like us that makes a loan before all the takeout 

financing is in place, and to smaller organizations, must have high 

capital ratios. Without question, the CDFI Funds awards are the 

most important way we do so. Every $1 we have received from the 

CDFI Fund at a critical juncture has allowed us to recruit at least 

$3 more in private capital. For these reasons, it is vitally important 

that the $227 million in the President’s fiscal 2012 budget requested for the CDFI Fund is appropriated. We know that there 

are many tough decisions to make, but supporting distressed communities in this way is critical. 

I look forward to continuing to work with you, and thank you 

again for your support. 
151 

Senator DURBIN. Thanks, Mr. Holmes. 

Mr. Moncrief, it’s good to have you here. Your perspective from 

Kentucky is a little different that the big city perspective, so we’re 

anxious to hear your testimony. 

STATEMENT OF RAY MONCRIEF, EXECUTIVE VICE PRESIDENT AND 

CHIEF OPERATING OFFICER, KENTUCKY HIGHLANDS INVESTMENT CORPORATION, LONDON, KENTUCKY 

Mr. MONCRIEF. Thank you, Chairman Durbin, Ranking Member 

Moran, Senator Kirk. It’s a pleasure being here. 

It’s an honor to sit before you today to tell you about what we 

do, connecting the SBA and the CDFI Fund. I hope that, when I 

leave today, that my testimony shows that they don’t compete, but 

they complement one another. And they’re very vital, specifically in 

the area that I work, Senator Moran. I live in rural eastern Kentucky. Your comments on the radio the other day resonated with 

me where I live. 

I work for an organization that was just 43 years old who stimulates the local economy through the creation of businesses that hire 

people through employment. They accomplish this through 

financings in equity capitals, through subordinated debt, difficult 

financings to do. We do this with small businesses. And by ‘‘small 

businesses,’’ let me explain. The SBA defines a ‘‘small business’’ as 

any business, 500 or fewer. The average size of a small business 

that I deal with are 14 employees, excluding government employees, schools, et cetera. So, I deal with very small businesses that 

require significant counseling. 

In addition to that, the banking crisis has been dramatic in our 

area. One example that I’d like to leave with you is that we have 

a manufacturer that hires 200 people whose bank was acquired by 

a larger regional. They were on the edge. They had not been profitable for 2 years. And they were told to seek their financing elsewhere. Because of where we are, we were able to put a financing 

together with another local community bank and provide a $1.5 

million working capital line of credit for that facility to maintain 

those 200 jobs. 

The Microloan program is very important to us. We’ve—we have 

borrowed more than $3.8 million since its inception in 1992. We’ve 

invested in more than 300 businesses. Last year alone, we did 36 

financings for $850,000. 

Administrator Mills spoke about the Community Advantage Program. We are one—we were the very first Community Advantage 

lender in the United States, connecting the dots between the CDFI 

Fund and the SBA. 

The product called the SBA loan—Administrator Mills said that 

many of the banks in our area don’t use that program. They don’t, 

because of the rural nature, the hard-to-get-to, the size of the community banks, et cetera. So, we, as a CDFI Fund that’s using the 

Community Advantage Program—it’s vital for us to be able to offer 

the guaranteed loans that we do. The CDFI Fund is absolutely 

paramount, because we have to have the money to make the guaranteed loans. And the CDFI Fund and its FA awards allow us to 

capitalize our balance sheet and use those funds to indeed make 

those guaranteed loans under the 7(a) program. 
152 

So, it is with that I’d urge this subcommittee to keep the SBA 

Microloan Program alive, thriving, as well as the CDFI Fund, at 

its current level of funding. Both are extraordinarily important to 

what we do, where we do it. 

Thank you. 

Senator DURBIN. Thanks, Mr. Moncrief. 

FORCLOSURE CRISIS AND DEVELOPMENT OPPORTUNITIES

I’m going to, in the second round, address the other two witnesses. But, I’m just going to ask Mr. Holmes a question now so 

the other Senators have their chance. 

I’ve seen this movie before. I grew up in East St. Louis, Illinois. 

It was a town of 80,000 people, now in the range of 25,000. In the 

early 1960s, white flight meant that people just left their homes behind. And as they did, the homes were abandoned, burned out, gutted, eventually bulldozed, and now it looks like a victim of some 

aerial bomb attack; the city just has so many vacant lots. Same 

thing is going on in Detroit. It’s going on in a lot of places. I fear 

what’s going to happen in the Chicagoland area, because I can see 

the same story playing out in areas like Marquette Park, where 

there are high foreclosure rates in otherwise long-time stable 

neighborhoods with great home stock—you know, these brick 

homes that we valued in Chicago became the trend after the Chicago fire. 

But, I’m asking you—because you talked about something that 

really catches my attention, of trying to help people finance the reconstruction or reoccupation of these homes. One of the obstacles 

I’ve seen in this is trying to find a bank that will cooperate. It 

seems that many banks are hell bent for foreclosure. And I don’t 

understand why, because their asset is going to disintegrate to zero 

value if they go through foreclosure and don’t have quick sale or 

reoccupation of the property. So, tell me—put this in perspective— 

tell me how it works, where you’ve been able to make it work to 

go into these foreclosure scenes, and what we might do to make 

sure that there’s a better opportunity for that. 

Mr. HOLMES. Got to remember to turn the talk button on. 

Senator Durbin, let me first say, it’s really heartwarming to me 

to hear you talk about my hometown, as well. You may recall that 

I’m also a native of East St. Louis and my mother still lives there, 

at 88th and State Street. And, as you talked about the Schnook 

store that came online at 25th and State, I, too, celebrated not having the entire town be a food desert. So, it’s always good to see, 

as they say in our neighborhood, a ‘‘homeboy’’. 

So, the foreclosure crisis, it is a pretty daunting experience, 

right? We are working with one- and two-person general contracting shops, many of them who would have been out of business 

today if they were not getting construction bridge loans for us in 

order to rehab these homes and to keep their crews alive. That’s 

one of the things I very much wanted to do. 

One of the reasons that we are able to operate in this environment—and you so astutely noted, earlier, that the real estate values are continuing to decline in a number of these neighborhoods. 

So, when we look at loan-to-value, it’s hard to get your comfort 

there. What we have, through the NSP, is a guarantee from the 
153 

city of Chicago, is that they will work with us to make sure that, 

one way or the other, we will get to the finish line, so that, as a 

lender, if—we can make sure that the construction process is handled well and goes to plan, and get that building rehabilitated. If 

for some reason the absorption is not there, there isn’t a home 

buyer on the other end immediately, the city assures us that they 

will work with us to make sure that we don’t lose our shirts. So, 

that’s one of the ways in which we work. 

Increasingly, however, in partnership with the city of Chicago 

and its administrator, through the MSP program, Mercy Portfolio 

Services, we are having a series of conversations with local banks, 

both regional and national, to bring them to the table so that they 

can provide end mortgages so that, at the end of our construction 

loan, there is a home buyer. And we’re also working with them on 

other commercial mortgage products so that they can help us accelerate the rate at which we rehabilitate these homes in our devastated communities. 

Senator DURBIN. My last question goes right to that point. The 

problem I’ve run into in the foreclosure situation is figuring out 

who makes the decision. You have a servicing bank, you have many 

lenders, you have all kinds of loan instruments and derivatives. It’s 

hard to get anyone who can say yes or no. How do you break 

through all that to finally find someone who can make a critical decision about the future of that property—to get the bank to answer 

the phone and cooperate? 

Mr. HOLMES. Well, Senator Durbin, it’s a complicated process, as 

you well know. So, one of the initiatives that we’re involved in, in 

Chicago, to be able to help the banks understand that it’s in their 

best interest to participate with the community, is something called 

the Regional Home Ownership Preservation initiative, where we 

have a number of stakeholders, both at the public sector level, the 

private sector level, and the community organizations, who, 

through this collaboration, can get the attention of the decisionmakers and get them to make decisions. And there are some successes, where we have a number of banks who are offering up portions of their real-estate-owned portfolio, so that the community 

can take possession, or a nonprofit, or a joint venture between a 

for-profit and nonprofit, and rehabilitate those homes. So, through 

this collaborative nature, with the public sector at the table as a 

convener, we’re starting to make some headway. 

Senator DURBIN. Thanks. 

Senator Moran. 

Senator MORAN. Chairman, thank you. 

PUBLIC-PRIVATE PARTNERSHIPS IN CDFI PROJECTS

Mr. Holmes, the Target photograph and the story that you told, 

I assume that Target, or any other company, would not have made 

that decision without some support. And I just want you to describe for me what it was that was—you were able to do that induced Target to believe this is a profitable location. 

Mr. HOLMES. Well, the simplest way to think about our role in 

a $150 million transaction is, we help our borrower, who’s the real 

estate developer, acquire all of the property, take care of all the encumbrances that make it really messy for a large retailer to even 
154 

think about a site like that. So, by putting $1 million on the table 

earlier on in the deal—and there were other CDFIs, thankfully, 

that were involved in the process, as well; this is a really big 

project, so there were some other layers of even predevelopment financing—but, we all worked together to take care of that site, so 

that Target knows their developer—— 

Senator MORAN. You created the—excuse me for interrupting, 

but you created the environment by which Target now believes it 

can succeed, as compared to providing any kind of direct benefit to 

Target. 

Mr. HOLMES. Exactly. But, a real easy way to think about it is 

that Target is not going to spend its R&D time, its staff focus time, 

its marketing time, its business planning time if the developer that 

is trying to recruit Target does not have site control. If Target 

doesn’t believe that a developer can pull off the project, then 

they’re not going to plan to open a store there. So, our money helps 

the developer go to Target and say, ‘‘Don’t worry about this. The 

city’s behind us. We’ve got our financing lined up. We’ve got site 

control. We’ve taken care of all the encumbrances. We’ve still got 

other layers of financing to put in place, but you can rest assured 

that this project will move forward.’’ 

GROCERY STORES AND COMMUNITY DEVELOPMENT

Senator MORAN. Mr. Moncrief, you also mentioned grocery stores. 

For much of the time I’ve been in the Congress, in the House, I 

have told my colleagues that—it goes back to the food desert conversation we had earlier—that, particularly where I came from as 

a Member of the House of Representatives, economic development 

can be whether or not there’s a grocery store in town. It’s what 

many people would consider very much the basics. 

I recall, after the tornado, in Greensburg, of now about 5 years 

ago. Greensburg was the town hit by the F5 tornado—destroyed 

the entire town. One of the first conversations that people had with 

me and others—community leaders—was, Is Dillon’s going to rebuild the grocery store? It was a determining factor as to whether 

anybody was going to live there. And I wonder if you have the experiences that would help keep Kansans and others figure out how 

we have those basic services in communities. How do we make sure 

the grocery store is there? 

Mr. MONCRIEF. Thank you, Senator Moran. Indeed, we have invested in grocery stores in those food deserts, where people don’t 

have access to healthy foods. 

First of all, grocery—the grocery business, if it’s nonchain, is very 

entrepreneurial. It requires all the products that we’re talking 

about, things like SBA microloans, things like some of the money 

that we use from the CDFI Fund, and others, including venture 

capital. 

We recently did a grocery store in a rural part of Congressman 

Roger’s district, where people had to drive 25 miles to buy any type 

of grocery. We worked with that business to help it grow. And ultimately, it grew to such a size that it was actually sold out to a 

larger chain, which really had an impetus in that particular area, 

so that they brought all of the multiline food products to that particular area. 
155 

The problem that we faced in the interior of Appalachia truly is 

one of healthy foods. There are people that don’t have access to the 

basic amenities in the mountains of Appalachia, much less groceries. They have to drive miles and miles and miles. And according to the Appalachian Region Commission, many times Sunday 

lunch is a bag of Frito Lay potato chips. So, it is a problem that 

we’re facing constantly, working with entrepreneurs to help them 

organize and create grocery products in those food deserts. 

IMPACT OF REGULATIONS ON COMMUNITY BANKS

Senator MORAN. Mr. Moncrief, one of the other things that you 

mentioned that particularly caught my attention was about the 

ability for a local bank to provide lending to a near-failing company, I guess, or a company that was struggling. And it’s one of 

the concerns I have that I’ve tried to highlight, both here in this 

subcommittee, but as a member of the Senate Banking Committee. 

In my view, the regulatory burden that community banks are facing, increasing the cost of being in business, which generally means 

that either a marginal bank no longer continues to exist in a community or it becomes a branch of some larger banking organization. 

And I was hoping that you—you don’t have to confirm my belief 

that the regulatory environment is the cause of this, but I would 

love to have you confirm that there are dramatic consequences to 

the ability of our communities to survive, to prosper, to grow in the 

absence of that hometown financial institution. And if we can alleviate that trend, or reduce the likelihood—I suppose I’m willing 

to see small banks, small financial institutions go out of business 

if that’s the nature of the market forces, there’s no option, but for 

them to go out of business because Government is putting such a 

regulatory burden upon them that the cost of being in business is 

so high that they have no choice but to spread those costs among 

a much larger financial institution—my question to you is, Can you 

give me the evidence, can you support my premise, that there is 

a bad consequence that occurs in the absence of hometown financial institutions? 

Mr. MONCRIEF. Senator Moran, I would have traveled to Washington, DC, just to answer this very question. It’s a very important 

question. Bank consolidation is the worst threat to rural economic 

development that exists, so much so that we find banks that we’ve 

worked with, in the years that I’ve been doing this, that we no 

longer work with, because they’ve been acquired by a larger regional that’s been consolidated, and the corporate headquarters are 

in a distant city, which means that those banks that aren’t bankable, under—according to credit scoring sorts of things, don’t receive the financing that they need. 

There literally are trillions of dollars pent up in the banking institutions today that cannot be lent because of the regulatory environment that we in, at present. There are banks that I go to every 

day—a typical example is, today, I was sharing that I am in a 

problem with a small business, that’s paying $5,000 a month for 

one of its loans, that breached a covenant and is in foreclosure procedures today. It will put about 35 people on the street if we don’t 

avert that, working in the special assets section of this bank, because of regulations that says that this bank had a—or, this com-
156 

pany had a loss, it doesn’t have quite the cash liquidity, although 

it is servicing its debt, that bank—that company likely will be sold, 

likely would go out of business, if we don’t avert the foreclosure 

procedure by that bank. 

Regulation is gruesome, is brutal and burdensome, and it is the 

regulators that decide who to preserve on the balance sheet and 

take income for those loans. 

Senator MORAN. I’m glad you made the trip to Washington, DC. 

And thank you for confirming both aspects—— 

Mr. MONCRIEF. Absolutely. 

Senator MORAN [continuing]. Of my premise. 

Mr. Cruz, thank you for your testimony. The key to our country’s 

future of success is the ability of entrepreneurs and small businessmen and women to succeed. In the process of pursuing a profit or 

pursuing the creation of wealth, you put people to work. And anytime we can tell the story and see the role model, the success that 

you provide today, it’s a great story for America. And it ought to 

be goal—and I’m certain that it is—the goal of every Member of the 

Senate to see that the American Dream can be fulfilled, as you and 

your family are doing so. Thank you for the inspiration. 

Thank you, Mr. Chairman. 

Senator DURBIN. Senator Kirk. 

Senator KIRK. Well, Mr. Cruz, I also want to congratulate you as 

an ‘‘Augie’’. I just got back from Augustine, and I’m—yesterday— 

and President Bahls would be pretty proud of you and what you 

did. I just moved into, I think, a 600 square foot apartment. So, to 

think about a 100,000 square foot facility, that is more space than 

I can possibly imagine, given what I just did. 

And, Calvin, you’re a fellow Cornellian, and I’m very proud of 

you, as well, and what you’ve been able to do here. I don’t know 

if you ever worked with Karen Muchin, very much in the CDFI 

Fund world—I’ve known her for 25 years, and very impressed with 

this—what you’ve been able to—done. 

SBA LOAN PROCESSING

To Mr. Cruz, I should say, gracias, or more—the language you’re 

probably more familiar with, arigato, in Japanese. Let me just ask 

you about what else we could do for you. One of the big reasons 

why I ran for the Senate was to enact the Small Business Bill of 

Rights—10 new policies to help out small business. One of the 

things I’ve been worried about is how burdened you are with State 

and Federal paperwork. And a role for the SBA also to ideally take 

advantage of 21st century technology and have one Web site, where 

all of your Federal bureaucracy is taken care of—IRS, OSHA, and 

EPA. What struck me is how many times you have to write your 

own name on all of these Federal forms—and address and TIN 

number and everything else. And it should be the mission of the 

SBA to farm all this data out to the bureaucracy, with a goal of 

200 hours per year, maximum, per entrepreneur, to fill out government paperwork. But, can you describe—how much time are you 

spending now, and—— 

Mr. CRUZ. In terms of—thank you, Senator Kirk—in terms of the 

question on the SBA loan, we were very fortunate, where we had 

a local SCORE office that was very, very helpful, and we used a 
157 

company called Growth Corp, who pretty much guided us through 

the process. And surprisingly, it was very seamless. And it wasn’t 

until after we received the loan and we actually did the construction that I realized, speaking with other people that had tried to 

obtain an SBA loan, the amount of work and paperwork that they 

went through, that some of them even gave up. So, I’m—I was very 

fortunate, where I didn’t have that much trouble. And meeting 

with Mrs. Mills last year, and thanking her for that, she had said 

that’s one of the initiatives that the SBA is working on is, to try 

to make it easier for businesses, paperworkwise. 

ATTRACTING INVESTMENT BY MAJOR RETAILERS

Senator KIRK. Right. Calvin, You’ve got a big-box store, here. 

And so, I am totally impressed with what you’ve done, and think 

you should keep on going. But, there are a lot of people in Chicago 

that say, ‘‘A Walmart shouldn’t come into the community.’’ What 

do you think of this view that some big boxes are okay and some 

big boxes—and does that hurt your ability to attract new investment and exactly what you’ve done? 

Mr. HOLMES. So, I knew one of you would give me a very tough 

question. And I’m not sure I’m in a position to speak to whether 

or not we should have unions, or not. I can tell you that a number 

of our constituents really do believe in livable wages. And the 

union question is a—— 

Senator KIRK. So, you shouldn’t—— 

Mr. HOLMES [continuing]. Big part of that. 

Senator KIRK. You should not be allowed to work with a 

Walmart, is what you’re saying. 

Mr. HOLMES. What we do is not finance the big national retailers, per se. We actually finance the developer who’s going to bring 

the brick and mortar envelope to the site for that retailer. 

Senator KIRK. Would this have been a bad idea, if Walmart had 

come? 

Mr. HOLMES. We think that it’s important to have a wide variety 

of high-quality goods and services in working class communities, 

Senator Kirk. 

Senator KIRK. Right. 

Mr. HOLMES. And we understand that there is a range of national and regional and chainlets that can do that. We are in a 

community of people who are incredibly concerned about making 

sure that there are employers who will pay a fair and decent wage 

to working class families. Some of the retailers are really questionable in that respect. So, there are lots of things that we’re trying 

to get our arms around. At the end of the day, we want a healthy 

mix of retailers in working class communities. 

Senator KIRK. One of the other arguments against big boxes is, 

all the little retailers on all the other streets who would oppose a 

Target coming in. How did you handle that? 

Mr. HOLMES. I can tell you, I don’t have the exact quote, but 

there is a small business owner who owned a salon just a couple 

of blocks to the north of the Target store, near the Wilson ‘‘L’’ stop, 

and her last name actually happens to be the same as mine. And 

she said, when we were at the grand opening with Mayor Daley, 

that she welcomed the Walmart sorry, not the Walmart—the Tar-
158 

get—because she saw it as an economic engine that was going to 

increase the foot traffic in the general vicinity. Therefore, she 

thought she would benefit from having the national retailer so 

close to her store. 

Senator KIRK. I think that’s exactly the point. I think the big 

boxes can totally transform a neighborhood. So, I think what you’ve 

done is exactly right. And I’m hoping that we don’t have ‘‘politically 

correct’’ tests. My hope is that your job is economic development, 

and we keep it on that, without the SEIU or other unions coming 

in, saying that you cannot work with a certain party who would 

bring another $150 million into another neighborhood. 

Thank you, Mr. Chairman. 

FAMILY-OWNED SMALL BUSINESS AND SBA LENDING

Senator DURBIN. Mr. Cruz, if I’m not mistaken, I met your mother and father at a luncheon in Chicago. And I just want to make 

sure that, although your father receives a great deal of credit, that 

your mom is also acknowledged. 

If you’d like to say a word about her role in the development of 

your business. 

Mr. CRUZ. Thank you, Senator Durbin. My parents wanted to 

come here so badly, to be part of this, to witness this. My mother 

and father did, together, start this business. And as a child—I have 

three sisters, and I remember—there was a time where they were 

in their—in our small home with a small garage, and both of them 

were cleaning furniture after smoke damage—thinking that these 

two people are my heroes. And I will share your compliments with 

them. Thank you for asking. 

Senator DURBIN. If I remember correctly, your dad came to this 

country with limited English skills and went to work at this business and, when the owner finally decided to give it up, offered it 

to your father. And that’s what launched where you’re sitting 

today. 

Mr. CRUZ. That’s correct. 

Senator DURBIN. It’s a great, great story. How did you find out 

about this SBA program? 

Mr. CRUZ. Well, my conventional banker had mentioned the process to me. And 4 years previous, probably 5 years previous, we had 

started to fill out an application to see if we would be able to obtain 

an SBA loan. And, like I had said to Senator Kirk, the paperwork 

was unbelievable. So, I went to a local SCORE office, and they gave 

me a bunch of literature, and read it, and then found—— 

Senator DURBIN. For the record, tell us what SCORE is. I know, 

and I think most of the members do. But, let’s put it in the record. 

Mr. CRUZ. SCORE are local offices that share information about 

helping your businesses grow, and specifically the SBA and the different programs—— 

Senator DURBIN. These are retired 

Mr. CRUZ [continuing]. That they—— 

Senator DURBIN [continuing]. Executives—— 

Mr. CRUZ. Correct. 

Senator DURBIN [continuing]. That give you—— 

Mr. CRUZ. Correct. Ex-business owners. So, it was very great, 

talking with them, because they understood our challenges and the 
159 

1 Jobs maintained are jobs at the business at the time the loan or investment is made. Jobs 

created are new jobs created after the loan or investment is made. Total jobs are computed as 

FTEs based on at least a 25-hour work week. Part-time employees are combined to FTEs. 2Source of job estimates includes new hires as a result of the financing; estimates based on 

State or local wage data; estimates based on economic impact modeling systems (i.e., IMPLAN, 

RIMSII, or REMI); real estate developer estimates about jobs created by type of business and 

square-footage built; or other sources. 

time that we didn’t have to fill out all the paperwork, and what we 

needed to do to make it happen. They introduced us to an office 

that specialized in SBA loans. And again, it was seamless, this 

what we were able to do is amazing. And I’m extremely grateful 

to the program. 

ADDITIONAL COMMITTEE QUESTIONS

Senator DURBIN. Great. Thank you very much. 

I want to thank the entire panel. It’s terrific to hear, firsthand, 

your experience with these Federal agencies, and demystify some 

of this regulatory gobbledygook, and put it into real life terms. 

Thank you very much for that. 

And we may have some follow-up questions. We’ll get back in 

touch with you. 

[The following questions were not asked at the hearing, but were 

submitted to the Department for response subsequent to the hearing:] 

QUESTIONS SUBMITTED TO DONNA J. GAMBRELL

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

Question. Treasury’s fiscal year 2010 Performance and Accountability Report 

states that the Community Development Financial Institutions (CDFI) Fund awardees created or maintained more than 80,000 jobs through loans and investments in 

fiscal year 2010 compared to the 2008 level of 29,500. As Federal CDFI funding has 

grown, the program has been able to maintain and actually improve on job creation 

per Federal dollar spent. Between fiscal year 2008 and fiscal year 2010, funding increased by 250 percent, but job creation increased by 275 percent. 

Does the CDFI Fund rely on CDFI self-reporting to determine job creation estimates? Does the CDFI Fund audit awardees after the fact to verify this data and 

track program outcomes? How else does the CDFI Fund hold awardees accountable 

after awards are made? 

Answer. Each CDFI program awardee is required to sign an assistance agreement 

prior to receiving an award, which provides the terms and conditions of the award 

use. Failure to meet the terms and conditions may cause the CDFI Fund to impose 

one or more sanctions, which may include requiring the awardee to return award 

funds. 

CDFI program awardees are required to self report on their financial performance 

and community impacts, including job creation estimates 1 annually for a 3-year period following receipt of the award. Award recipients report their annual performance through a Web-based reporting system, the Community Investment Impact 

System (CIIS). Each awardee has 180 days from its fiscal year end to report key 

financial performance and community impact data through CIIS. This allows the 

awardee to complete and support its annual audit and enables the CDFI Fund to 

verify reported information through desk reviews against the organization’s audit. 

The CDFI Fund collects full-time equivalent (FTE) data through annual Institution Level and Transaction Level reports. Data is provided by awardees, based on 

the source 2 listed for their estimates; the data are compared to benchmarks derived 

from Federal statistical agencies (e.g., Bureau of Labor Statistics) for accuracy and 

‘‘reasonableness’’ as defined by the CDFI Fund. 

The annual reports filed by awardees detail an organization’s financial position, 

current assets and liabilities, summary of income and expenses, loan purchases and 

sales, lending and financing activities, portfolio-at-risk, populations, and geography 

served by target markets, community impacts including job creation and businesses 
160 

financed, development services, depository offerings, award compliance, and summary ratios used for compliance monitoring. 

In past years, CDFI Fund awardees were measured on their ability to increase 

total assets. While growing assets may illustrate a healthy financial institution, it 

is critical to know that CDFIs are using their resources to make loans and investments in distressed communities. Beginning this year, awardees are now measured 

by the number and amount of loans originated during the fiscal year, not the total 

portfolio outstanding on their books. This helps the CDFI Fund hold awardees accountable for their ability to continually deploy capital each year of the reporting 

period. 

Question. The statute authorizing the CDFI Fund requires that financial assistance awards be matched with funds from sources other than the Federal Government on a one-to-one basis. However, for fiscal year 2009 and fiscal year 2010 CDFI 

Fund awards, our appropriations bill waived the matching requirement due to the 

tightening of the credit markets and difficulty in raising funds from philanthropic 

sources. For fiscal year 2012, the administration requests to reinstate the matching 

fund requirement for CDFI Fund programs. 

Has the economy recovered to the point where the private sector and philanthropic community is now more able to contribute matching funds to enable greater 

leveraging of public resources? 

Would reinstating the matching fund requirement disadvantage CDFIs in the 

most distressed communities? 

Answer. For decades, CDFIs have met the challenge of providing access to capital 

and credit in communities impacted by economic turbulence. For fiscal year 2012, 

the CDFI Fund does not recommend waiving the matching fund requirement for 

CDFI programs. While Treasury realizes that challenges raising private sector 

matching funds may exist, matching funds address several related objectives. First, 

private matching funds multiply the impact of scarce Federal funds. A one-to-one 

match means that each Federal $1 generates $2 for CDFIs and cuts the Federal cost 

of job creation, affordable housing development, and other community benefits in 

half. Second, CDFIs use the match requirement to attract private sector contributions. The Federal match encourages private support. Third, private match provides 

external validation that a CDFI applicant has the capacity to forge partnerships 

with the private sector. Private providers of matching funds have independently vetted the applicant and demonstrated their support with money. Fourth, a private 

source of matching funds is more likely to stay involved with a CDFI, often in ways 

that go beyond the funding itself. 

Because demand for the program in recent years has been so competitive, the administration believes that those CDFIs that receive awards from the CDFI Fund 

will be able to honor the match requirement for fiscal year 2012. However, the administration realizes that many challenges still remain for CDFIs to raise the private sector matching funds that could prevent some CDFIs from applying. While it 

is likely that the CDFI Fund will not receive as many applications by reinstating 

the match requirement, the CDFI Fund believes that this is the most responsible 

way to handle the trust placed by the Congress to provide grants to the highestqualified applicants. 

SUBCOMMITTEE RECESS

Senator DURBIN. I thank those who attended this hearing. 

At this point, the hearing stands recessed. 

[Whereupon, at 11:20 a.m., Thursday, May 25, the hearing was 

concluded, and the subcommittee was recessed to reconvene subject 

to the call of the Chair.] 
(161) 

1SOURCE: FDIC call report data at March 3, 2011. 2 National Community Investment Fund’s annual Social Performance Metrics analysis (see 

http://www.ncif.org/). 

MATERIAL SUBMITTED SUBSEQUENT TO THE 

HEARING 

[CLERK’S NOTE.—The following testimonies were received subsequent to the hearing for inclusion in the record.] 

PREPARED STATEMENT OF THE COMMUNITY DEVELOPMENT BANKERS ASSOCIATION

The members of the Community Development Bankers Association (CDBA) 

thanks Chairman Durbin and Ranking Member Moran for the opportunity to submit testimony on the Obama administration 2012 budget request for the Community Development Financial Institutions (CDFI) Fund of the Department of the 

Treasury. We thank you for your past support of the CDFI Fund, the community 

development finance sector, and the Low and Moderate Income (LMI) people and 

communities we serve. 

We strongly urge you to support the President’s budget request of $227 million 

for the CDFI Fund. CDBA is the national trade association of the community development bank sector. We are the voice and champion of banks and thrifts with a mission of serving LMI people and communities. 

Currently there are 91 certified CDFI banks with approximately $28.3 billion in 

aggregate total assets and a median asset size of approximately $200 million.1

While we account for less than 10 percent of the total number of CDFIs we comprise 

approximately 50 percent of the total assets of the CDFI industry. 

CDFI banks are regulated FDIC-insured financial institutions subject to the same 

standards and regulatory scrutiny as other traditional banks. Yet, we are distinctively different as demonstrated by our track record of commitment to our communities. All of CDBA’s members have been certified by the Department of the Treasury as CDFIs, meaning at least 60 percent of their total activities are targeted to 

LMI communities—with most targeting significantly more of their resources to these 

areas. As documented by analysis of the National Community Investment Fund 

(NCIF) 2, significantly more of our lending and service activity is concentrated in 

low- to moderate-income communities than traditional financial institutions. 

CDFI banks provide financing that is catalytic in sparking economic activity within their communities. For example: 

—The Central Bank of Kansas City is financing an exciting economic revitalization project in the long-neglected Rainbow Corridor of Kansas City, Kansas. 

39Rainbow is a 26,000∂ square foot mixed-use retail, residential, and hotel development that will create hundreds of jobs and serve as an anchor to spark 

the revitalization of the surrounding neighborhood. The project has strong civic 

support with the city of Kansas City (KS) and State of Kansas providing tax 

and development incentives to promote investment in the urban core. 

—The Pan American Bank helped the Velez family grow their small wholesale 

seafood business—which serves food product retailers in Chicagoland. Pan 

American financed El Ray Seafood’s expansion to larger facility and it has now 

grown to employ eight people. 

—The International Bank of Chicago enabled the Trinh family to expand their 

tofu and bean sprout production business through a loan to buy a warehouse 

in a low-income Chicago neighborhood. The business couldn’t fully respond to 

customer demand due to the limited size of their facility. Now settled into their 

new facility, they have just hired two additional employees. 

—Southern Bancorp helped stabilize and expand Strohm Manufacturing located 

in Clarksdale, Mississippi, one of the poorest counties in the South. Following 

the death of the founder and increasing global competition, Strohm struggled 
162 

to stay in business. Southern Bancorp helped restructure this family’s business 

debt and provided them with a line of credit. Strohm now employs 10 people. 

Illinois is home to 43 certified CDFIs—of which 16 are CDFI banks. Illinois 

CDFIs have received more than $115.5 million in support from the CDFI Fund since 

1996. This Federal money has been absolutely critical to combating long-term poverty, unemployment, and social ills of too many Illinois communities and citizens. 

Loss of—or reductions in—funding for the CDFI Fund will have a direct and immediate impact on our ability to serve our communities and facilitate economic recovery and job creation. 

Since 1996, hundreds of CDFIs and banks have participated in the programs of 

the CDFI Fund. The programs of the CDFI Fund have a proven, documented track 

record of creating impact and have become invaluable in helping banks find ways 

to serve credit markets and communities that otherwise might not be served. The 

programs of the CDFI Fund use very modest public resources to leverage large 

amounts of private dollars. Analysis by the Treasury Department estimates that the 

leverage factor is as high as 20 to 1. This finding makes the CDFI Fund one of the 

smartest investments of Federal resources to solve some of the Nation’s most critical 

economic problems. The CDFI Fund is truly one of the Federal Government’s best 

market-based strategies for leveraging and channeling needed resources to our most 

challenged communities. 

CDBA wholeheartedly supports all of the CDFI Fund’s programs. The CDFI 

Fund’s Bank Enterprise Awards (BEA) program is particularly important to CDFI 

banks and the communities they serve; it supports new investment in CDFIs of all 

types and provides resources to reach the most underserved communities. BEA resources are well-targeted to the neediest communities by requiring that direct lending and services be targeted to places with at least 30 percent poverty and 1.5 times 

the national unemployment rate. BEA is also focused on the smallest and most mission-focused banks. In fact, since 2007, CDFI banks have received 78 percent of all 

BEA awards and the smallest banks (with less than $250 million in total assets) 

have received more than 57 percent of all funding. Of the $227 million requested 

in the President’s budget, we ask that at least $22 million be reserved for the BEA 

Program. 

We fully recognize that Federal appropriators face great challenges this year. But, 

as you know, low-income families and communities are among the hardest hit during periods of economic distress. This recession has been no exception. The CDFI 

Fund has already endured a $20 million cut in funding between fiscal year 2010 

and fiscal year 2011. In the interests of promoting new jobs and economic recovery 

in the hardest hit rural and urban communities of our Nation, we urge you to maintain fiscal year 2011 funding levels of $227 million for the CDFI Fund in fiscal year 

2011. Any further reductions in the CDFI Fund’s appropriations will directly result 

in the loss of jobs, affordable housing, and small business credit that will be felt 

across the Nation in the places that need it most. 

We strongly urge you to support continued funding at the fiscal year 2011 level 

and as requested in the President’s budget. 

We thank Chairman Durbin, Ranking Member Moran, and the members of the 

subcommittee for the opportunity to express our views. 

LETTER FROM WOMEN IMPACTING PUBLIC POLICY

MAY 18, 2011. 

Hon. RICHARD J. DURBIN, 

Chair, Subcommittee on Financial Services and General Government, 

Washington, DC. 

DEAR SENATOR DURBIN: We are writing to express our views on the Small Business Administration’s (SBA) proposed budget for fiscal year 2012. Women Impacting 

Public Policy (WIPP) supports funding for programs and services that benefit the 

women-owned business community including the Women’s Procurement Program, 

Women Business Centers (WBCs), and SBA’s Office of Advocacy. WIPP is a national, nonpartisan organization representing 54 organizations and more than 

500,000 women business owners nationwide. 

WIPP supports the proposed $1 million funding for the Women Owned Small 

Business Federal Contract program included in the President’s proposed budget. 

This program, which has taken 11 years to enact, is designed to give women-owned 

businesses greater access to Federal contracting. It will allow contracting officers, 

for the first time, to restrict competition for Federal contracts to women-owned businesses. This program will also assist Federal agencies with reaching the Federal 

goal of awarding at least 5 percent of contracts to women-owned businesses. Central 
163 

to the success of this program are procurement center representatives (PCRs), 

breakout procurement center representatives (breakout PCRs), and commercial marketing representatives (CMRs). We supported increased funding for PCRs, breakout 

PCRs, and CMRs because of their importance in ensuring small business participation in the procurement process. 

In addition, we support the proposed $14 million in funding for Women Business 

Centers (WBCs). WBCs provide essential training, counseling, and mentoring to 

help women looking to start or grow a successful business. According to the SBA’s 

Office of Entrepreneurial Development (ED) 2010 Impact Report, WBC’s clients who 

received 3 or more hours of counseling reported a 47 percent increase in sales while 

clients who received less than 3 hours of counseling reported only a 36 percent increase in sales. Businesses that receive assistance from WBCs have significantly 

higher survival rates that those businesses not receiving similar support. 

WIPP also supports the Microloan and technical assistance (TA) programs at the 

SBA. These programs support entrepreneurs and small businesses seeking grow 

their businesses in underserved communities across the country. In addition, we 

support continuing the PRIME program, which is the only major program designed 

to provide TA funding to intermediaries which are not lenders. 

Last, we support funding for the Office of Advocacy. WIPP supports the President’s recommended funding of $9,120,000 for SBA’s Office of Advocacy. Small businesses need to have an independent voice in Federal regulatory process. 

We urge you to support funding for these important programs. 

Sincerely, 

BARBARA KASOFF, 

President. 

(165) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2012 

WEDNESDAY, JUNE 8, 2011 

U.S. SENATE, 

SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS, 

Washington, DC. 

The subcommittee met at 10:31 a.m., in room SD–138, Dirksen 

Senate Office Building, Hon. Richard J. Durbin (chairman) presiding. 

Present: Senators Durbin, Moran, and Kirk. 

DEPARTMENT OF THE TREASURY 

INTERNAL REVENUE SERVICE

STATEMENT OF HON. DOUGLAS H. SHULMAN, COMMISSIONER 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

Senator DURBIN. Good morning. I’m pleased to convene this hearing to consider the fiscal year 2012 funding request for the Internal 

Revenue Service (IRS). It’s the largest single account within our 

subcommittee. Our focus today is on the President’s budget request 

for the IRS. The $13.6 billion in annual funding constitutes more 

than one-half the total amount of discretionary funding under our 

jurisdiction. 

I’m pleased to share the dais with my friend and distinguished 

ranking member, Senator Moran of Kansas, and other Members 

will probably join us. 

Joining us today to present testimony about the resource needs 

of the IRS is the Honorable Douglas H. Shulman, now in his fourth 

year of a 5-year term as the 47th Commissioner of the IRS. 

Thanks for your service and for accepting the challenge to help 

lead the IRS from good to great. I welcome the opportunity to conduct a critical oversight of the IRS and its programs through our 

discussion today. 

The Congress exercises its most-effective oversight of agencies 

and programs through the appropriations process. It allows for an 

annual check-up and review of operations and spending. 

To complement congressional oversight, the IRS has a cadre of 

important watchdogs and keen observers, including J. Russell 

George, Treasury Inspector General for Tax Administration; Nina 

E. Olson, the National Taxpayer Advocate; Paul Cherecwich, Jr. 

Chairman, IRS Oversight Board; the U.S. Government Account-
166 

ability Office (GAO); and Colleen M. Kelley, national president, National Treasury Employees Union (NTEU). Lots of people are 

watching. I appreciate the exemplary work and constructive contributions of each of these entities to help us prepare for today’s 

hearing. 

The IRS administers the tax laws and collects revenues that fund 

more than 96 percent of Federal Government operations. Each year 

the 95,000-plus employees of the IRS make hundreds of millions of 

contacts with American taxpayers and businesses. 

The IRS represents the face of Government to more U.S. citizens 

than any other agency of Government. 

On a budget in this fiscal year of $12.15 billion, the IRS collected 

$2.345 trillion in taxes—93 percent of all Federal receipts. That’s 

$194 in revenue for every $1 of appropriated funds given to run 

this agency. They processed 230 million tax returns, including 141 

million individual returns, 7 million corporate, and 30 million employment tax returns. They issued 109.5 million refunds worth 

$366 billion, and the list goes on. 

For fiscal year 2012, the President’s budget request for funding 

of $13.2 billion represents an overall increase of $1.1 billion, or 

about 9.4 percent more than the fiscal year 2011 level. For the IRS 

accounts, the fiscal year 2011 enacted bill maintained funding at 

the same level as provided in fiscal year 2010. I recognize that such 

a level falls more than $487 million short of what the President 

had requested for this year, so there has been belt tightening all 

around, and it’s affected your agency. 

PREPARED STATEMENT

We will talk today about the budgetary challenges which you 

face in the upcoming year, some of the policy challenges which 

drive spending in your agency, and I look forward to hearing more 

about the challenges the IRS faces in these difficult budgetary 

times. 

[The statements follow:] 

PREPARED STATEMENT OF SENATOR RICHARD J. DURBIN

Good morning. I am pleased to convene this hearing to consider the fiscal year 

2012 funding request of the Internal Revenue Service (IRS), the largest single account within the Senate Appropriations Subcommittee on Financial Services and 

General Government. 

Our focus today is on the President’s fiscal year 2012 budget request for the IRS. 

The $13.6 billion in annual funding for the IRS alone constitutes just more than 

one-half of the total amount of discretionary funding under the jurisdiction of this 

subcommittee. 

I am pleased to share the dais with my distinguished ranking member, Senator 

Jerry Moran, and other members of the subcommittee. 

Joining us today to present testimony about the resource needs of the IRS is the 

Honorable Douglas H. Shulman, now in his fourth year of a 5-year term as the 47th 

Commissioner of the IRS. Thank you for your service and for accepting the challenge to help lead the IRS from ‘‘good to great’’. 

I welcome the opportunity today to conduct critical oversight of the IRS and its 

programs through a candid discussion of where the agency is today, where it needs 

to be, and how we can ensure that the IRS has the necessary resources to fulfill 

its important missions. 

The Congress probably exercises its most effective oversight of agencies and programs through the appropriations process. It allows an annual check-up and review 

of operations and spending. 
167 

To complement congressional oversight, the IRS has a cadre of important watchdogs and keen observers monitoring and evaluating its operations. These include the 

Treasury Inspector General for Tax Administration (TIGTA); the National Taxpayer 

Advocate, the IRS Oversight Board; the Government Accountability Office; and the 

National Treasury Employees Union. 

I appreciate the exemplary work and constructive contributions of each of these 

entities to help critique, guide, promote, and improve the work of the IRS. I invited 

top officials of each of these organizations to submit written materials to enrich the 

subcommittee’s work and augment the record of these proceedings today. 

I ask unanimous consent that the statements and accompanying materials received by the subcommittee be made a part of the permanent record of this hearing. 

ACCOMPLISHMENTS OF THE IRS

The IRS administers the tax laws and collects the revenues that fund more than 

96 percent of Federal Government operations and public services. 

Each year, the 95,425 employees of the IRS make hundreds of millions of contacts 

with American taxpayers and businesses. The IRS represents the face of Government to more U.S. citizens than any other agency. 

During fiscal year 2010, the IRS: 

—On a budget of $12.15 billion, collected $2.345 trillion in taxes—93 percent of all Federal receipts. That’s $194 in revenue for every $1 in appropriated funds. 

—Processed 230 million tax returns, including 141 million individual returns, 7 

million corporate returns, and 30 million employment tax returns. 

—Issued 109.5 million refunds worth $366 billion. 

—Spent an average of 53 cents to collect each $100 of tax revenue. 

—Examined more than 1.58 million individual income tax returns (an 11 percent 

increase more than fiscal year 2009) and nearly 30,000 returns filed by corporations. 

—More than doubled its offshore presence—adding offices in Asia and Central 

America, boosting law enforcement staffing throughout the globe, and expanding interaction with international organizations—all designed to investigate and 

crack down on tax absconders wherever they may be. 

—Increased automated under-reporter contact closures to more than 4.3 million— 

a 19.8 percent increase more than fiscal year 2009—and surpassing the 4 million mark for the first time. 

—Provided taxpayer assistance through 305 million visits to the IRS.gov Web site 

(double the volume in 2004)—responding to the growing demand for electronic 

tools and online access to information. 

—Answered 47 million calls to customer service phone lines. 

—Assisted more than 78 million taxpayers through its telephone helpline or at 

walk-in sites. 

—Received 35.1 million automated calls, a 21 percent uptick from fiscal year 

2009, reflecting rising demand for self-service options. 

THE BUDGET REQUEST

For fiscal year 2012, the President’s budget requests funding of $13.284 billion, 

representing an overall increase of $1.138 billion, or 9.4 percent, above the fiscal 

year 2011 enacted level of $12.146 billion under the continuing resolution enacted 

on April 15 to cover the balance of this fiscal year. 

For the IRS accounts, the fiscal year 2011 enacted bill maintained funding at the 

same level as provided in the fiscal year 2010 enactment. I recognize that such level 

falls more than $487 million short of what the President requested for this year. 

While my preference would have been to fund the IRS at the level recommended 

in our July 2010 Committee-reported bill, I regret to say that we faced a significant 

reduction in our available discretionary resources. 

In fact, our overall allocation cap was 10 percent below the fiscal year 2010 enacted level, compelling some difficult negotiations and funding decisions to finish the 

fiscal year 2011 bill this spring. I am pleased we were able to avert the troubling 

$603 million cut below fiscal year 2010 for the IRS that was included in the Housepassed H.R. 1. 

The fiscal 2012 funding forecast is, to put it mildly, bleak. This subcommittee 

faces grim prospects and challenging funding decisions for the ensuing fiscal year, 

and beyond. It will be helpful to hear Commissioner Shulman’s honest appraisal of 

the resource needs that the IRS will require to achieve its dual mission of: 

—Providing America’s taxpayers with top quality service by helping them understand and meet their tax responsibilities; and 

—Applying the tax law with integrity and fairness to all. 
168 

I look forward to hearing more about the particular challenges the IRS faces in 

these lean budgetary times, and how this subcommittee can be helpful in supporting 

the mission of the IRS. 

Now I’d like to turn the floor over to my colleague, Senator 

Moran. 

STATEMENT OF SENATOR JERRY MORAN

Senator MORAN. Chairman Durbin, thank you. Thanks for the 

hearing today. 

Welcome, Commissioner Shulman. 

I understand that the IRS is tasked with enormous responsibilities. The IRS collects the revenue that funds Government and administers our tax laws. 

The IRS’s goal of improving services, making voluntary compliance easier, and enforcing the laws to ensure that everyone pays 

their fair share of taxes, is all laudable. I also believe we would all 

agree that we should make sure that our tax code and the IRS 

compliance and enforcement efforts don’t make it even harder for 

taxpayers and small businessmen and women to meet their tax obligations. 

As we know, the American economy is facing very difficult times, 

and we need to get the country’s economy moving again. Americans 

are struggling, and overly burdensome regulations and reporting 

requirements hamper the ability of our Nation’s small businesses 

to grow their businesses and create jobs. 

I was very pleased to see the Congress address some of the uncertainty by passing legislation to repeal the costly and unprecedented 1099 tax reporting mandate in the new healthcare law. This 

marks a significant change in our healthcare law, and that repeal 

of the 1099 requirement is good news for small business and agriculture producers, who bear the largest burden under these provisions. I am interested in talking to you, Mr. Commissioner, about 

the consequences of that repeal on your appropriations and budget 

request. 

I note that the President’s request for the IRS for fiscal year 

2012 is almost $13.3 billion. This is an approximate $1.1 billion 

more than the 2010 enacted level and the fiscal year 2011 level, resulting in a 9 percent increase. Almost half a billion of that increase is requested to begin implementation of the new healthcare 

law. Given the current fiscal reality, I am interested to learn how 

the IRS intends to prioritize its goals and carry out its core responsibilities of enforcement and taxpayer services and make progress 

on important information technology projects. 

I appreciate the significant and complex responsibilities that the 

IRS faces. Given our Government’s fiscal constraints, we must 

carefully review all agency budget requests to ensure taxpayers are 

receiving the best value for their dollars. We must make sure that 

we address our country’s economic problems in a fiscally responsible way. 

Mr. Chairman, I look forward to hearing the testimony, and I 

thank you for calling the hearing and look forward to working with 

you on the subjects within this subcommittee’s jurisdiction. 

Senator DURBIN. Thanks a lot, Senator Moran. And, Mr. 

Shulman, the floor is yours. 
169 

SUMMARY STATEMENT OF HON. DOUGLAS H. SHULMAN

Mr. SHULMAN. Thank you, Chairman Durbin and Ranking Member Moran. It’s good to be here, and I appreciate the opportunity 

to testify about our 2012 budget. 

This budget was crafted during a time of fiscal austerity and belt 

tightening for the Nation, and it’s incumbent upon all of us in Government to be as efficient as possible and to spend taxpayer dollars 

wisely. This means, in my mind, finding savings where we can, and 

continuing to invest in strategic priorities that allow us to improve 

service and voluntary compliance. 

The fiscal year 2012 budget includes almost $190 million in efficiency savings and reductions, and you’ve got my commitment to 

continue to look for ways to save the Federal Government money. 

Against this backdrop, it’s also clear that the IRS is vital to both 

the functioning of the Government and keeping our Nation and 

economy strong. In fiscal year 2010, the IRS collected, as the chairman noted, $2.345 trillion in gross revenues to fund the Federal 

Government, which is approximately 93 percent of all Federal receipts. For every $1 spent on the IRS, we collect approximately 

$200 of revenue. 

Mr. Chairman, one of our core duties, as you noted, is conducting 

the filing season. Despite late tax law changes, this filing season 

actually went relatively smoothly. As of the end of May, we had 

gotten about 133 million individual returns. We issued more than 

100 million refunds, totaling $285 billion. We’ve also answered 

more than 50 million taxpayer calls this year. 

The IRS e-file program, which is lauded by many as one of the 

most successful modernization programs in all of Government, continues to show growth. This year, we reached two very major milestones. One is, for the first time ever, we had 100 million people 

electronically file. And this year—we started the e-file program in 

1986—we crossed the 1 billionth electronic filing of a tax return 

this year. Clearly it’s changed the way Americans interact with the 

IRS. 

This is also a big deal for efficiency. It costs us 17 cents to process an electronically filed return. It costs us $3.66 to process a 

paper return. And we’ve been reaping benefits and downsizing our 

operations ever since e-file started. 

Let me also note that we continue to try to help taxpayers who 

are struggling to regain their footing after the recession. This year, 

we started something we call our Fresh Start program, which expands our Offer in Compromise program. It made lien withdrawal 

easier for taxpayers, it made it easier for small businesses to enter 

an installment plan, and it changed our lien criteria. 

Now, in recognition of the critical role that we play in the economy—both helping taxpayers file their taxes and also collecting the 

revenue—the President asked for judicious investments in IRS in 

the 2012 budget. These investments reflect our balanced approach 

to both taxpayer service and compliance programs, and our commitment to administer the tax laws in a balanced and fair manner. 

It also includes funding to finish, for the 2012 filing season, our 

key core account database. If and when we’ve a fully operational 

account database, it will mean faster processing of returns, expe-
170 

dited refunds for all Americans, better customer service, and enhanced data security. 

I also want to emphasize that, because of our unique revenue collection function, all of the investments in the IRS more than pay 

for themselves by generating much more revenue than they cost. 

Mr. Chairman, I would be remiss if I did not mention for a moment the House budget resolution, which provided a funding level 

for the Financial Services and General Government Subcommittee 

of approximately $2 billion below the fiscal year 2011 enacted level. 

Because, as you mentioned, we’re the majority of the Financial 

Services and General Government bill, cuts of this magnitude 

would be substantial and affect all of IRS operations—from answering taxpayer questions on the phone to front-line compliance activities, such as audit coverage. 

Because the lost revenues from reduced tax law enforcement, 

cuts such as those in the House budget resolution would actually 

increase the deficit by decreasing revenues. In addition, conspicuous drops in our enforcement activities could have an impact 

on longer-term voluntary compliance in the country. 

PREPARED STATEMENTS

So let me conclude by just saying, I recognize that we are in a 

very challenging fiscal environment, and that there’s going to be a 

lot of difficult choices that you and your colleagues are going to 

need to make. I look very much forward to a constructive dialogue 

over the weeks and months ahead with this subcommittee, and 

very much appreciate the support that this subcommittee has given 

the IRS. 

[The statement follows:] 

PREPARED STATEMENT OF DOUGLAS H. SHULMAN

INTRODUCTION AND SUMMARY

Chairman Durbin, Ranking Member Moran, and members of the subcommittee, 

thank you for the opportunity to appear today to discuss the President’s fiscal year 

2012 budget request for the Internal Revenue Service (IRS). 

This budget was crafted during a time of fiscal austerity and belt tightening for 

the Nation and it is incumbent upon all of us in Government to be as efficient as 

possible and spend taxpayer dollars wisely. That means finding savings where we 

can, and continuing to invest in strategic priorities that allow us to continuously improve. 

Against this backdrop, it is clear that the IRS is vital both to the functioning of 

Government and keeping our Nation and economy strong. In fiscal year 2010, the 

IRS collected $2.345 trillion in gross revenue to support the Federal Government, 

approximately 93 percent of all Federal receipts. Moreover, for fiscal year 2010, we 

processed more than 140 million individual income tax returns and issued 109.5 

million refunds to individual taxpayers totaling $366 billion. 

A Record of Success 

Mr. Chairman, the IRS is also proud of its implementation track record over the 

past few years. 

We have run smooth filing seasons for the last several years, despite new tasks 

being added to our agenda and late passage of legislation. 

We have also made good strides in cracking down on international tax evasion. 

We struck a landmark deal with the Government of Switzerland, and for the first 

time received information on thousands of Americans hiding assets in Swiss bank 

accounts. As we turned up the pressure on those not paying taxes on overseas assets, we had approximately 15,000 voluntary disclosures from individuals who came 

in under our special Voluntary Disclosure Program. Since the special program 
171 

closed, we received an additional 4,000 voluntary disclosures from individuals with 

bank accounts from around the world. 

Many of these voluntary disclosure cases involve significant amounts of previously 

unpaid tax. 

However, collecting such substantial additional revenue for past misdeeds is not 

the only important consideration here. Regardless of dollar size, it is important that 

we are bringing thousands of U.S. taxpayers back into the system so they properly 

report and pay their taxes for years to come on their offshore accounts. 

In February 2011, the IRS announced a new special voluntary disclosure program 

designed to help people with undisclosed income from hidden offshore accounts get 

current with their taxes. 

Our goal in our offshore efforts is to fundamentally change the risk calculus of 

taxpayers. We are well on our way to deterring the next generation of taxpayers 

from using hidden bank accounts to avoid paying taxes. 

We have also been ushering in a new relationship with corporate taxpayers with 

a major focus on creating forums and venues where we can resolve issues faster and 

provide more certainty. 

The impetus for this new approach stems from the simple shared belief that at 

the end of the day, taxpayers and tax authorities pretty much want the same thing. 

They want a balanced tax administration system that provides: 

—Certainty regarding a taxpayer’s tax obligations sooner rather than later; 

—Consistent treatment across taxpayers; and 

—An efficient use of Government and taxpayer resources by focusing on the issues 

and taxpayers that pose the greatest risk of tax noncompliance. 

There are several interlocking pieces that will help advance this transformation. 

It requires more transparency on both sides; a re-tooling of our audit approach; and 

a commitment to resolving issues quickly and clarifying uncertainty in the law. 

We now have a number of innovative, forward-thinking programs and forums, 

such as our industry issue resolution program, compliance assurance program, fast 

track settlement, and our uncertain tax positions reporting requirement that are focused as a package on the goals of faster issue resolution and greater certainty for 

those taxpayers who want to be transparent. 

One of the most important initiatives that the IRS has undertaken in recent 

memory is the return preparer initiative, which is now being implemented. In September 2010, we launched the new online Preparer Tax Identification Number 

(PTIN) application system. It is up and running with more than 700,000 preparers 

already registered in the system. 

More than just an identification number, the PTIN registration process gives the 

IRS an important and better line of sight into the return preparer community than 

we have ever had before. We can leverage that information to help us better communicate, analyze trends, spot anomalies and potentially detect fraud. 

The registration process will help us build in several years a publicly accessible 

database of preparers who are authorized to prepare returns. This is an extremely 

important tool for consumers as they will be able to search the database to ensure 

that their preparer is registered. It will also make it easier to find and track the 

bad actors out there. They will not be able to pull up stakes and move around anonymously. 

The IRS is also very proud of its work in implementing the tax-related provisions 

of the American Recovery and Reinvestment Act (ARRA) and other economic recovery legislation. We put out billions of dollars to help people buy homes and stabilize 

the housing market through the First-time Homebuyer Credit, and we added $400 

to $800 to families’ paychecks through the Making Work Pay Credit, just to name 

two provisions. 

The IRS continues to provide taxpayers with quality customer service and different service channels and products. They run the gamut from traditional walk-in 

sites for those who need to see an IRS representative face-to-face, to toll-free automated and assistor telephone service, to Web-based applications and social media. 

All make it easier for taxpayers to file and pay their taxes. 

Telephone level of service has recovered after several challenging years. This year 

we are targeting a 71 percent assistor level of service for the full year. Toll-free tax 

law accuracy and accounts remain respectively at 93 percent and 95 percent, and 

the overall toll-free customer satisfaction rating stood at 92 percent. Last year, we 

also saw a 70 percent e-file rate for individuals as compared to a mere 10 percent 

15 years ago. As noted in the next section, this translates into a huge savings. 

IRS.gov has become the favorite source of information for millions of taxpayers. 

For fiscal year 2010, there were almost 305 million Web page visits to IRS.gov— 

a 14 percent increase over the same time period in fiscal year 2009. Use of the 
172 

‘‘Where’s My Refund’’ electronic tracking tool continued to post double-digit yearly 

gains. 

The IRS is increasingly communicating with taxpayers who may not get their information from traditional sources, such as newspapers and broadcast and cable 

news. By employing social and new media, such as YouTube, Twitter and even 

iTunes, we are able to reach these taxpayers with important service and compliance 

messages. 

In January 2011, the IRS also unveiled IRS2Go, its first smartphone application 

that lets taxpayers check on the status of their tax refund and obtain helpful tax 

information. 

This new smartphone app reflects our commitment to modernizing the agency and 

engaging taxpayers where and when they want. 

Finally, the IRS continues to run robust compliance programs. We continue to 

have appropriate and balanced audit coverage rates across taxpayers and to innovate in our collection programs. 

And in our latest effort to help struggling taxpayers, the IRS announced on February 24, 2011, a series of new steps to help people get a fresh start with their tax 

liabilities. 

The goal is to help individuals and small businesses meet their tax obligations, 

without adding unnecessary burden to taxpayers. Specifically, the IRS set forth new 

policies and programs to help taxpayers pay back taxes and avoid tax liens. 

The announcement centers on the IRS making important changes to its lien filing 

practices that will lessen the negative impact on taxpayers. The changes include: 

—Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens; 

—Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill; 

—Withdrawing liens in most cases where a taxpayer enters into a Direct Debit 

Installment Agreement; 

—Creating easier access to installment agreements for more struggling small 

businesses; and 

—Expanding a streamlined Offer-in-Compromise program to cover more taxpayers. 

In short, despite a quickly evolving taxpayer base and unprecedented demands on 

IRS resources, the IRS continues to deliver for the American people. 

Working Smarter and Greater Efficiencies 

The IRS continues to reap the financial benefits of the E-File program, one of the 

most successful modernization programs in Government. Today, we receive nearly 

100 million tax returns electronically. In the past these returns had to be opened, 

sorted, and transcribed manually. The efficiency savings have allowed us to reduce 

our submission processing sites in half. This year we are closing our fifth of the 

original 10 sites that processed paper returns. 

The fiscal year 2012 budget request includes almost $190 million in efficiency savings, reductions, and nonrecurring activities. While these targets are substantial, I 

am confident that we will meet them and more, by finding cost-savings in our operations wherever we can. 

I have also challenged the IRS leadership and indeed, all IRS employees, to take 

a hard look at their operations and look for potential savings and efficiencies. 

Even in a tough budget environment, I am confident that the IRS will continue 

to deliver value for the American taxpayer and will emerge as a stronger agency 

in the years to come. 

I am particularly pleased with the progress that we are making in achieving efficiencies in our technology operations. The IRS has embarked on a multi-year effort 

to streamline and standardize processes that will allow for substantial efficiency 

gains. For example, the Information Technology Infrastructure Library is a collection of best practices used to aid in the implementation of a lifecycle framework for 

IT Service Management. In September 2010, an independent third party found that 

the IRS recently reached Capability Maturity Model Level 2 based on established 

criteria. 

Achieving this level allows standardized project management practices across 

projects. This will improve our agility and quality in delivering software to our business customers and the taxpaying public, as well as reduce the cost of developing 

and maintaining products, and improve the cost of engineering services. 

Investing in Core Programs 

Indeed, it is in recognition of the critical role that the IRS plays in the economy 

that the fiscal year 2012 request includes a judicious investment in the IRS’ core 

service and enforcement programs and initiatives. Enforcement and customer serv-
173 

ice are not an either/or proposition. Accomplishing our mission requires that we do 

both well. 

The request also includes the necessary funding for completing on time for the 

2012 filing season the core taxpayer account database. A fully operational customer 

account database will mean faster processing of returns, expedited refunds for 140 

million individual taxpayers and enhanced data security. 

The funding in the President’s budget request will be used to carry out the IRS’ 

strategic and balanced agenda that includes: 

—Improved service to taxpayers, including enhancements to the IRS.gov Web site 

to meet taxpayer needs and growing demand for more e-services; 

—Robust and targeted enforcement programs to address offshore tax evasion and 

improve tax compliance for corporate and high-income taxpayers; 

—Completion of the new taxpayer account database and enhancements to our 

electronic filing platforms; 

—Leveraging the return preparer program to reduce noncompliance; 

—Implementation of our uncertain tax position reporting requirements; 

—Combating errors and fraud for refundable tax credits, such as the Earned Income Tax Credit (EITC); 

—Better use of data, such as credit card and securities basis information reporting; 

—Implementation of new tax provisions found in major recent legislation, including the Affordable Care Act (ACA); 

—Workforce development to ensure that we have a talented and capable workforce for the foreseeable future; and 

—Enhancing workplace/physical security for IRS employees. 

The IRS will also administer those portions of ARRA that were extended into 

2011. These include the expanded EITC for families with three or more children and 

the American Opportunity Tax Credit to help pay tuition and other expenses for individuals enrolled in institutions of higher education. In addition, we continue to administer the Health Coverage Tax Credit (HCTC) that was enacted as part of the 

Trade Adjustment Assistance Reform Act of 2002. 

The new enforcement personnel included in the request will generate more than 

$1.3 billion in additional annual enforcement revenue once the new hires reach full 

potential in fiscal year 2014. The roughly $6 to $1 return on investment estimate 

related to these initiatives does not include the indirect revenue effect of the deterrence value of these investments and other IRS enforcement programs, which is conservatively estimated to be at least three times the direct revenue impact. 

ACA

IRS will need to implement and administer the tax provisions of the ACA (Public 

Law 111–148) in 2012. IRS seeks to be helpful to families and businesses that will 

benefit from the ACA. In fact, some benefits have already begun. For example, upon 

enactment of the ACA, IRS immediately began to make sure that small employers 

were aware of a significant new tax credit to help them provide health coverage to 

their workers. 

Because the tax credit was enacted mid-year, and became effective immediately, 

IRS conducted a significant outreach campaign to small businesses. In addition to 

mailing postcards to millions of employers alerting them to the new credit, IRS held 

or attended more than 1,000 outreach events targeted at small businesses and the 

tax practitioners who serve them. 

Working with the Department of Health and Human Services, we also administered a program to provide $1 billion in tax credits and grants to qualifying therapeutic discovery projects. 

In addition, we have implemented or have begun to implement changes that expanded the tax credit for adoptive parents, a new exclusion for loan forgiveness programs for certain health professionals, and a new excise tax on indoor tanning services. 

We are also working diligently to implement the tax law components of the 

changes made to the health insurance marketplace that will begin in 2014. Let me 

put these efforts in context by describing the activities that we are undertaking to 

plan for these upcoming changes. 

The IRS also has significant information technology development work that must 

be completed in order to administer these provisions. The vast majority of the resources that the IRS will require between now and 2014 will be dedicated to technology and the associated business process design required to effectively administer 

these new provisions. 
174 

Exchanges and Medicaid Health Coverage 

Individuals seeking subsidized coverage will interact with the IRS at a few discrete points in the process: 

Obtaining Coverage Through Exchanges and/or Medicaid.—The ACA outlines 

eligibility rules for the premium assistance tax credit, as well as Medicaid. In 

both cases, the household income as reported to the IRS by approximately 140 

million taxpayers on the 2012 tax returns will be relevant to eligibility determination. IRS will alter its systems to take account of the new concept of household income, and is planning to provide significant educational tools to help individuals understand what household income represents. Furthermore, planning 

is underway to determine the best way to provide this information to taxpayers 

via the Web, telephone, and other channels. 

Receiving Advance Premium Tax Credits.—Individuals who are determined to 

be eligible for the premium assistance tax credit can receive the benefit through 

advance monthly payments that are made directly to the plan provider. Working with the Treasury Financial Management Service, which will be making the 

advanced payment, IRS will develop new systems for the administration of the 

tax credit. In addition, IRS will work with the exchanges as appropriate to ensure there is significant outreach and education to make taxpayers who are receiving the advance payments aware of the importance of reporting mid-year 

changes in circumstance that could affect their eligibility for, or the amount of 

the credit. 

Reconciling the Premium Assistance Tax Credit With Advance Payments Made 

Through the Year.—The ACA provides that individuals will reconcile the 

amount of advance payments of the premium credit with the actual amount as 

computed on the tax return. In other words, advance payments made throughout 2014 will be reconciled with individuals’ tax returns that are filed in the 

spring of 2015. To the extent that the ultimate credit amount is larger than the 

sum of the advance payments, the additional amount will be added to the taxpayer’s refund. If the ultimate credit amount is lower than the sum of the advance credit, the taxpayer will owe additional tax on the return, potentially subject to a cap. 

Individual Coverage Requirement 

IRS will also be responsible for administering the requirement that individuals 

who can afford health coverage either obtain it or make a payment to IRS. While 

implementation of this requirement does not come into effect until 2014, and will 

appear on the 2014 tax forms that will be filed in the spring of 2015, we have nonetheless received a number of questions about how this provision will be implemented. 

First, we anticipate providing significant outreach and education on this provision. This will come directly from IRS and in partnership with State and Federal 

agencies, employers, tax return preparers, and others. Our experience in administering new tax laws suggests that the vast majority of individuals will successfully 

incorporate this provision into their tax year 2014 returns, filed in 2015. 

The forms will provide instructions on how individuals can determine if they met 

the coverage requirement, and if not, how to compute the payment and include it 

in that year’s tax liability. We also plan to work closely with the tax return preparation industry to ensure that the professionals who advise taxpayers are fully informed about this provision. Today, approximately 60 percent of taxpayers use a return preparer and another 25 percent use software to prepare their own returns. 

Employer Provisions 

Finally, IRS will administer the employer responsibility payment for large employers who do not offer affordable coverage, and have at least one employee who 

receives subsidized coverage through the exchange. This provision closely intersects 

with the rest of the exchange provisions, and we are working closely with the Department of Health and Human Services and the Department of Labor to reach out 

to the employer community, understand what questions and issues they foresee, and 

incorporate the feedback that we get into the up-front program design and regulatory guidance. 

Tax Law Changes 

IRS is also working diligently to implement other tax law changes that come into 

effect over the next several years. Earlier in my testimony I mentioned several that 

we are already implementing, and would be happy to answer any questions that you 

have on those, or the provisions coming into effect in the months and years ahead. 
175 

1The fiscal year 2012 budget request also includes approximately $138 million from reimbursable programs and $204 million from user fees for a total operating level of $13.6 billion. 

CONCLUSION

In conclusion, let me thank the subcommittee again for this opportunity to discuss 

the IRS budget request for fiscal year 2012 which reflects the progress and improvements the IRS continues to make—even in a difficult budget environment. 

I believe the fiscal year 2012 budget is fiscally prudent and makes wise investments in strategic priorities in enforcement, service, and business modernization. It 

will help ensure that the IRS will continue its vital role in keeping our Nation and 

economy healthy and strong. 

PREPARED STATEMENT OF J. RUSSELL GEORGE, INSPECTOR GENERAL FOR TAX

ADMINISTRATION, DEPARTMENT OF THE TREASURY

Chairman Durbin, Ranking Member Moran, and members of the subcommittee, 

I thank you for this opportunity to provide a written statement regarding the fiscal 

year 2012 budget request for the Internal Revenue Service (IRS). 

OVERVIEW OF THE IRS’S FISCAL YEAR 2012 BUDGET REQUEST

IRS is the largest component of the Department of the Treasury and has primary 

responsibility for administering the Federal tax system. Since the Federal tax system is a system that relies upon voluntary compliance, almost everything IRS does 

in some way relates to fostering compliance with tax laws. IRS provides taxpayer 

service programs that help millions of taxpayers to understand and meet their tax 

obligations and administers enforcement programs aimed at deterring taxpayers 

who are inclined to evade their responsibilities. IRS is charged with vigorously pursuing those who violate tax laws. 

IRS must strive to enforce the tax laws fairly and efficiently while balancing service and education to promote voluntary compliance and reduce taxpayer burden. To 

accomplish these efforts, the proposed fiscal year 2012 IRS budget requested approximately $13.3 billion 1 in total appropriated resources. The total appropriations 

amount is an increase of $1.138 billion, or 9.4 percent, more than the fiscal year 

2010 enacted level. 

Program Summary by Appropriation Account 

IRS fiscal year 2012 budget request includes appropriations for five IRS budget 

accounts, as depicted in the graph shown: 
176 

2The Health Coverage Tax Credit is a refundable credit for health insurance available to 

qualified individuals, enacted as part of the Trade Adjustment Assistance Reform Act of 2002, 

Public Law 107–210, 116 Stat. 933 (2002). 

Generally, these five appropriation accounts fund the IRS’s tax administration 

functions. The three primary appropriation accounts are taxpayer services, enforcement, and operations support. The taxpayer services account funds programs that 

focus on assisting taxpayers with understanding and meeting their tax obligations, 

while the enforcement account supports the IRS’s examination and collection efforts. 

The operations support account funds functions essential to the overall operation of 

the IRS, such as infrastructure and information services. The Business Systems 

Modernization (BSM) account provides funding for the development of a new taxpayer account database and investments in electronic filing. Finally, the Health 

Coverage Tax Credit Administration account supports the administration of the 

Health Coverage Tax Credit.2

The administration seeks to increase funding more than fiscal year 2010 enacted 

operating levels for all of the appropriation accounts, ranging from 3 to 26 percent 

increases (see following table). The budget request includes a net increase in IRS 

staffing of more than 5,100 employees, for a total of more than 100,500 IRS employees. 

IRS FISCAL YEAR 2012 BUDGET REQUEST INCREASE OVER FISCAL YEAR 2010 ENACTED BUDGET 

[Dollars in thousands] 

Appropriation account Fiscal year 2010 

enacted 

Fiscal year 2012 

request Dollar change Percentage increase 

Taxpayer services .......................................................... $2,278,830 $2,345,133 $66,303 2.91 

Enforcement .................................................................. $5,504,000 $5,966,619 $462,619 8.41 

Operations support ....................................................... $4,083,884 $4,620,526 $536,642 13.14 

BSM ............................................................................... $263,897 $333,600 $69,703 26.41 

Health Insurance Tax Credit Administration ................ $15,512 $18,029 $2,517 16.23 

Total budget appropriated resources .............. $12,146,123 $13,283,907 $1,137,784 9.37 

IRS Fiscal Year 2012 Priorities 

The IRS will focus efforts on the following priorities in fiscal year 2012 (these priorities are reflected in multiple appropriation accounts): 
177 

3The Tax Gap is the difference between the estimated amount taxpayers owed and the 

amount they voluntarily and timely paid each year. 4 A measure of labor hours in which 1 FTE is equal to 8 hours multiplied by the number of 

compensable days in a particular fiscal year. 5 CADE 2 creates a modernized processing and data-centric infrastructure that will enable the 

IRS to improve the accuracy and speed of individual taxpayer account processing, enhance the 

Continued 

Enforcement.—A serious challenge confronting the IRS is the tax gap.3 Despite an estimated voluntary compliance rate of 84 percent and IRS enforcement actions, a significant amount of income remains unreported and unpaid. 

IRS estimated the gross tax gap for tax year 2001, the most current figure to 

date, to be approximately $345 billion. IRS’ strategy for reducing the tax gap 

is largely dependent on funding for additional compliance resources as well as 

legislative changes. 

In fiscal year 2012, IRS will continue to invest in compliance programs, including its relatively newly enhanced international enforcement initiatives to 

address offshore tax evasion. These initiatives are designed to address the 

under-reporting of income associated with international financial activities and 

expand enforcement efforts to address noncompliance by corporate and highwealth taxpayers and the complex business enterprises they control (including 

corporations, partnerships, and trusts). IRS plans to use audit results and intelligence from ongoing offshore initiatives to refine case identification and selection methods to identify promoters, facilitators, and participants in abusive offshore arrangements. 

In addition, IRS will continue to pursue other significant initiatives, such as 

the Compliance Assurance Process program, industry issue resolution projects, 

and fast track settlements, aimed at earlier and speedier issue resolution and 

greater efficiency. These initiatives are a major part of the overall retooling of 

IRS’ relationships with large corporate taxpayers. 

IRS also plans to continue to implement the recommendations of the Tax Return Preparer Strategy by addressing the challenges associated with the implementation of registration, continuing education, and testing requirements for 

tax return preparers that are scheduled to go into effect in fiscal year 2011. IRS 

took a major step forward in launching its new Preparer Tax Identification 

Number online registration process. The process gives IRS an important and 

improved line of sight into the return preparer community. IRS plans to use the 

information to analyze trends, spot anomalies, and potentially detect fraud. In 

addition, IRS will continue to develop and implement legislation to increase the 

use of electronic filing among the paid preparer community. 

Taxpayer Services.—Assisting taxpayers with their tax questions before they 

file their tax returns helps prevent inadvertent noncompliance and reduces the 

need for IRS to send burdensome postfiling notices and other correspondence. 

In fiscal year 2012, IRS plans to increase its service level by adding resources 

to meet the ever-increasing demand and by continuing to make efficiency improvements, such as automated self-service applications that allow taxpayers to 

obtain information on less complicated issues (e.g., refund inquiries). IRS believes that these improvements will allow staff to address the more complex taxlaw issues stemming from the passage of new legislation. In addition, IRS continues to study the services it offers to taxpayers on the Internet, at walk-in 

sites, and on its toll-free telephone lines. IRS officials are also exploring the relationships between taxpayer errors and unclear correspondence to guide them 

in the development of new approaches to service. 

BSM.—Data and technology are central to the future of tax administration. 

For the 2012 filing season, IRS plans to complete the new taxpayer account 

database and continue to make investments in its electronic filing systems. 

Completion of the core taxpayer account database is the cornerstone of IRS 

modernization that is expected to expedite refunds to millions of individual taxpayers. It is also a prerequisite for other major initiatives, such as the expansion of online paperless services. The ability of IRS to support increasingly complex taxpayer service and compliance initiatives will be severely limited until 

the new taxpayer account database is completed. 

The fiscal year 2012 BSM budget request is $333.6 million and 453 full-time 

Equivalents (FTE).4 This is an increase of $69.7 million (26.4 percent) and 120 

FTEs more than the fiscal year 2010 enacted level of $264 million and 333 

FTEs. Almost one-half of the budget request will fund continued development 

of the Customer Account Data Engine 2 (CADE 2).5 While the current BSM is 
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customer experience through improved access to account information, and increase the effectiveness and efficiency of agency operations. 6The IRS operates parallel tax processing systems that require updates to all systems when 

tax legislation is changed or updated. These parallel systems include CADE, CADE 2, and the 

Individual Master File. 7The Modernized e-File project develops the modernized, Web-based platform for filing approximately 330 IRS forms electronically, beginning with the U.S. Corporation Income Tax Return (Form 1120), U.S. Income Tax Return for an S Corporation (Form 1120S), and Return of 

Organization Exempt From Income Tax (Form 990). The project serves to streamline filing processes and reduce the costs associated with a paper-based process. 8Public Law 111–148, 124 Stat. 119. 

9The initiatives included in the fiscal year 2011 budget submission are separate from the 

$839 million in program increases included in the fiscal year 2012 budget submission. 

in its 12th year, the IRS’ modernization efforts started in the 1980s. IRS originally estimated that the BSM effort would last up to 15 years and incur contractor costs of approximately $8 billion. To date, the current BSM has received 

$3.24 billion in contractor services, plus an additional $474 million for internal 

IRS costs. 

BSM funding is intended to improve taxpayer service and enforcement, and 

reduce the costs and risks of operating parallel tax processing systems.6 IRS 

plans to update and settle individual taxpayer accounts in 24 to 48 hours with 

current, complete, and authoritative data which should facilitate expanded opportunities for compliance, increase analytical capabilities, and accelerate the 

identification of fraudulent trends. 

The increases more than the fiscal year 2010 budget seem reasonable considering the investments in developing and rolling out the CADE 2 during fiscal 

year 2012. Because the IRS is taking more responsibilities for program management, there are more IRS resources and fewer contractor resources devoted to 

BSM, thus the increase in labor costs. Finally, the other major BSM projects 

(e.g., Modernized e-File 7) have reduced budgets for fiscal year 2012 as they are 

winding down. 

In the area of information technology systems operations, the fiscal year 2012 

IRS budget request presents several budgetary increases related to maintaining 

and improving information technology operations and taxpayer service, including $33 million to expand online options through IRS.gov improvements, $25 

million for portal migration, and $27.5 million to update the Integrated Financial System. 

The portal initiative funds the second year of a 3-year effort to replace the 

aging infrastructure of the portals and complete the migration of the two portals by August 2013, when the existing contracts expire. This will result in significant enhancements to online capabilities for tax preparers and other registered users. Failure to complete the portal migration by this date will result 

in increased portal operating costs and increased risk under existing sole-source 

contracts. In addition, taxpayer and tax practitioners will continue to use more 

expensive, labor-intensive service delivery channels such as calling the 1–800 

telephone number or visiting an IRS taxpayer assistance center. 

Implementation of the ACA 

The implementation of the ACA 8 presents a major challenge to the IRS. ACA represents the largest set of tax law changes in more than 20 years, with more than 

40 provisions that amend the tax laws. Although the new law goes into effect gradually over many years, several provisions required immediate action by IRS, including the Small Business Health Care Tax Credit, the Qualifying Therapeutic Discovery Credit, and the expanded Adoption Credit. To enact the range of retroactive 

provisions, the IRS focused on developing new systems and business processes for 

near-term provisions, conducting initial planning for long-term provisions, and defining appropriate outreach activities for each affected group. 

ANALYSIS OF THE REQUESTED FISCAL YEAR 2012 BUDGET INCREASE

The fiscal year 2012 budget request of $13.3 billion for IRS is a $1.138 billion (9.4 

percent) increase more than the fiscal year 2010 enacted budget. The $1.138 billion 

consists of the following: 

Changes to the Base 

Adjustment To Reach Fiscal Year 2011 President’s Budget Level 9.—Increase of 

$402 million, including a $123 million increase related to the BSM appropriation. 

Maintaining Current Levels.—Increase of $86 million. 

Program Reinvestment.—Increase of $1.5 million (one-time cost). 
179 

These increases are offset by a decrease of $190 million in efficiencies and savings, including a $1 million decrease related to the modernization appropriation. 

Program Changes 

Program Increases.—Increase of $839 million, including an increase of $52 million 

in the operations support appropriation for costs related to maintenance of deployed 

modernization systems. This $52 million increase is offset by a corresponding decrease of $52 million in the modernization appropriation for fiscal year 2012. 

Adjustment To Reach Fiscal Year 2011 President’s Budget Level 

IRS is requesting about $402 million to reach the fiscal year 2011 President’s 

budget request adjusted for the proposed pay freeze. IRS has not issued new guidance for the fiscal year 2012 budget regarding the impact of the full-year fiscal year 

2011 continuing resolution signed by the President on April 15, 2011. Therefore, we 

are presenting the information as reflected in IRS’ fiscal year 2012 budget request 

dated February 14, 2011. 

The fiscal year 2012 budget request does not specify which initiatives are included 

in the $402 million increase. However, we reviewed IRS’ fiscal year 2011 budget request, and identified the following program changes in addition to changes to the 

base: 

—$21 million to increase the telephone level of service; 

—$25 million to improve and redesign IRS.gov Web site; 

—$247 million to reduce the tax gap. The three largest initiatives associated with 

this effort are $121 million for international enforcement to address offshore tax 

evasion; $78 million for under-reporting by corporate and high-wealth taxpayers, tax abuse, and other under-reporting issues; and $38 million to broaden 

collection coverage; 

—$168 million to complete development of the new taxpayer account database 

and continue investments in electronic filing systems. 

This includes continuing development and deployment of BSM projects such as 

Modernized e-File, core infrastructure (such as portals, hardware, software, and 

security), and system engineering management capabilities (including project 

planning and monitoring); and 

—$3 million program reinvestment of a portion of the electronic filing savings to 

fund the one-time separation costs associated with the September 30, 2011, closure of the Atlanta submission processing site. 

Additionally, IRS identified $9 million in program reductions to the taxpayer advocate service case processing activities, Low-income Taxpayer Clinic grants, Tax 

Counseling for the Elderly program, and Volunteer Income Tax Assistance grants 

to realign the programs to the fiscal year 2009 enacted levels. 

Maintaining Current Levels 

The IRS is requesting about $86 million to fund nonlabor inflation adjustments 

and an increase in Federal Employment Retirement System participation. Nonlabor 

inflation adjustments include rent, postage, supplies, and equipment. No inflation 

adjustment is requested for pay in fiscal year 2012. 

Program Reinvestment 

The increased use of electronic filing has led to the consolidation of sites that 

process paper individual returns. Resources from electronic filing savings will be reinvested to fund one-time separation costs associated with the September 30, 2011, 

closure of the Atlanta submission processing site. The IRS fiscal year 2012 budget 

request includes a net increase of $1.5 million related to this effort. 

Efficiencies and Savings 

The IRS fiscal year 2012 budget request includes a net reduction of about $190 

million related to efficiency savings. This $190 million reduction represents a total 

of 523 FTEs. The four largest areas of cost savings are outlined below. 

$75 Million Decrease From Reduced Information Technology Infrastructure.—The 

IRS intends to reduce its infrastructure through the use of the Capability Maturity 

Model (a process improvement approach that yields efficiencies in software engineering); the use of the Information Technology Infrastructure Library, which will 

allow IRS to improve the quality of its information technology services; and further 

consolidate its security activities to leverage security best practices. 

$27.3 Million Decrease From Reduced Training, Travel, and Programs.—IRS intends to reduce nontechnical training and noncase-related travel, and plans to implement various program efficiencies. IRS expects to achieve program efficiencies in 

the BSM, Health Insurance Tax Credit Administration, and various taxpayer com-
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10 IRS enforcement initiatives are funded from a variety of appropriations. Therefore, the requested $606 million increase in enforcement initiatives will not equal the requested $462 million increase in enforcement appropriations identified on page 3. 11Public Law 111–5, 123 Stat. 115. 12Public Law 111–147, 124 Stat. 71. 

munication and education programs. IRS also projects this efficiency initiative will 

lead to a reduction of 41 FTEs. 

$22.4 Million Decrease From Increased Electronic Filing Savings.—This decrease 

results from savings from increased electronic filing. Savings are based on projected 

growth in electronic filing and continued modernization efforts. As a result of this 

efficiency initiative, IRS projects it would need 416 fewer FTEs in submission processing. 

$22 Million Decrease From Nonrecurring Savings.—These savings would result 

from the net reduction of nonrecurring, one-time costs associated with various fiscal 

year 2011 enforcement initiatives (e.g., information technology equipment and training). 

Program Increases 

The IRS is requesting an increase of about $839 million for: 

—enforcement initiatives; 

—infrastructure initiatives; and 

—taxpayer service initiatives. 

The largest component of the $839 million increase is $606 million related to enforcement initiatives. The $606 million for the enforcement initiatives includes $243 

million for activities IRS believes will yield direct measurable results through an 

ROI. IRS estimates that the activities funded by the $243 million increase will generate $1.3 billion annually in additional enforcement revenues in fiscal year 2014. 

As stated earlier, many of the initiatives affect more than one appropriation account. Additionally, the $839 million in fiscal year 2012 program increases are in 

addition to the increases requested for all five appropriation accounts to reach the 

fiscal year 2011 budget request. 

The fiscal year 2012 budget request does not separately align the various program 

increases to the tax gap; however, many of the initiatives refer to the tax gap. IRS 

also states that helping taxpayers understand their obligations under the tax law 

is critical to improving compliance and addressing the tax gap. 

IRS Enforcement Initiatives.—$606 million increase 10 focuses on activities targeted at improving compliance through nine multi-year initiatives. These activities 

form the backbone of the IRS’s approach to address the tax gap. 

The five largest enforcement initiatives are summarized below. 

$260.3 Million To Ensure Accurate Delivery of Tax Credits.—This initiative calls 

for 834 new FTEs. IRS expects this initiative will improve the delivery of existing 

credits through a combination of improved technology tools and increased enforcement staffing. The initiative also funds the information technology and other systems required to implement the new ACA’s Premium Assistance Tax Credit, which 

becomes effective in 2014. IRS expects that this initiative will produce additional 

annual enforcement revenue of $183.3 million (an ROI of 4 to 1) in fiscal year 2014. 

$96.7 Million To Increase Coverage To Address Tax Law Changes and Other Compliance Issues (Tax Gap).—This initiative calls for 497 new FTEs. IRS anticipates 

this initiative will address compliance issues and new responsibilities arising from 

recent tax law changes included in major legislation such as the American Recovery 

and Reinvestment Act of 2009 11 and the ACA. This initiative will fund compliance 

programs needed for new provisions such as direct-pay bonds, new requirements on 

tax-exempt hospitals, a new fee on manufacturers and importers of branded prescription drugs, and the excise tax on indoor tanning. It will also increase audits 

of specialty programs (i.e., employment tax, excise tax, and estate and gift tax). IRS 

believes this initiative will produce additional annual enforcement revenue of $80.8 

million (an ROI of 3 to 1) in fiscal year 2014. 

$72.6 Million To Increase International Service and Enforcement.—This initiative 

calls for 377 new FTEs. IRS expects it will be able to implement changes required 

by enactment of the Hiring Incentives to Restore Employment (HIRE) Act of 2010,12

with funding for this initiative. IRS will implement the reporting, disclosure, and 

withholding requirements and expand coverage of international filings; conduct 

more in-depth international compliance work; strengthen compliance efforts related 

to offshore activity; and expand the Global High-Wealth Compliance Group. IRS 

predicts that this initiative will produce additional annual enforcement revenue of 

$467.1 million (an ROI of 8 to 1) in fiscal year 2014. 
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$58.5 Million To Administer New Statutory Reporting Requirements.—This initiative calls for 187 new FTEs. Recent legislation established significant new information reporting and sharing requirements from third parties (such as employers and 

health insurance providers), and the exchanges to administer the ACA’s Premium 

Assistance Tax Credit, the individual coverage requirement, and the employer responsibility payment. Effective implementation requires significant enhancements to 

existing information returns systems to handle the additional volumes and new information reporting categories. This initiative also includes resources to implement 

provisions that allow IRS to share tax data with State and Federal entities to determine eligibility for the credit and to ensure the secure exchange of information. 

$52 Million To Increase Collection Coverage.—This initiative calls for 413 new 

FTEs. IRS expects this initiative will expand work on the collection inventory and 

improve collection processes to bring taxpayers who fail to pay their debt into compliance and produce additional annual enforcement revenue of $398.3 million (an 

ROI of 9 to 1) in fiscal year 2014. 

Infrastructure Initiatives.—$119 million increase focuses on enhancing employee 

security, developing disaster recovery system capability, and establishing systems to 

implement various provisions of ACA through four initiatives. The three largest initiatives are summarized below. 

$62.5 Million To Implement Individual Coverage Requirement and Employer 

Responsibility Payments.—This IRS initiative supports the development of information technology, infrastructure, and systems to implement the provisions of 

ACA that establish shared responsibility payments for both individuals and employers. IRS requested an additional 65 FTEs for this program initiative. Beginning in 2014, the ACA requires individuals who are able to afford health insurance to obtain minimum essential coverage or pay a penalty. If affordable coverage is not available, certain individuals may be eligible for an exemption. 

$27.5 Million To Update the Integrated Financial System (IFS).—IRS believes 

updating the IFS will ensure compliance with future Federal accounting requirements; eliminate current work-around processes necessary to support adjustments and reimbursable receivables activities not provided in the current 

system; eliminate the year-end blackout period and multiple budget versions; 

and eliminate the month-end accrual process because liabilities would post upon 

receipt. This initiative calls for five new FTEs. 

$15.5 Million To Enhance Physical Security for Federal Employees.—The February 2010 attack against the Austin, Texas, IRS office killed one IRS employee 

and injured several others. As a result of this attack, this initiative will provide 

the investments needed to update and/or upgrade the physical security of IRS 

facilities. The investments are designed to enhance the overall security of IRS 

employees in the workplace. This initiative calls for 10 new FTEs. 

Taxpayer Services Initiatives.—$114 million increase focuses on improving taxpayer service and the IRS.gov Web site through two initiatives as summarized 

below. 

$81.3 Million To Improve Taxpayer Service.—IRS expects this initiative and 

the $25.9 million increase requested for fiscal year 2011 will provide additional 

staffing of at least 519 FTEs to address rising demand and increase the customer service representative level of service from the planned target of 71 percent in fiscal year 2010 to 80 percent in fiscal year 2012, while maintaining a 

93 percent customer satisfaction rate for toll-free telephone services. This initiative also includes funding to help taxpayers understand the new tax law provisions and to make related call center and infrastructure changes to handle anticipated inquiries, including questions regarding the ACA. 

$33 Million To Expand Online Options Through IRS.gov Improvements.—This 

IRS initiative will continue the multi-year effort to replace the outdated web 

portal environment and provide additional online services to taxpayers. This initiative will allow the IRS to continue the replacement of an outdated web portal 

environment that has reached the end of its useful life with the help of 15 additional FTEs. 

Chairman Durbin, Ranking Member Moran, and members of the subcommittee, 

I thank you for the opportunity to provide this statement regarding the fiscal year 

2012 budget request for IRS. 

PREPARED STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE, 

INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY

Chairman Durbin, Ranking Member Moran, and distinguished members of this 

subcommittee: Thank you for inviting me to submit this written statement regard-
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1The views expressed herein are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of the Internal Revenue Service (IRS). However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of IRS, 

the Treasury Department, or the Office of Management and Budget. Congressional testimony 

requested from the National Taxpayer Advocate is not submitted to IRS, the Treasury Department, or the Office of Management and Budget for prior approval. However, we have provided 

courtesy copies of this statement to both IRS and the Treasury Department in advance of this 

hearing. 2 IRS FY 2012 Budget Request, Congressional Budget Submission 77 (Feb. 14, 2011), available 

at http://www.treasury.gov/about/budget-performance/Documents/CJlFY2012lIRSl508.pdf. 3 IRS Data Book, FY 2010, Table 1. 

4 Id. at Table 14. 5 Id. at Table 2. 6 IRS, Joint Operations Center, Snapshot Reports: Enterprise Snapshot (week ending September 30, 2010). 7See IRS FY 2010 Enforcement Results, available at http://www.irs.gov/pub/irs-utl/ 

2010lenforcementlresults.pdf. 

ing the proposed budget of the Internal Revenue Service (IRS) for fiscal year 2012.1

As the National Taxpayer Advocate, the statutory voice for taxpayers and taxpayer 

rights inside IRS, I submit the following thoughts for your consideration: 

—IRS requires additional funding to collect the revenue that supports the Federal 

Government and to better meet the service needs of the taxpaying public. 

—IRS, in particular, requires more funding to improve taxpayer services. Both the 

quality of taxpayer services, like answering taxpayer phone calls and responding to correspondence, and the quantity of taxpayer outreach and education 

have diminished in recent years. At this point, only 5 percent of the IRS budget 

is allocated for pre-filing taxpayer assistance and education. In addition, the 

combination of increased IRS enforcement actions and the recession has created 

substantially greater taxpayer need for assistance from the Taxpayer Advocate 

Service (TAS) and the Low Income Taxpayer Clinic program. 

—The existing IRS budget structure does not accurately portray the activities of 

IRS. In particular, a significant percentage, and perhaps the majority, of funding included in the ‘‘taxpayer services’’ account is not spent on programs commonly viewed as taxpayer service. 

—The ‘‘program integrity allocation adjustment’’ mechanism has been used in a 

manner that enables the IRS to receive extra funding for enforcement but not 

for its taxpayer service activities. Under the proposed fiscal year 2012 budget, 

IRS would receive an additional $936 million in enforcement funding through 

this mechanism (which amounts to 16 percent of the $5,966,619,000 enforcement total), while receiving $0 in additional taxpayer-service funding through 

this mechanism.2 This is true despite the fact that taxpayer service indisputably plays a significant role in promoting tax compliance. 

—IRS desperately needs to conduct or commission better research so it can allocate its service and enforcement resources more efficiently. 

—IRS should revise its mission statement to acknowledge explicitly that its traditional role as the tax collector has expanded in recent years so that it is now 

both: 

—collecting taxes; and 

—administering social and economic benefits programs. 

This dual role should also be recognized explicitly in the budget to ensure the 

IRS receives sufficient funding to staff and perform both roles effectively. 

Before I delve into these issues, I want to take a moment to acknowledge the extraordinary work of the IRS workforce and its leadership. In fiscal year 2010, IRS 

collected more than $2.3 trillion to support the financial commitments of the Federal 

Government.3 It processed about 2.7 billion information returns 4 and about 230 million tax returns, including 141 million individual returns, 7 million corporation returns, and 30 million employment tax returns.5 Customer service representatives 

answered 47 million calls,6 and IRS enforcement personnel ramped up examination 

and collection activities.7 At the same time, IRS launched major initiatives to regulate Federal tax return preparers and combat noncompliance by taxpayers utilizing 

offshore bank accounts. There are always tasks IRS could perform better—and I will 

address some of them below—but I think it is important to place these comments 

in context by acknowledging how much the IRS does very well. 
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8See IRS Fact Sheet, FS–2011–09, IRS FY 2012 Budget Proposal Summary (February 2011), 

available at http://www.irs.gov/newsroom/article/0,,id=235959,00.html. 9Department of the Treasury, FY 2012 Budget in Brief (showing fiscal year 2010 enacted levels). 10Government Accountability Office, GAO–11–142, Financial Audit: IRS’s Fiscal Years 2010 

and 2009 Financial Statements at 59 (November 2010). 11See, e.g., Internal Revenue Service FY 2008 Budget Request: Hearing Before the Subcomm. 

on Financial Services and General Government of the S. Comm. on Appropriations, 110th Congress (2007) (statement of Nina E. Olson, National Taxpayer Advocate); Internal Revenue Service FY 2006 Budget Request: Hearing Before the Subcomm. on Transportation, Treasury, the Judiciary, Housing and Urban Development, and Related Agencies of the S. Comm. on Appropriations, 109th Congress (2005) (statement of Nina E. Olson, National Taxpayer Advocate). 

IRS REQUIRES ADDITIONAL FUNDING TO MAXIMIZE THE COLLECTION OF TAX REVENUE

AND TO BETTER MEET THE SERVICE NEEDS OF THE TAXPAYING PUBLIC

As I have testified previously, I view IRS as the accounts receivable department 

of the Federal Government. If the Federal Government were a private company, its 

management would fund the accounts receivable department at whatever level it believed would maximize the company’s bottom line. Since the IRS is not a private 

company, maximizing the bottom line is not—in and of itself—an appropriate goal. 

But the public sector analogue should be to maximize tax compliance, especially voluntary compliance, with due regard for protecting taxpayer rights and minimizing 

taxpayer burden. Studies show that if IRS were given more resources, it could collect substantially more revenue. 

In my 2006 Annual Report to Congress, I recommended that the Congress provide 

IRS with after-inflation increases of about 2 percent to 3 percent a year for the foreseeable future. I continue to believe that increasing IRS budget at this rate is an 

excellent financial investment. 

Most Federal expenditure programs are just that—expenditure programs. The 

funds are intended to be spent on worthwhile programs, but the expenditures generally do not directly generate more Federal revenue. IRS is different. IRS collects 

well more than 90 percent of all Federal revenue.8 On a budget of about $12.1 billion, 9 IRS collected about $2.35 trillion in fiscal year 2010.10 In other words, every 

$1 appropriated for the IRS produced about $194 in Federal revenue. 

In evaluating the likely revenue benefits of additional funding, the average return 

on investment (ROI) of 194:1 is less important than the marginal ROI that can be 

achieved for each additional $1 spent. While the marginal ROI is considerably less 

than 194:1 and will differ by program, studies generally show that, within reasonable limits, each additional $1 appropriated to IRS generates substantially more 

than an additional $1 in Federal revenue, assuming the funding is wisely spent. (As 

I discuss below, however, IRS needs to develop improved methods to measure the 

ROI of its activities.) 

Because of our national fiscal challenges, there has been considerable discussion 

recently about freezing or reducing all domestic discretionary spending. In my view, 

IRS as the tax collector should be exempt from any such freeze or reduction. Reducing funding for IRS will almost surely increase the deficit, because the reduction in 

revenue collected by the IRS will exceed the reduction in funding. A decision by the 

Congress to address our budget problem by cutting IRS funding would be akin to 

a private business attempting to address a spending shortfall by cutting its accounts 

receivable department. In other words, it would be penny-wise, but pound-foolish. 

Recommendation 

In light of IRS’ unique role as the Federal revenue collector, I recommend that 

the Congress develop new budget procedures to ensure that IRS is funded at whatever level will maximize tax compliance, with due regard for protecting taxpayer 

rights and minimizing taxpayer burden. Over the long term, this approach may include exempting IRS from spending ceilings or even taking IRS off-budget. In the 

short run, this approach should include carving out IRS from discretionary budget 

freezes intended to reduce the deficit, as cuts to IRS budget are likely to increase 

the deficit. 

IRS ESPECIALLY REQUIRES MORE FUNDING TO IMPROVE TAXPAYER SERVICES

IRS’ fiscal year 2005–fiscal year 2009 strategic plan was based on the slogan, 

‘‘Service ∂ Enforcement = Compliance’’, and IRS in fiscal year 2006 proposed to restructure its budget so that the two principal categories would be ‘‘taxpayer services’’ and ‘‘enforcement’’. In both cases, service is listed before enforcement. Although 

we view this formula as simplistic,11 it reflects the indisputable premise that both 
184 

12 Compare Department of the Treasury, FY 2012 Budget-in-Brief with Department of the 

Treasury, FY 2008 Budget-in-Brief. (The fiscal year 2006 budget was adopted using a different 

budget structure. The proposed fiscal year 2008 budget shows the enacted fiscal year 2006 totals 

as translated into the current budget structure.) Inflation adjustments were made using the Bureau of Labor Statistics inflation calculator, available at http://data.bls.gov/cgi-bin/cpicalc.pl. 13Government Accountability Office, GAO–11–142, Financial Audit: IRS’s Fiscal Years 2010 

and 2009 Financial Statements at 23 (November 2010). 14See IRS FY 2010 Enforcement Results, available at http://www.irs.gov/pub/irs-utl/ 

2010lenforcementlresults.pdf. 15 Compare IRS, Joint Operations Center, Weekly Enterprise Adjustments Inventory Report 

(week ending September 25, 2010) with IRS, Joint Operations Center, Weekly Enterprise Adjustments Inventory Report (week ending September 25, 2004). 16See IRS News Release, IR–2006–28, IRS Updates Tax Gap Estimates (February 14, 2006) 

(accompanying slide 1), available at http://www.irs.gov/newsroom/article/0,,id=154496,00.html. 

taxpayer service and enforcement contribute to tax compliance. Despite the intended 

implication that there is some rough equivalence between taxpayer service and enforcement in bringing about tax compliance, however, there is no equivalence in the 

IRS budget. 

For fiscal year 2012, the proposed budget would spend $701 million on ‘‘Pre-filing 

Taxpayer Assistance and Education’’, which is what most taxpayers think of as taxpayer service. This amounts to only 5 percent of the IRS budget. The last few years 

have been particularly challenging for IRS and many taxpayers, as the recently enacted Economic Stimulus Payments, First-Time Homebuyer Credits, and Making 

Work Pay Credits, among other tax benefits, have proven complex to claim or substantiate and have led to a significant increase in taxpayer inquiries and problems. 

As I will describe below, IRS has been unable to keep up with taxpayer needs. 

Significantly, IRS has been ramping up spending for enforcement programs in recent years while holding taxpayer-service spending flat. If the proposed fiscal year 

2012 budget is adopted without change, spending for the enforcement account will 

have increased by 15.4 percent while spending for the taxpayer services account will 

have declined by 0.3 percent since fiscal year 2006 on an inflation-adjusted basis.12

Not surprisingly, key IRS performance measures have improved for enforcement, 

but declined for taxpayer service. For example, IRS’ fiscal year 2010 Management 

Discussion and Analysis included in the GAO’s financial audit of the IRS states: 

‘‘Collection related to enforcement activities totaled $57.6 billion, a 34 percent increase over fiscal year 2004.’’ 13 By contrast, I note that IRS answered 74 percent 

of all calls from taxpayers seeking to speak with a telephone assister in fiscal year 

2010 as compared with 87 percent in fiscal year 2004, a decline of 13 percentage 

points, or 15 percent.14 IRS’ ability to timely process taxpayer correspondence has 

also declined. Comparing the final week of fiscal year 2004 with the final week of 

fiscal year 2010, the backlog of taxpayer correspondence in the tax adjustments inventory has jumped by 76 percent (from 357,151 to 628,016), the percentage of ‘‘uncontrolled’’ correspondence received, but not yet entered into IRS computer systems 

has increased by 134 percent (from 8.3 percent to 19.4 percent of correspondence), 

and the percentage of taxpayer correspondence classified as ‘‘overage’’ has increased 

by 135 percent (from 11.5 percent to 27 percent).15

Taxpayer Service Contributes to Higher Rates of Tax Compliance, and Outreach and 

Education in Particular Should be Increased 

Despite general agreement that both service and enforcement contribute to greater tax compliance, policymakers seeking to improve compliance and close the tax 

gap tend to focus almost exclusively on new enforcement measures—more audits, 

more collection actions, and more third-party information reporting to facilitate 

data-matching. The central role that service plays in promoting tax compliance is 

all too often overlooked. 

At the most basic level, there would be no compliance if IRS did not publish forms 

and publications, provide instructions on how to file returns, and answer filing-related questions. However, taxpayer service goes beyond merely publishing forms and 

answering telephone calls. 

Taxpayer outreach and education are critically important to achieving voluntary 

tax compliance, which is the cheapest type of compliance for the government. In my 

view, IRS is not conducting nearly enough outreach and education to taxpayers, especially self-employed and small business taxpayers, to maximize voluntary compliance. According to IRS’ most recent estimate of unpaid taxes, $148 billion, or 43 percent of the aggregate tax gap, is attributable to unreported income earned by unincorporated businesses and the associated unpaid self-employment tax.16

To be sure, a portion of the small business tax gap reflects a willful failure to report income. However, another portion reflects lack of knowledge about how to com-
185 

17 In fiscal year 2010, IRS audited 0.58 percent of all business returns, including 0.94 percent of small C corporations (under $10 million in assets), 0.37 percent of Subchapter S returns, and 

0.36 percent of partnership returns. See IRS Fiscal Year 2010 Enforcement Results, available at http://www.irs.gov/pub/irs-utl/2010lenforcementlresults.pdf. 18 House Report 109–307, at 209 (2005) (Conference Report). 19The House report ‘‘urge[d] the IRS to continue to expand upon its TAB-related work with 

regard to small business and self-employed taxpayers and tax-exempt and government entities, 

and to include these additional categories in the annual IRS update to the TAB.’’ House Report 

111–202, at 21–22 (2009). The Joint Explanatory Statement of Managers accompanying the conference report made clear that the House language was approved by the conference committee. 

House Report 111–366, at 892 (2009) (Conference Report). 20See IRS FY 2010 Enforcement Results, available at http://www.irs.gov/pub/irs-utl/ 

2010lenforcementlresults.pdf; IRS, Joint Operations Center, Snapshot Reports: Customer Account Services—CAS (week ending May 21, 2011). 

ply. For example, consider an individual without a college degree who becomes a 

successful plumber or electrician with a growing customer base. If he hires employees, he will face a host of employment, immigration verification, and local, State and 

Federal tax requirements, including the need to withhold and pay over payroll taxes 

with respect to his employees and to file employment tax and income tax returns 

on behalf of his business. Moreover, he likely will need to grapple with complex 

rules such as those dealing with automobile and transportation expenses, inventory, 

and depreciation of equipment and other fixed assets. For most taxpayers, these requirements would seem daunting or even impenetrable, and some taxpayers inevitably do not comply simply because they have no idea where to begin. 

IRS’ current compliance strategy, which consists largely of posting general information on its Web site and auditing a tiny fraction of small business returns,17 can 

be improved. IRS can increase compliance in the small business community efficiently if it expands its outreach and education efforts through a more robust field 

function and commits more resources to meeting proactively with small businesses 

that are starting operations. 

In fiscal year 2006, the Appropriations Committees of the House and the Senate 

directed IRS, the IRS Oversight Board, and the National Taxpayer Advocate to collaboratively develop a 5-year strategic plan for taxpayer service.18 In response, the 

IRS developed a plan known as Taxpayer Assistance Blueprint (TAB). IRS conducted extensive research on the needs and preferences of individual taxpayers in 

the course of developing TAB. Pursuant to annual appropriations directives, IRS is 

continuing to provide the Appropriations Committees with annual progress reports. 

As I have recommended before—and as the Appropriations Committees urged 2 

years ago 19—IRS should expand the scope of its TAB research studies to include 

self-employed and small business taxpayers and then should apply the knowledge 

it acquires through the studies to all of its interactions with those taxpayers. IRS 

should also expand its outreach to tax-exempt organizations to improve compliance 

in that sector. 

Taxpayer Services Should Be Strengthened To Meet the Service Needs of U.S. Taxpayers. 

Beyond compliance, I believe IRS has an obligation to provide high-quality service 

to its taxpayers simply as a matter of good government. When we ask people to pay 

over a large percentage of their income to the Government each year, the least we 

can do is make the process as simple and painless as possible. 

In important respects, IRS taxpayer service is falling short. Consider the following 

four examples: 

Telephone Service.—Each year, tens of millions of taxpayers call the IRS seeking help with a wide variety of issues, including account questions and tax-filing 

questions. Yet IRS is unable to answer a large percentage of these telephone 

calls. The Customer Account Services (CAS) Customer Service Representative 

Level of Service (LOS), generally measures the percentage of calls that get 

through to a representative among all callers seeking to do so. By this measure, 

as noted, IRS answered 87 percent of its calls in fiscal year 2004. Since that 

time, LOS has been declining, plummeting to a low of 53 percent in fiscal year 

2008. In other words, IRS telephone assistors in fiscal year 2008 were unable 

to answer nearly one-half of the calls they received. 

In fiscal year 2010, LOS rebounded somewhat to about 74 percent, and it is 

running at about that level so far in fiscal year 2011.20

While answering 74 percent of calls is a vast improvement over 53 percent, 

it means IRS is still failing to answer 1 out of every 4 calls it receives from 

taxpayers who need assistance. Equally concerning, among calls that do get an-
186 

21 IRS, Joint Operations Center, Snapshot Reports: Customer Account Services—CAS (week 

ending September 30, 2010). 22 IRS, Joint Operations Center, Snapshot Reports: Customer Account Services—CAS (week 

ending September 30, 2007). 23 Charles O. Rossotti, Many Unhappy Returns: One Man’s Quest to Turn Around the Most 

Unpopular Organization in America 285 (2005). 24For a more detailed discussion of IRS’ toll-free telephone service, see National Taxpayer Advocate 2009 Annual Report to Congress 4–16 (Most Serious Problem: IRS Toll-Free Telephone 

Service Is Declining as Taxpayer Demand for Telephone Service Is Increasing). 25 IRS, Joint Operations Center, Weekly Enterprise Adjustments Inventory Report (weeks ending September 29, 2007 and September 25, 2010, respectively). 

swered, the average wait time in fiscal year 2010 was nearly 11 minutes,21 up 

from about 41⁄2 minutes in fiscal year 2007.22

Although hard to quantify, the impact of IRS’ inability to answer taxpayer calls 

is significant and has considerable downstream consequences: 

—When taxpayers call the toll-free line with tax law questions and cannot get 

through, some will just give up and not bother to file their tax returns. Others 

will file inaccurate returns that require IRS follow-up action and taxpayer response. 

—When taxpayers receive notices proposing additional tax, many have questions 

and try to reach IRS by phone. If they cannot get through, they remain unsure 

about what to do and some will not respond, requiring IRS to take further steps 

and potentially exposing those taxpayers to enforced collection action. Others 

will write letters to IRS, requiring IRS employees in the AM function to respond. 

In his book, ‘‘Many Unhappy Returns: One Man’s Quest to Turn Around the Most 

Unpopular Organization in America’’, former Commissioner Charles Rossotti addressed the importance of maintaining a high level of service on IRS’ toll-free lines: 

‘‘Apart from the justifiable outrage it causes among honest taxpayers, I have 

never understood why anyone would think it is good business to fail to answer a 

phone call from someone who owed you money.’’ 23

Let me be clear that I am not being critical of IRS’ handling of the increased telephone volume—it generally is applying its current resources appropriately and is 

seeking new ways to use those resources more productively. However, to meet taxpayers’ needs, to improve taxpayers’ ability to comply with the law and respond to 

IRS notices, and to reduce the aggregate burden on IRS when those who cannot get 

through by phone contact IRS through multiple channels with the same question, 

I believe IRS must be able to answer at least 85 percent of taxpayer calls and keep 

taxpayers on hold for no longer than an average of 5 minutes.24

Taxpayer Correspondence.—IRS’ responsiveness to taxpayer correspondence is 

also lagging. Some AM employees shuttle back and forth between working with 

paper correspondence (including the processing of amended returns) and answering telephone calls. When IRS employees dedicated exclusively to answering taxpayer calls cannot handle the volumes, AM employees are shifted from 

handling paper correspondence to help out. Not surprisingly, as call volumes 

have increased and AM employees have been moved to answer telephone calls, 

paper correspondence inventories have increased as well. The correspondence 

inventory rose from approximately 480,000 at the end of fiscal year 2007 to approximately 628,000 at the end of fiscal year 2010—a 31 percent increase.25

To some degree, the combination of poor telephone service and slow correspondence processing creates a vicious cycle: Taxpayers who cannot get 

through to IRS by telephone send letters, causing more work for employees assigned to paper correspondence and leading to correspondence backlogs and 

delays in processing amended returns, while taxpayers who write to IRS and 

do not receive timely responses call IRS to try to figure out what happened. IRS 

requires taxpayers to file their returns and respond to notices on a timely basis. 

Taxpayers have a right to expect comparable timeliness of the IRS. 

TAS.—The workload facing my own organization, the TAS, has increased substantially in recent years. Although TAS has other important responsibilities, 

we are primarily the case-working operation of IRS for taxpayers who are experiencing a significant hardship. We assist taxpayers who are experiencing a current or imminent financial hardship as a result of an IRS action or inaction 

(e.g., where an IRS levy against a taxpayer’s paycheck will lead to eviction or 

a shutoff of utilities) or who are experiencing a systemic hardship because IRS 

has not served them on a timely or accurate basis (e.g., where IRS has failed 

to issue a refund or process a taxpayer’s response to an audit or collection notice). By statute, the Congress has required that TAS make at least one advo-
187 

26 IRC § 7803(c)(2)(D)(i)(I). 27From fiscal year 2004 to fiscal year 2010, levies rose from 2,029,613 to 3,606,818; liens rose 

from 534,392 to 1,096,376; and seizures rose from 440 to 605. See IRS FY 2010 Enforcement 

Results, available at http://www.irs.gov/pub/irs-utl/2010lenforcementlresults.pdf. 28One important current project is the development and deployment of a new, fully integrated 

system for TAS, which will automate many manual operations and integrate case advocacy, systemic advocacy, and all other TAS activities. This system, known as the Taxpayer Advocate 

Service Integrated System (TASIS), will replace more than 10 stand-alone systems and databases and improve efficiency by enabling employees to work across IRS systems, maintain and 

search case files electronically, and handle the intake, screening, and distribution of work electronically. TASIS will also enable management to ensure a more even distribution of workload 

because it will provide information not merely on the number of cases per case advocate, but 

also on case complexity, required skills, and anticipated time required for case completion. Assuming the funding committed to the project is not cut or deferred, we anticipate that much 

of TASIS will be operational in 2013. 29 Average annual caseloads represent aggregate TAS case receipts divided by the sum of case 

advocates, intake advocates, and half of TAS’s lead case advocates. (lead case advocates spend 

approximately 50 percent of their time on non-case-specific work, including training and nonevaluative reviews). 

cate available for each State,26 and we currently have 74 offices that serve taxpayers. Many of you are familiar with our local taxpayer advocates, because 

TAS handles congressionally referred taxpayer cases as well. 

TAS’s annual case receipts rose from 168,856 in fiscal year 2004 to 298,933 

in fiscal year 2010—an increase of 77 percent. For the first half of fiscal year 

2011, TAS case receipts have risen by an additional 4.3 percent as compared 

with the first half of fiscal year 2010. There are two main drivers of this increase. First, the majority of TAS’ cases stems from IRS compliance actions, and 

IRS has substantially increased the number of these actions in recent years.27

Second, TAS receives more cases during economic downturns, when more taxpayers cannot pay their tax bills and get into trouble with IRS. 

To date, TAS has managed to handle the increased caseload. After several 

years of declining staffing, the TAS has been able to hire three new categories 

of employees over the past few years to assist our case advocates in doing their 

jobs. We now have 116 ‘‘intake advocates’’, who answer telephone calls, respond 

to simple taxpayer questions, and assist with case-building by identifying key 

facts and issues and requesting necessary documentation. We also have 127 

‘‘lead case advocates’’, who mentor and assist case advocates with unusually 

challenging cases, maintain partial caseloads of their own, and help develop the 

TAS best practices. Finally, we have 18 ‘‘campus technical advisors’’, who provide technical guidance and support on complex cases worked by IRS in each 

of its 10 campuses. These additional specialty positions have freed up our case 

advocates to spend more direct time resolving taxpayer cases and have given 

them helpful resources when they get stuck on technical issues. The TAS management has also taken steps to improve efficiencies.28

As a result of these measures, I am pleased to report that the TAS has continued to perform well. In fiscal year 2010, the TAS obtained full relief for taxpayers in 69 percent of our cases and partial relief for taxpayers in an additional 5 percent. (In other cases, taxpayers generally are not entitled to relief.) 

These levels are consistent with historical norms. In addition, ongoing surveys 

conducted by an independent polling firm among taxpayers assisted by the TAS 

show that customer satisfaction stood at 84 percent in fiscal year 2004 and at 

85 percent in fiscal year 2010. 

Despite these positive results, the significant increase in case inventories is 

beginning to strain TAS’ capacity. In fiscal year 2004, TAS case advocates annually handled an average of 135 cases, and their caseloads have been steadily 

increasing since that time. In fiscal year 2010, the average annual caseload per 

advocate rose to 240 cases, and in fiscal year 2011, it is projected to reach 249 

cases.29

Because cases generally come to TAS only when a taxpayer is suffering from 

a financial hardship or the IRS’ regular processes have not worked as they 

should, the TAS as a practical matter is often a taxpayer’s last resort. As the 

IRS’ ‘‘safety net’’ for taxpayers, TAS has had a policy of assisting all taxpayers 

who meet our case-acceptance criteria since the Congress created our organization in 1998. If the imbalance between our resources and the demand for our 

services widens much further, however, we will have no choice but to decline 

to accept certain categories of cases, leaving taxpayers to fend for themselves. 

I have served as the National Taxpayer Advocate for 10 years, and this is the 

first time I have felt compelled to sound this alarm. But I am deeply concerned 

that if TAS is subject to spending freezes and does not have adequate resources, 
188 

30See IRC § 7526. 31Some LITCs provide tax education and outreach for taxpayers who speak English as a second language. 32 IRS Oversight Board, FY 2011 IRS Budget Recommendation 23–24 (March 2010). 

we will be forced to turn away cases and taxpayers will suffer significant hardships as a consequence. 

Low-income Taxpayer Clinics (LITCs).—In 1998, the Congress established a 

grant program to fund LITCs.30 LITCs primarily represent low-income taxpayers in Federal tax controversies with IRS for free or for a nominal charge.31

For fiscal year 2010, the Congress provided $10 million for LITCs. 

Largely because of the recession and consequent job losses, LITC case inventories have risen substantially. LITCs collectively worked 16,374 cases in 2008 

and 21,801 cases in 2009, an increase of 33 percent. During the first 6 months 

of 2010, LITCs worked 17,293 cases—more than the number they handled during all of 2008. Low-income taxpayers who face IRS audits or collection action 

have few alternative options for assistance. With roughly a doubling of cases in 

the last 2 years, it is critical that LITCs receive sufficient resources to deal with 

these caseloads. 

In its fiscal year 2011 budget recommendation, the IRS Oversight Board recommended a $2.3 million initiative to expand coverage of the LITC program. 

The Oversight Board noted: 

‘‘The current economic environment presents significant challenges as the 

number of taxpayers who cannot pay their liabilities is increasing while available assistance from tax professionals is declining. 

‘‘Taxpayers who want to comply with their tax obligations and responsibilities must have access to information, assistance, and, when appropriate, representation. Low-income taxpayers who cannot afford representation can be at 

a disadvantage in resolving tax disputes with the IRS. For example, a recent 

TAS research study found that taxpayers who were represented in Earned Income Tax Credit (EITC) audits by attorneys, accountants, enrolled agents, or 

even unenrolled return preparers, were nearly twice as likely to receive the 

EITC, and received almost twice as much EITC, as taxpayers who were unrepresented. Thus, LITCs ensure that low-income taxpayers receive the correct outcome in controversies with the IRS and pay the correct tax amount.’’ 32

The administration’s proposed fiscal year 2012 budget would reduce funding 

for LITCs by $500,000. I believe the LITCs need additional funding to provide 

assistance to low-income taxpayers whom IRS has targeted for enforcement action. 

Recommendations 

Both to improve tax compliance and to meet the needs of the taxpaying public, 

I recommend that the Congress provide additional funding for taxpayer-service activities, including increased funding for LITCs. 

To enable the IRS to better meet the needs of small business taxpayers and taxexempt organizations, I recommend that the Congress direct the IRS to conduct 

comprehensive TAB-like research studies of those populations. 

IRS BUDGET STRUCTURE DOES NOT ACCURATELY PORTRAY THE IRS’ ACTIVITIES AND

PROBABLY OVERSTATES SPENDING FOR TAXPAYER SERVICE

As discussed above, IRS since fiscal year 2006, has been proposing its budget by 

classifying most activities as either ‘‘taxpayer services’’ or ‘‘enforcement’’. For a number of reasons, including the availability of program integrity allocation adjustments 

for enforcement initiatives (discussed below) and how IRS approaches a program, 

the classification of an activity as taxpayer service or enforcement has consequences. 

One threshold challenge in dividing the budget in this way is that there is no universal agreement on where to draw the line between service and enforcement. For 

the most part, I think people view ‘‘taxpayer service’’ as including IRS activities that 

assist them in voluntarily complying with their tax obligations. I think most people 

view enforcement as including activities IRS undertakes to collect tax liabilities that 

have not been fully and timely paid. 

The current budget follows what I view as a fairly arbitrary division of IRS’ activities into the taxpayer services and enforcement buckets. A few examples will illustrate: 

Processing Tax Returns.—The budget treats the processing of tax returns entirely as a taxpayer service. In a response included in the National Taxpayer 
189 

33 National Taxpayer Advocate 2010 Annual Report to Congress 65–66 (Most Serious Problem: 

The Wage & Investment Division Is Tasked With Supporting Multiple Agency-Wide Operations, 

Impeding Its Ability to Serve Its Core Base of Individual Taxpayers Effectively). 34 IRS, Integrated Financial System, Status of Available Funds Report (FY 2010). 

Advocate’s 2010 Annual Report to Congress, IRS wrote: ‘‘The millions of taxpayers who each year voluntarily file and pay their taxes likely would not view 

the processing of their refunds as anything other than a service activity.’’ 33 The 

thinking behind this statement is not self-evident. It is true, as IRS has pointed 

out, that refunds are issued to many taxpayers in the course of returns processing, and it is understandable that taxpayers receiving a refund may see that 

activity as a service. 

It is also true, however, that taxpayers filing returns with balances due are 

required to remit payment with their returns and that IRS uses the information 

provided on all tax returns to help it determine which taxpayers to audit. As 

I observed only somewhat facetiously in my report, if collecting tax payments 

and facilitating audit selection are the types of services the IRS provides, I believe most taxpayers would choose to take a pass. In my view, returns processing is best classified as neither service nor enforcement. It is simply an overhead or support function that enables the IRS to collect taxes. 

AM.—Funding for the AM program, which includes the toll-free phone lines 

and correspondence processing, is included in the taxpayer services account, 

even though most of the AM budget is allocated toward working with taxpayers 

by phone or letter after IRS has proposed a tax adjustment. If IRS generates 

a notice telling a taxpayer he or she has under-reported income and owes additional tax, it is far from clear that the follow-up costs should be viewed as a 

‘‘service’’ rather than ‘‘enforcement’’. 

Field Assistance.—Funding for the Field Assistance Program, which includes 

IRS walk-in sites, is also included in the taxpayer services account. As with AM, 

more than half the work performed in the walk-in sites relates to account and 

notice work, so the decision to classify these activities as services is questionable. 

Small Business/Self-employed Operating Division.—The Small Business/SelfEmployed Operating Division (SB/SE) is tasked with serving all small businesses and self-employed taxpayers. For reasons I have described above, outreach and education are particularly important for this population. First-time 

business owners face a daunting array of employment tax requirements in addition to recordkeeping and other business income tax requirements. Growing 

businesses may not recognize tax issues that arise as they become more successful. Businesses experiencing financial difficulties may not understand that ignoring tax issues can further impair their economic viability in the short and 

long terms. Yet SB/SE is funded almost exclusively from the enforcement account. Only 1 percent of its funding comes from the taxpayer services account.34

TAS and Appeals.—Under the current budget structure, the TAS is funded 

entirely under the taxpayer services account, while the Office of Appeals is 

funded entirely under the enforcement account. I am discussing TAS and appeals together because they share similar characteristics. Neither function initiates contact with taxpayers. Rather, both functions become involved in a case 

when a taxpayer is dissatisfied with actions another IRS function has taken and 

seeks us out for assistance. This similarity raises questions about the underlying rationale for the difference in budget classification. 

There are other reasons to question the distinction as well. Most important, 

sound accounting principles generally require that revenues be matched with 

the expenses that generate them. If IRS enforcement functions propose and collect additional tax amounts, downstream costs associated with the revenue IRS 

receives arguably should be treated as part of the costs of enforcement. If IRS 

treats revenue generated by the collection function as ‘‘enforcement’’ revenue, 

but apportions the costs of working with the affected taxpayers to the taxpayer 

services account—as it currently does by treating TAS as a service expense— 

the net amount of IRS enforcement revenue will be overstated, perhaps considerably so. This will result in an inflated return on investment (ROI) on enforcement spending and has the potential to distort funding decisions. 

In addition, the Office of Appeals is constantly seeking to reassure skeptical 

taxpayers and practitioners that, despite its placement within IRS, it is independent from the IRS examination and collection functions and will provide taxpayers with an impartial hearing. The decision to fund Appeals entirely from 

the enforcement account along with the examination and collection functions 
190 

35 Compare Department of the Treasury, FY 2012 Budget-in-Brief with Department of the 

Treasury, FY 2008 Budget-in-Brief. (The fiscal year 2006 budget was adopted using a different 

budget structure. The proposed fiscal year 2008 budget shows the enacted fiscal year 2006 totals 

as translated into the current budget structure.) Inflation adjustments were made using the Bureau of Labor Statistics inflation calculator, available at http://data.bls.gov/cgi-bin/cpicalc.pl. 

may undermine appeals’ effort to persuade outsiders that it is not simply another IRS enforcement function. 

With respect to the foregoing examples, there is no objectively ‘‘correct’’ answer, so the existing budget categories are not necessarily wrong. But neither 

are they necessarily right, and that is the source of my concern. Using the 

terms ‘‘taxpayer services’’ and ‘‘enforcement’’ implies a bright-line distinction 

that cannot accurately be drawn. In that sense, the labels are arbitrary and 

somewhat misleading. In addition, because of the significant number of programs placed within the taxpayer services account that do not clearly belong 

there, I believe the budget may substantially overstate the amount of funding 

provided for programs that a layman would consider to be taxpayer services. 

This is significant as a matter of truth in packaging because it may paint an 

exaggerated portrait of how much emphasis IRS places on taxpayer service activities. As discussed below, it is also significant because programs assigned to 

the enforcement account may have more funding flexibility due to the operation 

of program integrity allocation adjustments. 

Recommendations 

I recommend the following steps: 

—Move the funding associated with returns processing into the operations support account. 

—Divide the funding associated with AM and field assistance activities between 

the taxpayer services account and the enforcement account based on the underlying activities to which they relate. 

—Divide funding for TAS between the taxpayer services account and the enforcement account based on the percentage of TAS cases that are service-related and 

the percentage of TAS cases that are enforcement-related. 

—Consider for the longer term devising a set of budget categories that do away 

with the artificial distinction between taxpayer service and enforcement. 

THE ‘‘PROGRAM INTEGRITY ALLOCATION ADJUSTMENT’’ MECHANISM HAS BEEN USED IN

A MANNER THAT ENABLES IRS TO RECEIVE EXTRA FUNDING FOR ITS ENFORCEMENT

ACTIVITIES BUT NOT FOR ITS TAXPAYER SERVICE ACTIVITIES, DESPITE THE FACT THAT

TAXPAYER SERVICE ACTIVITIES ALSO CONTRIBUTE TO COMPLIANCE

During the last few years, the IRS budget has utilized a mechanism that makes 

it relatively easy to provide increases for enforcement spending, but the procedure 

is not used for the taxpayer services account. Under this mechanism, known as a 

‘‘program integrity allocation adjustment,’’ new funding appropriated for IRS enforcement programs generally does not count against otherwise applicable spending 

ceilings provided: 

—the IRS’s existing enforcement base is fully funded; and 

—a determination is made that the proposed additional expenditures will generate a ROI of greater than 1:1 (i.e., the additional expenditures will reduce the 

deficit on a net basis). 

These conditions reflect the fact that IRS is able to project the direct ROI of its 

enforcement activities—it can measure to the dollar the amounts collected by its examination, collection, and document-matching functions—but faces a much harder 

task in measuring the ROI of taxpayer services. As discussed above, it seems intuitively clear that the ROI of taxpayer service activities is greater than 1:1. Basic 

services like publishing tax forms, providing guidance, and answering taxpayer 

questions are essential for enabling taxpayers to file returns and enabling the IRS 

to collect revenue. Yet because the IRS cannot quantify either the overall ROI of 

taxpayer service spending or the ROI of specific taxpayer service initiatives, taxpayer services spending is not currently considered eligible for program integrity allocation adjustments. 

As a consequence, the IRS has been able to request larger increases each year 

for enforcement than for taxpayer services, and it is increasingly becoming more of 

an enforcement agency with a relatively smaller focus on taxpayer service. If the 

proposed fiscal year 2012 budget is adopted without change, as noted above, spending for the enforcement account will have increased by 15.4 percent while spending 

for the taxpayer services account will have declined by 0.3 percent since fiscal year 

2006 on an inflation-adjusted basis.35 In essence, the 15.4 percent increase in en-
191 

36 Budget of the United States Government: Analytical Perspectives, Supplemental Materials 

Fiscal Year 2012: Federal Programs by Agency and Account, at 317–318, available at http:// 

www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/33l1.pdf. Taxpayer service 

spending is shown on page 317 (see line labeled ‘‘Taxpayer Services: Appropriations, 

discretionary... 803’’). Enforcement spending is the sum of the line on page 317 labeled 

‘‘(Federal law enforcement activities): Appropriations, discretionary... 751’’ and the line on 

page 318 labeled ‘‘(Central fiscal operations): Appropriations, discretionary... 803.’’ 

forcement is entirely attributable to program integrity allocation adjustments. 

Under the proposed fiscal year 2012 budget, the IRS would receive an additional 

$936 million in enforcement funding through this mechanism, which amounts to 16 

percent of the $5,966,619,000 enforcement total. 

Moreover, the recent trend is likely to continue. The administration’s fiscal year 

2012 budget proposal contains spending projections for future years. Over the next 

5 years (from fiscal year 2012 to fiscal year 2016), it projects that enforcement 

spending will rise by another 28 percent while taxpayer services spending will 

slightly decline.36

I am deeply concerned about the widening resource gap between the agency’s taxpayer service and enforcement programs. First, for reasons discussed in the prior 

section, I think the distinction between service and enforcement can be highly artificial and arbitrary. To provide substantial additional funding to any program that 

gets classified as ‘‘enforcement’’ while reducing or holding flat spending for any program that gets classified as ‘‘taxpayer service’’ will not result in a balanced agency 

and may even encourage game-playing to classify priority programs as enforcement. 

Moreover, the classification of a program as ‘‘enforcement’’ rather than ‘‘service’’ has 

significant implications for the way IRS treats taxpayers. 

Second, as I have also discussed, it is widely acknowledged that taxpayer service 

contributes significantly to compliance. In some cases, service may contribute even 

more than enforcement to improved compliance. Because IRS currently is unable to 

compute an ROI for service activities, however, service activities by themselves do 

not qualify for allocation adjustments. 

Third, the Congress has given IRS an increasing number of social and economic 

benefit programs to administer, and as I will discuss below, both of these types of 

benefits programs typically require more service. 

The use of program integrity allocation adjustments has enabled IRS to receive 

more funding than would otherwise be the case, and I think that is positive. But 

I strongly encourage IRS and this subcommittee to consider ways to modify the way 

allocation adjustments are used so that taxpayer needs are met and IRS remains 

a balanced agency. One possibility is to define new compliance initiatives more 

broadly, so that they include both an enforcement component and a service component. Because the projected ROI of some types of enforcement initiatives is high, 

a more broadly constructed initiative could still produce an ROI of greater than 1:1 

(i.e., the service components would piggyback on the high-ROI enforcement activity). 

That could satisfy the requirements for an allocation adjustment while giving the 

agency more flexibility to meet taxpayer needs and improve compliance in obvious 

yet currently immeasurable ways. 

Example of a Broader Compliance Initiative 

Assume the IRS is planning a new enforcement initiative to improve compliance 

among small business taxpayers. The initiative will cost $50 million and is projected 

to produce an ROI of 6:1 (or $300 million in additional revenue). IRS intends to request $50 million for this initiative as a program integrity allocation adjustment. 

Assume further that IRS has identified taxpayer service activities that would also 

improve small business compliance, such as new or additional types of outreach and 

education. The cost of the service initiative would be $25 million, but IRS cannot 

quantify the ROI. 

If IRS defines new compliance initiatives more broadly to include service activities, it could package the enforcement measures with the outreach and education 

measures and request $75 million for the combined initiative as an allocation adjustment. The ROI would still be positive (the $75 million cost and projected revenue of $300 million would produce an ROI of 4:1). Most important, IRS would be 

operating a more integrated, effective, and balanced compliance program. 

Recommendation 

I recommend that IRS and the Congress consider ways to broaden the use of program integrity allocation adjustments so that compliance initiatives include taxpayer service components. 
192 

37 In fiscal year 2010, the IRS collected $2.345 trillion. See IRS Data Book, FY 2010, Table 

1. The amount of enforcement revenue it collected was $57.6 billion. See IRS FY 2010 Enforcement Results, available at http://www.irs.gov/pub/irs-utl/2010lenforcementlresults.pdf. 38The congressional budget rules currently prohibit the Congressional Budget Office or the 

Office of Management and Budget from treating changes in discretionary appropriations to the 

IRS as giving rise to scorable increases in tax receipts. See House Report 101–964 (1990). See 

also Office of Management and Budget, OMB Circular No. A–11, Part 8, Appendix A, Principle 

14 (2006). Because changes to IRS funding levels undoubtedly have an impact on tax collections, 

this prohibition seemingly reflects the practical difficulty of devising accurate estimates. Yet accurate estimates would be helpful to the Congress, and we believe the IRS should make developing better estimates a priority objective. 

IRS DESPERATELY NEEDS TO CONDUCT OR COMMISSION BETTER RESEARCH SO IT CAN

ALLOCATE ITS SERVICE AND ENFORCEMENT RESOURCES MORE EFFICIENTLY

IRS would be able to allocate its resources more effectively if it had a better understanding of the causes of noncompliance and could test alternative compliance 

approaches. At present, IRS has a tendency to treat all noncompliance as willful and 

to treat taxpayers who do not fully comply as ‘‘bad’’ taxpayers. 

If all noncompliance reflected a willful decision by taxpayers to cheat the Government, a compliance approach that emphasizes hard-core enforcement measures 

might make sense. But much, if not most, noncompliance occurs for different reasons. In some cases, taxpayers do not know the rules. In some cases, taxpayers find 

complying with the rules excessively burdensome or confusing. In other instances, 

significant life events arise (e.g., illness, unemployment, or divorce) and taxpayers 

do not file returns. (This cuts both ways from a revenue standpoint. Some taxpayers 

who owe tax do not file returns, but many taxpayers who are due refunds each year 

also do not file returns and thus overpay their taxes.) In still other cases, taxpayers 

are too intimidated to file returns. For example, an individual who loses his job and 

cannot afford to pay may decide against filing a return because he fears what may 

happen if he reports a tax liability and cannot pay it. 

In large part, IRS’ one-size-fits-all approach reflects the absence of data on which 

to base better resource-allocation decisions. It bears emphasizing that ‘‘direct enforcement revenue’’ constitutes only about 2 percent of the revenue IRS collects.37

Ninety-eight percent of the revenue IRS collects is paid voluntarily due to a combination of its taxpayer service programs and the indirect, deterrent effect of its enforcement activities. However, IRS does not have adequate data to determine the 

relative contribution to compliance of taxpayer service and enforcement, let alone 

which components of taxpayer service and enforcement are most effective. Without 

these critical pieces of information, resource-allocation decisions are necessarily 

made more on the basis of best guesses and hunches than empirical evidence. 

I suggest that the Congress consider directing IRS to undertake additional research studies, perhaps utilizing the expertise of outside experts, to improve the accuracy of its ROI estimates for various categories of work, especially taxpayer service and the indirect effect of enforcement actions. IRS should also improve its methods of verifying, retrospectively, the marginal ROI it has achieved for each category 

of work. ROI estimates should include costs relating to the downstream consequences of the various categories of IRS work, including increased phone calls and 

correspondence, Appeals conferences, TAS cases, and Tax Court litigation. 

I acknowledge that developing reasonably accurate modeling is a significant challenge and will require a commitment of resources. Nonetheless, I have recommended 

in the past and continue to believe that this information will aid IRS enormously 

in making resource-allocation decisions and will provide Members of Congress with 

additional information on which to base future funding decisions.38

Recommendation 

I recommend that the Congress direct IRS to undertake additional research studies, perhaps utilizing the expertise of outside experts, to improve the accuracy of its 

ROI estimates for various categories of work, especially taxpayer service and the indirect effect of enforcement actions. 

IRS SHOULD REVISE ITS MISSION STATEMENT TO EXPLICITLY ACKNOWLEDGE THAT ITS

TRADITIONAL ROLE AS THE TAX COLLECTOR HAS EXPANDED IN RECENT YEARS SO

THAT IT IS NOW BOTH COLLECTING TAXES AND ADMINISTERING SOCIAL AND ECONOMIC BENEFIT PROGRAMS

Historically, IRS’ mission has been to collect taxes imposed by the Congress to 

fund Federal spending. In recent years, however, the Congress has increasingly 

been using the tax code to provide economic incentives or social benefits for taxpayers. 
193 

In 1975, the Congress enacted the Earned Income Tax Credit, which allows lowincome, working taxpayers to receive, through the tax code, Government payments 

that exceed their income tax liabilities. In 2008, the Congress directed IRS to make 

Economic Stimulus Payments. Also beginning in 2008, the Congress made available 

the first of three iterations of the First-Time Homebuyer Credit. Beginning in 2009, 

the Congress provided the Making Work Pay Credit. Then last year, the Congress 

enacted the Hiring Incentives to Restore Employment Act, which provides incentives 

for small businesses to hire additional workers, and the Patient Protection and 

ACA, which contains numerous provisions that will require interaction between IRS 

and businesses or individuals. 

In many cases, there are compelling reasons for administering these programs 

through the tax code. Absent adequate planning, however, I am concerned that directing a law enforcement agency to administer such programs could be problematic. 

While enforcement measures are required to prevent inappropriate claims in benefits programs, the overriding objective of agencies that administer benefits programs 

has traditionally been to help as many eligible persons qualify for the benefits as 

possible. That requires extensive outreach and even working one-on-one with potentially eligible individuals. 

There are significant differences between benefits agencies and enforcement agencies in terms of culture, mind set, and the skill sets and training of their employees. 

Benefits agencies like the Social Security Administration and the Department of 

Veterans Affairs, despite some shortcomings, are primarily trying to get to yes—to 

help as many eligible persons qualify for benefits as possible. Enforcement agencies 

are more in the business of saying no. As IRS prepares to administer large portions 

of the healthcare legislation, including approving claims by low-income persons for 

healthcare tax credits and imposing a penalty tax on those who are required to purchase health insurance but fail to do so, I believe IRS should hire and train a new 

category of caseworkers—employees with social welfare-type backgrounds or similar 

training who will work one-on-one with taxpayers to resolve legitimate disagreements, instead of merely sending out notices saying, in effect, ‘‘you owe us.’’ 

In addition, IRS will require more funding to perform effectively both its traditional tax collection role and its expanding role as a benefits administrator. I am 

convinced that with adequate planning and funding, IRS can do the job. But if IRS 

does not recognize the importance of improving its benefits administration capacity 

or does not receive adequate funding, there are likely to be significant violations of 

taxpayer rights and significant taxpayer burden. In this regard, the trend toward 

increased funding for IRS’ enforcement account relative to the taxpayer services account, as discussed above, is concerning and should be carefully evaluated. 

To help ensure that IRS focuses on these challenges and that its needs are recognized in the budget process, I believe IRS should revise its mission statement to 

make explicit that its mission is both to collect taxes and to deliver economic and 

social benefits authorized by the Congress. In this connection, the IRS should: 

—revise Revenue Procedure 64–22 to include the IRS’responsibility as a benefits 

administrator; 

—create a new program office and deputy commissioner position to provide strategic direction for all benefits programs; and 

—conduct a comprehensive evaluation of the administration of previous and existing benefits programs to aid in the planning and implementation of future programs. 

Recommendation 

I recommend that the IRS revise its mission statement to make explicit that its 

mission is both to collect taxes and to deliver economic and social benefits authorized by the Congress. 

CONCLUSION

In this statement, I have attempted to describe six issues that this subcommittee 

may wish to consider. Some require immediate attention, while others would benefit 

from consideration over the longer term. In the near term, my overriding concern 

relates to the overall funding of the IRS. As the Nation’s tax collector, the IRS is 

part of the solution to the problem of budget deficits, not part of the problem. There 

has been considerable discussion about freezing all domestic discretionary spending, 

which would presumably include funding for the IRS. I believe freezing or restricting IRS funding—either for taxpayer service activities or for enforcement activities—would be a mistake and would undermine the goal of closing the tax gap and 

reducing the deficit. I strongly encourage this subcommittee and the Congress to 

find a way to exempt the IRS from any such cuts. 
194 

PREPARED STATEMENT OF PAUL CHERECWICH, JR., CHAIRMAN, IRS OVERSIGHT

BOARD, DEPARTMENT OF THE TREASURY

The Internal Revenue Service (IRS) Oversight Board thanks Chairman Durbin, 

Ranking Member Moran, and members of the subcommittee for the opportunity to 

present the Oversight Board’s views on the administration’s fiscal year 2012 IRS 

budget request. 

This statement presents the Board’s recommendations for the IRS’ fiscal year 

2012 budget and why the Board believes this level of funding is needed to meet the 

IRS needs. Created as part of the IRS Restructuring and Reform Act of 1998, the 

Oversight Board’s responsibilities include overseeing the IRS in its administration, 

management, conduct, direction, and supervision of the execution and application of 

internal revenue laws. The Board is also responsible for ensuring that the IRS’ organization and operations allow the agency to carry out its mission. 

The Board has a responsibility to ensure that the IRS’ budget and the related 

measured contained in the performance budget support the IRS Strategic Plan 

2009–2013. In addition to this statement, the Board developed a special report in 

which it explains the detailed rationale for its budget recommendations. The report 

is available online at www.irsoversightboard.treas.gov. 

FISCAL YEAR 2012 IRS BUDGET RECOMMENDATIONS SUMMARY

The IRS Oversight Board recommends a fiscal year 2012 IRS budget of $13.342 billion, an increase of $1.2 billion more than the fiscal year 2010 enacted IRS budget, and an increase of $709 million more than the President’s fiscal year 2011 IRS 

budget request. 

The Board’s fiscal year 2012 recommendation is substantially higher than those 

made in the IRS fiscal year 2010 and fiscal year 2011 budget recommendations due 

in part to the cost to implement provisions of the Patient Protection and Affordable 

Care Act (ACA), which totals $473 million in the Board’s fiscal year 2012 IRS budget recommendation. Tables 1 and 2 show more information on the Board’s budget 

recommendations. Table 1 shows the program initiatives or increases the Board is 

recommending, and Table 2 shows the Board’s recommendations budget by account. 

The Board has also included an appendix to this statement that summaries new tax 

law provisions that have placed additional demands on IRS resources during the 

2007–2010 filing seasons. 

The Board’s foremost priority within its fiscal year 2012 budget recommendation 

is the $333.6 million in total funding recommended for the Business Systems Modernization (BSM) account, along with an associated $52 million within the operations support account for information technology infrastructure to support ongoing 

BSM maintenance. 

The Board’s second-highest priority is funding of taxpayer service that allows for 

the restoration of an 80 percent level of service (LOS) on IRS toll-free telephone assistance during fiscal year 2012. The Board believes that additional funding is needed to improve toll-free service, as major changes to the tax laws in recent years have 

contributed to a substantial increase in the number of calls to the IRS and a corresponding drop in the LOS. The Board notes that it foresees a greater demand for 

toll-free assistance in the coming years, driven by a proliferation of new tax provisions. 

TABLE 1.—IRS OVERSIGHT BOARD RECOMMENDED FISCAL YEAR 2012 IRS BUDGET 

Amount 

Fiscal year 2010 enacted budget ...................................................................................................................... $12,146,123 

Fiscal year 2011 annualized continuing resolution Level ................................................................................. $12,146,123 

Maintaining current levels ................................................................................................................................. $85,754 

Efficiencies/savings ........................................................................................................................................... ($189,957 ) 

Base reinvestment: consolidate submission processing Atlanta ...................................................................... $1,486 

Adjustment fiscal year 2011 President’s policy level ....................................................................................... $401,665 

Fiscal year 2012 adjusted base ........................................................................................................... $12,445,071 

Improve taxpayer service ................................................................................................................................... $81,307 

IRS.gov improvements ........................................................................................................................................ $33,000 

Taxpayer service initiatives ................................................................................................................................ $114,307 
195 

TABLE 1.—IRS OVERSIGHT BOARD RECOMMENDED FISCAL YEAR 2012 IRS BUDGET—Continued 

Amount 

Increase international service and enforcement ............................................................................................... $72,596 

Increase collection coverage .............................................................................................................................. $52,000 

Implement merchant card and basis reporting ................................................................................................ $35,730 

Increase coverage to address tax law changes and other compliance issues ................................................ $96,718

Ensure accurate delivery of tax credits ............................................................................................................. $260,293 

Administer new statutory reporting requirements ............................................................................................. $58,505 

Leverage return preparer ................................................................................................................................... $16,600 

Address appeals workload growth ..................................................................................................................... $9,100 

Implement uncertain tax position (UTP) reporting requirements ...................................................................... $4,129 

Enforcement initiatives ...................................................................................................................................... $605,671 

Enhance security and disaster recovery ............................................................................................................ $35,000 

Update integrated financial system .................................................................................................................. $27,500 

Leveraging data to improve compliance ........................................................................................................... $1,400 

Enhance physical security for employees .......................................................................................................... $31,057 

Implement individual coverage requirement and employer responsibility payments ....................................... $62,477 

Attract, retain, and develop a quality workforce .............................................................................................. $20,000 

Infrastructure initiatives .................................................................................................................................... $177,434 

BSM initiative: continue migration from aging tax administration system ..................................................... ..........................

Continue migration from aging tax administration system .............................................................................. ..........................

Health Insurance Tax Credit Administration ..................................................................................................... ..........................

Total Oversight Board budget .............................................................................................................. $13,342,483 

President’s fiscal year 2012 budget ................................................................................................................. $13,283,907 

Increase over President’s budget ...................................................................................................................... $58,576 

Percentage increase over President’s budget ................................................................................................... 0.4 
196 

TABLE 2.—IRS OVERSIGHT BOARD RECOMMENDED FISCAL YEAR 2012 BUDGET BY ACCOUNT 

Taxpayer service Enforcement Operations support BSM Health Insurance Tax Credit Administration Total 

Fiscal year 2010 enacted budget ......................................................................................................... $2,278,830 $5,504,000 $4,083,884 $263,897 $15,512 $12,146,123 Fiscal year 2011 annualized continuing resolution level ..................................................................... $2,278,830 $5,504,000 $4,083,884 $263,897 $15,512 $12,146,123 Maintaining current levels .................................................................................................................... $12,908 $30,691 $41,755 $168 $232 $85,754 Efficiencies/savings ............................................................................................................................... ($41,333 ) ($21,996 ) ($124,440 ) ($1,026 ) ($1,162 ) ($189,957 ) Base reinvestment: consolidate submission processing Atlanta ......................................................... $1,486 .......................... .......................... .......................... .......................... $1,486 Adjustment fiscal year 2011 President’s policy level .......................................................................... $23,254 $242,275 $10,128 $122,561 $3,447 $401,665 Taxpayer service initiatives ................................................................................................................... $44,078 .......................... $70,229 .......................... .......................... $114,307 Improve taxpayer service ....................................................................................................................... $44,078 .......................... $37,229 .......................... .......................... $81,307 IRS.gov improvements ........................................................................................................................... .......................... .......................... $33,000 .......................... .......................... $33,000 Enforcement initiatives ......................................................................................................................... $25,910 $209,668 $370,093 .......................... .......................... $605,671 Increase international service and enforcement .................................................................................. .......................... $48,363 $24,233 .......................... .......................... $72,596 Increase collection coverage ................................................................................................................. $2,201 $30,275 $19,524 .......................... .......................... $52,000 Implement merchant card and basis reporting ................................................................................... $10,475 $17,495 $7,760 .......................... .......................... $35,730 Increase coverage to address tax law changes and other compliance issues ................................... $7,229 $33,936 $55,553 .......................... .......................... $96,718 Ensure accurate delivery of tax credits ................................................................................................ $4,946 $49,083 $206,264 .......................... .......................... $260,293 Administer new statutory reporting requirements ................................................................................ $1,059 $5,061 $52,385 .......................... .......................... $58,505 Leverage return preparer ....................................................................................................................... .......................... $14,240 $2,360 .......................... .......................... $16,600 Address appeals workload growth ........................................................................................................ $7,450 $1,650 $9,100 Implement UTP reporting requirements ................................................................................................ .......................... $3,765 $364 .......................... .......................... $4,129 Infrastructure initiatives ....................................................................................................................... $500 $7,911 $169,023 .......................... .......................... $177,434 Enhance security and disaster recovery ............................................................................................... .......................... .......................... $35,000 .......................... .......................... $35,000 Update integrated financial system ..................................................................................................... .......................... .......................... $27,500 .......................... .......................... $27,500Leveraging data to improve compliance .............................................................................................. .......................... .......................... $1,400 .......................... .......................... $1,400 Enhance physical security for employees ............................................................................................. .......................... $3,911 $27,146 .......................... .......................... $31,057 Implement individual coverage requirement and employer responsibility payments .......................... .......................... .......................... $62,477 .......................... .......................... $62,477 
197 

Attract, retain, and develop a quality workforce ................................................................................. $500 $4,000 $15,500 .......................... .......................... $20,000 BSM initiative: continue migration from aging tax administration system ........................................ .......................... .......................... $52,000 ($52,000 ) .......................... ..........................HITCA ..................................................................................................................................................... .......................... .......................... .......................... .......................... .......................... ..........................

Total ......................................................................................................................................... $2,345,633 $5,972,549 $4,672,672 $333,600 $18,029 $13,342,483 
198 

1 Enactment of Public Law 112–9 on April 14, 2011 repeals certain information reporting required by the ACA and reduces the funding needed for ACA implementation by $23.3 million 

and lowers the entire request by that amount. 

Appendix 1, taken from the Board’s Annual Report to Congress 2010, provides a 

summary of major legislative and administrative tax provisions enacted in recent 

years and the challenges that each presented to tax administration during the 2007 

through 2010 filing seasons. In addition to describing the impacts associated with 

implementing these provisions, the appendix provides a short assessment of the IRS’ 

performance in implementing many of them made by either the Government Accountability Office (GAO) or the Treasury Inspector General for Tax Administration 

(TIGTA). 

The appendix highlights the many challenges the IRS faced in implementing new 

tax provisions that affected the last four filing seasons. Expanding taxpayer service 

and enforcement programs to ensure these provisions were understood and being 

claimed properly by taxpayers put a significant demand on IRS resources. 

The Board’s IRS budget recommendation also acknowledges the wide range of new 

responsibilities under the ACA, such as the administration of new tax credits and 

additional information reporting. 

Resources Needed To Implement the ACA 

The detail in Table 3 makes the fiscal year 2012 budget needs for implementing 

the ACA fully transparent. The IRS has been tasked with a wide range of new responsibilities under the ACA, including the requirements that it: 

—Administer new tax credits for individuals and businesses; 

—Collect a new excise tax on tanning services and a new fee on certain businesses 

engaged in the manufacturing and importing of prescription drugs; 

—Implement expanded exemption requirements on charitable hospitals; and 

—Gather, process, and share additional information reports.1

The Board concurs with the President’s budget request as to what the IRS funding needs are in fiscal year 2012 to responsibly implement the ACA as currently 

enacted. As shown in Table 3, the fiscal year 2012 funding needed to implement the 

ACA is $473 million with a staffing level of 1,269 full-time equivalents (FTEs). The 

Board’s budget recommendation identifies the funds the IRS needs to provide the 

necessary assistance, enforcement presence, and supporting systems infrastructure 

to carry out the ACA requirements in an effective manner. 

Of the total dollar funding needed in fiscal year 2012 for the ACA, nearly 83 percent is in the operations support account, much of which is for IRS staff, contractors, hardware, and software needed to build new IT systems and to modify existing 

tax processing systems to accommodate the new ACA provisions. 

OVERSIGHT BOARD’S BUDGET PRIORITIES

The Board’s budget recommendation for fiscal year 2012 is approximately $59 million higher than the President’s request of $13.284 billion, a difference of 0.4 percent. The Board firmly believes that its fiscal year 2012 IRS budget recommendation 

is the minimum imperative for strong and responsible tax administration. The 

Board’s recommendation calls for an overall IRS appropriation in fiscal year 2012 

of $2.35 billion for the taxpayer service account; $5.97 billion for the Enforcement 

account; $4.67 billion for the operations support account; $333.6 million for the BSM 

account; and $18 million for the Health Insurance Tax Credit Administration 

(HITCA) account. 

In the view of the Board, its budget recommendation reflects a proper balance between taxpayer service and tax law enforcement, funds strategic investments to reduce the tax gap and replace antiquated IRS tax processing systems, and furthers 

other strategic objectives of tax administration such as greater leveraging of Internet capabilities. 
199 

TABLE 3.—ACA-RELATED FUNDING AND FTE BY INITIATIVE 

[Dollars in thousands] 

Taxpayer service Enforcement Operations support Total 

Amount FTE Amount FTE Amount FTE Amount FTE 

Taxpayer service initiatives: 

Improve taxpayer service ............................................................... $20,725 150 $30,582 51,307 $150 ........................ ........................ ........................

Subtotal, taxpayer service initiatives ........................................ $20,725 150 $30,582 51,307 $150 ........................ ........................ ........................

Enforcement initiatives: 

Increase coverage to address tax law changes and other compliance issues ............................................................................ $4,904 46 $22,784 174 $45,927 143 $73,615 363 Ensure accurate delivery of tax credits ......................................... $4,946 49 $23,015 233 $199,535 222 $227,496 504Administer new statutory reporting requirements ......................... $1,059 7 $5,061 48 $52,385 132 $58,505 187 

Subtotal, Enforcement initiatives .............................................. $10,909 102 $50,860 455 $297,847 497 $359,616 1,054 

Infrastructure Initiatives: 

Implement individual coverage requirement and employer responsibility payments ................................................................ ........................ ........................ ........................ ........................ $62,477 65 $62,477 65 

Subtotal, Infrastructure initiatives ....................................... ........................ ........................ ........................ ........................ $62,477 65 $62,477 65 Total, fiscal year 2012 ACA initiatives ................................. $31,634 252 $50,860 455 $390,906 562 $473,400 1,269 
200 

Moreover, the Board’s foremost priority within its fiscal year 2012 budget recommendation is the $333.6 million in total funding recommended for the BSM account, along with an associated $52 million within the operations support account 

for information technology infrastructure to support the ongoing maintenance of 

BSM components that have been successfully implemented. This level of funding for 

BSM is imperative and requires a $122.6 million increase in fiscal year 2011 in the 

base BSM account to achieve the President’s policy level—a proposed adjustment 

contained in both the Board’s recommendation and the President’s budget request. 

The Board assigns top budget priority to BSM funding primarily because of the 

critical role these resources will play in modernizing the core taxpayer account system for individual taxpayers under the Customer Account Data Engine 2 (CADE 2) 

program. With the recommended funding, the CADE 2 program is poised to deliver 

daily account processing by the 2012 filing season, a major milestone in the IRS 

BSM effort that will yield tangible benefits, such as quicker refunds, to tens of millions of taxpayers. The Board’s recommended investments in BSM also lay the necessary technological foundation for other major advancements in IRS efficiency, taxpayer service, and enforcement for years to come—thereby helping to achieve the 

strategic goals of the agency. Both the TIGTA and the GAO agree that modernizing 

the IRS’ antiquated computer systems, for which CADE 2 is instrumental, is critical 

to providing improved and expanded service to taxpayers. 

The Board’s second-highest priority is funding of taxpayer service that allows for 

the restoration of an 80 percent LOS on IRS toll-free telephone lines during fiscal 

year 2012. Achieving this LOS requires both the $23.3 million increase in fiscal year 

2011 to reach the President’s policy level and the $81.3 million initiative in fiscal 

year 2012 to improve taxpayer service. Recent experience shows that tens of millions of taxpayers still depend on the IRS toll-free telephone operations for assistance in understanding their tax obligations, their eligibility for various tax credits 

and other tax provisions, or to resolve their account balances. However, major 

changes to the tax laws in recent years have contributed to a substantial increase 

in the number of calls to the IRS and a corresponding drop in the LOS into the low 

70 percent range. In addition, as more of the provisions of the ACA become effective 

in 2012, the Board believes that demand for IRS toll-free assistance will grow. Thus, 

the Board sees it as imperative that the IRS provides taxpayers with an adequate 

level of telephone assistance in the coming fiscal year; a level the Board believes 

should be no less than 80 percent. Increased telephone demand, driven by a proliferation of new tax provisions, has prevented the IRS from reaching this level, last 

achieved in 2007, and the Board believes taxpayers deserve no less in such a complex tax environment. 

The IRS has also been tasked with a wide range of new responsibilities under the 

ACA, such as the administration of new tax credits for individuals and businesses, 

and additional information reporting. These new responsibilities must be afforded 

budget priority as well to enable the IRS to properly implement the law. Both the 

Board’s recommendation and the President’s budget make transparent the resources 

in fiscal year 2012 needed to implement the ACA. These ACA funding requirements 

total $473 million with a staffing level of 1,269 FTEs. Of the total dollar funding 

recommended, nearly 83 percent is in the operations support account—much of it 

for IRS staff, contractors, hardware, and software needed to build new IT systems 

and to modify existing tax processing systems to accommodate the new ACA provisions. 

COMPARISON OF OVERSIGHT BOARD’S AND PRESIDENT’S BUDGET RECOMMENDATIONS

The Board’s budget recommendations are largely consistent with the President’s 

budget request in many categories. In particular, inflation adjustments, savings, 

and reinvestments are identical in both budgets. To facilitate a direct comparison 

of the Board’s recommendations to the President’s budget, the Board’s budget mirrors the upward adjustments to the fiscal year 2011 base funding to reach the President’s policy level. However, it is important to note that these adjustments to 

achieve the President’s policy levels essentially reflect proposed increases to the 

base IRS budget in fiscal year 2011; increases which had not been enacted at the 

time the Board and the President prepared their fiscal year 2012 IRS budget recommendations, and which may or may not be realized. 

As shown in Figure 1, for its first and second funding priorities, BSM and taxpayer service, the Board recommended budget and the President’s budget request 

are the same. The proposed enforcement budgets, as well as the ACA-related funding, are also the same in both budgets, as is the Heath Insurance Tax Credit Administration. 
201 

The $58.6 million difference between the Board’s fiscal year 2012 IRS funding recommendation and the President’s budget request occurs in three areas. The Board 

believes that more resources are needed in the area of IRS security and applauds 

the President’s budget request for including two valuable initiatives in these areas: 

—to improve IRS system security and disaster recovery capabilities; and 

— another to improve physical security at IRS facilities. 

The Board notes that TIGTA has identified security as the top management challenge facing IRS. The Board recommends higher funding levels in both areas. The 

Board is also recommending an additional initiative not contained in the President’s 

request, which accounts for the third area of difference. 

Specifically, the Oversight Board recommends that: 

—an additional $23 million be added to the infrastructure initiative in the President’s budget to enhance security and disaster recovery systems capability; 

—an additional $15.6 million be added to the infrastructure initiative in the President’s budget to enhance physical security for Federal employees; and 

—an additional infrastructure initiative be approved for $20 million to attract, retain, and develop a highly engaged workforce. 

All the budget recommendations by the Oversight Board are driven by the need 

to support the IRS Strategic Plan 2009–2013. As the Oversight Board has emphasized in its 2009 annual report to the Congress, IRS has a strategic plan that addresses two serious weaknesses of the tax administration system: the tax gap and 

IRS’ archaic information technology systems. The need to overcome these weaknesses, as well as effectively implementing the new tax-related provisions of the 

ACA drives the Board’s IRS budget recommendations. 

GOAL 1: IMPROVE SERVICE TO MAKE VOLUNTARY COMPLIANCE EASIER

The President’s policy level adjustment and the two taxpayer service initiatives 

contained in the President’s budget request and listed in Table 4. The Board considers its support of the $23.3 million fiscal year 2011 policy level adjustment for 

taxpayer service and the $81.3 million fiscal year 2012 initiative to improve taxpayer service particularly important to America’s taxpayers, and has identified them 

as its second-highest funding priority. 

TABLE 4.—TAXPAYER SERVICE ADJUSTMENT AND INITIATIVES RECOMMENDED BY THE OVERSIGHT 

BOARD AND THE PRESIDENT 

[In thousands of dollars] 

Amount 

Portion due to 

the ACA 

implementation 

President’s policy level adjustment ........................................................................................ 23,254 ........................

Taxpayer service initiatives: 

Improve taxpayer service ............................................................................................... 81,307 51,307 
202 

TABLE 4.—TAXPAYER SERVICE ADJUSTMENT AND INITIATIVES RECOMMENDED BY THE OVERSIGHT 

BOARD AND THE PRESIDENT—Continued 

[In thousands of dollars] 

Amount 

Portion due to the ACA implementation 

IRS.gov Improvements ................................................................................................... 33,000 ........................

Initiative total ............................................................................................................ 114,307 51,307 

Data from the IRS Oversight Board 2010 taxpayer attitude survey attests to the 

value taxpayers place on the IRS taxpayer assistance programs and the IRS tollfree telephone assistance operation in particular. As shown in Figure 2, more than 

80 percent of the public say it is either very or somewhat important that the IRS 

provide assistance on certain key service channels including assistance via toll-free 

telephone lines, an IRS Web site, and IRS office locations for walk-in assistance. In 

most instances, a sizable majority say it is ‘‘very important.’’ 

SOURCE.—IRS Oversight Board 2010 Taxpayer Attitude Survey. 

The Board’s survey further shows an increase in recent years in the percentage 

of the public who say that an IRS representative is a ‘‘very valuable’’ source for tax 

advice. As depicted in Figure 3, that upward trend, beginning in 2008, coincides 

with the start of major tax law changes designed to spur the economy. Clearly, taxpayers see a growing importance for the assistance the IRS provides through its 

service programs. 

SOURCE.—IRS Oversight Board Taxpayer Attitude Survey. 
203 

The Board believes that quality IRS assistance is critical to maintaining and ultimately improving voluntary compliance. Both the fiscal year 2011 adjustment to 

achieve the President’s policy level and the fiscal year 2012 initiative to improve 

taxpayer service are needed to provide an 80 percent level of service in fiscal year 

2012 on the IRS toll-free telephone operations, while maintaining an answer accuracy rate above 92 percent. In the view of the Board, the IRS should be equipped 

with the resources to deliver no less than an 80 percent telephone level of service. 

However, the IRS has fallen short of that standard in recent years. Should the Congress and the President agree on an IRS funding level for the rest of fiscal year 

2011 that does not include the policy level adjustment, an additional $23.3 million 

will need to be added to the fiscal year 2012 initiative to improve taxpayer service. 

As indicated in Figure 4, during the 3-year period prior to 2008, the IRS was receiving just under 60 million calls per year on its toll-free assistance lines and delivering a LOS of just more than 80 percent. However, due primarily to major tax law 

changes, such as those relating to economic stimulus payments, recovery rebate 

credits, and several other special tax provisions, the number of calls the IRS received rose sharply starting in 2008 and is now nearly 80 million calls per year. 

This increase in call volume has resulted in a corresponding drop in LOS, which 

now stands in the low 70 percent range. In looking forward to 2012, the Board seeks 

to ensure that taxpayers once again receive a minimum 80 percent level of service, 

addressing not only the slippage that has occurred since 2008, but also the increased call volume that will surely ensue as provisions of the ACA become effective. 

The Board also views as an important investment the Expand Online Options 

Through IRS.gov Improvements initiative to upgrade and expand IRS Internet services. The resources recommended for the IRS.gov Web site reflect a strategic investment that is key to providing substantially better service to greater and greater 

numbers of taxpayers in the years to come. This initiative furthers one of the guiding principles articulated in the IRS Taxpayer Assistance Blueprint, which calls for 

the IRS to enhance its Web site so that it becomes the first choice of more taxpayers 

for obtaining the information and services needed to comply with tax obligations. 

It also advances one of the core objectives in the IRS Strategic Plan 2009–2013 to 

deploy advanced information technology tools to improve IRS efficiency and productivity, and to expand online services that improve service and enforcement. In 2010, 

the IRS recorded more than 304 million page visits on IRS.gov, up from around 268 

million visits in 2009, and roughly double the volume experienced in 2004. 

SOURCE.—IRS and GAO. 

There is little doubt that IRS Internet applications for both internal and external 

customers are foundational to the success of tax administration. However, the IRS 

needs to replace its aging and outdated Internet portal environment to improve security and the quality of its Web services. The critical upgrades and expansion of 

the IRS Web site funded by this initiative are key to achieving the long-term vision 

for electronic tax administration inspired by the IRS Restructuring and Reform Act 

of 1998; a vision in which the vast majority of taxpayer interaction with the tax administration system are handled electronically. Moreover, taxpayer services deliv-
204 

ered over the Internet are considerably less expensive than telephone service. Also, 

investing in an improved Internet capability that eventually lessens telephone volume will result in future savings. In addition, because the Internet is available to 

taxpayers 24 hours a day, it overcomes a limitation of IRS telephone service. 

GOAL 2: ENFORCE THE LAW TO ENSURE EVERYONE MEETS THEIR OBLIGATION TO PAY

TAXES

The IRS Oversight Board supports the fiscal year 2011 adjustment and nine enforcement initiatives that are contained in the President’s budget and listed in 

Table 5. 

The Oversight Board supports the President’s proposed increases in the enforcement area in part because they continue a funding pattern in more recent years 

that has enabled the realistic and steady growth in enforcement resources; a pattern 

the Board has consistently recommended. For example, the IRS reports that staffing 

for its key enforcement occupations of Revenue Officers, Revenue Agents, and Special Agents, has grown from 20,113 in fiscal year 2002, to 21,185 in fiscal year 2006, 

to 22,710 in fiscal year 2010. 

TABLE 5.—ENFORCEMENT ADJUSTMENT AND INITIATIVES RECOMMENDED BY THE OVERSIGHT 

BOARD AND THE PRESIDENT 

[In thousands of dollars] 

Amount 

Portion due to 

the ACA 

implementation 

President’s policy level adjustment ........................................................................................ 242,275 ........................

Initiatives: 

Increase international service and enforcement ........................................................... 72,596 ........................

Increase collection coverage .......................................................................................... 52,000 ........................

Implement merchant card and basis reporting ............................................................ 35,730 ........................

Increase coverage to address tax law changes and other compliance issues ............ 96,718 73,615 

Ensure accurate delivery of tax credits ........................................................................ 260,293 227,496 

Administer new statutory reporting requirements ......................................................... 58,505 58,505 

Leverage return preparer ............................................................................................... 16,600 ........................

Address appeals workload growth ................................................................................. 9,100 ........................

Implement UTP reporting requirements ......................................................................... 4,129 ........................

Initiative total ............................................................................................................ 605,671 359,616 

The gradual growth in enforcement resources has allowed the IRS to increase its 

enforcement presence among both business and individual taxpayers, and is generally reflected in the IRS enforcement revenue results, which totaled $57.6 billion 

in fiscal year 2010. The value of IRS enforcement programs is more than just direct 

revenue, and year-to-year fluctuations in IRS enforcement revenue occur for various 

reasons, such as the final resolution of large dollar cases worked over several years. 

Nevertheless, the clear upward trend in direct enforcement revenue attributed to 

IRS compliance programs since 2002, as shown in Figure 5, illustrates one tangible 

result from funding a greater IRS enforcement presence in more recent years. 
205 

In the view of the Board, the recommended fiscal year 2011 policy adjustment and 

fiscal year 2012 initiatives also bolster IRS enforcement operations in a manner consistent with the IRS strategy to reduce the tax gap. In particular, the Board’s and 

the President’s recommended funding for enforcement initiatives combines a focus 

on: 

—expanded IRS global enforcement presence relative to business and individual 

taxpayers with international economic activity; 

—efforts to improve the accuracy of return submissions provided through paid tax 

preparers; 

—implementation and leveraging of various new information reporting requirements; 

—improved technology tools and increased enforcement staffing to detect fraud 

and other noncompliance with a myriad of new and existing tax credits, several 

involving rather substantial amounts; and 

—with attention to workload growth in appeals to ensure taxpayer rights are protected. 

The Board also notes that more than 40 percent of the total requested amounts 

for the fiscal year 2011 policy level adjustment and these fiscal year 2012 initiatives 

are directed toward the implementation of the ACA—most of which are for the investment in new technology and related infrastructure to administer the new tax 

credits. Among these new credits are those for small businesses to help them provide healthcare coverage for their employees and the new premium credit designed 

to help millions of other Americans purchase individual health coverage. The Board 

strongly believes that a balanced approach to the implementation of the ACA requires a proper degree of compliance activity, in addition to taxpayer assistance efforts, to deter noncompliance and fraud. 

The Board further notes that while IRS enforcement efforts produce direct revenue, their indirect contributions to voluntary compliance are likely even greater. 

IRS enforcement presence helps improve voluntary compliance by discouraging noncompliance by those who might otherwise be tempted to under-report their taxes 

and by giving compliant taxpayers confidence in the tax system and the fairness 

with which the IRS is administering the tax laws. 

To provide further context to the value of improved voluntary compliance, the 

Board notes that a 1 percentage point improvement in the voluntary compliance 

rate translates into an additional $21 billion per year in timely paid Federal taxes, 

based on estimates for tax year 2001 developed from the IRS National Research program. Some signs of potentially improved voluntary compliance from IRS enforcement efforts can be found in the Board’s 2010 taxpayer attitude survey. Respondents who had received an IRS-initiated contact in the prior year, such as a math 

error notice, were less likely to agree that it is acceptable to cheat on one’s taxes 

(either ‘‘a little here and there’’ or ‘‘as much as possible’’) than were respondents 

who had not been contacted by the IRS, i.e., 8 percent of the former versus 12 percent for the latter. 
206 

STRATEGIC FOUNDATIONS: INVEST FOR HIGH PERFORMANCE IN PEOPLE AND

TECHNOLOGY

Strategic foundations comprise two accounts in the IRS budget: BSM and operations support. 

BSM 

The IRS Oversight Board supports the total fiscal year 2012 budget of $333.6 million for the BSM account as contained in the President’s budget request and summarized in Table 6. The Board considers its funding recommendation for BSM as 

its highest priority because it reflects a strategic investment, which is crucial to rectifying one of the fundamental weaknesses in the current tax administration environment, i.e., archaic IRS tax processing systems. 

Embedded in the President’s request and the Board’s recommendation for BSM 

is an fiscal year 2011 adjustment (increase) of $122.6 million to achieve the President’s policy level. Because the Board considers BSM funding its highest priority, 

it further emphasizes that if the IRS does not receive the $122.6 million increase 

in fiscal year 2011 to achieve the President’s policy level, then this amount should 

be viewed as a Board-recommended fiscal year 2012 initiative for BSM. 

TABLE 6.—TOTAL PROPOSED FISCAL YEAR 2012 BUDGET FOR BSM BY PROJECT ACTIVITY 

RECOMMENDED BY THE OVERSIGHT BOARD AND THE PRESIDENT 

[In thousands of dollars] 

BSM projects/initiatives Fiscal year 2012 

budget 

Application migration to CADE 2 (taxpayer account database) ......................................................................... 156,800 

Current CADE ....................................................................................................................................................... 19,000 

Modernized e-File ................................................................................................................................................. 20,500 

Core infrastructure ............................................................................................................................................... 37,700 

Architecture, integration, and management ........................................................................................................ 27,645 

Management reserve ............................................................................................................................................ 2,622 

Subtotal, capital investment .................................................................................................................. 264,267 

BSM labor ............................................................................................................................................................. 69,333 

Total, BSM .............................................................................................................................................. 333,600 

The President’s request and the Board’s recommendations for BSM also include 

a proposed shift in fiscal year 2012 of $52 million (following the President’s requested policy level increase for BSM in fiscal year 2011) from the BSM account to 

the operations support account. This shift recognizes that as major components of 

IRS’ aging computer technology are modernized through successful BSM efforts, the 

ongoing operation and maintenance needs of these components can best be met in 

the future as part of the funding for existing IT infrastructure within the operations 

support account. 

The information in Table 6 reflects the BSM budget for fiscal year 2012 by project 

activity, assuming the Board’s recommendations and President’s request for BSM 

are enacted. Most of the total BSM budget, including nearly 60 percent of the portion devoted to capital investments, reflect the funds needed for the CADE 2 program. By the 2012 filing season, CADE 2 will provide a modern relational database 

and daily updating capability for the core tax processing system for individual accounts. The IRS refers to this important milestone as ‘‘Transition State 1.’’ 

Achievement of Transition State 1 under the CADE 2 program will have immediate benefits to taxpayers, including more timely account balance information to 

better serve taxpayers and the issuance of quicker refunds to the roughly 109 million individual refund filers each year—a major leap forward from the much smaller 

pool of about 41 million taxpayers receiving daily account processing today under 

the more limited ‘‘current’’ CADE system. The CADE 2 funding also enables the IRS 

to build on its new relational database foundation and begin the work on Transition 

State 2, which will help address long-standing financial material weaknesses identified by the GAO, and begin the replacement of current service and enforcement applications, based on antiquated computer code, with state-of-the-art, Internet-centric 

modular applications using modern programming languages. 
207 

2Treasury Inspector General for Tax Administration, Annual Assessment of the Business Systems Modernization Program, Reference Number 2010–2094, September 23, 2010. 3The United States Government Accountability Office, High-Risk Series: An Update, GAO– 

11–278, February 2011. 

The annual assessment of the BSM program by TIGTA lends further support to 

the merits of the requested BSM funds for CADE 2. As TIGTA stated in their assessment issued in September 2010, 

‘‘The IRS has refocused the BSM program to deliver the modernized systems sooner. TIGTA is encouraged by the actions planned and taken to refocus the BSM program, especially related to the retooling of the CADE program, known as CADE 2. 

When successful, the CADE 2 program will provide a significant boost to the IRS’ 

ability to move away from its antiquated tax return processing systems and provide 

improved service to taxpayers.’’ 2

The Board’s recommended funding for BSM will help the IRS advance technologically on other fronts as well, such as enabling the IRS to continue further expansion of its successful Modernized e-File (MeF) applications to include the employment series tax returns such as the Form 941, Employer’s Quarterly Federal Tax 

Return. Extending MeF capabilities to employment tax returns is particularly strategic, for as was emphasized in the Board’s recent 2010 report to the Congress on 

electronic filing, achieving the IRS long-term goal of an 80 percent e-file rate for all 

major tax returns will require effective strategies to substantially increase the volume of electronically filed employment tax returns, particularly the Form 941. 

The modern relational database to be achieved through the CADE 2 program and 

the Internet-filing capabilities achieved through the expanding universe of MeF systems, provide the necessary foundations for a new generation of tools and Internet 

applications that can dramatically improve IRS service and enforcement programs. 

That is why it so important, in the view of the Board, that policymakers provide 

the needed BSM funding requested by the President. Indeed, in designating the IRS 

BSM program as one of the Government programs on its ‘‘High-Risk Series’’ list, 

GAO has emphasized that the development and delivery of the modernized tax administration and internal management systems are 

‘‘. . . critical to providing improved and expanded service to taxpayers and internal business efficiencies for IRS and providing reliable and timely financial management information needed to better enable IRS to justify its resource allocation decisions and congressional budgetary requests.’’ 3

Operations Support 

The IRS Oversight Board supports the fiscal year 2011 adjustment in the operations support account and the six infrastructure initiatives contained in the President’s budget request, but also believes more funding is needed. In particular, the 

infrastructure funding requested by the President and supported by the Board is 

vital to sensible tax administration including resources needed to improve security 

for IRS systems and staff; provide for a long-overdue upgrade to the IRS’ obsolete 

financial management system that currently prevents the agency from meeting Federal accounting standards; and enable the development of the technology and other 

infrastructure components to implement major provisions of the ACA including new 

information reporting requirements. 

However, while the Board applauds the President’s budget request for including 

initiatives to enhance IRS computer systems security and disaster recovery capabilities, and to enhance physical security at IRS facilities, the Board believes more resources are warranted. In addition, the Board is also proposing a new initiative not 

in the President’s budget, which supports a long-term strategic goal for the IRS to 

be one of the best places to work in the Federal Government. The Board’s recommendations for infrastructure initiatives are presented in Table 7. 

TABLE 7.—OPERATIONS SUPPORT ADJUSTMENT AND INFRASTRUCTURE INITIATIVES 

RECOMMENDED BY THE OVERSIGHT BOARD 

[In thousands of dollars] 

Amount 

Portion due to the ACA implementation 

President’s policy level adjustment ........................................................................................ 10,128 ........................
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TABLE 7.—OPERATIONS SUPPORT ADJUSTMENT AND INFRASTRUCTURE INITIATIVES 

RECOMMENDED BY THE OVERSIGHT BOARD—Continued 

[In thousands of dollars] 

Amount 

Portion due to 

the ACA 

implementation 

Infrastructure initiatives: 

Enhance security and disaster recovery ........................................................................ 35,000 ........................

Update integrated financial system .............................................................................. 27,500 ........................

Leveraging data to improve compliance ....................................................................... 1,400 ........................

Enhance physical security for employees ...................................................................... 31,057 ........................

Implement individual coverage requirement and employer responsibility payments ... 62,477 62,477 

Attract, retain, and develop a quality workforce .......................................................... 20,000 ........................

Initiative total ............................................................................................................ 177,434 62,477 

In relation to the areas where the Board believes more funding is needed for infrastructure initiatives than the President has requested, the Board is recommending an additional $23 million for the initiative to enhance IRS system security 

and disaster recovery capabilities (bringing the total initiative request to $35 million) and an additional $15.6 million for the initiative to enhance the physical security for IRS employees and taxpayers at IRS office locations (bringing that total to 

$31.1 million). The Board is also recommending an initiative of $20 million to further develop a highly engaged IRS workforce. 

Enhance Security and Disaster Recovery Systems Capability 

The Board views its two recommendations around enhanced systems security/disaster recovery and enhanced physical security at IRS office locations as highly important to a more robust IRS enterprise risk management strategy. As recent events 

demonstrate, both natural and manmade catastrophes do occur, so the IRS needs 

to be prepared-given the critical role tax administration plays in the economic 

health of this country. Indeed, Homeland Security Presidential Memorandum has 

designated several core IRS tax processing systems as part of the Critical Infrastructure Protection (CIP) program. In a similar vein, TIGTA in its most recent report to the Treasury Secretary on the top 10 management and performance challenges facing the IRS elevated ‘‘security’’ to the top challenge, in recognition of the 

difficult task the IRS faces in safeguarding a vast amount of sensitive financial and 

personal data and also protecting approximately 100,000 employees and more than 

700 facilities. 

The infrastructure initiative to enhance security and disaster recovery systems capability would address the IRS’ need to provide resiliency of four critical tax systems: 

—Processing remittances; 

—Processing tax returns; 

—Processing refunds; and 

—Responding to taxpayer inquiries. 

The intent of this initiative is to move the IRS closer to its goal of having a disaster recovery time that does not exceed 12 to 36 hours, dependent upon the system 

disabled. The IRS’ current disaster recovery capability could leave some systems out 

of operation for days or even weeks at a time. 

Enhance Physical Security for Federal Employees 

This initiative will fund guard services for the IRS TACs during the filing season, 

a period when the IRS employees and taxpayers receiving assistance may be exposed to greater risk of dangerous situations. The initiative will also enable the purchase and installation of security equipment—cameras, screening equipment, and 

surveillance devices—as another strategy to address areas of vulnerability identified 

through a thorough security reassessment of all IRS facilities. This initiative will 

also support the IRS’ full participation on the Joint Terrorism Task Forces (JTTFs) 

and the Attorney General’s Advisory Counsels (AGACs). It will also train and develop agents to carry out assignments and rapidly follow-up on leads developed by 

the Garden City Counterterrorism Lead Development Center. 

Attract, Retain, and Develop a Highly Engaged Workforce 

The Board has approved a long-term strategic goal for the IRS to be one of the 

best places to work in Government, and will evaluate the IRS’ success in achieving 
209 

this goal by comparing its employee engagement score, as measured by the Office 

of Personnel Management’s annual employee survey, to other Federal agencies. Successful achievement of the goal requires the IRS to be in the top quartile among 

the 14 largest Federal agencies by 2012, based on that employee engagement index 

score. 

The Board believes that it is imperative that the IRS workforce be among the 

most highly engaged of all large Federal agencies for several reasons: 

—The agency is vital to the Nation’s economic security. 

—More Americans interact with the IRS than virtually any other Federal agency, 

and the performance of the IRS’ employees will have a direct bearing on whether taxpayers’ transactions with the IRS are satisfactory. 

—Studies have demonstrated that highly engaged employees are the most productive, and increased productivity will be asked of all Federal agencies. 

—More productive employees will also lower taxpayer burden through improved 

timeliness, which studies have shown is a key factor in taxpayer satisfaction 

with IRS transactions. 

Additionally, in the last 2 years, the IRS has hired a number of new employees 

to replace the growing number of retirees and to increase its enforcement staff. It 

has successfully recruited highly qualified employees, aided in part by higher unemployment. Retirement rates are expected to remain high in the future, so the IRS 

will need to continue to recruit highly qualified new employees to replace retired 

employees, and it must retain those employees it has hired and trained in the last 

several years. Improving economic conditions will make both these objectives more 

difficult. 

Specific findings by a major IRS operating division indicate that there is a significant benefit associated with high employee satisfaction, all indicating a high degree 

of efficiency and productivity. Also, attrition by resignation for highly satisfied new 

employees is significantly lower than for the overall division population. 

The proposed initiative will be used to fund activities that have a direct link to 

increasing and maintaining high levels of employee engagement for front line employees, especially those in mission-critical occupations who deal with taxpayers on 

a regular basis. Effective first-line management is a critical factor in developing a 

highly engaged workforce. 

The Board is concerned with two issues that relate to developing effective front 

line managers. First, many highly qualified technical employees are reluctant to 

move into management. Second, although qualified employees may be highly skilled 

in their chosen area, they often lack the skills needed to be effective managers and 

to effectively develop and engage the employees they supervise. 

Approval of this initiative would enable the IRS to: 

—Eliminate the backlog of untrained front line managers; 

—Ensure enough capacity to train new managers upon selection in all business 

units; 

—Improve and expand readiness programs to provide a cadre of candidates to 

step into management positions; 

—Revise the management curriculum to incorporate more e-learning and promote 

continuous learning; and 

—Evaluate the effectiveness and impact of the IRS’ leadership programs. 
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APPENDIX 1.—SELECTED MAJOR LEGISLATIVE AND ADMINISTRATIVE PROVISIONS THAT CREATED SIGNIFICANT CHALLENGES FOR THE IRS DURING THE 2007 THROUGH 

2010 FILING SEASONS 

2007 FILING SEASON 

Legislation/provision and impact(s) on filing season Some related GAO/TIGTA audit findings 

Tax Relief and Health Care Act of 2006 Legislation extended certain existing tax deductions such as those relating to 

deductions for State and local sales taxes. 

This late-passed legislation forced approximately 1 million taxpayers to delay 

their return filing and any associated refund claim for about 3 weeks while IRS finalized its system programs and testing. 

Required taxpayers to make, and IRS to process, unique annotations on paper 

tax returns to claim certain deductions. 

IRS improved most filing season services during 2007: electronic filing grew and several IRS Web site measures improved such 

as customer satisfaction; meanwhile, access to IRS telephone assistance and the associated IRS response accuracy were comparable to the prior year (GAO–08–38). 

Overall, the IRS correctly implemented the key tax law and administrative changes with no significant delays in returns processing during the 2007 filing season (TIGTA report: 2007–40–187). The IRS provided taxpayers with effective access to telephone service; however, the quality and level of service for Spanish applications were lower than those in English (TIGTA report: 2007–40–160). There were some areas in which taxpayers did not take full advantage of the benefits the tax law and administrative changes 

provided (TIGTA report: 2007–40–187). 

Telephone Excise Tax Refund (TETR) Allowed for a one-time refund on income tax returns applicable to all who paid 

telephone excise tax, regardless of obligation to file a tax return. 

The IRS received fewer TETR requests from individuals than expected; early data showed minimal impact on returns processing 

and taxpayer service (GAO–07–695). 

With some exceptions, the IRS successfully planned and implemented the TETR program for individuals and businesses; this includes revising forms, developing strategies to educate taxpayers, and developing methods for taxpayers to estimate their 

TETR claim without burden of obtaining years of telephone bills (TIGTA reports: 2007–30–178 and 2008–30–091). 

Despite IRS efforts, much of the over-collected tax went unclaimed and unrefunded (TIGTA reports 2007–30–178 and 2008–30– 

091). 

The IRS did not scrutinize many questionable TETR claims by individuals because of competing priorities to examine other issues

on returns (TIGTA report: 2007–30–178). 

The IRS effort to identify overstated TETR claims by businesses were ambitious; however, minimum selection criteria for some 

businesses were inconsistently applied (TIGTA report: 2008–30–091). 

A TIGTA survey indicated that 27 percent of preparers who did not compute the TETR claim for their business clients due to cost

involved were not aware that the IRS had offered a simplified method to estimate the refund (TIGTA report: 2008–30–175). 
211 

2008 FILING SEASON 

Legislation/provision and impact(s) on filing season Some related GAO/TIGTA audit findings 

Tax Increase Prevention Act of 2007 Legislation extended Alternative Minimum Tax (AMT) ‘‘patch’’ and certain AMT 

credit offsets. 

This late-passed legislation forced approximately 3 to 4 million taxpayers to 

delay their return filing and any associated refund claim for about 4 weeks, while the IRS finalized its system programs and testing. 

Overall, the IRS correctly implemented the tax law changes enacted late in the year with no significant delays in the processing 

of tax returns (TIGTA report: 2008–40–183). 

The IRS did not achieve its toll-free assistance and level of service performance goals because of the high volume of calls regarding the economic stimulus payments (TIGTA report: 2008–40–168). 

Mortgage Forgiveness Debt Relief Act of 2007 Allowed taxpayers to generally exclude from income forgiven mortgage debt 

used to buy or improve principal residence. 

The amount of forgiven mortgage debt excluded from income could be significant (GAO–10–997). The IRS faced several compliance challenges in administering this complicated tax provision, including limited information on 

current IRS forms, and return on investment considerations on whether to devote limited IRS enforcement resources to enforce this provision (GAO–10–997). 

Economic Stimulus Act of 2008 Mandated that the IRS send stimulus payments to more than 100 million 

households based on who filed a tax year 2007 during the 2008 filing season. 

Congressional passage occurred approximate 3 weeks after the start of the 

2008 filing season. 

As of June 13, 2008, the IRS had generated 129 million economic stimulus payments, totaling more than $89 billion with an accuracy rate of 99.6 percent (TIGTA report: 2008–40–174). The first stimulus payments were issued via direct deposit on April 28, 2008 (TIGTA report: 2009–40–069). The IRS made significant efforts to ensure eligible taxpayers received their stimulus payment such as sending advance information notices to more than 130 million taxpayers who filed a tax year 2006 return, initiating outreach efforts to retired individuals and veterans who normally have no need to file a tax return, and initiating outreach efforts to individuals whose stimulus payments were returned as undeliverable (TIGTA reports: 2009–40–069 and 2008–40–100). 

Demand for telephone assistance related to the economic stimulus legislation was unprecedented and led to a significant reduction in IRS telephone service (GAO–08–916T). The IRS decision to reallocate hundreds of IRS collections staff to help address large telephone call demand resulting from economic stimulus legislation resulted in up to $565 million in foregone enforcement revenue (GAO–08–916T). 

TIGTA identified $1.2 million in false stimulus payments that were issued by the IRS in 2008 and another $138 million that 

could be potentially released erroneously in 2009 unless the IRS made improvements in its fraud referral process (TIGTA report: 2009–10–049). 
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2009 FILING SEASON 

Legislation/provision and impact(s) on filing season Some related GAO/TIGTA audit findings 

Economic Stimulus Act of 2008 Allowed taxpayers who did not receive the full stimulus payment during the 

2008 filing season to receive the unpaid portion on their tax year 2008 return as a Recovery Rebate Credit during the 2009 filing season. 

Overall, the IRS successfully planned the implementation of the Recovery Rebate Credit and issued approximately $8.5 billion in

credits to approximately 21 million taxpayers (TIGTA report: 2009–40–129). 

Taxpayers had difficulty determining whether they qualified for this credit and early in the filing season the IRS had already 

identified more than 5 million tax returns with Recovery Rebate Credit errors (TIGTA report 2009–40–058). 

TIGTA found the IRS calculation errors in less than 1 percent of the cases but also identified a programming error, which the IRS 

took immediate action to correct, that could have potentially allowed almost 6 million taxpayers to erroneously claim nearly $1.6 billion in credits (TIGTA report: 2009–40–129). 

Legislation did not provide the IRS with math error authority to prevent individuals without valid SSNs from receiving the credit 

at the time the returns were processed, and as a result the IRS provided more than $27 million in credits to taxpayers without a valid SSN (TIGTA report: 2009–40–129). 

Housing and Economic Recovery Act of 2008 (HERA) Provided taxpayers a First Time Homebuyer (FTHB) credit of up to $7,500 on 

purchase of home, but required them to repay the credit over 15 years starting in 2011 filing season. 

While the FTHB credit was initially contained in the HERA, it was subsequently 

expanded, and the repayment provision eliminated in most instances, under the American Recovery and Reinvestment Act of 2009. 

The IRS met many of its processing goals during the 2009 filing season, but telephone access remained low, due in part to calls

about tax law changes; despite the heavy call volume, IRS accuracy remained above 90 percent (GAO–10–225). 

The IRS had a successful 2009 filing season despite the unique challenges it faced (TIGTA report 2009–40–142). The varied FTHB credit provisions within the HERA versus the American Recovery and Reinvestment Act may have confused taxpayers and also presented the IRS with significant challenges to ensure the credit was used correctly as authorized. (TIGTA report 2010–41–069). 

American Recovery and Reinvestment Act of 2009 (Recovery Act) Congressional passage occurred approximately 4 weeks after start of the 2009 

filing season. 

Provided taxpayers a revised credit of up to $8,000 on the purchase of home 

with need to repay only if home is resold or ceases to be primary residence within 3 years. 

Allowed small businesses to apply certain 2008 net operating losses against 

tax liabilities from the previous 5 years. 

Provided Federal subsidies for State and local bonds, including Build America 

Bonds (BAB), through certain credit provisions. 

The 2009 filing season provided challenges for the IRS due to the two significant tax laws that provided a new FTHB credit, and

a massive bailout and tax relief package, which entailed 116 different tax provisions (TIGTA report: 2009–40–058). 

The Recovery Act posed significant implementation challenges for the IRS because it had more than 50 provisions, many of 

which were immediate or retroactive and had to be implemented during the 2009 filing season (GAO–10–349). 

The IRS responded quickly to the implementation challenges of the Recovery Act; however, that quick response entailed tradeoffs, 

such as not making some computer changes to collect data (GAO–10–349). 

Nearly 50,000 taxpayers may not have claimed the full amount of the FTHB credit to which they were entitled; the IRS agreed to 

contact the applicable taxpayers to inform them (TIGTA report: 2009–41–144). 

Despite the fact that the Recovery Act was enacted during the filing season, the IRS issued timely and clear guidance that 

helped foster compliance with the new NOL provisions; by the end of 2009, the IRS processed approximately 44,000 NOL claims totaling more than $3 billion (TIGTA report: 2010–41–070). 

The initial guidance on bonds published by the IRS was quick, complete, accurate, and consistent with the requirements of the 

Recovery Act (TIGTA report: 2010–11–035). 

Generally, all complete requests for payment of Build America Bonds (BAB) Federal subsidies were processed accurately and 

timely by the IRS, and without indications of fraudulent or erroneous disbursements; as of September 2009, State and local governments received almost $26.4 billion in funding through 315 BAB issuances (TIGTA report: 2010–11–083). 
213 

2010 FILING SEASON 

Legislation/provision and impact(s) on filing season Some related GAO/TIGTA audit findings 

American Recovery and Reinvestment Act of 2009 (Recovery Act) Provided a Making Work Pay (MWP) credit to working individuals. Increased allowable credit amount for homeowners who make certain energy 

efficiency improvements. 

The IRS dealt with a number of challenges during the 2010 filing season, including significant tax law changes such as the 

MWP credit (GAO–11–111). 

The IRS balanced its resources across filing season activities with improvements in some areas but fluctuations in others: electronic filing and IRS Web site visits increased, level of service to callers seeking live IRS assistance improved compared to 

2009, and the accuracy of answers remained high; however, average wait time for telephone service increased compared to 2009, and millions of taxpayer refunds were delayed primarily because of the time needed to correct taxpayer errors associated with the MWP credit (GAO–11–111). 

The IRS implemented the MWP credit in accordance with the consent of the Congress by advancing it to taxpayers through a decrease in Federal income tax withholding rates (TIGTA report: 2011–41–002). The IRS initiated a significant outreach program to inform taxpayers about the change in withholding associated with the MWP 

credit and its potential to leave certain taxpayers underwithheld and owing taxes at the time they are due (TIGTA report: 2011–41–002). 

Despite IRS outreach actions, more than 13 million taxpayers were or will be negatively affected by the MWP credit withholding 

rate changes, including more than 1 million who may face an increase in their Estimated Tax Penalty amount (TIGTA report: 2011–41–002). 

A survey of taxpayers who appeared to be negatively impacted by the MWP credit withholding changes indicated that most were 

not aware of the credit or its effect on their taxes (TIGTA report: 2011–41–002). 

Worker, Homeownership, and Business Assistance Act of 2009 Extended FTHB credit another 5 months (to April 30, 2010) and allowed a 

credit up to $6,500 for certain long-time homeowners purchasing new homes. 

Provided the IRS with ‘‘math error authority’’ to deny erroneous FTHB credit 

claims upfront during the IRS return processing phase. 

Expanded and extended the NOL carry back provisions for businesses. 

As of early 2010, the IRS still did not have the ability to identify individuals who received the FTHB credit but who would have 

some repayment requirements because the home ceased to be their main residence; the IRS was, however, developing a comprehensive strategy to address this issue (TIGTA report: 2010–41–086). 

In May 2009, the IRS implemented a number of controls to prevent inappropriate FTHB credits claims from being issued before 

the claims were processed; however, follow-up action by the IRS was still needed on fraudulent and questionable claims processed before the controls were implemented (TIGTA report: 2010–41–069). 

The IRS timely implementing procedures to identify and reject extended NOL claims inappropriately submitted by Troubled Asset 

Relief program recipients, but was somewhat late in implementing controls to apply a limit on the amount of the loss carried back to the fifth year (TIGTA report: 2010–41–070). 

The IRS received millions of calls related to the MWP and the FTHB; approximately 9 percent of all calls received (GAO–11–111).
214 

PREPARED STATEMENT OF COLLEEN M. KELLEY, NATIONAL PRESIDENT, NATIONAL

TREASURY EMPLOYEES UNION

Chairman Durbin, Ranking Member Moran, and distinguished members of the 

subcommittee, I would like to thank you for allowing me to provide comments on 

the administration’s fiscal year 2012 budget request for the Internal Revenue Service (IRS). As president of the National Treasury Employees Union (NTEU), I have 

the honor of representing more than 150,000 Federal workers in 31 agencies, including the men and women at the IRS. 

IRS FISCAL YEAR 2012 BUDGET REQUEST

Mr. Chairman, the NTEU strongly supports the administration’s fiscal year 2012 

budget request of $13.2 billion for the IRS, a 9 percent increase of $1.1 billion more 

than the current fiscal year 2010 enacted level. We believe that the President’s request will allow the IRS to continue helping taxpayers meet their tax obligations, 

improve enforcement of the tax law and generate much needed revenue for the Federal Government. 

We are particularly pleased the administration’s budget request would provide 

critical increases for IRS enforcement and taxpayer service activities, and would 

allow the IRS to continue rebuilding its workforce which remains well below mid1990 levels. 

As in previous years, the NTEU also supports the budget recommendations proposed by the IRS Oversight Board which have generally called for additional funding above that requested by the administration. For fiscal year 2012, the Oversight 

Board has recommended $13.5 billion in funding for the IRS. We would be inclined 

to support providing additional funding for the IRS above the administration’s request and look forward to reviewing the details of the Board’s recommendation. 

TAXPAYER SERVICES

Providing quality customer service to the taxpayer is an important part of IRS 

efforts to help the taxpaying public understand their tax obligations while making 

it easier to participate in the tax system. Through a variety of channels, the IRS 

is able to provide year-round assistance to millions of taxpayers, including outreach 

and education programs, issuance of tax forms and publications, rulings and regulations, toll-free call centers, the IRS.gov Web site, Taxpayer Assistance Centers 

(TACs), Volunteer Income Tax Assistance (VITA) sites, and Tax Counseling for the 

Elderly (TCE) sites. These efforts have enabled the IRS continue raising the standard of service to America’s taxpayers and assisted in efforts to improve voluntary 

compliance. 

In fiscal year 2010, these efforts helped the IRS meet or exceed 83 percent of the 

taxpayer service performance targets. In addition, IRS taxpayer service activities 

were critical to its ability to deliver a successful 2010 filing season during which 

IRS employees processed more than 141 million individual returns and issued 109 

million refunds, totaling $366 billion and answered almost 36 million calls from taxpayers requesting information on new credits available to them. In addition, the IRS 

also provided in-person service at its 401 Taxpayer Assistance Centers (TACs) located around the country, for taxpayers to resolve tax issues and receive help to prepare their tax returns. In 2010, 6.4 million taxpayers visited a TAC, 3 percent more 

than in 2009. Walk-in service at TACs remains popular among elderly taxpayers, 

those with limited English and computer proficiency, and taxpayers without Internet access. 

In addition, during the 2010 filing season, the IRS expanded hours of service at 

16 geographically dispersed TACs, and seven were open every Saturday. In 27 locations, low-income taxpayers took advantage of IRS help in the preparation of both 

their State and Federal tax returns. The IRS held Open House events at 200 TACs 

and partner sites nationwide to help taxpayers prepare their returns and resolve 

their tax issues. As a result, more than 31,400 taxpayers were served and more 

than 7,700 returns were prepared at these events. 

The delivery of a successful 2010 filing season by the IRS is all the more impressive as employees delivered these numbers while also being confronted by a variety 

of challenges presented by implementation of provisions in the American Reinvestment and Recovery Act of 2009, the Worker, Homeownership, and Business Assistance Act of 2009, and increased telephone demand for Economic Recovery Payment 

inquiries. 

We were glad to see the administration’s request of $2.3 billion for taxpayer services acknowledges the good service that IRS employees provided to taxpayers in fiscal year 2010 while also recognizing that additional progress can be made. In par-
215 

ticular, we strongly support the proposed additional funding to improve telephone 

level of service, improve the IRS Web site and provide a variety of new online services. 

In fiscal year 2012, the IRS plans to increase the telephone level of service by adding resources to meet the ever-increasing demand and continuing to make efficiency 

improvements such as automated self-service applications that allow taxpayers to 

obtain information on less complex issues such as refund inquiries. These improvements will free up staff to deal with the more complex tax law issues stemming 

from the passage of new legislation. In addition, the IRS continues to study the effects of services it offers to taxpayers on the Internet, at walk-in sites, and on its 

toll-free telephone lines as well as exploring the relationships between taxpayer errors and unclear correspondence to aid in the development of new approaches to 

service. 

The NTEU strongly believes providing quality services to taxpayers is an important part of any overall strategy to improve compliance and that the President’s request for taxpayer services will enable the IRS to deliver another successful filing 

season, improve the responsiveness and accuracy of taxpayer service, and support 

IRS efforts to enhance taxpayer compliance. 

ENFORCEMENT

Mr. Chairman, the NTEU believes a strong enforcement program that respects 

taxpayer rights, and minimizes taxpayer burden, plays a critical role in the IRS’ efforts to enhance voluntary compliance, narrow the tax gap and reduce the deficit. 

In fiscal year 2010, the IRS enforcement efforts brought in almost $58 billion in enforcement revenue, an 18 percent increase more than fiscal year 2009. In addition, 

other key IRS enforcement programs continued to show progress over fiscal year 

2009. These include a 6 percent increase in collection case closures, a 20 percent 

increase in Automated Under Reporter (AUR) contact closures, an 8 percent increase in large corporate audits and an 11 percent increase in the number of individual return examinations. 

That is why the NTEU was happy to see the administration’s budget request 

would provide a $462 million increase in funding for the IRS tax enforcement above 

the current fiscal year 2010 enacted level, including additional resources made 

available through a program integrity cap adjustment. 

This increased funding will enable the IRS to continue strengthening current IRS 

compliance programs designed to close the tax gap in several areas, including: increasing compliance by addressing offshore tax evasion through more examinations 

and full implementation of the Foreign Account Tax Compliance Act (FACTA); implementing information reporting requirements approved by the Congress in 2008 

to validate income reported by businesses by reconciling their income with their 

payment card receipts and third-party transactions; and improving tax debt collection coverage and collection processes. The proposal will also allow the IRS to continue to focus on compliance issues and new responsibilities arising from recent tax 

law changes included in major legislation, including the American Recovery and Reinvestment Act and the Affordable Care Act. 

These investments in IRS enforcement programs are expected to generate $1.3 billion in additional annual enforcement revenue, resulting in a return on investment 

(ROI) of 6.4 to 1, once new hires reach full potential in fiscal year 2014. In addition, 

investment in new enforcement initiatives will also encourage voluntary compliance, 

further increasing revenue. According to the IRS, the deterrence value of these investments and other IRS enforcement programs on voluntary compliance is conservatively estimated to be at least three times the direct revenue impact. 

The NTEU strongly supports targeting additional resources to programs that 

would help close the tax gap, including new initiatives that deepen and broaden the 

IRS’ focus on international tax compliance of high-net-worth individuals and entities. The IRS has demonstrated that targeted compliance resources more than pay 

for themselves through increased revenues, which has motivated past Congresses to 

target additional funds to these enforcement activities. In addition to generating additional revenue for the Federal Government, reducing the tax gap will help 

strengthen public trust in the fairness of the tax system which will positively impact 

voluntary compliance with tax laws. 

PHYSICAL SECURITY

Mr. Chairman, as you know, last February, in what authorities believe was an 

intentional attack, a pilot crashed his small plane into a building housing almost 

200 IRS employees in Austin, Texas, killing 1 employee and seriously injuring several others. This brazen and cowardly attack, serves as a grim reminder of the great 
216 

risk that the men and women of the IRS face each and every day in service of this 

country. 

As one of the most public faces of the U.S. Government, the IRS and its employees 

often bear the brunt of anti-Government rhetoric and threats. According to the 

Treasury Inspector General for Tax Administration (TIGTA) which is charged with 

investigating threats and assaults against IRS personnel, more than 1,200 threat 

and assault cases were referred to TIGTA for investigation between 2001 and 2008. 

The cases resulted in more than 167 indictments and at least 195 convictions. 

That is why the NTEU was happy to see that the administration proposed $15 

million to enhance physical security for IRS employees. This includes $10 million 

to expand guard serve at Taxpayer Assistance Centers (TACs) during filing season, 

$1.5 million to improve security at IRS facilities around the country, and $3.9 million to provide additional resources to identify and investigate individuals or entities 

whose anti-Government or anti-tax rhetoric exhibit behavioral traits associated with 

domestic terrorism. 

The NTEU believes these critical investments will enhance the overall security of 

IRS employees in the work place, while maintaining open access for the taxpayers 

that they serve. 

CONTRACTING OUT

Mr. Chairman, the NTEU recognizes that in the current fiscal crisis, it is critical 

that the Federal Government look for ways to maximize its resources and to root 

out waste, fraud, and abuse wherever they find it. One way in which the NTEU believes that the Federal Government can best accomplish this is to reform the broken 

competitive sourcing process, and bring contracted work back in-house. By ensuring 

Federal employees are able to compete for work with contractors on an even playing 

field, and identifying areas in which the Government could perform this work more 

effectively and efficiently, the Federal Government will be better able to provide 

high-quality services and will save taxpayer dollars. The administration has already 

begun to reform Federal contracting by requiring Federal agencies to cut wasteful 

contract spending, reduce over-reliance on contractors, and improve oversight and 

accountability. These efforts are expected to result in $40 billion in annual savings 

by the end of 2011 which could be used to ensure agencies have the necessary resources and staffing. 

In recent years, the Congress has acknowledged the inherent flaws in the competitive sourcing process and has included language in year-end spending bills that 

prohibit the use of funds to begin new public-private Circular A–76 competitions for 

another year. The NTEU strongly believes the current A–76 competition moratorium should be continued for another year until further steps are taken to reform 

the broken competitive sourcing process that has eroded the ability of agencies to 

perform many critical functions, and has led to contractors performing work that 

should be performed solely by Federal employees. 

In addition, we would strongly encourage the Congress to continue the current 

prohibition on the use of funds for private collection agencies through fiscal year 

2012. The use of private collection agencies to collect tax debts has repeatedly been 

shown to be a waste of taxpayer dollars and lead to taxpayer abuse. The 2006 initiative resulted in widespread taxpayer abuse and a loss of almost $5 million to the 

Federal Government, after subtracting program administration costs and commissions payable to the PCAs. While the IRS ended the private tax collection program 

in 2009, it still retains the statutory authority to revive the program in the future. 

CONCLUSION

Mr. Chairman, thank you again for allowing the NTEU to provide our thoughts 

on the administration’s fiscal year 2012 budget request for the IRS. We strongly believe that by investing in demonstrably effective enforcement and taxpayer service 

programs, the administration’s request will allow the IRS to provide taxpayers with 

top-quality service, enhance voluntary compliance, narrow the tax gap, and reduce 

the deficit. 

Senator DURBIN. Thank you very much. 

As I mentioned in my opening statement, the IRS deals with a 

huge volume, processing more than 230 million tax returns and 

issuing more than 109 million refunds. It’s an indication of the 

challenge that you face, and your people that you work with face, 

on a regular basis. And, of course, there are going to be cases 
217 

where people set out to defraud or cheat the Government in terms 

of filing these tax returns. 

I’d like to call your attention to one that’s received some attention over the last year or so. This is the providing of refunds to people who are serving in prisons across the United States. The Treasury Inspector General for Tax Administration reported that erroneous prisoner refund claims are on the rise—up of 44,944 claiming 

refunds of $295.1 million in the year 2009. 

Even though the IRS has been able to prevent large amounts of 

these refunds from being issued—256 million were rejected in 

2009, this year of the study—the amount of false refunds issued 

still hit a high of $39.1 million. Since 2004, when 18,103 false tax 

returns were filed, nearly $123 million in fraudulent refunds have 

been issued to those serving in prison. 

Now, I can think of a situation where someone serving in prison 

may be eligible for a refund. It could happen. But clearly, in this 

case we’re dealing with those ineligible to receive refunds who are 

trying to defraud the Government. They aren’t satisfied with being 

punished by sitting in prison. They are dreaming up new crimes— 

at the taxpayers’ expense here—to try to defraud the Government. 

And so let me ask you at the outset—I understand you’ve spoken 

to the U.S. Bureau of Prisons to try to make sure that we can have 

identification of those prisoners filing these returns. But I also understand that, when it comes to the State prison systems, that your 

authority to have this kind of information transferred will expire 

at the end of this year. 

Can you tell me what’s being done to stop these false claims by 

prisoners, and what more we can do to protect the taxpayers and 

the Treasury? 

PRISONER CLAIMS

Mr. SHULMAN. Mr. Chairman, it’s an issue we take very seriously 

and we’ve been focused on. The bottom line is, when we have the 

name of a prisoner, we can stop the refund from going out, and we 

do. 

The problem is getting the data. And we signed last year a 

memorandum of understanding with the Federal Bureau of Prisons, so we’ll get the data in a format we need so we can put screens 

in place to block the refund. 

I sent letters out to the Governors of the 10 States that have the 

highest prison populations and the biggest problems here. We’ve 

since that time signed memorandums of understanding with seven 

of those States to get the information. We’re in discussions with 17 

other States. So, we’ve seen some progress with States getting us 

the information so we can block it. 

We have a bigger problem with big counties and municipalities, 

because we need to get information from them. They’ve got budget 

constraints; and we need to get the information in a format we can 

use in December, so we can load it into our system, so that we can 

put blocks in place for the filing seasons. 

What I would tell you—and I think the Inspector General recognized this in the last report—is, we’re stopping more, we’re detecting more, and we’re screening more now. 

Senator DURBIN. Are we prosecuting those who file false returns? 
218 

Mr. SHULMAN. The biggest hammer that we have is sending 

someone to jail. And these people are already in jail. And so, what 

we’ve been doing in these memorandums with States and the Federal Government—and this is authority you talked about—is sharing tax data, which generally we can’t do under 6103 of the tax 

laws, so that officials can do things like have additional punishment in prisons. Wardens can put a prisoner in solitary confinement and things of that like. Because the people we generally block 

are people who are there for life. As you mentioned, there’s a lot 

of prisoners who are married, filing jointly, who are due a refund. 

So, what we need to do is screen the return and make sure we’re 

not hurting the spouse of a prisoner. 

I think we’ve made a lot of progress. This year we’ve actually 

processed and done screens and follow-ups of 100,000 more returns. 

I added resources to the unit that does the screening. And so, all 

of this is moving in the right direction. And as long as we get the 

information, we can properly block these refunds. 

IMPROPER CLAIMS

Senator DURBIN. In the infinite wisdom of a Member of Congress, 

we dream up new tax deductions and tax credits for perfectly valid 

reasons—at least in our opinion. And then it’s up to you to try to 

make it work. And one of them related to tax credits for energy efficient windows, doors and insulation and geothermal heat pumps 

and solar water heaters. I probably voted for it. I would have if it 

were a separate vote. It sounded like a good idea. 

For tax year 2009, taxpayers claimed more than $5.8 billion of 

the energy credits which were included in the 2009 Economic Stimulus Recovery Act. Based on a review of a statistically valid sample 

of 150 tax returns, the Treasury Inspector General for Tax Administration was unable to confirm home ownership for 30 percent of 

that sample—45 of the taxpayers—which, of course, is required to 

claim the credit. So, there is, at least, a question mark going forward as to whether these 30 percent of the people who claimed this 

money were eligible for it. 

In addition, the Inspector General identified 362 ineligible individuals who were allowed to erroneously claim $404,578 in residential energy credits on their tax returns. These individuals included 

262 prisoners—here they are again, now claiming that they deserve 

a tax credit for energy efficient windows in their prison cells, I 

guess—and 100 individuals under the age of 18 who were ineligible 

to file. 

So, how do we get to the bottom of this—once again, with the 

prisoners, and, again, with those who are ineligible—to try to police 

the ranks and make sure that people aren’t filing and claiming 

credits that they’re not entitled to? 

Mr. SHULMAN. I think there’s a couple of things. This is a worldwide phenomenon. When people wanted to give incentives to spend 

when there was a major economic meltdown across the globe, people quickly used the tax system to push a lot of money out to help 

stabilize economies. The tax system is efficient, and there’s already 

an annual interaction that happens every year with most Americans. 
219 

When we have time, we can properly set up filters, think this 

process through, engage with the industry, find out where there’s 

potential leakage, find out what data we can get in, find out what 

data we can get through on our electronically filed returns, and 

then set up screens and filters. And we do that. For instance, in 

the report you referenced, we generally—this law happened very 

quickly, when we were trying to do some things—set up a set of 

filters. Our Inspector General—who provides incredibly valuable 

service, and we learn along the way, I think, both of us, as we go— 

recommended we put more filters in place while we were having 

dialogue on that report. 

Some leakage occurred. We’d like to have zero leakage. There’s 

going to be some leakage with any credits, because we’re only going 

to be able to screen and follow up with a certain amount. But we 

do follow-up. And so, when things happen very quickly, sometimes 

more refunds go out the door that are questionable. Then we have 

an audit program where we can go audit, find out what’s there, do 

follow-up, and close. If we have a lot more lead time, with more developed credits, we can set up the screens ahead of time. 

But make no mistake—I think we’re getting better at this, and 

we’ve a lot of sophisticated filters, and we stop the vast majority 

of fraudulent returns from going out. But if you’re going to use the 

tax system, which is built on voluntary compliance, to achieve 

these goals we’ve got to get this balance right between getting refunds to people who are due them and rely on them, and blocking 

the bad ones, there’s going to be some leakage. Our goal is to get 

that balance right—to narrow the leakage as much as we can. 

Senator DURBIN. If—Senator Moran, just bear with me. I want 

to ask two questions to close this line here. 

In the most egregious cases, when someone is claiming they’re a 

homeowner and entitled to these credits and, in fact, they’re 

not—— 

Mr. SHULMAN. Yes. 

Senator DURBIN [continuing]. So, they are just clearly misrepresenting their eligibility for the program. It’s not a math error. It’s 

a clear misrepresentation. In those cases, when you detect them, is 

there follow-up in terms of penalties, fines, prosecution? 

PENALTIES AND FINES

Mr. SHULMAN. Penalties, yes. Fines, yes. We have limited prosecutorial resources. We try to spend those resources on the places 

that are going to create the most long-term deterrence. Our Criminal Investigation Division is balancing things around money laundering, terrorist financing, preparer fraud, identity theft fraud, and 

very specific tax fraud. We try to allocate the resources appropriately. 

So the answer is ‘‘Yes’’. And a lot of times, you’ll see a scheme 

where one person puts a bunch of false claims in, files a return, 

comes back. An individual who claims $1,000 credit for himself 

fraudulently usually will be fined in more of a civil context than 

a criminal context. But the bigger the crime, the more prosecution 

is likely to happen. And as you know, it’s a partnership with the 

Justice Department and local U.S. Attorneys. 
220 

IMPROPER CLAIMS

Senator DURBIN. So, we talked about these jail-cell taxpayers, 

and I’ve talked about this specific credit. If you could—the last 

question here—if you could take a look at the overall landscape, 

where do we find the most fraud—the most cheating going on in 

terms of people claiming what they are not entitled to under our 

tax code? 

Mr. SHULMAN. You know, the tax code is incredibly complex. 

There’s a fair amount of noncompliance. Some of it is confusion; 

some of it’s fraud. The places we focus, which is where we think 

the most leverage is for the tax system to make sure we protect the 

fisc, is overseas and offshore tax evasion—people just parking assets overseas. I would say, where there’s complexity is where people hide money and push the envelope. 

We’ve been focused around preparer fraud, because we think it’s 

a big point of leverage. If one preparer gets 1,000 taxpayers and 

encourages them to do something fraudulent, a lot of times the taxpayer is unsuspecting. If we can lock that down, it’s a big link in 

the system. 

And then refundable credits. In places where you can get a large 

tax credit, you find fraud. So, we did a lot of focus on the Firsttime Home Buyer Credit, where there was a big refundable credit 

that was temporary, that was quick. Earned Income Tax Credit— 

we put a lot of effort there, doing both civil and criminal followup. And then, this set of credits that you talked about, is where we 

put a lot of effort. 

Senator DURBIN. Thank you. 

Thank you, Senator Moran, for your patience. 

Senator MORAN. Mr. Chairman, thank you. 

FRAUD DETECTION

Commissioner, following that line of questioning, how often is it 

that the IRS finds the fraud, as compared to an Inspector General’s 

report, or a GAO report requested by the Congress? How actively 

engaged and how successful are you in ferreting out the problem 

with some, without some other agency pointing out the fraud or the 

challenge? 

Mr. SHULMAN. Every tax return goes through a screen. We call 

it the Electronic Fraud Detection System (EFDS). It’s our fraud filters. And it looks for, for example, returns that have the same address—100 returns that have the same address; big changes in income; not having the proper documentation attached or not including information in the return. We set filters and tolerances, frankly, based on resources. A lot of these are an indication that we need 

to follow up. 

And so, we have civil units that call employers and say, ‘‘Was 

this person employed? Is this income accurate?’’ And then it kicks 

out to criminal, who develop schemes, and that feeds our criminal 

prosecutions. 

What I would say is the GAO, our Inspector General, Congressional oversight all really help us by focusing on places where they 

think we’ve had too much leakage. I don’t think there’s been an in-
221 

stance—at least since I have been there—where people have found 

more fraud in their investigation than we’ve actually blocked. 

And so just to give you a sense of magnitude, our EFDS filters, 

screen filters, kick out between 1 and 2 million tax returns a year 

that we do follow-up on. We block every year and reject 2 million 

returns who have duplicate SSNs of either dependents or individuals. And sometimes it’s a transcription error, but sometimes it’s 

somebody trying to defraud the system. In EITC alone we protect 

$4 billion annually through our enforcement efforts and blocking 

refunds. 

We’ve got an incredibly active program there. But then it’s very 

helpful to have people overseeing the program, finding where they 

think there’s too much leakage, and we tighten—you know, it’s a 

continual evolution and tightening up. Frankly, the real fraudsters, 

they’re always testing our tolerances, sending things in to our systems. And so, we always have to be one step ahead. 

PRISONER CLAIMS

Senator MORAN. Well, the two examples that Chairman Durbin 

indicated—the prisoner example—that’s something you would have 

known before we read about it in the paper? 

Mr. SHULMAN. Well, sure, we’ve had extensive conversations. 

Look, it’s counterintuitive to your average American that a prisoner 

could get a tax refund, right? So it’s going to be in the paper. 

Senator MORAN. It makes a story. 

Mr. SHULMAN. I think the reality is, some prisoners can get tax 

refunds. We can’t just reject everyone. So we need to do screening. 

If you look at the reports that say there’s been more, they also 

show that we’ve been screening more and blocking more and identifying more. It’s just the volume’s grown, so the gross volume of refunds were higher this year. The numbers, the percentages that we 

caught, the amount we caught and filtered, also grew exponentially. So, we were protecting a lot more money for the Federal 

Government. But, as a fraction, more was going out. 

Senator MORAN. Okay. 

E-FILING

You talked about e-filing and the savings that come from that 

successful program. Your sentiment—first of all, how much more 

potential is there for savings? Is there more, opportunity for more 

e-filing expected? And then second, you talk about the $190 million 

in efficiency savings, reductions and nonrecurring activities. What 

does that mean in the budget and appropriations process? 

Mr. SHULMAN. Sure. So, on e-file, just to tell you what we’ve 

done, we’ve shut down 5 of our 10 processing centers over the last 

6 years. It hasn’t been popular with folks where those processing 

centers were. But, we’ve been very clearly reaping the savings of 

e-filing. Right now, we plan to get to 80 percent of returns e-filed. 

We’re at 75 percent. But, certainly, we’re going to look to reap more 

savings. So, we’re at 75 percent individuals e-filing. 

Twenty years from now, my guess is the IRS won’t take any 

paper. We still take some paper. I am hoping that percentage is 

just going to keep going up, and that’s been a great success. Really 

working with the private sector, with individuals, to help them to 
222 

understand, we take data security very seriously, so nobody will be 

worried with those 1 billion returns that there’s going to be any 

leakage. 

Since I came here, and for every budget for the last 3 years that 

I’ve submitted, we’ve always included substantial savings. Because 

I believe, as the head of a big hundred-thousand-person agency, 

that you can always find efficiencies. You’ve always got to be looking at core operations, stopping operations that don’t make sense 

so you can keep investing in the future and positioning yourself for 

the future. 

This year, the $190 million is some savings from e-file. We’re just 

reaping the benefits and cutting down our processing operations; 

reducing IT infrastructure. We’ve been going through a process 

called Capability Maturity Models, which is pretty standard practice in the private sector, where I came from—I used to be involved 

in helping to run stock markets and run big computer systems— 

where you standardize your processes across your whole IT infrastructure. So you have standard ways of documenting IT, standard 

ways of developing requirements. You bring in an outsider to observe—there’s a thing called the Software Engineering Institute 

that will come in and do random audits to see where it is. And 

we’ve been promising and reaping benefits, for the last 3 years, $75 

million a year by being more efficient and more standardized. And 

my Chief Technology Officer has signed up to those savings. And 

as long as I am here, you’re just going to expect it, and we say 

we’re just going to keep doing savings and adjusting core operations. It actually increases efficiency, while saving money. 

And then we made some tough choices. This year we didn’t automatically send out any paper 1040 forms. E-filing crossed a threshold. We just said, even in the past, if you filed a paper 1040, we 

didn’t send you a paper 1040. I thought that was a self-fulfilling 

prophecy. So what we did instead this year, we sent you a postcard 

and said, if you really want your 1040, give us a call and we’ll send 

it to you, but we’re not going to spend $10 million printing and 

sending out those. 

We’ve cut contracts. I mean, this is just a series of issues. And 

to be honest, as the chairman said, we’ve been under a continuing 

resolution. Because there’s inflation in things like rent and other 

things, it’s an effective cut, and we’ve been doing aggressive cost 

cutting this year as well, beyond the things we listed in our 2011 

budget as cost savings. 

Senator MORAN. So, you would be requesting $190 million more 

in your appropriations request in your budget request, but for 

those savings? 

Mr. SHULMAN. Correct. 

FILING METHODS

Senator MORAN. Okay. What percentage of American individuals 

file their return with the assistance of a professional preparer? 

Mr. SHULMAN. About 60 percent last year. That number is actually going up. And then, another 20 percent use prepackaged software. So, 80 percent of people are using someone in the professional realm to help them with their tax return. 
223 

Senator MORAN. And if you use someone in the professional 

realm, is that an automatic e-file, or are there professional preparers who are still filing paper? 

Mr. SHULMAN. One of the things that, if you come out to one of 

our processing centers you will see—which drives me crazy—is 

someone who clearly printed, had developed their tax return on a 

computer, printed it and sent it to us. And I have got people there 

typing it back into the system after it had already been typed in 

once. And there’s 10 percent error. We’ve been reducing it, but that 

is how you have transcription errors, and it’s just incredibly inefficient. 

And so last year, the Congress passed an e-file mandate for preparers. We started, we’ve been phasing it in. It gave us authority 

to have any preparer who files 10 returns, to e-file. This year we 

started with preparers with 100 returns. 

The good thing about e-file, and I think we did this right over 

the years, is we only got to a mandate once we really had momentum and almost everyone that we could convince voluntarily to 

send in electronically had gone in voluntarily. And so, over the 

years we’ve really increased e-file. And, now there’s a mandate that 

says if you’re a professional preparer and you’re using software, 

you’re going to need to e-file—unless you get a waiver from your 

client who really wants to send it in—— 

Senator MORAN. Thank you. 

Mr. SHULMAN [continuing]. On paper. 

Senator MORAN. Chairman, I have other questions, but I assume 

you do, too. 

Senator DURBIN. Thanks a lot, Senator Moran. 

TAX GAP

So we’re in this debate here about our deficit and how we can 

come up with a savings of $4 trillion over 10 years, or roughly $400 

billion a year, either in cutting spending or raising revenue. So, 

that is, kind of, the standard we’re using—save $400 billion. 

It’s estimated that $345 billion of Federal taxes go uncollected 

each year—a noncompliance rate of 16.3 percent. This gross tax 

gap problem illustrates an enormous untapped resource of Federal 

revenue which can go a long way to dealing with our shortfalls and 

our deficit. 

Most of the tax gap—$285 billion out of $345 billion, or 82 percent—is attributable to under-reporting tax liability, $197 billion of 

that from individual income tax payers. Under-reporting can be the 

result of understated, or, can be understated income, improper deductions, overstated expenses, and erroneously claimed credits. 

So, we went through a little exercise here on the Affordable 

Health Care Act and decided that one way we could capture some 

of these uncollected tax revenues when it came to small businesses 

was to have more reporting from them, more 1099s reflecting their 

business activity. Well, naturally, there was huge push-back from 

the business community saying, ‘‘More paperwork? Thank you, 

Washington. That is just what we need.’’ And so we back-tracked 

and walked away from that and said okay, we won’t tighten up the 

system at the expense of more paperwork. 
224 

So I want to ask you a pretty obvious question—with a pretty obvious answer, I am sure. Is there a way to address this tax gap 

without more reporting, more regulation, and more disclosure? 

Mr. SHULMAN. Our statistics basically show, when you have information reporting and withholding—like the average American’s 

paycheck, where it’s withheld and the employer sends in the taxes 

and they get a refund—you have more than 99 percent compliance. 

Where you have some information reporting—mortgage interest deduction, 1099 reporting for interest on bank accounts that kind of 

thing—you’ve got 95, 96 percent compliance. 

Where you have no information reporting—cash economies, think 

about cash businesses—the compliance drops. It’s hard to do these 

compliance studies. I mean, they’re by their nature inaccurate, because what you don’t get, you don’t know. But we go out and we 

do research. We do some statistically selected samples, et cetera— 

you get 50 percent, 60 percent compliance, 70 percent compliance, 

etc. 

And so the real answer, and the place where there’s leverage, is 

information reporting. But as you said, we set up our tax system 

as a voluntary tax system, where you’re supposed to be fully forthcoming with the Government, report what you know, and then we 

keep an eye on things. The way that we can have broad coverage 

and keep an eye on things is having a third party do information 

reporting. It’s the only efficient way to really go at the tax gap. But 

because it affects a lot of people with the tax code, it becomes pretty politically unpopular, like you said, for example with the 1099 

reporting. 

So that would have helped with the tax gap, but I fully understand both the politics and the reality around small businesses and 

what people are trying to do. And so, it’s very tough. 

There was an economist who’s spent a lot of time in tax, who 

said the thing to remember about the tax gap is, it’s like a deep 

shale oil reserve. This is not just money sitting there that’s easily 

tapped. I mean, we’ve in many ways tapped the easy money. We 

actually have a very high tax compliance rate in this country. 

There’s only five countries who study the tax gap, and we’re as 

high as any of them. And the real way to go at the tax gap is better 

information reporting, but it brings with it some burden. 

I do think there’s some hope, though, as we get better at information technology, as information becomes more ubiquitous, it’s 

lower cost and easier for people to do reporting. A great example 

is, this year we’re implementing the credit card reporting, where 

we will get from credit card processors and people like PayPal, 

gross receipts that were paid into businesses. That’s not a direct 

match, because some industries have high credit card receipts, 

some industries have lower credit card receipts. We’ll look at those 

statistics, and it will be another factor we use in our audit selection 

and our compliance selection. And what we try to do with our compliance selection is spend time on noncompliant taxpayers and 

leave compliant taxpayers alone. 

INFORMATION REPORTING

Senator DURBIN. So, I think you answered—I was going to ask 

a question, if other countries do it more effectively than we do, and 
225 

I think what you said, we’re in the top five in terms of compliance. 

So I, if there is an example of another country that has figured out 

how to do this with greater efficiency in terms of collecting taxes 

owed, I would appreciate you sharing it. 

The second part of it, though, I think you’ve alluded to. As, we 

started off with the premise, I receive a W–2 and my 1040 form 

from the IRS, sit down and dutifully fill it out, sign it, mail it back, 

and some human being receives this paper and goes through it to 

see if I’m telling the truth, or it looks presentable—that whole system is starting to change and become paperless. And information 

is flowing back and forth out without the traditional paper form. 

So, are we looking, would you say, looking to a transformation 

in information gathering, as you just described with credit cards, 

that may make compliance easier? Where we may not be burdening 

local businesses so much with filing forms, but rather, having some 

basic flow-through of information that tells us what we need to 

know to assume, or, to assert tax liability? 

Mr. SHULMAN. I think there’s a couple of possibilities. I laid out 

kind of a long-term vision. We’re still quite a ways away from 

there, because we’ve got to get some of our core technology done. 

We’re trying to get W2s, 1099s loaded into our system before filing. 

Right now, the way that all the reporting happens is, those don’t 

get loaded in the system until after people file. We can’t use those 

as screens and blocks. And in some ways, it’s back to this refundable credit question. 

So I laid out a concept which basically asked if we could figure 

out a way to front-load the issue—could we potentially work with 

the private sector and make that information available to people? 

So rather than people scrambling around and trying to look 

through their files for those envelopes that say, ‘‘Important tax return information,’’ and opening it up and sending it to their accountant or keeping a file of it, we could have a database that 

would have that. 

When people filed, if there was a mismatch, we’d ask them to 

correct it. It would come in to us. We think we’d have a lot better 

compliance on the front end, and we’d create a lot less hassle for 

taxpayers. Right now, if you file and you get it wrong 6 months 

later you get a letter from us. You then have got to scramble to 

get your records, go back to your accountant, pay them again, and 

go through a second loop with us, which is probably unnecessary. 

So, I think that’s one thing we can potentially do. 

Second is, I actually started an office, reporting directly to me, 

on compliance data analytics, which is looking at our databases 

and trying to make sure we’re really smart about the information 

we have, and that we’re applying appropriate treatment streams. 

So, for instance, we’re looking at things like, rather than sending 

out the standard four letters to taxpayers, which they get over 

time, making a call to a taxpayer immediately when they have a 

tax liability, to try to sort things out immediately, much like a 

credit card company. We are continually looking at data analytics 

to get better. 

I think on the flow-through issue, it’s more of a conceptual conversation, and one that we’d have to have a full vetting with the 

Congress. Because as the 1099 issue showed, people are very sen-
226 

sitive about burden, but people are also sensitive about the voluntary nature of our tax system and the government not knowing 

too much about people. And so in our compliance job we want to 

get as much information as we can, again, so we spend time with 

noncompliant taxpayers and don’t spend time with compliant taxpayers. 

I just think in the world there’s a lot more information available 

that can move around a lot quicker. And so, there could be less 

burdensome ways to get that information. 

IT CAPABILITIES

Senator DURBIN. My last question is, do you have the information technology capability and the staff capability to develop what 

we’ve just discussed—a new generation of thinking about collecting 

and processing information that doesn’t rely on the transfer of 

paper? 

Mr. SHULMAN. Well we’ve had this conversation. I think we have 

the staff capability. I would put my IT leadership team that we’ve 

recruited up against anybody else in the Government or the private 

sector. We brought in a CTO who had been head of technology for 

Boeing, then EDS, then Visa International. He’s built an incredibly 

strong team. And that’s why we’re able, even under tough budget 

circumstances, to finally finish this 20-year modernization of our 

account database. 

With that said, where I came from, building big technology and 

the benchmarks in financial service are, you spend somewhere between 10 and 20 percent of your budget on capital investment in 

the future and technology, because you’re all about processing 

money, getting information, serving people—which is a very similar 

model to ours. 

Our capital investment, this President had asked to almost double it from 1.5 percent of our budget to about just under 3 percent 

of our budget. And so my objective view is that this agency, for 20 

years, has been underfunded in investing in technology for the future, and we’re just getting there. And we recognize the constraints 

that we’re under. And I’m not going to come and make a request 

for a 10 percent increase in our technology budget, or 10 percent 

of our budget be technology investment. But I do think the future 

of running the Nation’s tax system is all about investment in technology, investment in information, dealing with information well. 

And we’re going to need to keep investing. 

Senator DURBIN. Thank you. 

Senator Moran. 

Senator MORAN. Mr. Chairman, thank you again. 

1099 REPEAL

The IRS 1099 issue that Chairman Durbin just talked about, as 

I understand, your budget request included $23.3 million and 82 

full-time employees attributed to that healthcare law’s provisions. 

In light of its repeal, the IRS’s request is reduced by that $23.3 

million, and a change in the 180, or, I am sorry, in the 82 full-time 

employees? 

Mr. SHULMAN. Yes. Well, we’ve—that’s dropped. 

Senator MORAN. Good. That’s the correct answer. 
227 

Mr. SHULMAN. We just saved some money. 

SECURITY OF TAXPAYER DATA

Senator MORAN. And then, what Chairman Durbin was talking 

about caused me to want to inquire about the security. You mentioned about the voluntary nature, the concern by Americans about 

information, the Federal Government having information about 

them. How secure of a system do we have in place that protects 

taxpayer information from those who would want to either damage, 

harm the system, or steal the information for their own use? 

Mr. SHULMAN. It is very secure and locked down. I always tell 

everybody when I was sworn in, I came back to the office, and the 

first briefing I had as IRS Commissioner was about protection of 

taxpayer data and data security. It’s really built into the DNA of 

the IRS. There’s laws that prohibit any of our individual employees 

from sharing information about any individual taxpayer with anyone, and we prosecute aggressively when anything happens. 

From the just pure data security infrastructure, we’ve got extensive perimeter infrastructure around the Web, and we’re continually monitoring that. We coordinate with all of the Federal and 

national securities agencies around this issue to make sure our infrastructure is protected. 

And then for internal security, we have logs monitoring 

lockdown. And one of the things that I committed to when I came 

in, is that any new technology we put online is going to have 100 

percent lockdown data security. You have to make choices about 

what you’re going to do, but we’re never going to make a choice 

around data security. So, we take this very seriously and we will 

stay focused on it. 

ACA IMPLEMENTATION

Senator MORAN. One of the reasons—I’ll shift topics—but, one of 

the reasons you would request more money and more personnel is 

the passage of the ACA. Its constitutionality is being tested and, 

I assume, ultimately will be decided by the United States Supreme 

Court. 

In light of whatever the uncertainty is, whatever the magnitude 

of that uncertainty is, is the IRS operating as if it is constitutional 

and going to be fully implemented? Is there a middle-of-the-road 

approach? I assume that you’ve not, or, you’re not sitting there 

waiting for the constitutionality to be determined. But are you behaving any differently in the expenditure of money, the use of personnel, the focus of resources because of the constitutional challenge? 

Mr. SHULMAN. Our job is to administer the laws that are on the 

books. And there’s lots of tax laws that are in different places in 

the courts. This is obviously a high-profile one. 

Just to be clear, our responsibility regarding the ACA is to administer traditional tax laws, issue refundable credits, and collect 

some of the revenues for that. And we are implementing the law 

on the books. We’re in the process of implementing the ACA. If, obviously, if something happens and changes, we’ll move. Similar to 

the 1099 issue that was in there, we would have been prepared to 

implement that. We had started to do a small amount of planning. 
228 

It got repealed, we stopped. But, we move forward with the laws 

that are on the books. 

Senator MORAN. Timeframe wise, for implementation of ACA, 

what happens incrementally between now and 2014, or, its full implementation? Is there a series of additional use of resources, personnel and tax collections and enforcement? 

Mr. SHULMAN. Yes. So, you can really break up the work that 

we’re going to need to do on the ACA into the technology infrastructure, largely around the refundable credits, and connecting 

with the State exchanges. And that’s our biggest lift between now 

and 2014. Technology and operations are 82 percent of the request 

in the 2012 budget. It’s building the infrastructure to hook up with 

all the State exchanges, so when people are registering, they can 

find out their eligibility for tax credits, can sign up for tax credits, 

and then we have the information flows and the money flows with 

the insurance companies to be paying those on a regular basis. 

And then there’s some very bespoke tax law in the ACA that we 

need to implement immediately. There’s a lot of immediately effective provisions, such as an excise tax on tanning salons, which was 

implemented. And right now we’re doing outreach to them. There’s 

2,500 who have never had an excise tax. And so, we’re doing outreach, education, and then we’ll have a compliance program. 

There’s a credit for small businesses to help them buy insurance, 

or, I mean, to help them buy insurance for their employees. There’s 

a tax on branded pharmaceuticals, which right now we’ve sent out 

the initial bills to the branded pharmaceutical companies for that. 

They’re verifying the data. It’s actually based on Government purchases. And so there’s that kind of work, but that is a very small 

amount of the work. 

So between now and 2014, there’ll be the immediately implemented tax provisions and the work that has to happen there. But 

the big lift is building the technology infrastructure to be ready to 

interface with the State exchanges and the insurance companies 

around the refundable, the $400 billion of refundable credits. 

Senator MORAN. And that’s required by, in 2014? 

Mr. SHULMAN. Yes. The open enrollment will happen sometime 

in 2013. And if you scope a systems build, you basically need to 

lock down requirements, then do your build, and then do your testing. So, there’s a huge lift in 2012 around requirements and build, 

because by 2013 you should be testing the systems. 

Senator MORAN. Mr. Chairman, I think perhaps my last question 

is related to Nina E. Olson, the National Taxpayer Advocate’s, testimony. And she raised a couple of issues for me talking about, 

really, customer service, taxpayer service. 

TAXPAYER SERVICE MEASURES

The IRS’s fiscal year 2010 management discussion analysis included the GAO’s financial audit of the IRS. Collection related to 

enforcement activities totaled $57.6 billion—a 34 percent increase 

more than 2004. By contrast, the Taxpayer Advocate noted that the 

IRS answered 74 percent of all calls from taxpayers seeking to 

speak with a telephone assister in 2010, as compared to 87 percent 

in 2004. So, a decline of 13 percent—13 percentage points—or 15 
229 

percent. So, less access to the person, the live person on the phone, 

I think, is the point that’s being made here. 

And then, also, this sentence that, ‘‘the backlog of taxpayer correspondence and the tax adjustments inventory has jumped by 76 

percent. The percentage of ‘uncontrolled’ correspondence received’’—I don’t know exactly what the word uncontrolled means, 

but it’s in quotes—‘‘ ‘uncontrolled’ correspondence received but not 

yet entered into the IRS computer system has increased by 134 

percent. And the percentage of taxpayer correspondence classified 

as ‘overreach’ ’’—again in quotes—‘‘has increased by 135 percent.’’ 

What are we being told, and what does that mean? 

Mr. SHULMAN. As I mentioned at the beginning, I take very seriously that the vast majority of Americans are wrestling with a very 

complex tax code. Their interaction with us every year is: file a return and get a refund. And that’s the last they hear of us. And I 

think about it, and I talk about it internally at the IRS, as we’re 

a big financial service operation. We need to answer the phones, 

have a Web site that works, process paper, do all the things that 

you need to do to serve the American people. 

The reality is, we’re right now operating with about 1,200 less 

people than we were at the end of the last fiscal year because we 

were under a continuing resolution, and our budget was slightly reduced. We have allocations to taxpayer service and we have allocations to enforcement, and those enforcement allocations have a ring 

around them because they have a direct revenue-producing effect. 

The reality, in my mind, is our taxpayer service operations also 

bring in revenue. When we answer a tax law question, help them 

get it right, help them e-file, or build computer systems so that we 

can do matching—all of those actually help get the $2.3 trillion in 

revenue. 

And we’re trying to get a mix of investments. 

The phone calls—I think we’re actually doing okay. We actually 

need more people to answer more phone calls. We didn’t get the request last year for 2011, and we’ve put the request in again for 

2012, which will bring up that level of service. 

I would point out, because we use this thing we call the level of 

service. That is not: ‘‘Is a taxpayer satisfied with the service?’’ We 

actually have a 96 percent customer satisfaction rating on our 

phone calls. 

We’ve introduced a few things, which has dropped our level of 

service, but we think it increased satisfaction, like wait time. So, 

if a taxpayer calls and hangs up, that counts as a negative. So, 

that’s not in the 74 percent. But we tell them, it’s a 12-minute wait 

and you might want to call back at a less busy time. 

Our paper inventory has been growing because we’ve had less 

people processing paper. We either put people on the phones or put 

people on paper. The way we try to balance it is, during March and 

April we try to make sure we answer all the phone calls we can, 

and so paper gets backed up, and then we catch up with paper as 

we go. 

This request asks for more customer service folks because I 

mean, this, you’ve got to just process mail. You need people to process it, open it up, look at it, make decisions about where it goes. 

Things fall out and into error. And so, that’s gone down. 
230 

I’ve always leaned and said, around priorities, we want to make 

sure—technology is the key, and we need to make sure we invest 

in technology. Phones and paper and the Web—because we can 

move people off of paper and the phones if we can do more transactions on the Web—have to be invested in. And, frankly, the conversation that ends up happening with people who spend time with 

the budget is, there’s always a tendency to put money into enforcement. And so, we really need—I think you’re pointing out and the 

Taxpayer Advocate’s pointed out—we need to keep an eye on a balanced program. 

I think the President’s budget is very balanced and will get us— 

will boost those numbers, and so we’ll be serving people better. But 

make no mistake about it. In tough budget times, there’s going to 

be longer wait times; we’re going to answer less phone calls; paper 

is going to take longer. 

IRS WORKLOAD

Senator MORAN. Are there more inquiries over time? More taxpayers are calling asking for help? Or less? 

Mr. SHULMAN. It spikes based on different kinds of provisions. 

We had a huge spike in 2008, when we sent out the stimulus 

checks to every American. People were, ‘‘Where’s my stimulus 

check? Am I going to get one?’’ et cetera. And phone call volume 

spiked and our level of service plummeted. 

We’ve had kind of steady—and a lot of it depends on tax law, 

what’s going to happen. If you look at our ACA request—just back 

to what you were talking about—technology and service, and making sure people understand how the rules work, what they’re eligible for, is really the bulk of the request. 

Senator MORAN. Thank you, Commissioner. 

Thank you, Mr. Chairman. 

Senator DURBIN. Thank you. 

Senator Kirk. 

Senator KIRK. Mr. Chairman, you, I, none of us have been accused of ever being in a tanning booth, so I think you can go forward with your outreach without us being affected. 

TAX COMPLEXITY

I want to ask about, the Taxpayer Advocate has estimated that 

it takes Americans about 6 billion man-hours a year to comply with 

Federal taxes, which, when you divide it out by a full-time equivalent employee, is 3 million jobs, just complying with Federal law. 

When we look at how people then comply with this law, in a practical way, about 60 percent of the individuals are hiring someone 

else, about 29 percent of people are interacting with software. It’s 

a hidden tax on Americans of, on average, about $250 a year. And 

it’s really an extra tax on top of the tax that you pay to comply 

with Federal law. 

Have you thought about a way—it seems to be unreasonable to 

take 3 million Americans in a country of 300 million to comply with 

Federal law. Have you thought about a way to develop metrics and 

then, through software, get it down to 1 million Americans? Maybe 

just 2 billion hours to comply with taxes, instead of 6 billion? This 

is an incredible drag on the economy. 
231 

Mr. SHULMAN. As you know, the Congress has the prerogative of 

passing the tax laws. Our job is to administer whatever laws the 

Congress passes and the President signs. 

Senator KIRK. But let me interrupt you on that. There are two 

ways in the 21st century we can handle complexity. The ideal way, 

for me, is a flatter, fairer tax, like what the Gang of Six may come 

up with to lower the rate to 28 percent. But, you know, we’ll see. 

The other way is entirely in your hands—that an American 

doesn’t pay TurboTax, doesn’t pay H&R Block, simply logs onto the 

IRS Web site and fills out their taxes in an accurate, complete way 

in which the software is handling all of the complexity. And the 

amount of time spent complying with Federal law drops like a rock, 

which is entirely within your purview. 

Mr. SHULMAN. We were talking earlier about my view, in looking 

at the metrics, that we’ve under-invested in IRS technology for 

more than 20 years—not in recent history. I will tell you frankly, 

we don’t have the capability. We need to build some things like our 

core account database, and get that off of a 30-year platform, which 

we’re finishing this year. And so, we need to build some core infrastructure. 

We do have available forms that calculate, that people can go in 

and file online directly with us. 

I think there’s a big discussion about the IRS having software. 

And, frankly, it’s an administrative discussion. But, it’s also a political discussion about—— 

Senator KIRK. Your total budget is how much? 

Mr. SHULMAN. Our total budget is about $12 billion. 

DIRECT E-FILING

Senator KIRK. About $12 billion. 

And, Mr. Chairman, I think something we might work on—because I think Americans would love not to pay TurboTax, and not 

to pay someone else, just, my guess, correct me if I am wrong—to 

develop a software package might be a $20- to $30-million job? And 

then put it up on the Web for free to Americans? 

Mr. SHULMAN. I mean we’ve taken some looks at this. I don’t 

think it’s quite that simple. And I think there are choices—— 

Senator KIRK. Actually—— 

Mr. SHULMAN [continuing]. And I can show you some—— 

Senator KIRK. I would just disagree. It might actually be even 

more simple. Because the software companies have to make software calls based on checking with you. Whereas, you actually own 

all the rules and could be setting up the decision matrix, because 

you’re the authority. 

Mr. SHULMAN. I would love, Senator, to talk to you about this 

further, and I’m happy to talk about it here. I’ve got lots of letters 

on both sides of these issues about, should we be in the business 

of the sets of choices that are embedded in software, or shouldn’t 

we? 

What I would tell you is, we’ve got a very full plate right now 

of technology investments that we need to get done. That would 

build the basic infrastructure to start talking about those things, 

and I would welcome a full-ranging discussion about it. 
232 

Senator KIRK. Chairman, I think it might be something that we 

can work together on. 

Because it should—it shouldn’t be a theological discussion for 

you. Your mission should be to make it as easy as possible to comply with Federal law. So, this argument inside your shop should 

end, like, in an hour. 

And then you say, how do we then deploy software in a 21st century context so that an American gets on, puts in their basic data, 

files, doesn’t pay anybody, and, you know, sort of like the E-Verify 

program—we’re making it as easy as possible through an Internet 

21st century solution to comply with Federal law. 

Thank you, Mr. Chairman. 

Senator DURBIN. Thank you, Senator Kirk. 

Oh, a call from H&R Block. 

Thank you very much for, thanks for—and I don’t think that’s, 

I think it’s a valid question. 

Mr. SHULMAN. Oh, I do too. I totally agree. 

TAX COMPLEXITY

Senator DURBIN. If we can eliminate the middleman, the middleman will hate it, but it may save taxpayers money. And if, I’m 

looking for ease of filing, to be, put another idea on the table— 

which will never pass as a law—I may have mentioned to you that 

about 15 years ago my accountant died in Springfield. And I said, 

come on. I’m a lawyer. I’m a Senator. My tax return is not that 

complicated. I’ll do it myself. 

Every Member of Congress should be required to do their own 

personal income tax return. I guarantee, we’d have tax simplification overnight. Because I struggled with it for hours thinking, why 

is this so hard? You know? Because I don’t do it. And I didn’t have 

a computer program to work with. I was just using my wits. And 

it didn’t turn out to be that impressive. 

But the point I am getting to is that the complexity of the system, I think you would agree, needs to be continually reviewed, so 

that we can make it within the grasp of ordinary Americans to understand how their taxes are being calculated. If there’s a mystery 

associated with it, there is a sense of injustice that I’m paying, and 

he isn’t. You know, that sort of notion. And it is expensive as heck 

to get some of these tax preparers to do some pretty basic returns. 

So, I don’t think Senator Kirk’s off base that, and I want to follow 

through with it. Let’s see what we can do about that. 

Senator Moran, do you have anything more? 

Senator MORAN. I do not. 

ADDITIONAL COMMITTEE QUESTIONS

Senator DURBIN. Thanks for coming. I appreciate it, Commissioner Shulman. We’ll have some written questions for you, and 

maybe some other colleagues will send some along. I’d appreciate 

it if you’d take a look at them. Thanks. 

Mr. SHULMAN. Thank you very much. 

Senator DURBIN. Thank you. 

[The following questions were not asked at the hearing, but were 

submitted to the Department for response subsequent to the hearing:] 
233 

1 Regulations Governing Practice Before the Internal Revenue Service. 

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

REGULATING FEDERAL TAX PREPARERS

Question. Every year, more than one-half of all taxpayers pay someone else to prepare their Federal income tax returns. In calendar year 2009, the Internal Revenue 

Service (IRS) processed approximately 83.1 million individual Federal income tax returns prepared by paid preparers. 

Last year, the IRS launched an oversight program to regulate paid tax return preparers. The purpose of this initiative is to improve the accuracy and quality of filed 

tax returns and to heighten awareness of preparer responsibilities. 

All preparers must now obtain a preparer tax identification number (PTIN) and 

pass a tax compliance check. Additionally, over the next several years, the IRS 

plans to establish competency testing and continuing education requirements for 

preparers. 

The fiscal year 2012 budget request for the IRS includes nearly $17 million to increase oversight of tax return preparers. Among the efforts planned are ensuring 

that all tax practitioners, tax preparers, and other third parties in the tax system 

adhere to professional standards and follow the law. In addition, the IRS will develop a public database so that the public can ensure that their tax return preparer 

is registered with the IRS. 

How is the paid tax preparer registration initiative progressing? 

Answer. Since September 28, 2010, more than 708,000 individuals have obtained 

or renewed their PTINs in the IRS Tax Professional PTIN System. The IRS processed approximately 95 percent of the applications online and 5 percent on paper. 

Per newly implemented user fee regulations, applicants must pay $64.25 annually 

for PTINs, consisting of $50 to recover IRS costs and $14.25 for third-party vendor 

costs. 

On June 3, 2011 (scheduled to be effective on August 2, 2011) the IRS published 

the final regulations that amended Treasury Department Circular No. 230 (Circular 

230).1 Some of these significant changes include creation of a new registered tax 

return preparer designation, extension of Circular 230 ethical rules to all paid preparers, creation of new rules applicable to continuing education providers, expansion 

of the definition of practice to include return preparation, and numerous other revisions. 

In April 2011, the IRS selected two vendors to develop/administer the competency 

testing and fingerprinting programs. Planning is underway for a projected fourth 

quarter 2011 launch of both programs. 

In preparation for the launch of a new 15-hour annual continuing education requirement for certain preparers, the IRS is gathering information to help revamp 

the education provider approval process. The IRS is targeting the new continuing 

education requirement to begin January 2012. 

Question. To what extent is the IRS identifying and weeding-out unscrupulous or 

unqualified tax preparers? 

Answer. The IRS is developing a competency test for return preparers. Additionally, we will begin fingerprinting return preparers in order to conduct a suitability 

check. Fingerprinting will help to insure that those who are entrusted with taxpayer 

information do not have a criminal history of violations. 

The IRS continues to develop and enhance various internal filtering tools to detect 

egregious behavior and inaccurate return preparation. These tools will enable the 

IRS to look at aggregate individual return information and extract unique characteristics, identifying likely questionable issues with a return preparer. 

We are developing a comprehensive database to house all preparer information, 

with the goal of detecting unscrupulous return preparers and intervene early. This 

central database will enable the IRS to track preparers who try to avoid detection 

through changes in location and varying customers. The IRS is also designing a referral system to investigate and timely address taxpayer and stakeholder complaints 

surrounding return preparers. The IRS is also developing an aggressive and dynamic identification system for preparers who are being compensated to prepare returns, but who are not properly identifying themselves. 

Additionally, the IRS is taking steps to address preparer compliance. Beginning 

in July, we will begin contacting more than 100,000 preparers who prepared returns 

in 2011, but failed to follow the new requirements. These preparers either used outdated PTINs or Social Security Numbers as identifying numbers on the returns they 

prepared. Also, we have identified more than 1 million returns that appear to have 
234 

2The DIF is a mathematical technique used to classify income tax returns as to examination 

potential. Under this concept, formulas are developed based on available data and are programmed into the computer to classify returns by assigning weights to certain basic return characteristics. These weights are added together to obtain a composite score for each return processed. This score is used to rank the returns in numerical sequence (highest to lowest). The 

higher the score, the higher the probability of significant tax change. 3DDB Rule Breaks are used to verify eligibility for the Earned Income Tax Credit by determining if a taxpayer is eligible to claim dependents. 4The IRS developed a risk-based scoring tool to identify high-risk preparers based on filters 

that look at volumes and ratios of certain deductions from various schedules. 5 By using data collected ruing tax administration processes (math errors, Automated Underreporter (AUR), and the Examination Operational Automation Database), it may be possible to 

develop a limited accuracy/error rate for individual preparers as well as groups of preparers. 

been prepared by someone other than the taxpayer, and later this year we will 

begin to contact those taxpayers to determine who actually prepared these returns. 

These initial efforts are part of a comprehensive effort to improve both the way 

in which the IRS identifies problematic preparers and the methods used to bring 

them into compliance. Unscrupulous preparers may attempt to elude the new requirements by not signing the returns they prepare. With better data and stronger 

analytical and historical knowledge, our goal is to ensure all preparers comply with 

the rules and that unscrupulous or unethical preparers do not continue to prey on 

taxpayers and the tax system. 

Question. To what extent does the IRS plan to assess the impact of tax preparer 

registration on compliance? 

Answer. The IRS has developed a Service-wide preparer compliance strategy to 

ensure return preparers adhere to the newly implemented registration requirements. The scope of the strategy is to review return preparer compliance with return filings, and includes e-file visitations, return preparer visitations, ghost preparer visitations, and preparer action cases. 

This integrated strategy allows for a consistent implementation of the program 

and assessment of sanctions and/or penalties, and identifies the potential noncompliant/questionable paid return preparers. Through this strategy the IRS will 

identify the population of return preparers who may have chosen to ignore the new 

tax preparer registration requirements. 

The IRS is also developing a proposed set of long-term strategic measures that 

will enable the agency to assess the effect of the program on tax compliance. To do 

this assessment, the newly established IRS Return Preparer Office (RPO) is working 

with Research, Analysis and Statistics and the Office of Compliance Analytics. The 

IRS plans to establish a baseline for the measures in 2012 and to track progress 

from that point. 

Additionally, the IRS is developing a proposed set of short and long-term strategic 

measures that will enable the agency to assess the effect of the program. Short-term 

measures that could be used to assess program performance using current compliance metrics include the Discriminate Function (DIF) score,2 the Dependent Database (DDB) Rule Breaks,3 Risk Scores,4 and accuracy measures.5 With the exception 

of the risk scores, the IRS designed all of the other preceding metrics for purposes 

other than measuring preparer compliance. The newly established IRS RPO is working with the Office of Research, Analysis, and Statistics and the Office of Compliance Analytics to develop longer-term strategic measures. The IRS plans to establish a baseline for the measures in 2012 and to track progress from that point. The 

RPO will develop this more customized means for measuring the impact of the preparer program over the next 2 to 3 years. 

Question. What performance indicators will be used to measure the impact of regulating paid preparers? 

Answer. As noted above, the IRS is evaluating current compliance metrics to assess the near-term effect (6–18 months) of the program. Over time, the IRS will develop a more comprehensive measure of compliance that can be more directly tied 

to the specific education, service, and compliance initiatives of the program. 

In the meantime, the IRS is developing indicators to measure the impact of regulating paid preparers. The IRS is still developing the suite of indicators. Indicators 

may include, for example: 

—Number of tax preparers who apply for a PTIN; 

—Number of applicants who pass/fail a background check; 

—Number of applicants who pass/fail a personal tax compliance check; and 

—Incidence of paid preparers misrepresenting professional credential to the IRS 

and the public. 
235 

The above indicators are a small representation of those the IRS is developing. 

However, such indicators focus on outputs rather than on outcomes. The development of outcome measures requires additional time and experience. 

The IRS has also developed a Service-wide preparer compliance strategy to ensure 

return preparers adhere to the newly implemented registration requirements. The 

scope of the strategy is to review return preparer compliance with return filings, 

and includes e-file visitations, return preparer visitations, identification of unregistered preparers, and visitations and preparer action cases. Measures are included 

for each of the strategy’s components, which include letters and visits to high-risk 

preparers, program compliance checks, and identification of nonsigning return preparers. 

This integrated strategy allows for a consistent implementation of the program 

and assessment of sanctions and/or penalties, and identifies the potential noncompliant/questionable paid return preparers. Through this strategy the IRS will 

identify the population of return preparers who may have chosen to ignore the new 

tax preparer registration requirements. 

Question. Does the IRS expect to be able to cover the costs for the entire registration program with user fees or will you need to depend on existing compliance funds 

to support the program? 

Answer. The user fees are necessary to recover the costs to the IRS that are associated with administering the PTIN application and renewal program, undertaking 

the fingerprinting and testing requirements, and providing the special benefits that 

are associated with obtaining a PTIN. The costs to the Government include: 

—the development and maintenance of the IRS information technology system 

that interfaces with the prime contractor’s systems; 

—the development and maintenance of internal applications; 

—IRS customer service support activities, which include development and maintenance of an IRS Web site and call center staffing; and 

—personnel, administrative, and management support needed to evaluate and address tax compliance issues, investigate and address conduct and suitability 

issues, and otherwise support and enforce the programs that require individuals 

to apply for or renew a PTIN. 

User fees do not support traditional compliance activities. In fiscal year 2012 the 

IRS requested funding for initiatives that focus on preparer activities and utilize 

traditional enforcement actions currently conducted by IRS personnel. 

BUDGET CONSTRAINTS AND FORECAST IN THE FACE OF CUTS

Question. In the final continuing resolution enacted for fiscal year 2011, funding 

for the IRS was maintained at the fiscal year 2010 enacted level, which was $487 

million below the requested level. 

What initiatives planned for fiscal year 2011 were put on the back-burner as a 

result of the reduced level? 

What are the consequences of deferring or not being able to address the resource 

needs contemplated in your fiscal year 2011 funding request? 

Answer. Due to the reduced funding in fiscal year 2011, the IRS will not realize 

the projected new hires who would have reached full performance potential by fiscal 

year 2013; therefore, the IRS will collect $1.9 billion less in Federal revenues per 

year due to a diminished ability to fairly enforce tax law. As a rule of thumb, for 

every $1 spent on additional enforcement initiatives, the IRS would have collected 

about $7 in revenue or more at full performance, so these cuts actually add to our 

Federal deficit. American taxpayers will also see a diminished level of telephone 

service as a result of these cuts. Specifically, the following initiatives were put on 

the back-burner as a result of the reduced level: 

International.—Without the funding to hire additional staff, the IRS estimates that it will not collect an additional $812.2 million in enforcement revenue that would have been collected once the new fiscal year 2011 hires reached 

full potential in fiscal year 2013. Furthermore, the IRS was unable to increase 

data capture from certain paper returns that would have improved identification of abusive transactions using complex enterprise structures, and was unable to increase the capacity to support law enforcement efforts to investigate 

and address multi-jurisdictional tax evasions. 

Examination.—Without the additional planned staff in field examination, specialty tax (matters that involve the excise, estate and gift and employment tax 

programs), correspondence examination and Automated Underreporter, the IRS 

estimates that it will not collect an additional $659.6 million in enforcement 

revenue that would have been collected once the new fiscal year 2011 hires 

reach full potential in fiscal year 2013. 
236 

Collection.—Without the additional staff the IRS planned to hire in field collection and the Automated Collection System (ACS), the IRS estimates that it 

will not collect an additional $474.4 million in enforcement revenue that would 

have been collected once the new fiscal year 2011 hires reached full potential 

in fiscal year 2013. 

Increase Telephone Level of Service (LOS).—Without the additional funding, 

the IRS will deliver a 71 percent LOS in fiscal year 2011, instead of the 74 percent LOS achieved in fiscal year 2010. 

Question. The IRS has outlined a handful of ambitious high-priority performance 

goals for fiscal year 2012. These include achieving 4.5 million document matching 

closures (where the IRS information does not match taxpayer reported information), 

ensuring 80 percent of individual taxpayers receive refunds on a 5-day cycle in the 

new customer account engine database; attaining an individual income tax filers’ 

American Customer Satisfaction Index score of 70 percent; improving telephone 

level of service to 80 percent; and raising the individual e-File rate to 76 percent. 

How might these goals and your proposed IRS priorities for fiscal year 2012 be 

impacted and IRS operations affected if the additional resources you seek aren’t addressed given the austere fiscal projections? 

Answer. Without the funding requested in fiscal year 2011 and fiscal year 2012, 

the IRS will have to delay/reduce program priorities, identify alternative funding 

sources, and/or decrease base resources in other programs to implement mandatory 

legislation, such as the Foreign Account Tax Compliance Act, Merchant Card and 

Basis Reporting, Tax Return Preparer, and the Affordable Care Act. Furthermore, 

the IRS may be unable to: 

—Deliver an 80 percent telephone LOS; 

—Replace the outdated Web portal environment and provide additional online 

services to taxpayers; 

—Expand global high-wealth coverage, and further its global presence and pursuit 

of offshore tax and financial crimes; 

—Increase coverage in ACS and Offers in Compromise collection programs; 

—Develop a comprehensive and integrated compliance strategy for administering 

refundable credits and addressing refund schemes; 

—Address increasing workloads in Appeals and Counsel; 

—Enhance security and disaster recovery systems capability; 

—Upgrade the Integrated Financial System; 

—Improve compliance by leveraging data; 

—Enhance physical security for employees; and 

—Continue migration from an aging tax administration system. 

CAPTURING ADDITIONAL SAVINGS

Question. The IRS found $75 million in savings for 2012 through reductions in 

information technology (IT) infrastructure. These savings were identified through a 

systematic process to which several staff were dedicated. 

Can the IRS apply this systematic approach agency-wide to identify more savings? 

Answer. The IRS uses a variety of approaches to identify savings, including soliciting ideas from front-line employees, establishing task forces of agency subject-matter experts, conducting analysis of existing programs, streamlining existing processes, and directing detailed analysis to determine the need and the effectiveness 

of each program. In addition to the approaches listed above, in the annual internal 

instructions and guidance for the budget submission, the IRS will continue to look 

to the business units to identify specific and achievable savings and efficiencies. 

Question. What is your reaction to the suggestions by the Government Accountability Office (GAO) that the IRS may be missing savings opportunities and that the 

costs of conducting periodic reviews on other select aspects of the budget, targeting 

areas with high potential for savings and efficiencies, could be offset by the savings 

that are identified? 

Answer. The IRS remains committed to exploring additional areas for savings and 

efficiencies as is evidenced by the identification of $190 million in savings and efficiencies in both the fiscal year 2011 and fiscal year 2012 budgets, and will continue 

to employ new approaches to identify opportunities for further savings, balancing 

the cost with the expected benefits. 

IMPROVED UTILITY OF BUDGET REQUEST: GAO RECOMMENDATIONS

Question. Because of the size of the IRS’s budget and the importance of its service 

and compliance programs for all taxpayers, the subcommittee requested that the 

GAO to review the fiscal year 2012 budget justification for the IRS. 
237 

In its April 11 report (GAO–11–547), the GAO stresses that several of the open 

matters for the Congress or recommendations to the IRS have the potential to increase revenue or savings if implemented. 

To improve the usefulness of the budget request for the IRS, the GAO recommends that the IRS take the following four actions: 

—further expand efforts to systematically identify savings and efficiencies as part 

of its budget development process on a periodic, but not necessarily annual, 

basis; 

—report in its budget justification how savings beyond projections were used. The 

amount of explanation provided should correspond to the amount of the savings; 

—provide cost estimates for individual legislative proposals in future budget justifications; and 

—include measures of cost and schedule performance for major IT systems in Operations Support, such as it does for Business Systems Modernization (BSM). 

What is the IRS’s reaction to the findings and recommendations of the GAO? 

Answer. The IRS appreciates and agrees with many of the GAO recommendations. The IRS agrees to the following: 

—Continue to expand efforts to systematically identify savings and efficiencies 

throughout the budget process; 

—Include in future budget submissions actual savings and to identify how additional savings beyond projections are utilized; 

—Provide costs for individual legislative proposals in future budget submissions 

for those proposals received in sufficient time to prepare the cost estimates; and 

—Provide cost and schedule performance for major IT systems in Operations Support in future budget submissions. 

Question. Are the GAO’s proposals for enhancing your budget presentation reasonable ones and worthwhile for inclusion in your fiscal year 2013 budget submission? 

Answer. The GAO’s proposals for enhancing the IRS budget presentation appear 

reasonable and the IRS will strive to include them as a part of the fiscal year 2013 

and future budget submissions. 

MEASURING ROI

Question. In this year’s congressional budget justification, the IRS estimates the 

ROI for six proposed new enforcement initiatives. 

The fiscal year 2012 budget includes $339 million in new IRS enforcement initiatives, which raise $1.3 billion in revenue annually at full performance. This is a ROI 

of 4.5 to 1 when new hires reach full potential in fiscal year 2014. 

The GAO has consistently recommended that the IRS compile actual ROI outcome 

data that could be compared to the original projections. 

How much progress has been made developing actual ROI’s to measure the effectiveness and success of initiatives previously funded to determine if the anticipated 

revenue was reaped, exceeded, or fell short of projections? 

Answer. The IRS has made progress in measuring the effectiveness and success 

of the fiscal year 2009 and fiscal year 2010 initiatives. The IRS is able to compare 

the actual revenue collected (adjusted for the late hiring of the fiscal year 2009 and 

fiscal year 2010 initiative staff) to the projected revenue expected from the initiatives’ hires in the three major enforcement functions—Examination, Collection and 

AUR. As the table below shows, in fiscal year 2010, the enforcement revenue collected exceeded fiscal year 2009 collections by $8.7 billion, or $7.5 billion once initiative revenue is removed. The large increase in fiscal year 2010 can be attributed 

to several factors—new initiative hires, closing of several large cases, and continued 

implementation of better case selection and case analysis tools. 
238 

[In millions of dollars] 

Actual enforcement revenue collected Fiscal year 2009 Fiscal year 2010 

Additional 

revenue collected 

(fiscal year 2010– 

fiscal year 2009) 

Fiscal year 2009 Fiscal year 2010 Revenue projected from initiatives 1

Revenue 

collected 

above/below 

prior year level 

Examination ............................................................................................................ 17,446 23,563 6,117 179.5 414.7 594.2 5,522.8 Collection ................................................................................................................ 26,871 29,105 2,234 58.7 258.9 317.6 1,916.4 AUR ......................................................................................................................... 4,569 4,924 355 47.4 239.8 287.5 67.5 

Total .......................................................................................................... 48,886 57,592 8,706 285.9 913.4 1,119.3 7,506.7 

1 Adjusted for staggered on-board of hires. 
239 

Question. The IRS is currently developing a methodology to compare actual costs 

to projected costs so that a ROI can be calculated for the three major enforcement 

functions. 

Would it not be prudent and helpful to determine the extent to which your revenue forecasts were accurate and the yield was realized? 

Answer. The IRS agrees it would be ideal if the IRS could determine the exact 

accuracy for its revenue forecasts. 

It is important to recognize the actual revenue collected is affected by many external and internal factors such as the economy, implementation of new legislative proposals, enforcement resources, changing priorities, and implementation of new case 

selection and case analysis tools. 

Question. Assuming that the Congress is able to provide these resources as requested and that the IRS proceeds with the initiatives as planned, how will we 

know whether this was a wise investment? 

Answer. The specific answer depends on the initiative. Some initiatives relate to 

short-term revenue-producing activities, which can be measured by program performance and compliance results. Others are longer-term and strategic, with a larger payback in the long-run, but are more difficult to measure in the early years. 

In either case, the IRS articulates, for each initiative, suggested measures or indicators for what the initiatives will deliver, which can serve as the basis for evaluating 

these initiatives after the fact. 

IT FUNDING: COST AND SCHEDULE INFORMATION

Question. The IRS seeks $2.67 billion for IT funding in fiscal year 2012, of which 

$333.6 million (12.5 percent) is for BSM and the $2.3 billion (87.5 percent) is for 

Operations Support. 

The IRS funds 155 IT systems. Of these, about 31 are considered ‘‘major,’’ each 

having an overall life-cycle cost of greater than $50 million or an annual budget of 

greater than $5 million. The other 124 systems are ‘‘non-major.’’ 

The GAO’s review of the systems funding justification notes the lack of cost and 

schedule performance information for the bulk of the IT funding. 

Can the IRS undertake the formulation and submission of better estimates for at 

least some of the major systems? 

Answer. The IRS plans to provide cost and schedule performance for major IT systems in Operations Support in future budget submissions. A Treasury and OMB reporting system for all major IT investments already contains the cost and schedule 

data. In the future, the IRS will utilize an extract to provide the information for 

the congressional justification. 

Question. What factors or circumstances hamper the IRS’s ability to develop such 

estimates? 

Answer. As part of budget formulation process, the IRS currently develops highlevel estimates of cost and schedule for each major and nonmajor IT investment. 

Once the Congress enacts the fiscal year appropriations bill, the IRS completes the 

process by developing the more detailed cost and schedule plans. The timing and 

resources required hinder the IRS’s ability to develop more detailed estimates before 

the enactment of appropriations. 

During the initial design stage, the IRS uses a tool to produces a Rough Order 

of Magnitude (ROM) estimate. After that ROM exercise, the IRS follows-up with a 

rigorous estimation analysis, updated during the passback cycle. On average, a full 

costing exercise takes 55 business days, three full-time equivalents and participation of multiple IRS business unit representatives. This analysis can be completed 

prior to the enactment of the appropriation, but generally would not be captured in 

time for inclusion with the budget submission. 

Each year the IRS identifies in the internal budget formulation process new IT 

investments required to implement legislation and other IRS strategic priorities 

that become part of the President’s budget request. The IRS submits proposals and 

develops cost estimates based on past experience with similar projects. The IRS includes cost estimates by major category (i.e., labor, contractor costs, equipment, software, etc.) in the cost tables that are part of each initiative justification 

Once the Congress appropriates funding for the new IT projects, the IRS develops 

detailed requirements, cost and schedule information. This information is available 

at ITDashboard.gov. 

VOLUNTEER INCOME TAX ASSISTANCE (VITA) SCOPE EXPANSION

Question. Almost all businesses (more than 90 percent) start as a sole proprietorship or self-employed businesses. Unless incorporated or part of a partnership, selfemployed business income is subject to taxation through calculations performed on 
240 

‘‘Schedule C’’ (or C–EZ). Each year, approximately 20 million self-employed businesses file a Schedule C or C–EZ. 

In August 2010, the IRS, in partnership with the National Community Tax Coalition and Self-Employed Tax initiative, launched the Schedule C VITA Pilot for the 

2011 tax season. 

The pilot is designed to determine the feasibility of restructuring IRS policies governing self-employment tax preparation at VITA sites. The 12 VITA sites involved 

in the pilot are exploring the expansion of service delivery to low-income, self-employed individuals. 

What are the preliminary results of the Schedule C VITA pilots? 

Answer. There are 24 sites participating in the Schedule C VITA pilot. Preliminary results indicate a total of 3,216 Schedule C returns filed at those 24 pilot sites 

from January 1 to June 6, 2011. 

Question. When will a complete assessment be available? 

Answer. IRS will share the complete assessment with participating stakeholder 

partnerships, education, and communication partners by July 31, 2011. Additionally, IRS will have a summary of the results by mid-August. 

Question. Does IRS plan to extend and expand the pilot more broadly to other 

VITA sites to expand the program reach to small businesses? 

Answer. IRS is still waiting for the final report results. 

CONCLUSION OF HEARINGS

Senator DURBIN. This will conclude the hearings for this fiscal 

year and the subcommittee will stand in recess. 

[Whereupon, at 11:34 a.m., Wednesday, June 8, the hearings 

were concluded, and the subcommittee was recessed, to reconvene 

subject to the call of the Chair.] 
(i) 

LIST OF WITNESSES, COMMUNICATIONS, AND 

PREPARED STATEMENTS 

Page 

Cherecwich, Jr., Paul, Chairman, IRS Oversight Board, Department of the 

Treasury, Prepared Statement of ....................................................................... 194 

Cochran, Senator Thad, U.S. Senator From Missouri, Questions Submitted 

by ........................................................................................................................... 116 

Community Development Bankers Association, Prepared Statement of the ...... 161 

Cruz, Warner, President, J.C. Restoration, Statement of .................................... 148 

Durbin, Senator Richard J., U.S. Senator From Illinois: 

Opening Statements of .................................................................... 1, 45, 125, 165 

Prepared Statements of ............................................................................ 3, 47, 166 

Questions Submitted by........................................................ 30, 84, 104, 159, 233 

Enterprise Compliance International, Prepared Statement of ............................ 121 

Gambrell, Donna J., Director, Community Development Financial Institutions 

Fund, Department of the Treasury .................................................................... 133 

Prepared Statement of ..................................................................................... 134 

Questions Submitted to .................................................................................... 159 

Geithner, Hon. Timothy F., Secretary, Department of the Treasury .................. 1 

Prepared Statement of ..................................................................................... 7 

Summary Statement of .................................................................................... 5 

Gensler, Hon. Gary, Chairman, Commodity Futures Trading Commission ....... 45 

Prepared Statement of ..................................................................................... 55 

Questions Submitted to .................................................................................... 84 

Summary Statement of .................................................................................... 53 

George, J. Russell, Inspector General for Tax Administration, Department 

of the Treasury, Prepared Statement of ............................................................. 175 

Holmes, Calvin, President, Chicago Community Loan Fund, Statement of ....... 149 

Hutchison, Senator Kay Bailey, U.S. Senator From Texas, Questions Submitted by ............................................................................................................... 118 

Investment Company Institute, Prepared Statement of the ................................ 121 

Kelley, Colleen M., National President, National Treasury Employees Union, 

Prepared Statements of..................................................................................... 70, 214 

Kirk, Senator Mark, U.S. Senator From Illinois, Questions Submitted 

by......................................................................................................................... 37, 120 

Lautenberg, Senator Frank R., U.S. Senator From New Jersey: 

Opening Statements of .................................................................................... 10, 52 

Prepared Statement of ..................................................................................... 53 

Mills, Hon. Karen G., Administrator, Small Business Administration ............... 125 

Prepared Statement of ..................................................................................... 131 

Summary Statement of .................................................................................... 130 

Moncrief, Ray, Executive Vice President and Chief Operating Officer, Kentucky Highlands Investment Corporation, Statement of .................................. 151 

Moran, Senator Jerry, U.S. Senator From Kansas: 

Opening Statements of .................................................................... 4, 49, 129, 168 

Prepared Statement of ..................................................................................... 51 

Questions Submitted by................................................................................... 36, 99 
Page

ii 

Nelson, Senator Ben, U.S. Senator From Nebraska, Questions Submitted 

by.................................................................................................................. 33, 98, 114 

Olson, Nina E., National Taxpayer Advocate, Internal Revenue Service, Department of the Treasury, Prepared Statement of ............................................ 181 

Schapiro, Hon. Mary L., Chairman, Securities and Exchange Commission ....... 61 

Prepared Statement of ..................................................................................... 62 

Questions Submitted to .................................................................................... 104 

Shulman, Hon. Douglas H., Commissioner, Internal Revenue Service, Department of the Treasury ........................................................................................... 165 

Prepared Statement of ..................................................................................... 170 

Summary Statement of .................................................................................... 169 

Women Impacting Public Policy, Letter From ...................................................... 162 
(iii) 

SUBJECT INDEX 

COMMODITY FUTURES TRADING COMMISSION 

Page 

Adapting Operations to Expanded Responsibilities .............................................. 84 

Additional Committee Questions ............................................................................ 84 

Audit Frequency ...................................................................................................... 95 

Budgetary Needs ...................................................................................................... 47 

CFTC: 

Mission.............................................................................................................. 46, 55 

Reorganization .................................................................................................. 86 

Scope .................................................................................................................. 55 

Checklist of Commodity Futures Trading Commission Cost-cutting Initiatives ....................................................................................................................... 82

Convert Software Licenses to Enterprise Agreements ......................................... 83 

Cost of Unregulated Derivatives ............................................................................ 72 

Cost-benefit Analysis Issue ..................................................................................... 96 

Critical Market Oversight ....................................................................................... 45 

Detailed Funding Request ...................................................................................... 58 

Enforcement: Preserving Market Integrity and Protecting Market Users ......... 94 

Fiscal Year 2012 Budget Request .......................................................................... 56 

Gasoline Prices ......................................................................................................... 78 

Implementing the Dodd-Frank Act ........................................................................ 56 

Inspector General Report ........................................................................................ 72 

Leverage NASA Government-wide Acquisition Contract ..................................... 82 

Margins ..................................................................................................................... 79

Negotiate Cost Reductions on Active Contracts .................................................... 82 

Phase in .................................................................................................................... 74

Position: 

Limit Requirements and Oil Speculation Task Force ................................... 93 

Limits and Core Principles .............................................................................. 75 

Promoting Market Transparency Thorough Publicized Information .................. 97 

Renegotiate: 

On-line Legal Research Service Rates ............................................................ 82 

Space Leases ..................................................................................................... 82 

Rule-writing Timetable ........................................................................................... 71 

Rulemaking .............................................................................................................. 92 

Savings ..................................................................................................................... 80

Technology ................................................................................................................ 73 

Modernization Investments ............................................................................. 91 

User Fees .................................................................................................................. 83 

Working With Swap Execution Facilities .............................................................. 98 

DEPARTMENT OF THE TREASURY 

COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS FUND

Additional Committee Questions ............................................................................ 159 

CDFI Healthy Foods ................................................................................................ 146 

CDFIs in Rural America ......................................................................................... 142 

Forclosure Crisis and Development Opportunities ............................................... 152 

Grocery Stores and Community Development ...................................................... 154 

Impact of: 

CDFIs ................................................................................................................ 137 

Regulations on Community Banks .................................................................. 155 
Page

iv 

Public-Private Partnerships in CDFI Projects ...................................................... 153 

The: 

CDFI Fund’s Role ............................................................................................. 135 

President’s Fiscal Year 2012 Budget Request ................................................ 137 

INTERNAL REVENUE SERVICE

ACA ........................................................................................................................... 173 

Implementation ................................................................................................. 227 

Accomplishments of the IRS ................................................................................... 167 

Additional Committee Questions ............................................................................ 232 

Analysis of the Requested Fiscal Year 2012 Budget Increase ............................. 178 

Budget Constraints and Forecast in the Face of Cuts ......................................... 235 

Capturing Additional Savings ................................................................................ 236 

Comparison of Oversight Board’s and President’s Budget Recommendations ... 200 

Contracting Out ....................................................................................................... 216 

Direct E-filing .......................................................................................................... 231 

E-filing ...................................................................................................................... 221 

Enforcement ............................................................................................................. 215 

Filing Methods ......................................................................................................... 222 

Fiscal Year 2012 IRS Budget Recommendations Summary ................................ 194 

Fraud Detection ....................................................................................................... 220 

Goal 1: Improve Service To Make Voluntary Compliance Easier ........................ 201 

Goal 2: Enforce the Law To Ensure Everyone Meets Their Obligation To 

Pay Taxes .............................................................................................................. 204 

Improper Claims.................................................................................................. 218, 220 

Improved Utility of Budget Request: GAO Recommendations ............................ 236 

Information Reporting ............................................................................................. 224 

IRS Fiscal Year 2012 Budget Request ................................................................... 214 

Workload ........................................................................................................... 230 

IT: 

Capabilities ....................................................................................................... 226 

Funding: Cost and Schedule Information ....................................................... 239 

Measuring ROI ......................................................................................................... 237 

Oversight Board’s Budget Priorities ...................................................................... 198 

Overview of the IRS’s Fiscal Year 2012 Budget Request ..................................... 175 

Penalties and Fines ................................................................................................. 219 

Physical Security ..................................................................................................... 215 

Prisoner Claims ................................................................................................... 217, 221 

Regulating Federal Tax Preparers ......................................................................... 233 

Security of Taxpayer Data ...................................................................................... 227 

Strategic Foundations: Invest for High Performance in People and Technology .................................................................................................................... 206 

Tax Complexity.................................................................................................... 230, 232 

Gap .................................................................................................................... 223 

Taxpayer: 

Services .............................................................................................................. 214 

Service Measures .............................................................................................. 228 

1099 Repeal .............................................................................................................. 226 

The Budget Request ................................................................................................ 167 

Volunteer Income Tax Assistance Scope Expansion ............................................. 239 

OFFICE OF THE SECRETARY

Additional Committee Questions ............................................................................ 30 

Assisting Homeowners and Repairing the Housing Market ................................ 8 

Banking Regulations ............................................................................................... 24 

Bush’s Tax Cuts ....................................................................................................... 16 

Consumer Financial Protection Bureau ................................................................. 37 

Corporate Tax Holiday ............................................................................................ 28 

Debt Ceiling and Economic Consequences ............................................................ 13 

Deficit Reduction ..................................................................................................... 18 

Domestic Finance ............................................................................................. 33, 36, 37 

Economic Consequences of a Government Shutdown ........................................... 16 

Federal Debt and Economic Crisis ......................................................................... 20 

Financial: ..................................................................................................................

Crimes Enforcement Network ......................................................................... 29 

Management During Budget Uncertainty ...................................................... 11 
Page

v 

Foreclosure Crisis .................................................................................................... 22 

Funding: 

For: 

The CFPB ................................................................................................... 28 

Treasury’s International Programs .......................................................... 18 

Wall Street Reform .................................................................................... 17 

To Fight Illegal Tobacco Trafficking ............................................................... 26 

Improving the Efficiency of Government Services ................................................ 9 

Infrastructure Bank Proposal ................................................................................. 27 

Iran Sanctions .......................................................................................................... 30 

Promoting U.S. Economic and National Security Interests Globally .................. 9 

Repair and Reform of the Financial System ......................................................... 8 

Sanctions on Libya .................................................................................................. 17 

Strengthening Economic Growth ............................................................................ 8 

Tax Reform ............................................................................................................... 9 

And CFPB Funding and Structure ................................................................. 14 

Wall Street Reform .................................................................................................. 21 

SECURITIES AND EXCHANGE COMMISSION 

Broker Dealer and Investment Advisers Standards of Conduct .......................... 114 

Circuit Breaker Rules in Response to May 2010 Flash Crash ............................ 109 

Clearly Erroneous Pilot Program ........................................................................... 110 

Corporate Compensation ......................................................................................... 78 

Credit Rating Agencies ............................................................................................ 104 

Critical Market Oversight ....................................................................................... 45 

Enforcing the Law ................................................................................................... 63 

Fiscal Year: 

2011 Budget ...................................................................................................... 67 

2012 Request ..................................................................................................... 68 

Impact of Reduced Funding .................................................................................... 76 

Importance of a Well-funded and Effective Securities Regulator ........................ 122 

Improvements in the Use of Available Resources ................................................. 122 

Improving Market Structure .................................................................................. 65 

IT Weaknesses ......................................................................................................... 112 

Key Rulemaking ...................................................................................................... 66 

Madoff Scam and Other Ponzi Schemes ................................................................ 77 

Market Maker Quoting Obligations ....................................................................... 110 

New Leadership, Organizational Reform, and Expertise ..................................... 63 

Responsiveness to Tips, Complaints, and Referrals ............................................. 106 

Rule-writing Timetable ........................................................................................... 71 

SEC: 

Mission .............................................................................................................. 46 

Organizational Structure Study ...................................................................... 105 

Resources ........................................................................................................... 67 

Staffing and Dodd-Frank Implementation ............................................................ 122 

Strengthening: 

Exams and Oversight—Frequency of Reviews ............................................... 107 

Oversight ........................................................................................................... 64 

Tackling Material Weaknesses in Internal Controls ............................................ 113 

SMALL BUSINESS ADMINISTRATION 

Additional Committee Questions ............................................................................ 159 

Attracting Investment by Major Retailers ............................................................. 157 

Bank on USA Proposal ............................................................................................ 139 

Banking Regulations and Small Business Lending .............................................. 142 

Budgeting for Disasters ........................................................................................... 138 

Cost of Small Business Lending ............................................................................. 139 

Family-owned Small Business and SBA Lending ................................................. 158 

Loan Servicing ......................................................................................................... 144 

SBA: 

Disaster Loans .................................................................................................. 143 

Loan Processing ................................................................................................ 156 

Microloans ......................................................................................................... 145 

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