U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

72–603 PDF 2012

FIXING THE WATCHDOG: LEGISLATIVE 

PROPOSALS TO IMPROVE AND ENHANCE 

THE SECURITIES AND EXCHANGE COMMISSION 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

SEPTEMBER 15, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–62 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

September 15, 2011 .......................................................................................... 1 

Appendix: 

September 15, 2011 .......................................................................................... 67 

WITNESSES 

THURSDAY, SEPTEMBER 15, 2011 

Atkins, Hon. Paul S., Visiting Scholar, American Enterprise Institute, and 

former Commissioner, United States Securities and Exchange Commission . 39 

Crimmins, Stephen J., Partner, K&L Gates LLP, and former Deputy Chief 

Litigation Counsel, Division of Enforcement, United States Securities and 

Exchange Commission ......................................................................................... 41 

Katz, Jonathan G. ‘‘Jack,’’ former Secretary, United States Securities and 

Exchange Commission, on behalf of the U.S. Chamber of Commerce ............. 43 

Pitt, Hon. Harvey L., Chief Executive Officer, Kalorama Partners, LLC, and 

former Chairman, United States Securities and Exchange Commission ........ 45 

Schapiro, Hon. Mary L., Chairman, United States Securities and Exchange 

Commission ........................................................................................................... 10 

Saumya, Shubh, Partner and Managing Director, the Boston Consulting 

Group, accompanied by Michael Shanahan, Senior Partner and Managing 

Director, and Chandy Chandrashekhar, Managing Director ........................... 12 

Verret, J.W., Assistant Professor of Law, Stanford University School of Law, 

and Senior Scholar, Mercatus Center, George Mason University ................... 47 

APPENDIX 

Prepared statements: 

Atkins, Hon. Paul S. ......................................................................................... 68 

Crimmins, Stephen J. ...................................................................................... 81 

Katz, Jonathan G. ‘‘Jack’’ ................................................................................. 86 

Pitt, Hon. Harvey L. ......................................................................................... 101 

Schapiro, Hon. Mary L. .................................................................................... 120 

Saumya, Shubh ................................................................................................. 136 

Verret, J.W. ....................................................................................................... 141 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Atkins, Hon. Paul S.: 

Addendum to his testimony ............................................................................. 143 

Schapiro, Hon. Mary L.: 

Written responses to questions submitted by Representatives Schweikert 

and Grimm .................................................................................................... 147 

Written responses to questions submitted by Representative Garrett ........ 150 

(1) 

FIXING THE WATCHDOG: LEGISLATIVE 

PROPOSALS TO IMPROVE AND ENHANCE 

THE SECURITIES AND EXCHANGE 

COMMISSION 

Thursday, September 15, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:02 a.m., in room 

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the committee] presiding. 

Members present: Representatives Bachus, Manzullo, Biggert, 

Garrett, Neugebauer, McHenry, Pearce, Posey, Luetkemeyer, 

Huizenga, Duffy, Hayworth, Renacci, Hurt, Dold, Schweikert, 

Grimm, Canseco, Stivers; Frank, Waters, Maloney, Gutierrez, 

Watt, Sherman, Baca, Miller of North Carolina, Scott, Green, Perlmutter, Himes, and Carney. 

Chairman BACHUS. Good morning. The hearing will come to 

order. Without objection, all Members’ written statements will be 

made a part of the record, and at this time, the Chair recognizes 

himself for an opening statement. 

This morning, we will continue our examination of the DoddFrank Act. Section 967 of Dodd-Frank required the Securities and 

Exchange Commission to hire an independent consultant to examine the Commission’s operations, structure, and need for reform. 

The SEC hired the Boston Consulting Group to conduct the 

study, and the consultant’s report was issued last March. The 

study and the report recognized that much needs to be done at the 

SEC to improve the effectiveness and efficiency of the organization, 

and I think that is a good starting point for this committee and 

Congress. I don’t think there is an agreement on exactly what 

needs to be done when it comes to reforming the SEC, but all of 

us agree that the status quo is unacceptable. 

I think all of you have the Boston Consulting Group’s recommendations, so I won’t go over that again. It was a three-step 

process. I will say that what I have introduced, and I think if you 

hear nothing else I say, hear this, it is not legislation. It was not 

introduced on the Floor of the House. It is a discussion draft. It is 

simply meant as a starting point for all of us to discuss various options. 

I think there are probably two basic paths we can take, and I 

think both of them are very logical. One would be for the SEC to 

2 

reform itself; physician heal thyself. I think that is a rational, appropriate approach. 

Another approach would be legislation. A lot of Republicans and 

Democrats and others have said that before the SEC obtains additional funding, there need to be reforms. On the other hand, some 

of my colleagues have argued, I think with some persuasion, that 

with their expanded role, there is a need for an immediate funding 

increase, and in fact my personal view is that an increase in funding is probably necessary as part of the reform process. 

We have tried—and I just had a discussion with the ranking 

member where he mentioned that five of the six witnesses were selected by the Republicans. We did that, but I will say this: We had 

witnesses—we invited witnesses who were on the record publicly 

saying, let the SEC reform itself. So we didn’t try to invite witnesses who would come and agree with this discussion draft. In 

fact, some of our witnesses will— 

Mr. FRANK. Mr. Chairman, yes, I acknowledge that, and I appreciate that. I was really talking about for the future. That is why 

we discussed it privately, not publicly. That was not meant as a 

criticism today, just a procedural for the future because I acknowledge what you just said. 

Chairman BACHUS. I am going to introduce my written statement into the record, and I go into some more detail, but again, 

let me close by stressing that there is nothing sacred about this 

discussion draft. It is merely an attempt to start the discussion 

that I think we all agree—I know, Chairman Schapiro, you inherited an agency that needed reform, that I think acknowledged itself 

that there were inefficiencies. You also have inherited an agency 

that has been given vastly greater responsibilities, and with that 

in mind we will simply go forward, and I think that we can share 

the best ideas on both sides of the aisle and with the Administration. 

And with that, I will recognize the ranking member. 

Mr. FRANK. Let me ask that Mr. Scott be recognized first for 3 

minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman. This is indeed 

a very important hearing and a very timely hearing, and I want 

to thank Chairman Bachus for this hearing today regarding proposals to reform the Securities and Exchange Commission. I certainly want to welcome Chairwoman Schapiro and the other gentleman, Mr.—I am afraid to attempt your name for fear I may hurt 

it a lot, but I will try—‘‘Saumya.’’ 

As a result of the Dodd-Frank financial reform legislation that 

originated in this committee last year, the SEC was required to 

hire external consultants to examine its structure, operations, and 

funding. This was following, as we know, a lack of awareness by 

the SEC during the financial crisis of the dangers presented by the 

approval of subprime mortgages as well as inadequate supervision 

of the largest investment banks at this time. 

Following a study, the Boston Consulting Group released its findings this past March, including recommendations for increased investment in infrastructure as well as reorganization of the SEC to 

increase its effectiveness and cooperation with other Federal agencies. But despite these findings, Chairwoman Schapiro has exVerDate Nov 24 2008 18:41 May 18, 2012 Jkt 072603 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\72603.TXT TERRIE
3 

pressed a lack of resources available to the SEC to meet the majority of the Boston Group’s recommendations. However, she has stated that some of the recommendations would be put into practice by 

means of some structural reorganization, so I am interested in finding out today what changes have been made and if the SEC is able 

to conduct any additional reforms in order to improve the Commission’s effectiveness. 

Let me just take a moment to talk about the need for these resources, particularly at this time when we are faced with the budget crisis, the debt crisis, the challenge to find $1.5 trillion or $2 trillion. We have to find a whole lot of money. So there is some 

thought about putting the increases that are needed on hold for the 

SEC; but let me point out that increasing the SEC’s budget would 

not, and I repeat would not, have any impact on the deficit. And 

it is because of this reason: By statute, the SEC’s transaction fees 

paid by Wall Street firms will be set to match the agency’s appropriated funding levels, so cutting the SEC budget’s request, it is 

important for us to establish today, will not help solve the Nation’s 

debt problem. So we need to keep that in mind. 

Furthermore, I anticipate the opportunity to discuss the legislative proposals that seek to overhaul the SEC’s structure, including 

its ability to use reserve account funds and to lock the SEC structure into statute. We need to make sure that by proposing such legislation, we will still allow it to evolve with market changes, and 

that we are not preventing the SEC from conducting its intended 

purpose. This is indeed an important hearing. I thank you, and I 

thank the witnesses for coming. 

Chairman BACHUS. Would the gentleman yield for 10 seconds? 

Mr. SCOTT. Sure. 

Chairman BACHUS. What the gentleman pointed out is that the 

SEC is funded by user fees, and I think that was an important distinction; that it is not, does not result in and contribute to a deficit 

or to the Nation’s debt. And obviously, that is something we will 

need to consider if we determine that funding is necessary, which 

I think we all agree it is. 

Mr. SCOTT. You are absolutely right, Mr. Chairman. Thank you. 

Chairman BACHUS. Mrs. Biggert for 11⁄2 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman, and good morning to 

the witnesses and thank you for being here. I look forward to hearing your thoughts on how we can improve what has been happening at the SEC to ensure that recent regulatory failures never 

happen again. 

While the crisis exposed a systemwide regulatory failure, there 

is plenty of blame to be shared between the regulatory agencies, 

Congress, and the industry. Today, we are going to focus on the 

SEC, and Chairman Schapiro, I realize that most of all—that everything that happened was long before your time, and I certainly 

appreciate the Herculean task that you have been given. With 

Dodd-Frank having tasked the SEC with expansive new regulatory 

powers and responsibilities, I think that this is a heavy lift. And 

before the Commission undertakes these additional responsibilities 

over complex derivatives, hedge funds, and credit rating firms, I 

know that you have a lot of work ahead of you. So I am anxious 

to hear the Boston Consulting Group’s recommendations, and, most 

4 

importantly, I am anxious to hear from you, Chairman Schapiro, 

on the efforts taken to reform the agency and your strategy for 

overseeing the vast new responsibilities mandated under DoddFrank. 

And I would also like to hear a little bit about what we have 

been asking the Department of Labor, to make sure that they 

worked with you and you worked with them. I know that you have 

been very accommodating that way, but I was very disappointed to 

see that the Department of Labor had come out with regulations, 

and you are still working on the study and everything, so I was 

very disappointed in what the Department of Labor has done. 

With that, thank you again for being here, and I look forward to 

your testimony. 

Chairman BACHUS. Mrs. Maloney for 1 minute. 

Mrs. MALONEY. Thank you, Mr. Chairman, and Ranking Member 

Frank, for calling this very important hearing. And I welcome both 

of our panelists today. One of the important recommendations of 

Dodd-Frank was to have a review of how we could streamline, 

bring the SEC into the 21st Century, make it more effective because there are substantial new responsibilities given to the SEC. 

I know that a later report will be coming out from the IG shortly, 

and I truly do believe that if this report is substantive, its detail 

can be a guidepost as we move forward with recommendations. But 

with the new responsibilities, the SEC needs the funding to get the 

job done while they are implementing these changes to be literally 

even more effective. 

I was interested in one of your particular recommendations on 

evaluating nonperformance, the fact that there is no way to evaluate whether or not someone is actually responding to whistleblower 

complaints, how they respond to them, how they respond to industry, or really whether or not they are doing a good job for the SEC 

and for the government. But in any event, I congratulate the SEC, 

its report, their response, and the Boston Consulting Group, and I 

look forward to your testimony. 

Chairman BACHUS. Thank you. Mr. Garrett for 11⁄2 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman. Thank you for the witnesses here. We are looking forward to a good discussion on the operations and the effectiveness of the SEC. 

I also wish to thank Chairman Bachus for allowing this committee today to consider the SEC Regulatory Accountability Act as 

part of today’s proceeding. This is a bill that I introduced with 

about 14 of my colleagues to ensure that the SEC, basically being 

an independent agency, would be subject to the President’s recent 

Executive Order to try to improve regulation and regulatory review. 

In addition, what the bill would do is it would strengthen the 

Commission’s cost-benefit analysis by: first, making sure there is 

actually a problem that the proposed regulations are trying to address; and second, requiring a cost-benefit analysis be performed by 

the SEC’s chief economist. These are really basically commonsense 

reforms that make a lot of sense, I think, especially in light of how 

the Commission continues to seem to struggle with this issue. 

For instance, in the recent unanimous opinion of the D.C. Circuit 

Court of Appeals, which vacated the Commission’s proxy access 

5 

rule, the court stated, ‘‘Unfortunately, the Commission acted arbitrarily and capriciously for having failed once again to adequately 

assess the economic effects of a new rule.’’ And, ‘‘inconsistently and 

opportunistically frame cost and benefits of the rule.’’ 

So while I understand Chairman Schapiro may have concerns 

about this legislation, H.R. 2308, clearly a stronger commitment by 

the agency to a good cost-benefit analysis by the SEC I believe is 

essential. Why? To ensure that we do not unduly overburden registered companies or negatively impact job creation here in this 

country. I thank you and I yield back. 

Chairman BACHUS. Mr. Himes for 2 minutes. 

Mr. HIMES. Thank you, Mr. Chairman. And let me add my 

thanks to BCG and to Chairwoman Schapiro. I wanted to take my 

2 minutes now, just to make a point that I think follows up on Congressman Garrett’s point, because I hope that the regulatory agencies and that my friends in the Majority will think about cost-benefit analysis in this area in a slightly different way than they are. 

I have been uncomfortable sitting here listening to a traditional 

way of evaluating cost-benefit analysis. And by the way, I fully buy 

into the notion that a rule’s costs should match its benefit. As I 

thought about it, most of the regulation we do regulates activities 

that are a little bit predictable, that happen on a continuum, by 

which I mean if you decide to allow a little bit more particulate 

matter into the air, more kids are going to have asthma. You can 

predict that. Look, we will make a decision about how much of that 

we want or don’t want. Motor vehicles, we will set a speed limit, 

and 40,000 Americans die on the roadways today, and that is a decision we have either implicitly or explicitly made around regulation. 

The financial industry is different. We are talking about truly 

catastrophic events, if we get it wrong, that we have all lived 

through. And I am not sure you can analyze the cost associated 

with the incredible destruction of American wealth, and the millions of people out of work that happens when you get what the 

statisticians call a ‘‘tail event.’’ It may not happen very often, but 

when it happens, it is devastating. This was understood by the 

Bush White House when they persuaded us into the Iraq War by 

holding up a picture of a mushroom cloud. Catastrophic event. It 

may be low probability, but you will do almost anything to avoid 

that event. 

Now, I recognize that is not the best analogy, but it is not completely inapt. We should be prudent and do perhaps almost anything to avoid the destruction of household wealth that we saw in 

the meltdown. And by the way, we have seen them more often. 

Chairman BACHUS. Another minute. 

Mr. FRANK. The gentleman has another minute, I would add. 

Mr. HIMES. Thank you. Since Glass-Steagall was weakened and 

a variety of our financial services regulations were lightened—and 

by the way, in some instances, they were good ideas, but starting 

in the 1990s, we saw emerging market crises in Russia in 1998 and 

in Mexico in 1994, the Internet bubble, and now truly the catastrophic tail event where Americans lost tens of trillions of dollars 

of wealth, and millions of Americans were thrown out of work partly because we got the regulation wrong. 

6 

So my plea is, let us not think about this like motor vehicle safety and speed limits or about particulate matter in the air which, 

by the way, we should debate. Let’s think about this as being extra 

prudent, going the extra mile to avoid events which may be rare, 

although they are less rare now than they used to be, because 

when they happen, they are almost unthinkably catastrophic. 

Thank you, I yield back the balance of my time. 

Chairman BACHUS. Thank you. 

Mr. Neugebauer for 11⁄2 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman, and thank you for 

holding this hearing. As we began to have this hearing today, I 

went back and reviewed some of the headlines for the SEC over the 

last few years: ‘‘Report Says SEC Failed in Oversight of Bear 

Stearns,’’ that was The Washington Post; CBS News, ‘‘Court Documents Show How SEC Failed to Nab Madoff in 2006’’; Washington 

Post, ‘‘Madoff Again’’; CNBC, ‘‘SEC Ignores Complaints about Stanford’’; ABC News, ‘‘How Big is the SEC’s Porn Problem?’’; New 

York Times, ‘‘SEC Hurt By Disarray in Its Books’’; ‘‘Improvements 

Needed in SEC’s Internal Controls and Accounting Procedures.’’ 

And so as we begin to have this debate, one of the things that 

Washington always seems to say is when we have deficiencies, we 

need more regulation, and we need more money. But really when 

you go back and look at a lot of the failures through the regulatory 

standpoint of the past crisis that we went through, a lot of those 

existing laws were on the books that would have prevented a lot 

of those events from happening. And so, I think one of the things 

that concerns me is that before we start doling out more money— 

some people say that doesn’t create the deficit; it is a tax on the 

economy when you increase fees. But, before we go down that road, 

we need to make sure that we have regulators that are capable and 

structured to do their job before we expand that. And so I think 

we have to be very careful here of rewarding bad behavior with 

more money and more regulations. 

I look forward to hearing from the witnesses today. Thank you. 

Chairman BACHUS. Mr. Perlmutter for 1 minute. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. And I agree with Mr. 

Neugebauer; we have to make sure that what is on the books is 

enforced. Under the Bush Administration, there was very little enforcement, and so I do want to do the cost-benefit analysis for my 

friend from New Jersey, because between July of 2008 and January 

of 2009, the market dropped 6,000 points. It is $1.3 billion per 

point when the cops were taken off the beat, and we had a catastrophe, as Mr. Himes talked about. That is $7.8 trillion of wealth 

that evaporated. It was gained back with stronger enforcement. 

But for every man, woman, and child in America, that was $26,000 

of wealth that evaporated in the stock market during that period 

of time. So now, let’s try to do the cost-benefit analysis of that catastrophe. 

Pretty much everybody has a 401(k) or a pension, so this affected 

a lot of people. And that is the reason for regulations and for the 

enforcement of regulations, which I hope that this SEC will continue to do. And with that, I yield back. 

Chairman BACHUS. Thank you. Mr. Dold for 1 minute. 

7 

Mr. DOLD. Thank you, Mr. Chairman. I certainly want to thank 

Chairman Bachus and Subcommittee Chairman Garrett for their 

proposals to reorganize, improve, and reform the SEC. For decades, 

the SEC has been a critical factor in the historical success of our 

capital markets by helping to protect investors, to facilitate capital 

formation, and to promote transparent, fair, orderly, and efficient 

capital markets. But like every other regulatory agency, the SEC 

is not perfect, and the financial crisis manifested some of those imperfections. But even without the financial crisis, Congress should 

regularly review the SEC and other regulatory agencies to ensure 

that they are cost-effective, transparent, accountable, responsive, 

and efficient, especially in this constantly changing and competitive 

global marketplace. 

Our regulatory agencies must have rational management and organizational structures; strong, clear, ethical standards; and effective checks, balances, systems, and controls. I am confident that all 

of us, Democrats and Republicans, market participants and regulators, share those objectives that will facilitate smart and cost-effective regulation. 

And I look forward to hearing from our witnesses. Thank you, 

Mr. Chairman. 

Chairman BACHUS. Thank you. Mr. Frank is recognized for 7 

minutes. 

Mr. FRANK. For as much time as I may consume—I don’t know 

if a couple other of my Members may come. I have to confess, Mr. 

Chairman, my mind wandered for a bit when I was here. I was 

thinking of something else, and as I listened to my friend from 

Texas, I thought for a minute we were talking about the Pentagon 

when we were talking about not rewarding inefficiency with more 

money, and I got momentarily encouraged that maybe we would 

begin to think about spending constraints there. 

But alas, I came back to this hearing, and the answer is, yes, you 

do want to make people be more efficient, but you don’t penalize 

the American public further because agencies that were supposed 

to be protecting them didn’t do the job well enough. And, yes, it is 

important to get more efficient; but, no, that is not in this case a 

substitute for funding when you are significantly increasing resources. 

It is also the case that some of the inefficiencies resulted or some 

of the poor results resulted from ideological differences, from policy 

differences. The Boston Consulting Group, and I very much, Mr. 

Chairman, by the way—and I appreciate what you said about the 

hearing, and I think the witness list is a good representation. The 

reason I appreciated your comments is I think we should be trying 

to do both, which is to improve efficiency and deal with funding. 

But let me just read a couple of things from the Boston Consulting Group’s report: ‘‘Despite the material increases in responsibility driven by Dodd-Frank and the concomitant increase in workload, the SEC’s resources have not grown in proportion.’’ Next, and 

this is very important, on page 69 of the report, ‘‘While the SEC’s 

funding has grown over the decades, in recent years the growth has 

not kept pace with the SEC’s expanded role. Consequently, while 

the agency can certainly use its resources more efficiently, it still 

faces a resource disconnect,’’ i.e., with the greatest affliction to the 

8 

world, they wouldn’t have the money to do what they are supposed 

to do. 

And then on page 147, ‘‘While assessing which activities the SEC 

should undertake is beyond the scope of BCG’s studies, senior management itself has identified several high-priority regulatory activities that it cannot implement today, even with the efficiencies described above.’’ They cannot implement today, even with the efficiencies described above, including the agency’s demand for technology and expertise. You can’t ‘‘efficient’’ your way into modern 

technology and to getting the kind of personnel that you need. And, 

by the way, the BCG said, look, you are never going to have all the 

money in the world. Prioritize your activities. 

So this is a reference to what would happen if they did do the 

prioritization. This is not saying, do everything. This says, after 

prioritization. And here’s what the BCG says, not the SEC, but the 

Boston Consulting Group: ‘‘Based upon a very preliminary estimate, a range of an incremental $200 million to $300 million may 

be required for the initiatives described in choice one.’’ 

And finally, one of the options that some people have said they 

might do if they don’t get the money is in the event that—this is 

on page 150—in the event that the funding environment does not 

change, an alternative option is the SEC’s role to be changed to fit 

the budget. The SEC would then need to rethink what activities it 

should perform and delegate greater—I am sorry. It should then 

need to rethink what activities it should perform, delegate greater 

authority to SROs. The new SEC would change from being an actor 

that actively regulates markets and market participants to an overseer that primarily monitors the regulatory actions of others to 

whom it has delegated regulatory activity. 

Let me just ask you in terms of time, is that based on 5 or— 

Chairman BACHUS. The gentleman can have another minute. 

Mr. FRANK. I will just finish with this. I will just take 1 more 

minute. There is one major additional responsibility that I believe 

is very important. That is the shared responsibility with the Commodities Futures Trading Commission over derivative regulation. 

Among the mistakes that were made by Congress and the President earlier, around 2000, when derivatives were exempted from 

regulation, when the swap market grew up. So the swap market 

grew up in an area, in fact it is not even correct to call it deregulation, it is nonregulation of a very important activity. 

We have given the SEC, along with the CFTC, the responsibility 

to regulate derivatives. We are talking about AIG, we are talking 

about interchanges between financial institutions, not so much end 

users. The notion that they could take on that added responsibility 

is a very complicated one. We want it done right. Derivatives is a 

complicated business, and we don’t want to impinge on end users. 

To do that without a significant increase in funding is clearly impossible. 

So I welcome the Boston Consulting Group. They argue that we 

may have been overly prescriptive in the legislation last year, and 

I am open to that. I think that is one of the things we may be able 

to agree upon, Mr. Chairman, about giving them more flexibility 

within the context of assuring these things. But let’s be very clear. 

We have a major new grant of responsibility in derivatives, and the 

9 

notion that can be done without a significant increase in funding 

is greatly flawed. 

Thank you, Mr. Chairman. I will reserve the balance of my time. 

Chairman BACHUS. At this time, Mr. Canseco for 1 minute. 

Mr. CANSECO. Thank you, Mr. Chairman. According to the SEC’s 

Web site, their mission is to protect investors, maintain fair, orderly, and efficient markets, and to facilitate capital formation. In 

order to carry out this mission for Fiscal Year 1999 through Fiscal 

Year 2010, the SEC’s annual budget tripled from $340 million to 

$1 billion. Looking back over those years, one can’t help but think 

of the words Enron, WorldCom, Madoff, Stanford, and Lehman. 

The recent failures of the agency were not due to the lack of funding or authority. They were due to poor communication and bureaucratic roadblocks that resulted in billions of dollars of losses 

for innocent investors, essentially regulators asleep at the wheel. 

The old-fashioned solution is to throw more money at the problem 

and hope it goes away, but more money doesn’t solve inefficiency. 

Only a serious reform can fix the SEC. 

I look forward to today’s hearing on this important topic and 

commonsense measures introduced by Chairmen Bachus and Garrett. Thank you. 

Chairman BACHUS. Ms. Waters for 2 minutes. 

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

this hearing this morning on the future of the Securities and Exchange Commission. I am very interested to hear how the SEC is 

moving forward to implement the recommendations outlined in the 

Boston Consulting Group report. As you know, constructive organization reforms at the SEC can help to increase the Commission’s 

effectiveness, but of course we cannot overlook the fact that despite 

pursuing greater efficiencies, the SEC continues to be 

underresourced by the Congress, and that ultimately undermines 

their effectiveness. 

I also wanted to note my concerns about Chairman Garrett’s legislation, which seeks to subject the SEC to very onerous cost-benefit tests when not only issuing new rules but also enforcement orders. 

First, the SEC already has to consider what impact any rule or 

regulation would have on efficiency, competition, and capital formation before issuing it, so this bill is redundant. This is evidenced 

by the fact that the D.C. Circuit Court of Appeals recently struck 

down the SEC’s proxy access rule on the grounds that it contained 

an insufficient cost-benefit analysis. Clearly, the SEC is already 

held to a high standard by the court. 

Second, I am concerned that Chairman Garrett’s bill would conflict with the SEC’s mission. The bill almost exclusively focuses on 

limiting burdens on the market and puts no emphasis on protecting 

investors. 

Finally, I am concerned that enforcement actions could now also 

be subject to a cost-benefit analysis. I feel this would be inappropriate. Enforcing securities laws should be a matter of protecting 

the rule of law, plain and simple. 

I am also concerned about Chairman Bachus’ draft legislation 

which would enshrine in law an organizational chart for the SEC. 

I am concerned about whether the SEC would be able to respond 

10 

to rapidly changing capital markets under the provisions set forth 

in this bill. 

Mr. Chairman, I would hope that we have a bipartisan effort to 

support the SEC in ways that will allow them to do their job and 

protect the investors and the consumers. And I would hope that we 

would just give them the opportunity to do what they have to do 

and to realize their mission. 

I yield back the balance of my time. 

Chairman BACHUS. Thank you. 

At this time, we have votes on the Floor. We are told it is going 

to be about 45 minutes, so we will return at the end of that time. 

We have 3 minutes left on our side. I am simply going to say this: 

We talked about funding, and as one Member said, ‘‘If it is a user 

fee, it is a tax on the industry. If it is an appropriation, it does affect the deficit.’’ 

That is another decision that Congress needs to make as to how 

the SEC is funded. I think most of my colleagues in the past have 

supported user fees, but at the same time, some have stressed that 

Congress needs to maintain at least some review by the appropriators. So that would obviously be a discussion we would also have. 

Another thing I think we all need to acknowledge is that we do 

have a law in place, Dodd-Frank. We have different views on different provisions of that law, but it is a reality, and statutorily the 

SEC is charged with implementing that Act. And so, those are 

things that have to be factored in. And I do acknowledge that the 

Boston Consulting Group did say that additional funding was necessary. I am not going to argue with what is in print. Thank you. 

We will recess at this time. 

[recess] 

Chairman BACHUS. The committee will come to order. At this 

time, I would like to introduce the two witnesses from the first 

panel: the Honorable Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission, who was not there during Madoff; 

and Mr. Shubh Saumya, partner and managing director of the Boston Consulting Group. Mr. Saumya is accompanied by Michael 

Shanahan, senior partner and managing director, and Chandy 

Chandrashekhar, managing director. They will participate in the 

question-and-answer session, but will not give an opening statement. 

I welcome our witnesses. 

So at this time, Chairman Schapiro, you are recognized for your 

opening statement, which you don’t have to limit 5 minutes. You 

have the discretion to get yourself in as much trouble as you need. 

No, I am kidding. Thank you. 

STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, CHAIRMAN, UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

Ms. SCHAPIRO. That is very good advice, Mr. Chairman. Thank 

you, Chairman Bachus, Ranking Member Frank, and members of 

the committee. 

Thank you for the opportunity to discuss the organizational assessment of the Securities and Exchange Commission performed by 

the Boston Consulting Group and other issues regarding the SEC. 

11 

When I arrived at the SEC 2 years ago, the agency was reeling 

from a variety of economic events and mission failures that had severely harmed the ability of the agency to—we acted swiftly and 

comprehensively to reform the way the Commission operates. We 

brought in new leadership in virtually every office, including the 

Commission’s first Chief Operating Officer and first Chief Compliance Officer. We revitalized and restructured our enforcement and 

examination operations, revamped our handling of tips and complaints, took steps to break down internal silos and create a culture 

of collaboration, improved our risk assessment capabilities, recruited more staff with specialized expertise and real-world experience, expanded our training programs, and enhanced safeguards 

for investors’ assets through new rules and by leveraging public accounting firms. 

Our goal, throughout these many changes, has been to create a 

more vigilant, agile, and responsive organization to perform the 

critical mission of the agency. I believe our efforts are paying dividends. Last year, the SEC returned $2.2 billion to harmed investors, twice the agency’s budget for that year. And last fiscal year 

as well, $2.8 billion in disgorgement and penalties were ordered in 

SEC enforcement actions, a 176 percent increase over the amounts 

ordered in Fiscal Year 2008. We have brought enforcement actions 

ranging in scope from complex cases against parties that have 

played significant roles in the recent economic crisis to lesser 

known cases involving real harm to individual investors. Our examiners and enforcement investigators now collaborate frequently 

and effectively, resulting in a number of recent enforcement actions 

generated from exam referrals. We are proud of our progress but 

we continue to seek ways to improve our operations. 

Last fall, as required by the Dodd-Frank Act, the SEC engaged 

the services of BCG, a top tier organizational consulting firm with 

significant capital markets expertise to conduct a broad and independent assessment of the SEC’s organization. It was gratifying 

that BCG confirmed what we believed, that over the past 2 years, 

the SEC has improved the effectiveness of its operations. Nevertheless, we agree as well with BCG that the SEC still has significant 

opportunities to further optimize its available resources. 

However, even assuming further optimization, BCG still concludes that the SEC will not have the personnel resources to perform all the activities that are within the agency’s responsibility. 

BCG also concludes that insufficient resources have contributed to 

a gap in the SEC’s ability to develop needed information technology 

systems. Beyond the resource issue, BCG provided useful insights 

into how the SEC might continue its efforts to ensure that it remains a vigilante, agile, and responsive organization. Given the 

broad scope of the BCG reports recommendations, determining and 

executing the appropriate course of action will require careful internal coordination and a significant commitment of staff and other 

resources. That process has already begun. We have organized our 

work streams around four principle goals: optimizing the agency’s 

mission and structure; strengthening capabilities; improving controls and efficiencies; and enhancing our workforce. 

In addition, we have already implemented or are in the process 

of implementing a number of BCG recommendations, including 

12 

clarifying the role of the Chief Operating Officer and enhancing his 

ability to make needed changes, build in high priority staff skills, 

establishing a continuous improvement program, improving the Office of Administrative Services, optimizing the organizational design of the Office of Information Technology, redesigning the Office 

of Human Resources, and prioritizing among the many SEC responsibilities. As we move forward, however, it is important to note 

that BCG believes that substantial up-front investments will be required to implement its recommendations. 

While some portion of these costs can be paid for through the efficiency gains outlined in the report, those savings will not be sufficient to cover the full investment needed to achieve our goals. In 

addition to the report, the committee has requested my views on 

two pieces of legislation, the SEC Modernization Act of 2011 and 

the SEC Regulatory Accountability Act. 

Although I appreciate the intent of both bills, my written testimony describes some significant concerns with regard to these bills’ 

impact on the agency’s structure, and our ability to flexibly respond 

to changing market conditions as well as our ability to police the 

financial markets. For example, the Regulatory Accountability Act 

requirement for cost-benefit analysis of all SEC orders could undermine our ability to issue enforcement orders against wrongdoers, 

delay exemptive orders needed to facilitate the introduction of new 

investment products to the market, and impede the capital formation process by delaying orders to companies that accelerate registration of their securities. I would welcome the opportunity to 

work with the committee on both pieces of legislation to ensure any 

legislation truly improves the SEC’s ability to achieve its mission. 

The SEC recognizes that implementation of many of the ideas in 

the BCG report will require a long-term commitment and sustained 

effort over several years to successfully implement. While we are 

still in the early stages of implementing the recommendations, we 

are committed to an open and transparent process. Thank you 

again for the opportunity to testify, and I am, of course, happy to 

answer any questions you may have. 

[The prepared statement of Chairman Schapiro can be found on 

page 120 of the appendix.] 

Chairman BACHUS. Thank you. 

Mr. Saumya? 

STATEMENT OF SHUBH SAUMYA, PARTNER AND MANAGING 

DIRECTOR, THE BOSTON CONSULTING GROUP, ACCOMPANIED BY MICHAEL SHANAHAN, SENIOR PARTNER AND 

MANAGING DIRECTOR, AND CHANDY CHANDRASHEKHAR, 

MANAGING DIRECTOR 

Mr. SAUMYA. Chairman Bachus, Ranking Member Frank, and 

members of the Financial Services Committee, my name is Shubh 

Saumya, and I am a partner and managing director at the Boston 

Consulting Group. In my capacity as the partner responsible for 

leading the BCG team that conducted this review, I am pleased to 

appear before you this morning on behalf of BCG to discuss the report that BCG completed concerning our organizational and operational review of the U.S. Securities and Exchange Commission. As 

this was a significant undertaking involving many BCG profesVerDate Nov 24 2008 18:41 May 18, 2012 Jkt 072603 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\72603.TXT TERRIE
13 

sionals, I am accompanied by two of my colleagues who will be able 

to assist in responding to your questions, Chandy Chandrashekhar, 

who was responsible for the IT review, and Michael Shanahan, who 

was responsible for the organizational and people review. 

Our study of the SEC was conducted pursuant to Section 967 of 

the Dodd-Frank Wall Street Reform and Consumer Protection Act 

and resulted in a 263-page report which we delivered to Congress 

and the SEC on March 10, 2011. We leveraged a number of proprietary methodologies and tools, reviewed extensive documentation, 

undertook analysis, and conducted more than 425 discussions with 

current and former SEC officials, regulated entities, peer regulators, self-regulatory organizations (SROs), and industry groups. 

We focused on the four subjects that the SEC identified in the 

statement of work for this project: first, organizational structure; 

second, personnel and resources; third, technology and resources; 

and fourth, relationships with self-regulatory agencies, or SROs. 

To carry out its mission, the SEC requires both a regulatory 

framework with clear authorizations as well as a robust set of internal capabilities to fulfill its mandate. Our study focused on the 

latter. We found that while the SEC has initiated steps to better 

fulfill its mission as well as its expanded mandate under DoddFrank, the agency can do more to shape a more effective organizational structure and to address capability gaps we identified. 

To this end, we developed a portfolio of initiatives which will create real efficiency and effectiveness improvements for the agency. 

We recommended that the SEC implement these initiatives immediately and rigorously on a ‘‘no regrets’’ basis because they are 

foundational to the agency’s future. These initiatives fall into four 

major categories and are as follows: First, reprioritize regulatory 

activities. The SEC should engage in a rigorous assessment of its 

highest priority needs in regulatory policy and operations and reallocate resources accordingly. Second, reshape the organization. 

The SEC should reshape its organizational structure, roles, and 

governance to maximize efficiency, effectiveness, and collaboration 

as well as to drive continuous improvement. Third, invest in enabling infrastructure. The SEC should invest in key enabling infrastructure, including technology, human resources, risk management, and high priority staff skills. 

And finally, enhance the SRO engagement model. The SEC 

should implement initiatives to enhance its role as both an overseer of and co-regulator with SROs. In our report, we outline an 

implementation plan for these initiatives that carefully sequences 

them in a way as to create significant efficiencies that would help 

fund the investments and capabilities called for in the plan. As an 

initial matter, we recommended that the agency create a project 

management office to coordinate the immediate implementation of 

the recommended initiatives. 

We also recommended that after the SEC has implemented these 

initiatives, Congress should reflect on whether or not the resulting 

organization adequately meets its expectations for the agency’s efficiency and effectiveness. If Congress determines that the optimization still does not meet its expectations, then we recommend that 

it consider either increasing funding to allow the SEC to better fulfill the current role, or changing the SEC’s role to fit available 

14 

funding. We have reviewed the draft bills you will discuss today. 

The proposed SEC Modernization Act of 2011 contains a number 

of provisions which, based on our reading of the draft bill, appear 

to be consistent with options outlined in our report. 

Moreover, there are several provisions of the Modernization Act 

which appear to posit actions beyond those outlined in our report. 

In addition, several provisions of the Act appear to go beyond the 

scope of our study. The other proposal, the SEC Regulatory Accountability Act, H.R. 2308, addresses regulatory mandates that 

are beyond the scope of our study. Again, thank you for your time 

and attention. My colleagues and I are happy to answer any questions that you may have. 

Chairman BACHUS. Thank you. 

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

136 of the appendix.] 

Chairman BACHUS. Mr. Saumya, what do you think would be the 

number one structural change that ought to be made at the SEC? 

And should it be made before additional funding or additional staff 

hires? Or what should that sequence be? 

Mr. SHANAHAN. There are a number of structural recommendations that we have made which we consider that it should implement, but we gave several choices for those. One of them was, of 

course, the relationship of IM and TM, and the issue of the challenge of market dynamics having made broker-dealers and investment advisers more similar in the approach rather than dissimilar, 

and having two separate divisions dealing with that posed challenges around information and best practice sharing. 

Chairman BACHUS. In that regard, would we first need to settle 

the question of who is going to be the primary regulator over the 

investment advisers? 

Mr. SAUMYA. We did note that there is a lot of dialogue on that 

topic of harmonizing investment adviser and broker-dealers exam. 

In the set of options that we identified, one option got to a structure that assumes that you have resolved that. But clearly, as an 

input to finally deciding the right structure, a resolution on that 

would be important. 

Chairman BACHUS. I think they could be combined irregardless 

because I think the SEC would continue to have oversight and accountability, even if you had an SRO or something. 

Mr. SAUMYA. Yes. Because the SEC would have to oversee the 

SRO in a very robust manner. 

Chairman BACHUS. That is right. Thank you. 

Mr. SHANAHAN. And the second major structural option that we 

said was how to organize the exam, and there are pros and cons 

on either side of how the exams should be organized. Right now it 

is a separate office, as you are aware. And we have pointed out 

that that has its pluses and minuses. In the recent past, it has had 

several pluses by raising the standard of exam and the consistency 

of the exam and having won individual accountability for 

prioritizing an exam. There is also potentially an added advantage 

of it being independent from enforcement—independent so that it 

is not necessarily a slave to enforcement, as it were. 

The cons, however, are clear as well. Separating exam from divisions means that you lose the possibility of information flow beVerDate Nov 24 2008 18:41 May 18, 2012 Jkt 072603 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\72603.TXT TERRIE
15 

tween the two. Not only do you need that operationally, but you 

need that for learning. Exam can feed back to rules, and rules can 

transfer to exam much more seamlessly if they are together. And 

second of all, there is some career mobility if you combine the two 

that is lost if you separate the two. 

Chairman BACHUS. Thank you. Chairman Schapiro, you have 

had the report since March. I am sure you have reviewed it. Has 

the agency undertaken any of the recommendations to date? 

Ms. SCHAPIRO. Yes. We have, Mr. Chairman, undertaken quite a 

few of the recommendations. Understandably, a lot of these involve 

a longer-term process because some of the recommendations are 

really quite massive. And so, on top of all the other work the SEC 

is engaged in, it will take us some time. But we have already consolidated the Office of the Executive Director under the Office of 

the Chief Operating Officer and have eliminated the Executive Director. We have established a continuous improvement program to 

look for cost savings wherever we can in the agency so that we can 

redeploy those savings to other activities. That is savings in terms 

of programs and operations. We are in the process of training all 

of our employees for a full rollout of our new performance management system, which was highlighted by BCG. 

We have reorganized the Office of Information Technology with 

new leadership, and that is starting to yield dividends as well. And 

we have begun the full review of the design and the structure of 

the other infrastructural parts of the agency, including the Office 

of Administrative Services. That work should be done in November 

and then we will be able to go forward with it. In addition, we have 

offloaded some responsibilities that we think can be done more efficiently by outsourcing to agencies. 

So as you well know, our financial management program is being 

outsourced to a Shared Federal Service Provider, the Department 

of Transportation, and all of our leasing activity is being 

outsourced to the General Services Administration. We have also, 

as you know, reorganized enforcement to great result, I believe, reorganized the examination program, and the other more 

workstreams that I mentioned are well under way with respect to 

the other recommendations. 

Chairman BACHUS. Thank you. And the ranking member is recognized for 5 minutes. 

Mr. FRANK. Thank you, Mr. Chairman. Let me say—and you 

have been very reasonable here. As I listen, I am now prepared to 

reconsider the extent to which we were as prescriptive as we were 

last year in the bill with regard to the SEC. I think one of the 

things that we can perhaps work together on is to find ways to convey our sense of the importance of particular activities without necessarily having a separate entity. One, for example, that I know 

you have been very concerned about, we have the whole municipal 

securities issue. We clearly believe that municipalities have been 

badly treated by this system. By the way, with regard to the ratings agencies, which we will get back to, they are extraordinary. 

They managed to be very wrong in two different directions. These 

are people who have systematically overrated private securities but 

systematically underrated public entities. I am not now talking 

about the United States. I am talking about State and local governVerDate Nov 24 2008 18:41 May 18, 2012 Jkt 072603 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\72603.TXT TERRIE
16 

ment, full faith and credit, general obligation bonds which never 

default. 

Moody’s threatened to downgrade some AAA communities that I 

represent. I asked them why, and they said, ‘‘We are not saying 

that they are going to default. We are saying that they are more 

likely to default than some others.’’ That is kind of like saying, if 

you live in Iowa, you have more chance of being eaten by a shark 

than if you lived in Montana. That might be statistically the case. 

Neither one would be relevant to any rational human being. And 

we have had the problem of the municipalities under fiscal stress 

being misadvised. 

We did enhance the fiduciary responsibility of advisers. But setting up the office may have gone too far. So I am prepared to work 

with the chairman and work with the agency and find out if there 

are ways that we can make sure we have enhanced the importance. 

Now let me ask you, Chairman Schapiro, in the bill by Mr. Garrett, H.R. 2308, on raising the bar for adopting regulations, there 

are two points that occurred to me. One, Mr. Pitt, in his testimony, 

makes a very interesting point that we should not be telling you 

to decide whether or not to do things that we have told you you 

have to do, that it is appropriate for you to decide how to do them. 

But if you read the bill, it would give the SEC the option of deciding to ignore a congressional mandate, and that obviously would 

have to be fixed. More seriously—maybe harder to fix. I take that 

back—maybe perhaps more intended is this reference in the bill to 

saying that it covers not just regulations but orders. And it says, 

before you could issue any order pursuant to such laws and any intended regulation or order, etc.—am I correct, would that mean 

that an enforcement order would have to go through a cost-benefit 

analysis? What would that language mean for you in terms of enforcement? 

Ms. SCHAPIRO. Congressman, I think as we read the bill, it would 

require a cost-benefit analysis for enforcement orders which would 

obviously have huge implications for our prosecution of securities 

fraud. But also, for exemptive orders that we utilize to enable industry to bring products to market more quickly. Exchange traded 

funds, for example, operate by virtue of exemptive order from the 

Investment Company Act. Orders to accelerate the registration of 

securities— 

Mr. FRANK. I appreciate that. But again, particularly I have to 

say with regard to enforcement, the notion that before you could 

issue an enforcement order, you have to do a cost-benefit analysis 

seems to me really quite odd. 

Ms. SCHAPIRO. I think it would be very damaging to the enforcement program. 

Mr. FRANK. All right. Let me just go now to Mr. Saumya. And 

I really appreciate the quality of the report and the way in which 

you have presented it. Am I correct that what you are saying is 

that, yes, there are ways to be made more efficient and some 

choices, but if you are going to continue with major new responsibilities—and the biggest single responsibility, it seems to me, we 

gave the Commission last year was derivatives, particularly swaps 

which have previously been exempted. Is there any way for them 

to take on the new responsibilities regarding swaps without an inVerDate Nov 24 2008 18:41 May 18, 2012 Jkt 072603 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\72603.TXT TERRIE
17 

crease in the appropriation, no matter how much efficiency improves? 

Mr. SAUMYA. As we described in the report, Congressman, as the 

SEC is currently constructed and given the productivity of its resources, the added workload clearly leaves them a capacity gap. We 

also identified a series of initiatives which we recommended the 

agency immediately adopt which will create efficiencies and restructure the organization in a way that will clarify roles and improve productivity. This will go some way towards addressing the 

capacity gap that has been identified. The challenge to know precisely how far it will go is that the need is determined by the regulatory agenda that you all have. 

So there is the swaps issue that you raise. But there are other 

sets of issues, for example, the investment adviser exam. That is 

a big issue. And depending on where the Congress and the agency 

determines, whether it should be increased, how much they should 

be increased has a very material impact on the actual resource 

need. 

Mr. FRANK. By ‘‘capacity gap,’’ you mean not enough money, is 

that correct? 

Mr. SAUMYA. Capacity gap, money—yes. 

Mr. FRANK. Let me just say, my last point, as I read all the testimony—I may not be able to come back to Commissioner Atkins. He 

had one thing in there in which he talked about how much more 

logical it would be if we were—and better if we would be able to 

merge the SEC and CFTC, to which I can only say, I wish. If I was 

making a new country, there would be one such entity. But unfortunately, interests do vest. 

So I will say yes, you are right. But unfortunately, that is a little 

beyond us. And let me also say, in anticipation, I did appreciate 

former Chairman Pitt’s reemphasis of the importance of a selffunding operation. That is something that is within our grasp. And 

I think that got defeated, frankly, by turf. It was the fact that the 

Senate appropriators felt so strongly about that, that we lost it. I 

am hoping we can get back to that. And I think Mr. Pitt is right, 

there are ways to make that conform to oversight. Thank you for 

your indulgence, Mr. Chairman. 

Chairman BACHUS. I thank the ranking member. Our staff is 

working on the shark question, and they have determined that it 

would be a long freshwater swim either way. 

Let me ask for a clarification. You are saying in the Garrett 

amendment, it asks for cost-benefit analysis even before a rule is 

proposed? 

Mr. FRANK. As I read the bill—I am on page 2—‘‘before promulgating a regulation under the securities laws, as defined in section 

3, or issuing any order pursuant to such laws, the Commission 

shall’’ and it does all of those things. 

Chairman BACHUS. Yes, and before it proposes. 

Mr. FRANK. Yes. 

Chairman BACHUS. So that would be tough to do. I may have to 

take another look at revising that. 

Mr. FRANK. I think the cost-benefit analysis of following this 

bill— 

18 

Chairman BACHUS. I would like to make an announcement before we move on. Mr. Miller has asked that the 2:00 hearing be 

postponed and the two witnesses have agreed. There were only two 

witnesses at that hearing. So the International Monetary Policy 

and Trade Subcommittee will hold its hearing to examine the impact multilateral development banks have on America’s national 

security at a later date, September 21, 2011, at 2:00 p.m. So that 

has been rescheduled. With that, Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Chairman Schapiro, I hope I am not off message with this hearing. But I did want to go back to the study that Dodd-Frank required the SEC to—one of the issues, and that was to study the 

current standard of care for broker-dealers and investment advisers. I know that you released the study. I am not happy with the 

outcome of that. And that was to harmonize the different standards 

that currently exist. Can you point to any economic research or 

analysis that shows the need for this harmonization? 

Ms. SCHAPIRO. Congresswoman, as you know, the study itself did 

go through some economic analysis and we did seek data from commenters about that. We would normally provide our economic analysis when we proposed a rule which we have not done in this context. While the staff is thinking through what the contours of a 

rulemaking might look like, and are continuing to meet with industry and investors who have interests in it, we have also asked our 

economists to gather whatever data is available to help inform that 

discussion and that rule-writing process. But we have not yet proposed to go forward with a specific rule at this time. 

Mrs. BIGGERT. There has been talk about—because so much is 

involved—to have assistance in the examination and oversight of 

investment advisers, and it has been suggested that there be SROs, 

such as FINRA. Of course, you are very familiar with FINRA. 

Would this be something that you think would happen? 

Ms. SCHAPIRO. I didn’t participate in the staff’s study because of 

my affiliation with FINRA. I was under the 2-year recusal period 

at that time. The staff laid out three alternatives. I think we can 

all agree that covering or examining 9 percent of investment advisers, that hold $43 trillion worth of assets, a year really isn’t sufficient. So the staff’s alternatives were that there be a fee mechanism for advisers to pay for the SEC to be able to examine them, 

that FINRA be given the authority to do at least the examination 

of duly registered broker-dealers and investment advisers, or that 

there be an SRO created. 

I think unless there is sufficient funding for the SEC to do this, 

we have to look very seriously at an SRO. Whether it is FINRA or 

not is a question I would not address. But I think we have to find 

a way to have better oversight of intermediaries who have such 

enormous interplay with retail investors, and an SRO is one of the 

vehicles to do that. 

Mrs. BIGGERT. And despite your efforts to study, I was concerned 

that the Department of Labor then unilaterally moved to publish 

a rule that could conflict with any new standard that your Commission might propose. I know that there was some talk about at least 

getting together and working together, so I was really surprised 

that the Department of Labor came out ahead of what you had deVerDate Nov 24 2008 18:41 May 18, 2012 Jkt 072603 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\72603.TXT TERRIE
19 

cided. And I don’t know that there was any real coordination or 

conversations. I know that you tried to get together, but is this 

going to be a problem? 

Ms. SCHAPIRO. We reached out to the Department of Labor. We 

had a number of conversations. We participated in some of their 

roundtables. But at the end of the day, they have responsibility for 

the administration of ERISA and the definition of fiduciary under 

ERISA. The SEC doesn’t have that responsibility. We did make 

clear in our study that when we talk about fiduciary duty in the 

context of investment advisers, it is not with regard to ERISA 

standards. 

Mrs. BIGGERT. Thank you very much. I yield back. 

Mr. SCHWEIKERT [presiding]. The gentlewoman from New York. 

Mrs. MALONEY. Thank you for your testimony and for your report. I would like to ask Mr. Saumya, in BCG’s report, your preliminary estimate of needs ranged from $200 million to $300 million and your report estimated a shortfall in staff needed to fulfill 

the current mission of 375 to 425 full-time equivalents. And yet we 

are all aware that the funding level proposed by the House is 

$1.185 billion for Fiscal Year 2012. So my question is, did your 

study or did BCG consider the effects of limiting the SEC’s budget 

to $1.185 billion when conducting the analysis and recommendations? 

Mr. SAUMYA. As we looked at the SEC, as currently constructed, 

we analyzed the workload and said, there is a capacity gap. Having 

recognized that, we then laid out a set of options and implementation plans against that. That will create material efficiencies at the 

agency, which should help address part of this capacity gap. We 

also recommended that given the circumstance, the agency should 

look very hard at its regulatory activities and reprioritize its resources to the most important activities that it is doing, and transparently engage in a dialogue with Congress to indicate what activities it will have to scale back or stop in order to redirect resources to higher priority activities. 

Mrs. MALONEY. So you did not recommend what they should not do since there is quite a gap when you need $200 million to $300 

million to do the job, as you estimated, and roughly 400 additional 

people to do the job. That is quite a gap. I would like to ask Ms. 

Schapiro and Mr. Saumya, how will investor protections be impacted by the funding proposal or the cap of $1.185 billion when 

the Boston report says that you need $300 million to $400 million 

more to get what is required to do the job? Did you do an investigation of how investor protections will be impacted by this cap that 

limits the number of people you can hire and limits really the resources that are in front of you? 

Clearly, you have more to do than the resources that are there 

before you. So Mr. Saumya, did you look at how it will impact investor protections, the fact that the money is not there, the personnel is not there by your own report, by the facts? 

Mr. SAUMYA. Since we left it to the agency to determine and 

reprioritize their activities, depending on what they choose to emphasize and what they choose to scale back, that would have to furnish an impact. So the agency is best suited to address that question. If I may just go back to the point that was made earlier, the 

20 

$200 million to $300 million that was talked about includes a lot 

of capital spent for technology, which is a one-time spend, not a 

budget increase, because that then sets up a lot of productivity opportunities at the agency, which is how it should be. 

Mrs. MALONEY. Did you break that down in the report, how the $200 million to $300 million should be spent? 

Mr. CHANDRASHEKHAR. We identified a number of areas where 

money will have to be spent somewhere, would have been in technology, personnel and others, specific upgrades that are needed to 

be made to individual systems and capabilities. 

Mrs. MALONEY. That would be helpful, I think, if you gave us a 

clear breakdown of capital versus resources. And so then, let me 

turn to Ms. Schapiro. How will investor protections be impeded by 

a funding level proposed by the House that is $1.185 billion, even 

though your responsibilities have grown, I don’t know how many 

times more, twofold, threefold, fourfold? 

Ms. SCHAPIRO. Our responsibilities have grown dramatically. 

And I would say that while we are engaged in this process of looking at how we prioritize what we do, our responsibilities are a result of Congress making decisions over many years about what is 

important for this agency to do. So I think it is very difficult for 

us to cast aside whole areas of responsibility and announce that we 

won’t be doing them anymore because we don’t have the funding 

when Congress has directed us to do them. But under the House 

budget proposal, there are a couple of areas I would focus on as 

particularly concerning. 

Clearing house oversight is one of them. Clearing houses clear 

close to $2 trillion a day worth of transactions. There are nine 

clearing houses. We have 10 dedicated examiners to perform that 

function. We will not be able to operationalize the OTC derivatives 

rules. We will get the rules done, but we will not be able to 

operationalize them and that will result in a lack of oversight, and 

frankly uncertainties for an industry that has to operate under 

that regulatory regime. 

I think that we will see the number and scope of our enforcement 

actions decline. We may decline to prosecute where the costs of investigating or litigating are just too high. We may name fewer respondents or defendants in our cases. Our exam coverage, which I 

think is already inadequate, will suffer. We have 700 examiners for 

15,000 regulated entities. 

One-third, as I said before, of investment advisers have never 

been examined. We will not have examination resources for hedge 

fund advisers when they come under our responsibility in the first 

quarter. We will have to cut IT spending clearly, which will be unfortunate because we need to modernize systems like EDGAR, 

which receives all corporate filings, is used by the public, by the 

staff, and by public companies, and is a critical system for the SEC. 

I think we will also be hindered in our ability to hire industry expertise. 

We will essentially be in a hiring freeze in 2012 under the House 

number. And I think something that business cares very much 

about, as we do, is that our ability to quickly and efficiently review 

the increasing flow of IPOs could be hindered as well. And that is 

something I don’t think any of us wants to see happen. 

21 

So across the agency, I think you would find there are real impacts on investor protection but also on capital formation and those 

processes that are critical right now. 

Mrs. MALONEY. My time has expired. Thank you. 

Mr. SCHWEIKERT. Thank you. Mr. Luetkemeyer. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. Ms. Schapiro, 

very quickly, I am just curious to follow up on Mrs. Biggert’s comments and questions with regard to DOL’s fiduciary role. Have you 

been working with them in concert to try to resolve that situation? 

Ms. SCHAPIRO. Our staffs have spent a lot of time talking, and 

from our perspective, trying to educate them about the securities 

laws and how investors are protected under the securities laws 

through either fiduciary duty or suitability requirements and about 

the panoply of regulatory requirements that exist to govern the relationship between an adviser or broker and their customer. But as 

I said, at the end of the day, we don’t administer the ERISA law. 

The Department of Labor does, and it has to be their call about 

whether or not to propose rules under that statute. 

Mr. LUETKEMEYER. Is it your assertion then that the ruling does 

not infringe on an area of fiduciary responsibility that falls under 

the SEC’s oversight? 

Ms. SCHAPIRO. Certainly, it will impact some regulated entities 

that the SEC also has responsibility for, who might be advising 

customers about their IRA accounts, for example, and are likely to 

also be registered as securities brokers. 

Mr. LUETKEMEYER. You are not concerned about that? 

Ms. SCHAPIRO. I know the industry is gravely concerned about it. 

And we have spent a lot of time talking with them about it. As I 

said, we have met with DOL. We have explained the issues to 

them. But it is their responsibility to do what they believe they 

need to do under ERISA, and we have no capability with respect 

to ERISA. 

Mr. LUETKEMEYER. Yes. But don’t you think that if they are getting into your territory, you should work with them to let them 

know that they have overstepped—they can’t hide behind that authority or adopt rules here that are going to impact other things 

that they shouldn’t have any ability to impact? 

Ms. SCHAPIRO. I believe they do have the ability. And as I said, 

I think the most the SEC can do is really to help educate them 

about how the securities regulatory regime, we believe, protects investors in this context. But the people subject to SEC regulation, 

because they are broker-dealers, may also be subject to State insurance regulations or by the DOL under ERISA. They are—unfortunately, I think they would say—subject to multiple regulatory regimes. So I don’t think we can say that just because we have a regulatory responsibility, that DOL is excluded from doing what they 

believe they need to do under ERISA. 

Mr. LUETKEMEYER. My concern is that we certainly are going to 

limit the ability of individuals to be able to have the expertise to 

advise them on their securities. I had a meeting yesterday with an 

individual. He is the only gentleman in the entire county who has 

a securities license. And you continue to allow other entities to get 

into security advising situations. So I think it is going to dramatically continue to impact the ability of individuals to get expertise 

22 

to be able to make the wise decisions. I am very concerned about 

this. 

Ms. SCHAPIRO. I share that concern, Congressman. I will tell you, 

we are very sensitive as we look at what we might do in this area 

to be careful about being business model neutral to the extent we 

can, to understand that access to financial services is something 

that all citizens should have at a reasonable cost and in a reasonable way. We are very sensitive to those concerns as we think 

about what we might do here. 

Mr. LUETKEMEYER. I would certainly urge you to be working with 

the DOL folks and Treasury to try to find a way to work to come 

up with some sort of a common ruling here on this. I am not 

against trying to make sure that the consumers are protected, but 

I think that the pendulum has swung a long way in the wrong direction on this issue, and I think we need to bring it back to where 

we have all of the agencies working together to find the best fit and 

the best common ground to allow some protection, yet allow the 

products to be sold by the individuals and so consumers can get 

what they need. 

Very quickly, I have one more question for you. I am the sponsor 

of the Communities First Act, which is the independent community 

bankers bill, this year, and we are wanting to raise the threshold 

on shareholders on some small companies from 500 to 2,000. It 

hasn’t been done, it hasn’t been raised in years, and I would just 

kind of like your opinion or to see if you have any concerns. I know 

raising it that high suddenly, you don’t have to have as many folks 

to regulate and examine, so maybe we are taking a little burden 

off your shoulders. 

Ms. SCHAPIRO. This is a very important issue to us right now. 

You may have seen that we just announced the creation of a Small 

Business Advisory Committee. I believe a community banker serves 

on that committee. We have met a number of community bankers 

who have raised this issue about the 500 shareholder reporting 

threshold and the burdens it places on those in the community. 

And so we have a fairly robust review going on right now of a number of issues around small business capital formation. The 500 

shareholder limit is well advanced in our deliberations, and we are 

also looking at a number of other issues like crowdfunding and the 

general solicitation ban, quiet periods and so forth. So we have a 

full menu, and we are very anxious to get our first advisery committee meeting called and the input of experts on the ground who 

can help us with these issues. 

Mr. LUETKEMEYER. I am anxious to see your results. Thank you 

very much for your time today. Thank you, Mr. Chairman. I yield 

back. 

Mr. SCHWEIKERT. Mr. Gutierrez? 

Mr. GUTIERREZ. Thank you very much, Mr. Chairman. Chairman 

Schapiro, when we wrote, drafted the Dodd-Frank bill, and passed 

it in the House and the Senate, one of the things that we did was 

say there was going to be a study so we could kind of streamline 

and the improve Securities and Exchange Commission. And so, one 

of the bills we have before us today would kind of codify the recommendations made by the study group. Is that going to help you 

23 

streamline and improve the efficiency of the Securities and Exchange Commission in your opinion? 

Ms. SCHAPIRO. I think, Congressman, there are some things in 

the bill that are worth exploring. I will say my primary concern is 

that we not set a rigid structure for the agency in statute. This is 

an agency I think we could all say didn’t evolve quickly enough and 

rapidly enough in response to changes in the markets and the 

world over the last several years, and we need the flexibility to organize the SEC on an ongoing basis over time to be responsive to 

tremendous developments in the marketplace. So that would be my 

primary concern with the bill. 

There are some other issues with which I would also disagree, 

but we are more than willing to try to work with the committee 

to see if there is some legislative approach that does make sense. 

That aside, though, you should understand we are very committed to reforming the SEC. I came to an agency pretty badly broken in many regards, and we have undertaken tremendous reforms 

already. We know we have a long way to go. We are open-minded 

and trying to be thoughtful and careful about how we do that, but 

also to proceed with some sense of urgency. But I worry about it 

being locked into statute and in 5 years discovering that the model 

doesn’t work and we need an act of Congress to put the agency 

back together. 

Mr. GUTIERREZ. Let me then follow up with the following: my 

friend from New Jersey, Mr. Garrett, has a bill that would require 

cost-benefit analysis before you could, the way I understand it, proceed. 

Tell me how you see the bill and cost-benefit analysis, and does 

that give you the kind of flexibility and quickness that you might 

need in order to respond to what you suggest are changing markets 

and maybe failures in the past that you have come to attempt to 

address? 

Ms. SCHAPIRO. Sure. And let me say at the outset, I support good 

standards that are clear. But they have to be achievable for us, and 

they have to be consistent with our mission, and I really feel that 

the way this bill is structured, almost no agency of government 

could meet all of these standards and all of these requirements as 

they are laid out. 

We already do cost-benefit analysis. We look at effects on competition of our rulemaking. We consider the impacts on small business. We test and estimate the paperwork burden of our information collection. We look at whether our rulemaking will promote efficiency, competition, and capital formation. So we do extensive 

cost-benefit analysis, and we know we can do it better, and we are 

committed to doing it better. But this bill adds so many new provisions, 11 new factors that the agency is— 

Mr. GUTIERREZ. Eleven new factors that have to be considered 

before you can do what? 

Ms. SCHAPIRO. Before proposing not just regulations but also orders which emanate from enforcement cases and exemptive orders, 

and orders even approving self-regulatory rules. So it is an extraordinarily different standard than applies anywhere else in government, and it is I think almost impossible to meet. 

24 

Mr. GUTIERREZ. I thank you for those answers because it seems 

to me that we have a Congress and a Majority, Members on the 

other side of the aisle who are always speaking about new requirements and new standards that they believe inhibit the ability of 

the small business person and business in general to succeed and 

to thrive, and that they advocate for smaller, less government and 

fewer regulations. 

I find it curious that when it comes to the agency whose major 

purpose is the Securities and Exchange Commission to watch, they 

want more regulations and they want to hamper it, and they want 

to tie it up in knots. I don’t quite understand how it comes to government in general when it is vis-a-vis the business community. 

And then when we have a group that is supposed to monitor part 

of that business community, investment business community, we 

would even want more regulations. And I would suggest that in a 

society in which something as simple as a credit card for 25,000 

miles, I did get the credit card, I got the 25,000 miles, the only frequent flyer mile ticket I could get was from Chicago to Milwaukee, 

a 90-minute drive. Apart from that, I didn’t get any other benefit. 

I say that part in jest, but in part because I said if those are the 

consequences to me, imagine the other kinds of things consumers 

are subjected to and that we need to monitor. 

Thank you for your time today and your commitment. 

Mr. SCHWEIKERT. Thank you, Mr. Gutierrez, although I think 

Milwaukee feels a little disparaged right now. Chairman Garrett? 

Mr. GARRETT. And I thank the Chair. So I guess I am in the position of actually being the Republican here defending more regulation, and that is what my bill would essentially do. 

Let me just begin by reading something from the previous Executive Order: ‘‘The American people deserve a regulatory system that 

works for them, not against them, regulatory policies that recognize that the private sector and the private markets are the best 

engines for economic growth.’’ That is not from this Administration. 

That actually goes all the way back to 1993 from the Clinton Administration, trying to do what we are trying to do now effectively 

with—through their Executive Order, with a piece of legislation 

that we are discussing here. 

I know a couple of issues came up through the ranking member, 

one of which pertains to our legislation dealing with the issue of 

applying to orders, right? So since this is a discussion draft, this 

is the reason why we are going through regular order here, this is 

something that wasn’t done in the past term, but we would like to 

go through regular order, an opportunity to hear if there are problems with the legislation and whether they can be fixed. So that 

is one that we are more happy to discuss whether it can be finetuned with regard to orders. 

The second point I guess that was raised was the issue with regard to putting the cart before the horse or not, where we say that 

you have to identify the problem first that you are going to potentially address through a regulation. I guess there was some comment by the ranking members or others saying, that seems to be 

the reverse order. 

Again, let me go back to the Executive Order of Bill Clinton that 

says that was his intention, that you have to identify a problem beVerDate Nov 24 2008 18:41 May 18, 2012 Jkt 072603 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\72603.TXT TERRIE
25 

fore you actually start doing the whole regulatory process. He said 

each agency shall identify the problem that it intends to address, 

including where applicable, so on and so forth, as well as assess the 

significance of that problem. And I think that only makes sense, 

that you begin doing it in that manner. 

Now, I appreciate the fact that you did say that you already do 

cost assessment analysis, but as you heard in my opening comments, the D.C. Circuit Court of Appeals begs to differ with the nature and the quality of the rulemaking. So I guess my initial question is, what is your reaction to that and what steps are you going 

to take in reaction to the Court of Appeals’ decision with regard to 

the proxy assess rule, not so much on the proxy assess rule per se 

but on the process? 

Ms. SCHAPIRO. Sure. Obviously, we are disappointed by the 

court’s decision—they vacated the rule—because we thought it was 

important that it be possible for long-term shareholders with a significant economic stake in a company to be able to have their nominee for director considered by other shareholders. Nonetheless, we 

take very seriously our obligation to consider the costs and benefits 

and the economic impact of the rules we adopt. And I believe if you 

were to look at the SEC’s rules compared to many other financial 

regulatory agencies, you would see that we do a much more extensive cost-benefit analysis than others do. That said, though— 

Mr. GARRETT. Maybe I will just digress there, and I don’t mean 

this flippantly at all. It may sound that way when I say this. If you 

have information on other agencies that you would—I would be 

more than happy to take a look at them as well. I know it sounds 

that way, but we should be making sure that everyone—you agree 

on the same level and the same thoroughness. 

Ms. SCHAPIRO. I do think it is important that everybody do robust cost-benefit analysis. All of that said—and I think our staff 

has done a very good job on many rules—I have asked the staff to 

reevaluate the whole process for conducting the analysis, not just 

the process of the economic analysis, but the substance of it, assuring that we better integrate, for example, our economic analysis 

throughout the course of the rulemaking process. We are expanding 

our Risk FIN Division in stature and size so we have more economic firepower. We are taking more care with our rules to explain 

the choices that we make. 

Mr. GARRETT. Let me just stop you there, too; because as far as 

one of your other comments, you said our legislation would mandate you to consider more factors in the process. I think you said 

11 different factors. Actually, our legislation says not that you 

‘‘shall’’ but that you ‘‘may’’ consider those factors. We are just saying these are things that Congress believes should be considered. 

Ms. SCHAPIRO. That is right; they are not mandatory. 

Mr. GARRETT. Right. 

Ms. SCHAPIRO. But because they are contained in statute, they 

are highly likely to be used in a challenge against the agency of 

the next rule that doesn’t make a mandatory evaluation of each of 

the factors. And finally, we want to explain more clearly, learning 

from the proxy access decision, how we make the choices we make 

and how we consider the differing views that come in through the 

comment process and through other means. 

26 

Mr. GARRETT. My time is really just up, but can you get back to 

us? We just had a hearing on the separate issue of investment advisers, that issue and the study that came out of that. I know you 

have worn two hats in your life, both here and over in your previous position, as to the cost basis, for the cost of doing these examinations. And I would just be curious; we know the disparity 

with regard to the examinations between investment advisers and 

broker-dealers. I would just be curious if you have numbers, an explanation as to not just the numbers of examinations that are done 

but the actual—the nature of the examinations on both, and also 

the cost. 

Ms. SCHAPIRO. I am sure we could do—it won’t be scientifically 

precise, but I am sure we could do ballpark figures for broker-dealer examinations versus investment adviser examinations. 

Mr. GARRETT. Great. And I yield back. Thank you. 

Mr. SCHWEIKERT. Thank you, Chairman Garrett. Mr. Sherman. 

Mr. SHERMAN. Thank you. I want to focus on credit rating agencies. Dodd-Frank had a couple of provisions. One involved moving 

around the organizational boxes, and I regard that as pretty inconsequential, like moving around the deck chairs on the Titanic. And 

then the Boston Consulting Group makes that part of the bill or 

recommends that part of the bill may be made even less consequential in that you are not even going to change the boxes, you are just 

going to have the two existing boxes talk to each other, which 

makes it even less consequential. But since it started off as inconsequential, that is not my focus here. 

My concern is that due to the work of Senator Franken and myself, there is a very consequential provision, and that is a provision 

that requires the SEC to create a system to assign the credit rating 

agencies rather than the current system in which the home team 

selects the umpire, and whoever is selected gets a million bucks or 

two million bucks or whatever their fee is. I have used the analogy 

what it would be if the home team selects the umpire. We are used 

to softball leagues where the umpire gets some beer, and so might 

not bend over backwards to get the chance to umpire again. These 

umpires get paid a million bucks or more. 

Is the fact that there is nothing here in this report about the 

SEC organizing to undertake this new function, is that in some 

way prejudicial to undertaking the function? Or is this report simply irrelevant to Senator Franken’s work and my work? 

Ms. SCHAPIRO. I would like to have my colleagues address that 

as well, but let me just say that we think it is a tremendously consequential part of Dodd-Frank. 

Mr. SHERMAN. Are you referring to the— 

Ms. SCHAPIRO. No, not the boxes. I am referring to the study of 

whether there is a better, less conflicted business model that might 

be explored for credit rating agencies. We have out for comment 

right now and are receiving comments on a series of questions 

about different ways to structure how we might do that and to get 

information in so the staff can go ahead and proceed with that 

study. 

As you know, it was not one of the 1-year deadline items under 

Dodd-Frank, so it took its place in queue a little bit behind other 

things. 

27 

With respect to the credit rating agency office, let me just say 

that the work of the office is ongoing, even if the structuring of it 

has not been changed, to have it report directly to— 

Mr. SHERMAN. If I can reclaim my time. My concern with your 

answer seems to be that the SEC’s sole obligation is to just do this 

study and that you are free to reenshrine the status quo. I think 

you are obligated by the statute to radically change this giant conflict of interest, and I hope you are structured in order to accomplish that goal. 

Ms. SCHAPIRO. As I recall, and I haven’t looked at this provision 

in a while, we are required to either implement the proposal that 

is in the statute or come up with another proposal. The study is 

a prelude to our being able to do that in an informed way. 

We are also doing, as the statute required, an annual exam of 

every nationally recognized statistical rating organization, and we 

have created the Office of Credit Rating Agencies. It is just not reporting directly to the chairman, as the statute would require, at 

this point, because we don’t have reprogramming authority to do 

that. 

Mr. SHERMAN. Who reports to whom, I leave to you and the Boston Consulting Group. And I am glad to establish that at least 

these charts here don’t mean that you are not ready to implement 

the results of that study. 

But maybe the Boston Consulting Group can comment. Did your 

proposal for how to organize the SEC envision that the SEC would 

be selecting the credit rating agency for each debt issuer, or is this 

the organization chart for an SEC that doesn’t undertake that responsibility? 

Mr. SAUMYA. Congressman, the issue that you just raised was 

not part of the scope of our work, so we did not look at that. This 

was simply to look at the proposal that had been made to create 

the credit rating office, to look at overseeing credit rating agencies, 

and that are existing functions at the agency today. We recognize 

the importance of this, and we were laying out options on how best 

they could be organized. 

Mr. SHERMAN. I misunderstand your answer here. You seem to 

be saying your report ignored the possibility, or I think the mandate, that the SEC undertake this new responsibility and was focused only on how to organize to meet its current responsibilities? 

You are shaking your head. Does your report lay out a program for 

organizing the SEC that would be selecting the credit rating agencies for debt issuers? 

Mr. SAUMYA. Our report assumes that the agency will follow 

what is required under the legislation. This was simply an organizational design issue that we focused on. 

Mr. SHERMAN. Okay. Given the fact that the Chairwoman has indicated that it may be—my reading of your report is that you simply ignored that the SEC would undertake that function. 

Ms. SCHAPIRO. Congressman, if I could just add, at the time 

when the study is completed and the SEC determines what the 

right structure is, whether the SEC will select a credit rating agency, whether a self-regulatory organization might do it, whatever we 

determine to be the optimal new business model, then we will, of 

course, have to restructure the SEC to accommodate that. 

28 

Mr. SHERMAN. Okay. 

Ms. SCHAPIRO. So that we are doing it— 

Mr. SHERMAN. Hopefully, the fee you have paid to Boston Consulting Group will cover any additional work necessary at that 

time. And I yield back. 

Mr. SCHWEIKERT. Thank you, Mr. Sherman. Two quick things. 

Chairman Garrett has a motion, and then we will move to Mr. 

Posey. 

Mr. GARRETT. Right. I ask unanimous consent to enter into the 

record a letter to the Commission with regard to beneficial ownership reporting rules and how they may or may not be changing and 

the revisions for the record. 

Mr. SCHWEIKERT. Unanimous consent? So ordered. Why not? 

Mr. Posey, it is your turn. 

Mr. POSEY. Thank you very much, Mr. Chairman. Madam Chairman, a colleague came up to me and said the SEC is fracking 

crazy, and I thought they needed a vocabulary lesson, and then I 

read the Wall Street Journal article that now the SEC is determining that it is going to regulate fracking in the mining industry. 

And I wondered, with all the victims, potential victims, citizens 

who are at risk for securities abuse, why in the world the agency 

feels it is necessary to go into the environmental business now, further into the environmental business than before, when there is so 

much work yet to be done. And the agency was whining about not 

having enough money in the budget now to focus on securities per 

se, and now wants to involve itself in what appears to most to be 

a responsibility of an environmental agency, of which we have plenty. 

Ms. SCHAPIRO. Congressman, that is a very fair question. We are 

not in the business of regulating fracking, and there were a number of newspaper articles, you might recall, a while ago that suggested when the SEC changed its rules for public companies to report their oil and gas reserves that, as a result of those rules being 

liberalized by the SEC to allow for reporting of potential reserves 

as opposed to only proven reserves, that companies were then exaggerating what their oil and gas reserves were in their public disclosure documents that investors rely upon to buy and sell stocks. 

I believe our review group for that industry in our Corporation 

Finance Division has asked questions in their comment letters as 

they send them back and forth to companies about their methodologies for estimating their reserves and putting that in their disclosure documents. 

I would be happy to get more information for you about it, but 

I want to assure you we are not regulating fracking in any way, 

but we do have responsibility to ensure honest and fair disclosure 

about issues like reserves. 

Mr. POSEY. Generally, I have been able to pretty much trust the 

Wall Street Journal. I don’t always agree with them, but generally, 

I trust what they write; they have good editorial and news safeguards. I am delighted to know that. If, when you get back to the 

office, anyone tells you differently or there is any light shed on it, 

I would appreciate you letting me know, because I am going to take 

your comments as the absolute gospel, and I am going to engage 

29 

anyone who indicates that you are doing anything other than just 

verifying reserves. 

Ms. SCHAPIRO. Let me be clear. I don’t know that we are not asking more questions than just the verification of reserves. There 

may be other issues in the comment letter. So let me come back 

to you with as complete an answer as possible. But what I was trying to make clear is that we are not telling people they can or cannot engage in fracking or any of those kinds of issues, but we do 

ask questions to try to get a more complete disclosure about the 

risks, about reserves proven or estimated, and so forth, but let me 

come back to you with a more complete answer. 

Mr. POSEY. The space between not regulating fracking and merely making sure the disclosure requirements are correct on their reserves is big enough to drive a million space shuttles through, so 

I think that would be important, and I hope that you would maybe 

respond to me and the chairman, with his permission, and anyone 

else who has an interest in here. 

Ms. SCHAPIRO. Absolutely. 

Mr. POSEY. In writing within the next week. 

Ms. SCHAPIRO. I would be happy to do that. 

Mr. POSEY. Thank you. 

Mr. SCHWEIKERT. Mr. Posey, anything else? Thank you, Mr. 

Posey. Mr. Carney? 

Mr. CARNEY. Thank you, Mr. Chairman, and I thank the panel 

for coming today. I would like to just expound a little bit on the 

two parts of the discussion that we have had today, this issue of 

cost-benefit analysis. We have heard what Mr. Garrett’s view of 

that is, and he has legislation that would require these kind of assessments to be done. And we heard earlier my colleague, Mr. 

Himes, and his caution about how to do that with respect to tail 

effects and so on. 

So first to the BCG folks, how would you do that to accommodate 

the concerns that Mr. Himes articulated? 

Mr. SAUMYA. Congressman, this issue was outside the scope of 

our study. Our study focused on— 

Mr. CARNEY. I am not asking you really—and if you don’t want 

to offer an opinion—you do cost-benefit analyses for clients, don’t 

you? 

Mr. SAUMYA. Yes. 

Mr. CARNEY. How would you envision accommodating some of 

the concerns that Mr. Himes had about how you get low probability 

effects that have cataclysmic impacts on the financial system in 

this instance? Do you have any thoughts on that? 

Mr. SAUMYA. We will have to reflect on that and get back to you. 

Mr. CARNEY. Okay, thank you. 

Ms. Schapiro, do you have any view on that? If Mr. Garrett’s bill 

were to pass, how would you implement that? How are you doing 

it now that accommodates the concerns that were articulated by 

Mr. Himes, which I think are real concerns? If you look at the financial crises that we have had historically, they have been created 

by some of these things that are not expected. 

Ms. SCHAPIRO. I think it is a very difficult question. The costs are 

almost always easier to quantify than the benefits are, and we 

struggle with that; and we try, if we can’t actually quantify beneVerDate Nov 24 2008 18:41 May 18, 2012 Jkt 072603 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\72603.TXT TERRIE
30 

fits, to at least discuss as fully as we can what we believe the benefits would be and balance from there. 

Mr. CARNEY. But that is an important part. That is an essential 

part of doing an analysis like that. 

Ms. SCHAPIRO. It is essential. 

Mr. CARNEY. You have to enumerate costs and benefits and what 

they are and assign values to them. And as Mr. Perlmutter and 

Mr. Himes pointed out, sometimes that is difficult to do. 

Ms. SCHAPIRO. And failure to act has a cost as well that we often 

don’t quantify, either. 

Mr. CARNEY. Right. 

Ms. SCHAPIRO. I think cost-benefit analyses would be more useful 

if we did talk sometimes about if we don’t act, what are the potential ramifications of that if other events come to pass. 

Mr. CARNEY. So do you have a view as to how you might implement something like this in a way that would result in what is in 

the legislation a ‘‘reasoned determination that the benefits justify 

the costs?’’ 

Ms. SCHAPIRO. I think what we do now is, while we haven’t done 

it perfectly in the proxy access case, and historically in a handful 

of other rules, I think what we do now is really geared towards getting a reasoned judgment about whether a rule’s benefits will outweigh its costs. And my fear about this legislation is that it layers 

so many analyses on top of what we already do that we are set up 

to fail; that there is no way that this agency or any other agency 

can possibly do all of these things, some of which conflict, some of 

which seek to protect market participants. Sometimes we need to 

protect market investors from market participants. 

I think there are—we would be happy to work through these 

issues in this legislation as constructively as possible, but I think 

there are a lot of things here that make it very difficult for us to— 

Mr. CARNEY. I think in concept Mr. Garrett’s idea makes sense, 

but I think implementing it is difficult to do, particularly to accommodate the concerns that Mr. Himes has. 

I only have a minute to go, and there has been a lot of discussion 

about priorities. You mentioned earlier some of the things that you 

don’t think are getting the priority that they ought to. Could you 

go over those again? And I agree that we ought to have a discussion about what those priorities are so that you know what Congress believes the priorities ought to be and that you have—you 

can challenge us or tell us what you think they ought to be, and 

we can have a reasoned discussion of that. In 30 seconds, could 

you— 

Ms. SCHAPIRO. I would be happy to, and let me add to the ones 

I said before. 

Mr. CARNEY. I missed one of them. You had clearing house oversight, hedge fund adviser examiners, hindering of hiring expertise, 

and there was one other that you mentioned that I didn’t— 

Ms. SCHAPIRO. Building the necessary information technology infrastructure to be more efficient, operationalizing the OTC derivatives rules. And I would add to that our ability to ensure that we 

have a stable equity market structure in this country so that public 

companies can cheaply and efficiently and transparently have their 

stocks traded, and investors can feel like they are participating in 

31 

a market that operates fairly for them. We have spent a lot of time 

on market structure, but it is an area where we have to have data 

and tools in order to really do a good job, and those cost money. 

Mr. CARNEY. Thank you very much. I see my time has expired. 

I do believe that we ought to extend this conversation for sometime 

in the future to go over these priorities and how to implement some 

of the things that you are trying to implement. 

Mr. SCHWEIKERT. Thank you, Mr. Carney. Mr. Pearce? 

Mr. PEARCE. Thank you, Mr. Chairman. I would join my colleague Mr. Carney in saying that this conversation should be a little bit longer, so if we get the chance to visit with Ms. Schapiro 

again, that would be good. 

I would like to add my voice, Ms. Schapiro, to that of Mr. Posey, 

on the fracking. The Wall Street Journal actually says you are asking questions about the chemicals used, which somewhat deviates 

from the idea that we are trying to prove reserves. 

I see in your report, page 10, page 11, twice on page 11, resources constrained, environment resources constrained, resources 

do not permit, and yet you are drifting off into these environmental 

questions; and I wonder, are you asking the same questions of, say, 

the manufacturers of windmills? Those electric generating windmills are scattered across New Mexico; they kill birds, they affect 

the environment. Are you asking about that same sort of environmental impact on those companies? 

Ms. SCHAPIRO. Congressman, I would like to get back to you with 

more detail. Our goal is not to vindicate any kind of environmental 

interest here. 

Mr. PEARCE. It appears that you have, with all due respect, and 

I would appreciate it if you would get back with me. On page 2, you are describing the payouts, $2.2 billion, $2.8 billion. How much of that came from Mr. Madoff’s settlement? 

Ms. SCHAPIRO. I don’t believe any of that. That has all gone 

through the SIPC process. 

Mr. PEARCE. Has any investor been compensated anything from 

your efforts, from the efforts of the SEC? 

Ms. SCHAPIRO. I would have to get back to you on whether any 

fines or penalties went into the SIPC fund from the SEC. I don’t 

know the answer to that. 

Mr. PEARCE. You mean we have the most highly visible investor 

defrauding that has ever occurred, and you don’t know the answer 

to that? 

Ms. SCHAPIRO. Congressman, because our goal would be not to 

take money into the Treasury and deprive the— 

Mr. PEARCE. I asked if any payments have been made back to 

investors. 

Ms. SCHAPIRO. I am sorry; I just don’t know the answer to that. 

Mr. PEARCE. Do you understand from my point of view how astounding that is, that the most highly visible—you are in charge 

of this, you are the one, and— 

Back in 2008, Evergreen Silver, ESLRD, a NASDAQ company, 

filed for—they had assets of a billion dollars. They make silver 

sales, they are publicly traded—they were—and they filed bankruptcy. They took $58 million of Massachusetts money with them. 

Do you have that on your radar scope? 

32 

Ms. SCHAPIRO. I am not familiar with it. I would have to get back 

to you. 

Mr. PEARCE. SpectraWatt Incorporated spun off of Intel, they 

took money from Goldman Sachs, who you do have; SpectraWatt 

was a private firm, but they took large sums of money from Goldman Sachs. They also took public money from New York State. And 

I wonder, after they filed bankruptcy, did you have any insights on 

them? 

Ms. SCHAPIRO. Again, Congressman, I don’t—we have thousands 

of investigations ongoing at any one time. I would be happy to try 

to find information for you. 

Mr. PEARCE. But your agency does have time to go in and worry 

about fracking? 

Ms. SCHAPIRO. I am not suggesting that we do or don’t have investigations of those particular companies. I just don’t know. 

Mr. PEARCE. I am saying that you do have the money to put a 

front page article in the Wall Street Journal that you are investigating fracking and the chemicals used there. I am saying that 

sometime you should take care of your business instead of the 

EPA’s business. 

Ms. SCHAPIRO. I understand. 

Mr. PEARCE. A very highly visible firm just in the last day or 

two, Solyndra, came under your jurisdiction when they filed to incorporate and filed for a public offering. Given the events of the 

last 2 or 3 days, have you done anything to look at Solyndra and 

what you might have warned the American taxpayers about before 

we gave them $400 million or $500 million? 

Ms. SCHAPIRO. I can’t comment on any ongoing inquiries that the 

agency has. 

Mr. PEARCE. You can comment if you do or don’t have an investigation. Do you have an investigation? Are you looking at that? 

Ms. SCHAPIRO. Actually, I can’t comment on whether or not we 

have an investigation. 

Mr. PEARCE. Okay. We have begun to get information from the 

small investment advisers that they are facing standards that 

maybe the big guys don’t face. Again, I would like at some point 

to hear your observations—we don’t have time today, but I would 

like to hear your observations on why you would be concentrating 

more efforts on the small fish than the Madoff fish. 

I just worry that what we are going to do is implement regulations on the mom-and-pop operations across the country who had 

nothing to do with any of the investment problems that we have 

seen in a big way off of Wall Street. And I do hope that as you are 

implementing your regulations, you will be considerate of where 

the big fish are to fry. 

I yield back, Mr. Chairman. Thank you. 

Mr. SCHWEIKERT. Thank you, Mr. Pearce. Mr. Perlmutter? 

Mr. PERLMUTTER. Thanks. And I wasn’t going to get this, but I 

want to respond to my friend from New Mexico. Chairman 

Schapiro, you are familiar with a company called the Reserve 

Fund, are you not? 

Ms. SCHAPIRO. Yes. 

Mr. PERLMUTTER. The Reserve Fund, I would say to my friend 

from New Mexico, probably cost State governments and special disVerDate Nov 24 2008 18:41 May 18, 2012 Jkt 072603 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\72603.TXT TERRIE
33 

tricts zillions potentially, because it broke the buck, and all these 

guys invested in it. The SEC was all over it and helped recover— 

and my guess is New Mexico’s special districts and local governments had a lot of money in that, as well as Colorado—but helped 

them recover on average, I think, about 95 or 98 or 99 cents on the 

dollar. So that was a big one. It affected each State, and they were 

all over it. So, I don’t know the specifics of all the little questions 

you were just asking, but certainly in defense, I want to say that. 

Now, let’s get to the guts of this thing. I appreciate the gentleman from Boston Consulting and your study. The question is: 

Should there be more private, in effect, assistance and enforcement 

and oversight with an umbrella kind of potentially being—what we 

are saying is there is not enough money to do all the jobs that are 

assigned to the SEC at this point. There may be other ways to do 

it, using FINRA or some other organizations. 

Here is my question—or it may be coming from the legislation. 

I am looking at an article today in the Denver Post about outsourcing of government jobs, where it says, for example, a study found 

that on average the Federal Government paid contractors $268,653 

per year for computing engineering services while government 

workers in the same occupation made $136,456. Human resources, 

the annual rate was $228,488 for contractors, more than twice the 

$111,000 for the same services done inhouse. 

I have no problem with the private sector making a lot of money. 

We had Mr. Ketchum in here from FINRA a couple of days ago and 

he said, ‘‘I want to be fully accountable to the Congress.’’ I am not 

sure if he really means all of that because the salaries at FINRA 

are pretty substantial. But whoever it is, whether it is the public 

organization, the SEC, or assigning it to somebody else to help, 

there is responsibility. And I mentioned the math earlier about 

how a 6,000 drop in the stock market translates to $7.8 trillion, 

which is a lot of money. That is a huge user fee for a lot of people. 

So explain to me, if you would, either Ms. Schapiro or the others, 

there is responsibility with or without Dodd-Frank. Can the agency 

do it on the budget that it has today? 

Ms. SCHAPIRO. I will be happy to start. I think I have been pretty 

consistent with Appropriations and in testimony generally over the 

past year, that we cannot operationalize the Dodd-Frank rules 

without additional resources. We agree with the BCG report that 

we have the opportunity to optimize the use of our resources. We 

are looking for savings wherever we can find them. We have some 

opportunities to do things differently that we think will free up 

some resources. But at the end of the day, we are taking a piece 

of the $600 trillion over-the-counter derivatives markets under our 

responsibility—hedge fund regulation, credit rating agencies, municipal advisers, large new areas of responsibility that the Congress, and frankly the American people, will expect us to do well; 

and without significant additional resources, that is simply not 

going to happen. 

Even if we become very efficient, very effective, very agile, all 

things we are working towards, at the end of the day, there is a 

gap. 

Mr. PERLMUTTER. Let me ask the gentleman from Boston Consulting, in preparing this report, I don’t know whether we asked 

34 

you to look at it, but do you consider the catastrophic losses? We 

are talking harm-benefit analysis, and I do think we asked for that 

in our study, but maybe not. Did you consider the catastrophic 

losses we saw in the fall of 2008 when I think the SEC hadn’t been 

doing their job? 

Mr. SAUMYA. Our focus, Congressman, was on looking at the organization structure, people, technology, and how they interact 

with the SROs. We took the SEC as we found it when we arrived 

and then looked ahead as to what capabilities they need to have 

to deliver against their mandate and mission, and so our focus was 

forward looking. 

Mr. PERLMUTTER. Okay, thank you. 

Mr. SCHWEIKERT. Thank you, Mr. Perlmutter. Dr. Hayworth? 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

Chairman Schapiro, I know that the SEC is forming an advisery 

committee on small and emerging companies, and I think that is 

an important step in the direction of facilitating enterprise. We 

want our small businesses to be able to acquire capital, we want 

investors to be able to engage in that marketplace ever more fully. 

One of the questions that proceeds or one of the challenges that 

proceeds from that beneficial action is that we do need a market 

for those stocks once they are issued. And as you know, right now 

we really lack that kind of a marketplace in the United States for 

various reasons. But a marketplace certainly helps investors to observe and to set a market value for these sorts of investments. 

So would you be willing to work—my office is taking a particular 

interest in trying to facilitate a United States-based marketplace 

analogous to France’s Alternext or London’s AAM. Could we work 

with you to see what we can do to facilitate setting up that kind 

of a market? 

Ms. SCHAPIRO. Absolutely. We would be happy to do that. You 

should know it is just getting started. NASDAQ has created a venture marketplace from the roots of the Boston Stock Exchange that 

they bought. And while I don’t think it is fully up and running yet, 

the Commission did approve that. It was one of our efforts to try 

to create a better, more transparent trading market for lowerpriced securities. But we would be happy to work with you. 

Dr. HAYWORTH. Great, I appreciate that. And we are eager to 

work with you, so our staff will get in touch with yours, and we 

will continue to move forward on that. I appreciate it. 

I do have another question regarding revisiting the Williams Act 

and Regulation 13(d). And, in specific, the SEC is looking to respond to a lawsuit by Wachtell that is requesting that the timeframe for disclosure be reduced substantially from 10 days to 1 

day. That could have, as you can imagine, a substantial effect on 

that sort of investor engagement, and many unintended consequences potentially because, of course, the Williams Act comprises a number of spheres of activity, so intervening in one place 

may indeed create an imbalance. So it does strike me that the division of risks, strategy, and financial innovation should be involved, 

and study the potential effects of these proposals. Are you planning 

on asking them to explore all the implications and the cost-benefit 

of this kind of an intervention? 

35 

Ms. SCHAPIRO. Absolutely. This is, as you intimated, a very controversial proposal. The staff has not made any recommendations 

at all to the Commission about it, but they will be very involved. 

Dr. HAYWORTH. Great. I appreciate that, because clearly we are 

functioning in an environment in which everybody is exceedingly 

concerned about our being a destination for working capital in this 

country, and I know that you are dedicated to doing the right thing 

in that regard. So I appreciate hearing that. I think that is a great, 

thoughtful approach. 

Thank you, and I yield back, Mr. Chairman. 

Mr. SCHWEIKERT. Thank you, Doctor. Mr. Hurt? 

Mr. HURT. Thank you, Mr. Chairman. I want to thank the chairman and all of the witnesses today for your being here. I am Robert Hurt from Virginia, and one of the things that concerns us the 

most in my rural southern Virginia district, of course, is jobs. I 

think it is on the top of everybody’s mind. I was pleased that the 

President last week tipped his hat to capital formation as something that is very important to help get this economy going. 

One of the bills that has been passed out of this committee is a 

bill that would extend the same exemption to private equity that 

has been given to venture capital and would repeal that part of 

Dodd-Frank dealing with that issue. That is obviously, in my opinion, a Main Street issue. I know of thousands of jobs, hundreds if 

not thousands of jobs that are in Virginia’s Fifth District as well 

as across the Commonwealth and across this country that have 

been created by the capital formation that is provided by private 

equity. 

I was wondering, Chairman Schapiro, if you could articulate for 

me any possible benefits? What are the benefits to requiring advisers to private equity to register with the SEC, and what could possibly be the benefits of the quarterly and sometimes monthly evaluation reports? What could SEC, with the strapped resources that 

you have, do to improve what private equity has done for the economy, especially at a time when our economy is failing, and private 

equity I think has proved again and again to be able to create jobs 

at a time when we are losing jobs? 

So in the context of cost-benefit, let’s talk about the benefits first, 

and then we can talk about the costs. But what possible benefits 

can you see? 

Ms. SCHAPIRO. Congressman, I think I am familiar with the bill 

that has been reported out that would basically exempt private equity levered less than 2 to 1. 

Mr. HURT. Correct. 

Ms. SCHAPIRO. Which I think is an interesting approach. With respect to private equity, when the Commission followed the requirements of Dodd-Frank, which during the course of the debate, considered actually exempting private equity along with venture capital, and ultimately the decision was not to. Our obligations there 

are with respect to reporting and registration only. There are not 

sort of substantive SEC requirements on that, and it is part of understanding the broad scope of participants in the financial services 

industry and in the economy who have the potential to impact 

other financial institutions and investors in a fundamental way. 

36 

Mr. HURT. And I guess the reason I ask is because—for a couple 

of reasons. I think most people agree and I think the view of this 

committee, a majority of this committee, was that private equity is 

different. It is not leveraged at the fund level. You have, of course, 

highly sophisticated investors, and then of course the portfolios by 

design are necessarily diversified, so there is no financial or no financial systemic risk, I think, to be concerned with. 

Let’s talk about the costs because I am interested—and I appreciate the fact that you brought up the ‘‘cost-benefit analysis,’’ that 

phrase. Obviously the costs are, in my opinion, very significant. We 

had one witness who testified that it would cost their company almost a million dollars to register, and then an ongoing cost, of 

course, of hundreds of thousands of dollars to continue to file these 

reports. And my view, my Main Street view, southern Virginia 

view, is that is money that could be used to invest in another Dollar General or in another Ply Gem window manufacturer in the 

Fifth District. That creates jobs. 

So I am wondering, do you believe that what I would call unnecessary reporting and registration would negatively affect those private equity firms that would have to then comply with this? 

Ms. SCHAPIRO. I guess I would have to go back and look at the 

analysis that was done when the rulemaking was promulgated to 

perhaps answer that more completely, and I am happy to do that. 

I do know that we met with a number of middle-market PE firms 

in the course of this, and one of the things they did ask for was 

a delay in their registration of a year, I believe; and so I think we 

have done a 9-month delay at this point. 

Mr. HURT. Yes, you have. 

Ms. SCHAPIRO. So we have some opportunities to continue to 

talk, and I would be happy to come up and have further conversations. 

Mr. HURT. Thank you. And I wonder, following along these lines, 

it would appear to me that under the Investment Adviser Act, you 

all have the authority to exempt; and is that something that you 

would consider? 

Ms. SCHAPIRO. We do. We were very conscious of the fact that 

the Congress made an explicit choice here. Sometimes things just 

don’t happen, but here there seemed to be an explicit choice to require registration, which seems contrary to exercising exemptive 

authority, but again that is something we could talk about. 

Mr. HURT. Okay. Thank you very much. 

Ms. SCHAPIRO. Thank you. 

Mr. HURT. I yield back. 

Mr. SCHWEIKERT. Thank you, Mr. Hurt. I know there is a vote 

that has been called, but I was hoping I could throw out a couple 

of questions, and then you get to abandon us. But speaking both 

for the chairman and everyone here, we really appreciate your 

time. 

Chairman Schapiro, you were kind enough earlier to mention the 

500 shareholder rule, and I know the SEC has been looking at that 

for a while. I am also working on legislation in that subject area. 

What do you know about your rulemaking or your discussions internally? And if you have warm and fuzzy things to say about my 

legislation, we can talk about that. 

37 

Ms. SCHAPIRO. But only if I have— 

Mr. SCHWEIKERT. Only if they are warm and fuzzy. 

Ms. SCHAPIRO. I am actually familiar with—I think you have two 

pieces of legislation in this arena, one with respect to the Reg A 

offering threshold? 

Mr. SCHWEIKERT. Yes. 

Ms. SCHAPIRO. And that would require us to raise it, I guess, to 

$50 million, and then to consider in the future whether there are 

additional changes that ought to be made. And then secondly, the 

500 shareholder limit and whether accredited investors ought to be 

excluded or the number of investors ought to be raised, or even employees could be excluded from the threshold. 

Mr. SCHWEIKERT. Yes, employees. 

Ms. SCHAPIRO. Those are all exactly the issues that the staff is 

looking at right now, and I would say that I think the 500 shareholder limit is probably the first item on the agenda that we hope 

to bring to the small business advisery committee to get their 

thoughts and perspectives on, and on the burdens of reporting, and 

whether there are any other alternatives. But we are moving 

very—‘‘forcefully’’ may be a little too strong of a word, but we are 

moving very deliberately forward to do the analysis that we need 

to do. 

When the 500 shareholder limit was put in place originally, there 

had been years of study, and it was carefully calibrated, and I 

think we don’t want to just toss it out the window. We want to do 

an analysis, a cost-benefit analysis as well, but we are very committed to moving ahead on looking at this. 

Mr. SCHWEIKERT. And I appreciate that. Actually this is one of 

those moments where the Republican side, you have been very 

kind, or your staff has been kind working with our staff, particularly in the Reg A issue. And in regards to the 500, in many ways 

that environment is more about capital formation, particularly for 

small, upcoming businesses. 

Ms. SCHAPIRO. Right. 

Mr. SCHWEIKERT. So in some ways, it is less about sort of modeling the cost; it is more modeling access to capital. 

Ms. SCHAPIRO. Right. 

Mr. SCHWEIKERT. I had just sort of an offshoot, and you are going 

to have to help me a little bit on this one, municipal advisers. I 

hear a lot from my banking community saying, we are regulated 

by everyone. And there is this sort of sense of concern saying, are 

they about now just to get another layer, particularly when they 

are doing some of the advising practice within those banks? 

Ms. SCHAPIRO. When we proposed the municipal adviser definition, my personal view is that we cast a bit too wide a net, and 

we brought into that definition otherwise regulated persons who 

probably ought not to be included at the end of the day. The staff 

has not made a final recommendation. I understand the term sheet 

will be coming to the Commission very soon. We have gotten, I 

want to say, 11,000 comment letters. That might be another rulemaking. We have gotten thousands of comment letters. 

Mr. SCHWEIKERT. In that case, have you heard from the other 

11,000? 

38 

Ms. SCHAPIRO. I think we have heard from almost every Member 

of Congress as well. So we understand the issue. We cast a very 

wide net, perhaps inappropriately wide, and we are working 

through those issues. 

Mr. SCHWEIKERT. I appreciate the wide net comment. It is one 

of those—we appreciate the struggle for resources in this particular 

environment. I am a fan of something Chairman Bachus is doing 

in trying to move forward with what was almost another 100 million in IT and technology money, believing that your access to technology, as has been stated here, would be sort of a one-time expense, but would actually make your ability to do your job much 

easier, but for all of us to see what is being done in your job easier, 

but—and I had this great fear of taking on something that would 

actually in the banking sector be huge and almost untenable in the 

current budget situation, so—and I think with that, if there is any 

burning comment left—if not, thank you for spending time with us. 

Ms. SCHAPIRO. Thank you. 

Mr. SCHWEIKERT. Thank you. We are in recess until the sound 

of the gavel, and I think at that point we will be moving to the second panel. 

[recess] 

Chairman BACHUS. The Financial Services Committee will come 

to order for the purpose of hearing testimony from our esteemed 

second panel. First, we will hear from the Honorable Paul Atkins, 

visiting scholar of the American Enterprise Institute, and former 

Commissioner of the U.S. Securities and Exchange Commission. 

Paul, it is great to have you back. You are a good friend and I look 

forward to your testimony. 

Second, we will hear from Mr. Stephen J. Crimmins, partner at 

K&L Gates, and former Deputy Chief Litigation Counsel for the Division of Enforcement at the SEC. 

Mr. CRIMMINS. Thank you, Mr. Chairman. 

Chairman BACHUS. I am glad to have you here. I have read all 

of your testimony and I believe all of it is of value as we try to determine with the SEC what the best approach and a collaborative 

effort will be. 

Third, Mr. Jonathan G. ‘‘Jack’’ Katz, former Secretary, U.S. Securities and Exchange Commission, on behalf of the U.S. Chamber of 

Commerce. 

Mr. KATZ. Good afternoon Mr. Chairman. Thank you for inviting 

me. 

Chairman BACHUS. Thank you. Welcome. And we have assembled this panel because we believe all of you have valuable insight 

into what direction both the Commission should go in and the Congress in addressing it. 

Fourth, the Honorable Harvey Pitt, chief executive officer, 

Kalorama Partners, and former Chairman of the SEC. It is great 

to have you back. 

Mr. PITT. It is good to be here. 

Chairman BACHUS. I always enjoy your testimony and your insight. 

And finally, Mr. J.W. Verret, assistant professor of law at Stanford University School of Law. And this is your first time to testify 

as a witness for the Majority. 

39 

Mr. VERRET. As a Majority witness, yes, sir. I have had a chance 

to testify nine times as a Minority witness. 

Chairman BACHUS. It probably will be a very similar experience. 

So we welcome all of you. And this 5-minute clock—if you need 

to take 6 minutes or 7 minutes, feel free to do so. We are not going 

to limit you. If you get up to 8 or 9 minutes, we might suggest that 

you wrap up. Commissioner Atkins, former Commissioner, we will 

start with your testimony. 

Mr. ATKINS. Thank you very much, Mr. Chairman. 

STATEMENT OF THE HONORABLE PAUL S. ATKINS, VISITING 

SCHOLAR, AMERICAN ENTERPRISE INSTITUTE, AND 

FORMER COMMISSIONER, UNITED STATES SECURITIES AND 

EXCHANGE COMMISSION 

Mr. ATKINS. Thank you very much, Chairman Bachus, Ranking 

Member Frank, and members of the committee for inviting me to 

appear today at your hearing. It is an honor and a privilege for me 

to be able to provide information for your deliberations regarding 

the organizational issues at the SEC. I would like to begin by congratulating this committee for taking up this issue of improving 

and enhancing the SEC. I have had the privilege of working there 

for a total of 10 years, first as a staffer in two Chairmen’s offices, 

and then as Commissioner under three Chairmen, including Chairman Pitt, who is on the panel as well. 

Because the public sector lacks the crucible of competition to 

winnow out inefficiencies and promote better management systems, 

I think it is periodically necessary for Congress and the President 

to step in to do so. A good example of this approach was what Congress in the Truman Administration took with the reorganization 

plan number 10 of 1950. In about one page, it gave the Chairman 

of the SEC clear authority over executive and administrative functions and radically reconfigured the SEC’s governance in the process. Now in contrast to reorg plan 10, Dodd-Frank’s 2,319 pages 

haphazardly addressed too many things and I think not very well. 

It created a grab bag of ideas that, through micromanagement, has 

made the management of the SEC much more difficult. 

For example, Dodd-Frank added four statutorily mandated direct 

reports to the Chairman, the investor advocate, the Office of Minority and Women Affairs, the Office of Credit Ratings and the Office 

of Municipal Securities. Because these provisions are statutory, the 

chairman has little alternative to do things differently, especially 

since the chairman already has more direct reports than is practical. So these and other statutory provisions etched in stone one 

way of doing things to the exclusion of others. 

Under Dodd-Frank Section 967, the SEC commissioned BCG to 

do a supposedly independent review of its management and organization. Unfortunately, this review does not appear to be independent, and I don’t think it was very well done. And Jack Katz 

will give you a much more detailed critique of the BCG report in 

his testimony, which I have read and I subscribe to. But suffice it 

to say, I believe the taxpayer ought to get a refund of the $5 million or so that the SEC spent on that report. 

I commend the committee for taking a fresh deliberate look at 

the organizational structure of the SEC with the draft legislation 

40 

that is under discussion today. I also commend Chairman Bachus 

for proceeding in regular order, holding legislative hearings to 

gather commentary and consider openly the best approach before 

introduction of actual legislation. The committee correctly perceives 

that the SEC desperately needs organizational and management 

philosophy changes to increase efficiency and improve its regulation of the markets that it is tasked with of regulating, considering 

how dramatically the markets have evolved in the last decade or 

more. 

With that said, I would caution against being too prescriptive regarding the internal organization of the SEC. Times and circumstances change, and the example of reorg plan 10 demonstrates 

that general guidelines, but with a firm sense of what the sense of 

Congress is, may be sufficient. But much depends on good managerial experience to lead the agency, which, of course, cannot be legislated. 

The draft bill contains many good ideas. For instance, recognizing the second-class status of economists at the SEC and seeking to enhance their participation in policymaking and promote 

them to first class status I think is badly needed. The endemic 

problem is that economic analysis at the SEC has been performed 

as a post hoc exercise. The policy for rulemaking is mostly determined first by lawyers and only near the end of the process are the 

economists brought in to justify the actions on a cost-benefit basis. 

In this vein, I think Chairman Garrett’s proposed SEC Regulatory 

Accountability Act is a very good step forward. The bill directs the 

SEC to utilize economists to determine whether or not to propose 

or adopt a regulation and to do so only after considering the costs 

and the benefits. The criteria set out in the draft bill are in the 

main commonsensical, and an economist worth his salt should take 

those criteria or similar ones into account. 

The trouble is, at the SEC, cost-benefit analyses are usually done 

by lawyers in the rule-writing division and only shown to the 

economists at a much later stage. The SEC, after all, is an agency 

of, by, and for lawyers. Now this morning, Ms. Waters, Mr. Frank, 

and others raised the point regarding the applicability to enforcement cases of this draft legislation. That actually, I think, is a very 

good point. But it is an easy fix I think by carving out administrative orders and perhaps other things as we look at it. Even regulations mandated by Congress could benefit from such an analysis 

outlined in the draft legislation because the devil is always in the 

details, and the challenge is always to do the most for the least cost 

because the investor always pays for regulation through either 

higher prices or diminished choices. 

Another area of potential reform required by Dodd-Frank is the 

SEC’s oversight and reliance on SROs, most notably FINRA and 

the possible delegation of investment adviser oversight to an SRO. 

The committee, in fact, held a hearing a couple of days ago regarding this issue. Although the subject of an SRO for advisers is not 

necessarily the subject of this hearing, in my written submission, 

I raised concerns regarding expanding FINRA’s empire without a 

fundamental re-evaluation of its statutory functions and organization. The subject of SEC funding often comes up in the context of 

discussing management failures at the SEC. It is far from a probVerDate Nov 24 2008 18:41 May 18, 2012 Jkt 072603 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\72603.TXT TERRIE
41 

lem that is easily addressed by money or by creating new offices, 

as Dodd-Frank has done. 

Madoff and Stanford did not result from parsimonious funding. 

Self-funding is certainly not a solution for these problems either. 

If the current leadership cannot handle leasing, as the chairman 

asserted in a hearing a couple of months ago, how in the world can 

it handle self-funding? There are many intelligent, competent, dedicated, hardworking people at the SEC. It is the management system and how it determined priorities over the past decade or more 

that has let them down. The system essentially is unchanged 

today. I salute this committee for taking on this issue and continuing a public discussion. In the past decade, the Securities and 

Exchange Commission’s budget has increased threefold and the 

fundamental problems remain. Everyone in the current economic 

environment has to do more with less. And before the SEC gets 

any more money, I think it needs to show that it has garnered efficiencies and can use its billion-plus dollars well. So for the sake of 

investors who have lost billions in fraudulent schemes that should 

have been discovered earlier, it is high time that these organizational issues be addressed. 

So thank you again for the invitation to come here today and testify. Thank you very much. 

[The prepared statement of Mr. Atkins can be found on page 68 

of the appendix.] 

Chairman BACHUS. Thank you. 

Mr. Crimmins? 

STATEMENT OF STEPHEN J. CRIMMINS, PARTNER, K&L GATES 

LLP, AND FORMER DEPUTY CHIEF LITIGATION COUNSEL, 

DIVISION OF ENFORCEMENT, UNITED STATES SECURITIES 

AND EXCHANGE COMMISSION 

Mr. CRIMMINS. Thank you, Mr. Chairman. By last summer, most 

of the criticisms that are now being thrown by many at the SEC 

were already out on the table. All of this was long before we had 

heard of Bernie Madoff, before we had heard of Robert Allen Stanford, before we had heard of employees viewing Internet porn on 

company time, or the SEC lacking the same quality bookkeeping 

systems as the private sector. But Mr. Chairman, last summer we 

also heard that every year, through thick and thin, the SEC manages to file almost 700 complex securities cases against almost 

2,000 defendants. How the SEC, with just 3,700 employees, reviews 

tens of thousands of disclosure documents each year while riding 

herd over 11,000 investment advisers, 5,000 broker-dealers, 7,500 

mutual funds, a large collection of transfer agents, securities exchanges, rating agencies, clearing agencies, SROs and a market 

trading 8.5 billion shares a day. 

So having already heard most of the same criticisms we are hearing today, but facing the worst financial crisis in 80 years, what 

did Congress decide to do? Congress last summer enacted legislation to double the SEC’s budget in specified steps over 5 years. 

Now as you have noted, Mr. Chairman, and as Mr. Himes mentioned this morning, since 1996, the SEC has always been run entirely on noncontroversial Wall Street user fees, never spending a 

dime of taxpayer money. So the double budget would not have any 

42 

deficit impact. After running the SEC on a shoestring, even with 

increases in recent years, still a shoestring for what they have to 

ride herd over, Congress wisely realized that to get out of the worst 

downturn since the 1930s, to promote growth, to create jobs, we 

need a securities market overseer that has the resources to make 

a difference. 

Mr. Chairman, 12 months later, we still know pretty much what 

we knew last summer. But instead of actually moving forward getting that doubled SEC budget in place, we are hearing from consultants, albeit sophisticated talented consultants, about things 

like optimization initiatives, time-phased multiyear implementations, cross-workstream integration points. And we are forgetting, 

Mr. Chairman, that a wall-to-wall restructuring like this will effectively paralyze the SEC for a year, 2 years or longer. Endless meetings to plan and replan new reporting chains, job descriptions, reallocations of power and authority among SEC offices, staff members obsessing over resumes, and how to handle internal job interviews. 

Mr. Chairman, I suggest that you got it right when you said earlier this morning, ‘‘heal thyself.’’ Heal thyself, realize what you 

have to do, and do it. And Mr. Chairman, I would say, having 

heard Mary Schapiro this morning and others that we have heard 

in recent months, they get it. They get what has to be changed. 

And Mr. Chairman, you referred to some of the changes that Chairman Schapiro has effected. They get it. I say, Mr. Chairman, let’s 

let them concentrate on their core missions and we know what 

those are: capital formation; market surveillance; and fraud detection. This is the worst of all possible times to do this kind of comprehensive reorganization. 

At the same time, we can’t freeze things in time. And Chairman 

Schapiro this morning talked about her concerns that the Modernization Act, while very well-intentioned and focused, might have 

that effect, that it might freeze the org chart and would take an 

act of Congress to change things. Mr. Chairman you commented 

that certainly you are looking for flexibility and this is a discussion 

draft and this is something that you want to consider further, as 

does the committee. You and Mr. Frank have both commented this 

morning about the need for flexibility, and we all appreciate that. 

Another point, Mr. Chairman, in last week’s Joint Session, the 

President urged us all to, as he put it, cut away the red tape. Cut 

away the red tape that prevents startup companies, those people 

in garages and warehouses and so forth, companies just in the 

starting phase from raising capital. We all want the SEC to write 

those rules, providing cheap and efficient procedures for America’s 

small businesses to raise capital, to give us the growth we need 

and to give us the jobs we need. But procedures that still ensure 

that investors, obviously, get the information that they need on 

their own to make informed investment decisions. 

But Mr. Chairman, I have a concern. My concern is that we can 

forget about this kind of rulemaking to streamline capital formation or anything else if we keep handing rulemaking opponents of 

all the ideological persuasions more and more tools to block anything that the SEC tries to do. Now Mr. Garrett’s bill is, again, 

very well-intentioned and very thoughtful. But as a proposal, the 

43 

Regulatory Accountability Act would have an unintended consequence. It would let opponents file lawsuits to block any new rule 

by arguing that the SEC had failed to appropriately consider a 

whole laundry list of—and this is the key point, Mr. Chairman— 

vague factors that any plaintiff’s lawyer can easily exploit. Things 

like, is it good for society? Sure, we want it to be good for society. 

Sure, we want a cost-benefit analysis. That is a given. Absolutely 

right. But do we want to give that to the plaintiff’s bar as a tool? 

Regardless of what their particular persuasion is on a particular 

issue, do we want to give them that as a tool to just tie stuff up, 

and prevent these rules getting through that we actually do need? 

Mr. Chairman, I think what hasn’t been mentioned is that if you 

look at any SEC rulemaking, the release, the second half of it, dozens of pages are all about cost-benefit. They have the Regulatory 

Flexibility Act, the Paperwork Reduction Act, a whole bunch of 

stuff which holds their feet to the fire and makes them do this kind 

of stuff. That Court of Appeals case we talked about this morning 

is unfortunate. Maybe the economic analysis should have been better, as the judges said. But the point is, the execution. It is not pile 

on more requirements. Cost-benefit is clearly a requirement. It is 

clearly something they do. If they need to do it better to execute 

better in particular instances, absolutely right. 

Mr. Chairman, a back-to-basics focus on the SEC’s core missions 

of capital formation, market surveillance, and anti-fraud enforcement is what these difficult times demand, not micromanaging the 

SEC, not paralyzing it by piling on mandated multi-year reorganization studies and new requirements and procedures. It is time 

to let the SEC get to work. 

In conclusion, Mr. Chairman, last summer, with all the recent 

criticisms already out on the table, Congress made a sound decision 

to double the SEC’s budget. Again, using Wall Street user fees that 

are already available, that Wall Street is willing to supply. They 

are peanuts compared with the user fee that I pay to take my family on a relative basis into a national park, small user fees. Wall 

Street is okay with them, using those and no tax dollars—no tax 

dollars, no deficit impact to help get us out of this present crisis 

and do what we can to avoid future crises. Mr. Chairman, I would 

respectfully suggest to the committee that it is time to deliver on 

that promise and give the SEC that doubled budget. Thank you 

very much, Mr. Chairman. 

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

81 of the appendix.] 

Chairman BACHUS. Thank you, Mr. Crimmins. 

Mr. Katz? 

STATEMENT OF JONATHAN G. ‘‘JACK’’ KATZ, FORMER SECRETARY, UNITED STATES SECURITIES AND EXCHANGE COMMISSION, ON BEHALF OF THE U.S. CHAMBER OF COMMERCE 

Mr. KATZ. Thank you, Mr. Chairman. Good afternoon. Good 

afternoon, Congressman Schweikert. Thank you for giving me the 

opportunity to participate in this hearing. As you may know, I 

spent most of my professional career at the SEC until I retired in 

2006. I believe very strongly in its mission and I care deeply about 

its future. Since my retirement, I have had an association with the 

44 

Center for Capital Markets Competitiveness at the U.S. Chamber 

of Commerce, and it has provided me with an opportunity to continue to express my views and do what I can to support the agency. 

I believe that the SEC must change in many ways. And for this 

reason, I consider the BCG report has really been a missed opportunity. The analysis and findings in the report are conclusions. 

They lack insight. They lack empirical foundation. Simply put, I 

think the report ends with recommendations that should have been 

the starting point of the report. For example, it recommends that 

the agency should consider reorganization. It recommends that the 

agency should examine its priorities and then consider how to realign its staff with these priorities. These statements should have 

been the starting points for the study, not its findings. During the 

past 2 years under Chairman Schapiro, the SEC has actually initiated some really significant changes in its operation. The report, 

however, fails to assess what has been accomplished, if anything. 

It just restates the changes in a general and uncritical manner. It 

fails to conduct a meaningful assessment. And in doing so, I think 

it has done a disservice to the Commission and to the people at the 

Commission who have spearheaded these changes. If these changes 

have had a positive impact at the SEC, a report that documented 

the benefits of these changes would have been really useful in restoring the credibility of the Commission. 

Given the way I feel, I applaud you, Chairman Bachus for focusing attention on the need for reorganization in the SEC. It really 

is long overdue. The current structure is antiquated. It is cumbersome. It is largely based on a design to regulate the U.S. capital 

markets in the 1970s, not the markets of today. In addition to 

being antiquated, it places an unrealistic burden on the Chairman. 

The CEO of any organization should not have 20 direct reports. Reorganization by itself isn’t going to solve any all of these problems. 

But an intelligent reorganization structured properly can really 

contribute measurably to a stronger agency. So while I support the 

objectives of your proposal, I believe that the focus of the legislation should be reoriented. 

I think Congress must be responsible for determining the authority and powers of a government agency. It should be responsible for 

monitoring agency performance, for holding the agency accountable 

for its actions. And it is the responsibility of the government agency for execution of those policies and implementation of its responsibilities. And this necessarily should encompass organizational 

structure and the assignment of duties, for the same reason I believe that the Dodd-Frank provisions requiring the creation of five 

new offices is a mistake that should be corrected. 

I have a second concern with reorganization through legislation. 

The reality is, no organization with charges are ever perfect. Agencies to be effective must change over time. If the structure of the 

SEC can only be changed by an act of Congress, we would be exacerbating the problem we already have. An agency that is already 

slow to adopt a change in markets would become even slower to 

change. And I have a similar perspective on Congressman Garrett’s 

bill. I support his efforts to improve the quality of SEC rulemaking 

by clearly specifying the components of a careful analysis of a rule’s 

costs and benefits. But I worry that a pre-adoption cost-benefit 

45 

analysis will always be fundamentally limited in what it can 

achieve. It requires the staff to estimate the impact of events that 

have not yet happened. 

A regulator rarely has the capacity to predict with certainty how 

individuals or firms will respond to a new rule. If the regulator 

can’t predict the response, it is difficult to accurately quantify the 

cost of compliance or the value of benefits. For this reason, I believe in a different approach. I would combine the preadoption costbenefit analysis with a post-adoption look-back requirement for the 

SEC. In my written statement, I have a detailed explanation of 

how I think this could be implemented. My written statement also 

has several other suggestions for how Congress could act to facilitate and contribute to an SEC turnaround. 

In closing, I just want to briefly mention two of them. The first 

is an amendment to the government in the Sunshine Act that 

would permit two or more Commissioners to meet informally with 

Commission staff to monitor staff activities and participate in the 

early discussions where the action really is concerning formulation 

of Commission rulemaking policy. In 20 years as Commission Secretary, I had the privilege of working for seven Chairmen, four acting Chairmen, and almost 20 Commissioners. Every one of them, 

at some point in time, expressed deep frustration with how the 

Sunshine Act was preventing them from really doing their job to 

the best of their ability. 

The second recommendation that I want to highlight is the need 

for creation of a special study team to engage in a systematic and 

comprehensive review of the U.S. capital markets and our regulatory system. The first special study was completed in 1963. In an 

18-month span, it produced a 5-volume report that really was the 

basis of the development of our current national market system. 

And that study provided what I considered the intellectual touchstone for really the next 20 years of enlightened, progressive, and 

dramatically changed SEC regulation. I think the time is right now 

for another special study. And thank you for this opportunity to 

speak today. 

[The prepared statement of Mr. Katz can be found on page 86 of 

the appendix.] 

Chairman BACHUS. Thank you, Mr. Katz. 

Mr. Pitt? 

STATEMENT OF THE HONORABLE HARVEY L. PITT, CHIEF EXECUTIVE OFFICER, KALORAMA PARTNERS, LLC, AND 

FORMER CHAIRMAN, UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

Mr. PITT. Chairman Bachus, thank you for your invitation to discuss the legislative proposals that are clearly intended to improve 

and enhance the performance of the Securities and Exchange Commission, and the performance needs to be enhanced. I commend 

you and the members of this committee for holding this kind of a 

hearing and for the important consideration this committee is giving to ways to improve the SEC’s effectiveness. To assist the committee, yet stay within the time restraints that you have asked us 

to respect, I would like to briefly raise five overarching points for 

46 

your consideration, and I will leave the details in my written statement. 

First, the SEC is vital to the proper functioning of this country’s 

economy and capital markets and has been given an extraordinary 

and ever-increasing mandate over the past 77 years. These days, 

the agency’s mission is often overlooked and its successes are often 

ignored. Instead, the SEC has been converted into an institutional 

pinata, attacked whatever it does or what it doesn’t do. The SEC 

has made some significant and serious mistakes. But it is taking 

steps to correct the perceived weaknesses. Second, enhancing the 

Commission’s effectiveness is a proper and important goal. The 

agency must improve its organizational structure and efficacy, but 

it cannot and should not do so without the constructive assistance 

and oversight of this committee. 

And yet accountability, efficiency, and effectiveness, while concepts for which the agency must strive—and I encourage those efforts—can also be an effective euphemism for creating impediments 

to the agency’s ability to meet these goals. Third, sustainable 

change in agencies as well as in individuals can only come about 

if the agency embraces the need for change and the proposed way 

in which change should be effected. This does not give the agency 

the right to thwart Congress’ directives. But no amount of legislation can force a change in the agency’s culture or performance unless the agency and its employees embrace both. 

Fourth, without ignoring the instances in which the agency failed 

to meet legitimate expectations, public attacks on the agency’s bona 

fides, the potential failure to give it appropriate resources and the 

assumption that the agency can’t even get wrong right can demoralize those whose participation in sustainable change is crucial and 

ultimately prevent this committee from achieving its very laudatory objectives. Fifth, the SEC must do better and change. It has 

too important a role to play. 

Principal among the requirements, I think, is for the agency to 

be creative in figuring out how to meet its new responsibilities, including those under the Dodd-Frank Act, without receiving any additional funding. One such way is effectively for the agency to improve its compliance examination function, the very function that 

did not capture the Madoff and Stanford Ponzi schemes. It could 

do this if Congress gives it the authority to require every money 

manager to be examined either yearly or, in the case of smaller 

firms, every other year at no cost to the taxpayer by an independent expert group that would do an examination pursuant to 

standards the SEC could create. We proposed this policy in February of 2003 when I was Chairman, and it, I think, will offer some 

very valuable opportunities to get better examinations and perform 

what I would call compliance audits in the same way financial audits are performed. 

Of course, we have financial audits and that doesn’t prevent financial frauds, and compliance audits won’t prevent compliance 

frauds. But this will allow the agency, if it gets reports on all of 

these examinations, to focus its attention to see new trends as they 

are arising and effectively be able to do the kind of oversight it 

should do with no burden placed on the American taxpayer. That, 

47 

it seems to me, is the kind of creativity that the agency has to now 

come up with and be in the forefront of efforts to achieve. 

I appreciate this opportunity to discuss these important issues, 

and I will try to respond to any questions you have. And I also 

offer, without meaning to sound presumptuous, to make myself 

available if there is any way in which I can assist this committee 

in its very important work. Thank you. 

[The prepared statement of Mr. Pitt can be found on page 101 

of the appendix.] 

Chairman BACHUS. Thank you. 

Let me say this to all of the witnesses. We plan to give all of you 

an opportunity to not only give your testimony today but to continue to advise us, as we go forward. Professor Verret? 

STATEMENT OF J.W. VERRET, ASSISTANT PROFESSOR OF LAW, 

STANFORD UNIVERSITY SCHOOL OF LAW, AND SENIOR 

SCHOLAR, MERCATUS CENTER, GEORGE MASON UNIVERSITY 

Mr. VERRET. Thank you, Chairman Bachus, and distinguished 

members of the committee. I appreciate the opportunity to testify. 

My testimony today will focus on two important and necessary reforms. First, I will argue that clarifying the SEC’s legislative mandate to conduct economic analysis and a commitment of authority 

to economists on staff at the SEC are both vital to ensure that new 

rules work for investors rather than against them. Second, I will 

urge that the SEC be required to consider the impact of new rules, 

particularly corporate governance type rules, on the State-based 

system of business incorporation. 

Every President since Ronald Reagan, including Presidents Clinton, Obama, and Bush, have requested that independent agencies 

like the SEC commit to sincere economic cost-benefit analysis of 

new rules. Further, unlike many other independent agencies, the 

SEC is subject to a legislative mandate that it consider the effect 

of most new rules on investor protection, efficiency, competition, 

and capital formation. The latter three principles have been interpreted as requiring a sort of cost-benefit economic analysis using 

empirical evidence, economic theory, and compliance cost data. 

These tools help to determine the rule’s impact on stock prices and 

stock exchange competitiveness and also measure the compliance 

costs that are passed on to investors. Three times, three times in 

the last 10 years, private parties have successfully challenged SEC 

rules for failure to meet these requirements, for failure to make the 

grade. Over the three cases, no less than five distinguished judges 

on the D.C. Circuit appointed during Administrations of both Republican and Democratic Presidents found the SEC’s economic 

analysis severely wanting and insufficient. One failure might have 

been an aberration. Three failures out of three total challenges is 

a dangerous pattern. Many SEC rules have treated the economic 

analysis requirements as a mere afterthought. This is in part or a 

consequence of the low priority the Commission places on economic 

analysis, evidenced by the fact that economists have no significant 

authority in their rulemaking process or the enforcement process. 

And I realize that rules have a section called cost-benefit analysis. 

But having it there is no substitute for having quality analysis. 

48 

As an example of the level of analysis typically given to significant rulemaking, consider the SEC’s final release of its implementation of a very controversial and often reviewed rule, Section 44(b) 

of the Sarbanes-Oxley Act. The SEC estimated that the rule would 

impose—this is at the time the rule was adapted—an annual cost 

of $91,000 for a publicly traded company on average, $91,000 was 

their best guess. In fact, a subsequent SEC study 5 years later 

found average costs of $2.87 million per company. That is missing 

the mark in a big way. That error in judgment only applies to estimates of direct costs. The SEC gave no consideration to the more 

important category of indirect costs and the much larger category 

of indirect costs, like the impact of the rule on the volume of new 

offerings or IPOs on U.S. exchanges. In Business Roundtable v. 

SEC alone—this is the most recent challenge—the SEC estimates it dedicated over $2.5 million in staff hours to a rule that was 

struck down. That represents an estimate of about $100 an hour 

for SEC time. Now for securities lawyers of that experience, I think 

most would agree that $100 an hour is probably a very conservative estimate of the hourly opportunity costs of their time. But 

let’s assume that estimate, $2.5 million in staff hours. An honest 

commitment by the SEC to empower economists in the rulemaking 

process will be a vital first step to ensure the mistakes of the proxy 

access rules are not replicated in future rules. 

I also support the goal in H.R. 2308 to further elaborate on the 

economic analysis requirements. I would suggest in light of the importance and pervasiveness of the State-based system of corporate 

governance that the bill include a provision requiring the SEC consider the impact of new rules on the States when rulemaking 

touches on issues of corporate governance. The U.S. Supreme Court 

has noted that no principle of corporate law and practice is more 

firmly established than a State’s authority to regulate domestic corporations. Delaware is one prominent example, and it is the State 

of incorporation for half of all publicly traded companies. Its code 

is so highly valued among shareholders that the mere fact of Delaware incorporation typically earns a publicly traded company a 2 

to 8 percent increase in value. Many other States also compete for 

incorporations, like New York, Massachusetts, California, and 

Texas. 

In order to fully appreciate this fundamental characteristic of our 

financial market system, I would urge adding the following language to H.R. 2308, ‘‘The Commission shall consider the impact of 

new rules on the traditional role of States in governing the internal 

affairs of business entities and whether it can achieve its stated objective without preempting State law.’’ 

The SEC can comply with this requirement by taking into account commentary from State Governors and State Secretaries of 

State during the open comment period. It can minimize the preemptive effect of new rules by including references to State law 

where appropriate, similar to one already found in Section 14(a)(8) 

promulgated under the Exchange Act. It can also commit to a process for seeking guidance on State corporate law issues by creating 

a mandatory State court certification procedure, similar to the one 

that was voluntarily used by the SEC in the AFSCME v. AIG case 

in 2008. 

49 

Now we have heard a number of comments from some members 

about the importance of the financial crisis and the importance of 

tail risk. I would note that regardless of litigating the merit of 

items of the Dodd-Frank Act, a number of items in the Act were 

unrelated to the financial crisis and were unrelated to issues of 

systemic risk, particularly in the securities regulation area. The 

Dodd-Frank Act was a big bus coming through Congress and there 

were a lot of old ideas that had been germinating for 10 years, particularly with proxy access, that got on the bus. 

Proxy access was essentially a union-driven special interest item 

that managed to get tagged on. I have done some independent 

analysis with an econometrician at the economics department. We 

studied the impacts on a very small subset of firms, a few hundred 

firms, and found that proxy access caused actually $500 million in 

losses for just a few hundred firms, as of the event date of August 

25th—and I will be happy to submit the full study to this committee. So I think this is a very important issue to consider, and 

I appreciate the opportunity to testify. I also want to clarify on a 

personal note and correct a very serious error in a prior testimony 

during the DFA hearing on this issue on proxy access, I represented to Congressman Frank that I was a Red Sox fan. And in 

the interim, I have been lucky enough to marry a Phillies fan. So 

I want to go on the record as saying I am a Phillies fan and correct 

that prior error in my testimony. Thank you. 

[The prepared statement of Professor Verret can be found on 

page 141 of the appendix.] 

Chairman BACHUS. He would say you went over to the dark side. 

Thank you. 

I think most of your testimony was pretty clear, and I don’t have 

any questions about what you testified. One thing that I do want 

to ask you—you have not testified about this, but I would like an 

answer to it. The Stanford case, we have talked about the SEC and 

the failures of the SEC in the Stanford case. As I understand it, 

it was a financial product, not a security, and that it was actually 

advertised as a foreign-based product. What effect did that have on 

the SEC? Their jurisdiction on it was somewhat clouded, I would 

think. And I am just trying to get a handle on that. Can anybody 

comment on that? I am not sure I articulated that right. But it was 

not a security. It was a financial instrument. 

Mr. PITT. Yes. Certainly when the SIPC issues came up, the 

claim was that they were banking and financial entities, not brokerage firms; and therefore, there was no coverage. But if I am not 

mistaken, the SEC did file a lawsuit in which it alleged fraud on 

the part of an entity it claimed was acting as a broker-dealer. And 

so I think the SEC found jurisdiction. The real issue was what happened between the years when this Ponzi scheme was going and 

when it finally came to light and whether or not the process used 

was effective. But I think they came up with sufficient authority. 

Chairman BACHUS. Right. And I think that they obviously did 

have jurisdiction. But I am saying, did that cloud some of the initial investigation or enforcement? If you look at the perspective— 

it has been some time. There was a representation that they were 

buying something foreign. 

50 

Mr. KATZ. Mr. Chairman, if I can add something. I have always 

believed that Stanford was actually, in the perspective of what happened in the SEC, a far more troubling instance than Madoff. 

Chairman BACHUS. Okay. 

Mr. KATZ. And if I could make a comparison. In Madoff, the staff 

were presented with information and they dropped the ball. They 

didn’t see it, and they didn’t figure it out. What troubles me with 

Stanford is, if you look at the facts as they have been made public, 

the examination staff in the Fort Worth regional office spotted it. 

They recognized it as a potential Ponzi scheme through their examination program, and they tried very hard to get the enforcement 

staff to follow up. And for a variety of reasons, the enforcement 

staff had no interest in it. This was not a legal issue. This was not 

a question of authority. This was a question of staff making a bad 

decision when other staff in the Commission were saying, this 

could be a very serious problem. 

Chairman BACHUS. Right. In fact, some of that staff was then let 

go who made the recommendation to go forward. So I do believe 

there is something there that— 

Mr. KATZ. If I could just tie it into a broader theme. Metrics 

count. Staff do what they are evaluated on. And I have written in 

a law review article a couple of years ago that one of the problems 

of the Enforcement Division was it used the most simplistic measure of performance, which is, how many cases did you bring? A 

nickel-and-dime case was one stat. A massive investigation was one 

stat. And that there were offices that knew how to game the system, and they realized, we can devote four or five people for several 

years to this really complex difficult case and have one case to 

show for it. Or we can bring 5, 10, 15, or 20 smaller cases and sort 

of really knock the ball out of the park when it comes to our evaluation. 

And that was what I think happened in Stanford. They looked 

at this. They saw, this is a huge complicated case. We are a small 

office. If we try to take this case on, we are just not going to bring 

as many cases. And to me, that is the management problem at the 

SEC that Stanford illuminates. 

Chairman BACHUS. Right. 

Mr. ATKINS. Just to chime in there too. I am not up to date on 

the Stanford case. It is obviously being litigated and everything 

else. So I wouldn’t want to really weigh in on that. But I do agree 

with what Jack Katz was just saying, that the real problem which 

the BCG report didn’t really address, the elephant in the room is, 

how does one gauge whether an enforcement attorney or the enforcement program or what have you, is successful, and what does 

success mean? How do you measure what the SEC does? When you 

look at the simple number of cases brought, that is not really a fair 

gauge. For all the reasons Jack said, it is easy to goose the numbers every year. There are cases called the 12(j) cases where the 

SEC brings accounts as a statistic, and that is simply where a company should no longer be listed. It is forcibly delisted. 

Every year, that is 100 or more cases that sort of add to the— 

it is a good way to make the numbers look better. So I think that 

is one real challenge with respect to how to run at least the enVerDate Nov 24 2008 18:41 May 18, 2012 Jkt 072603 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\72603.TXT TERRIE
51 

forcement program and to a lesser extent the examination program. 

Mr. CRIMMINS. Mr. Chairman, if I could weigh in also. I think 

you were exactly right in terms of overlapping jurisdiction. If you 

have a Stanford where maybe the securities jurisdiction, if you posture it the right way. But there were also the banking agencies and 

various other financial services agencies. Things can drop between 

the cracks. One agency can figure, well the other one—it is passing 

muster over the other agency. I think you hit the nail on the head, 

Mr. Chairman. When you have overlapping jurisdiction, there can 

be those issues. But also, the other short point I would make is the 

competing priorities. We had Madoff hit and Stanford hit. In the 

midst of other stuff, we had the Enron WorldCom crises; we had 

the market timing and late trading in mutual funds is a big deal; 

we had option back dating sweeping corporate America; we had all 

these things where they had to pile on all the troops, keep up with 

the New York attorney general, keep up with FINRA. And when 

somebody walks through the door, as diligent and hardworking and 

sincere as Mr. Markopolos absolutely is, and he walks in the door 

and says, hey, I have a hot one for you, it is the former Chairman 

of FINRA, the guy who also was the vice chairman of the industry, 

securities industry association, and he is a fraud. 

And meanwhile, that particular office of the SEC is in the midst 

of running to catch up with other regulators and to keep up with 

other regulators on late trading and market timing, it is a question, to wrap it up, Mr. Chairman, about competing priorities in an 

agency run literally on a shoestring, with half the budget it should 

have, especially post-1996 when we took it off the taxpayers’ backs 

and made it Wall Street user-fee-funded. It needs double the budget. It needs to deal with those competing priorities. That is how it 

will deal with the Madoff situations. That is how it will deal with 

the Stanford situations going forward. Thank you. 

Chairman BACHUS. One thing—and I am going to give all questioners 10 minutes. Several of you had referred to them focusing 

on what their job is. One of my concerns has been that they and 

really all the Federal agencies have been papered and run to death. 

They are spending tremendous amounts of resources just reporting 

to Congress, which is a legitimate function of the Congress. But in 

the draft that I proposed, it would allow the Chairman—several of 

you indicated she ought to be free to do her job or his job, whomever it may be—and we reduce, I think, from 24 to 14 the number 

of people who report to her. But I think it is a problem. And you 

do see that the CEO or the Chairman ought to focus on fewer 

things and more important things and the vision. 

Let me ask each of you this: Does anyone disagree that because 

of the added jurisdiction, there is a need for more money? There 

is expanded jurisdiction. Would we all agree there is an expanded 

jurisdiction for— 

However it comes, through an appropriation or through user fees, 

can a reform happen without money, without additional funds? I 

would ask that. And I am saying that a condition to additional 

funds ought to be a reform, but just give me a comment there. 

Mr. ATKINS. I do think that reform can happen without additional funds because it depends on what—we are talking about 

52 

here managerial reforms, we are talking about how do you manage 

an agency to try to incentivize people to do the best. 

I remember sitting in a senior staff meeting one year where certain senior staffers from certain divisions asserted that everyone in 

their division ought to get a merit bonus, regardless of who they 

were, but it had to be equal throughout. An interesting concept 

that I don’t think is duplicated in the private sector. So that is just 

one indication of how managerial attitudes probably need to 

change, and again things like that were not— 

Chairman BACHUS. And I am sure the employees union and some 

of those present some challenges having to do with it. 

Mr. ATKINS. Perhaps. But this was coming from senior staff people who were saying that in their division, they thought that it 

would be untenable to differentiate between people. Some other divisions disagreed, of course, but some were taking that tack. 

Chairman BACHUS. Sure. And I disagree, too, with that thought, 

that they ought to all get a merit bonus. 

Mr. VERRET. I would just express agreement with that, and also 

add that reform can also save money. And with respect to the debate over funding, I would just note also that the taxpayer, though 

taxpayers don’t fund the SEC through taxes, they are the residual 

beneficiary of the user fees. So to that extent it certainly—it is a 

relevant discussion. And there is some debate over funding the 

SEC and how much and such, but part of the discussion ought to 

be the fact that the taxpayer is a residual beneficiary, and so the 

debt and deficit discussion does play in, at least tangentially, to 

that discussion. 

Chairman BACHUS. Right. And obviously if they don’t have the 

resource, there is often a cost from not doing something, which is— 

Mr. PITT. Part of the difficulty, I think, is there is no agency that 

has ever been created that won’t tell you that they could use more 

money. 

Chairman BACHUS. Right. 

Mr. PITT. They all want it. So one of the issues is, how do you 

manage what you have? I think, first, the SEC’s increase in responsibilities has been so large that there is a huge gap; but, second, 

I think that there are ways in which the agency can save money, 

such as the one I mentioned on the examination process, that 

would actually do better for America’s investors than what the SEC 

is able to do. And somebody has to be thinking creatively to try to 

come up with those ways. I think both things have to be done in 

order to make sure that the resources the agency does have are 

used appropriately. 

We are at $1.1 or $1.2 billion. When I took over, our budget was 

about $300 million, and it was a lot of money, although we needed 

more, of course. 

Mr. KATZ. Excuse me, Mr. Chairman, if I can echo and expand 

on what Harvey just said. I was at the Commission for a long time, 

through the fat times and the lean times, and I remember after 

Boesky in 1986, the budget of the agency doubled. And then there 

was a period in the early 1990s, after the passage of the Remedies 

Act, where the Commission got a huge increase in its funding. Harvey mentioned when he was there, and there was also a similar increase. 

53 

Economists have a phrase, they refer to something as being necessary but not sufficient. My problem with increased funding is I 

absolutely believe it is necessary, and I absolutely believe it is not 

sufficient. What I saw happen when the agency got these huge 

budget increases was it enabled them to avoid taking a hard look 

at what it was doing well, and what it was doing poorly. So that 

when the Enforcement Division got a massive increase in staff and 

everybody said, good, now they will have the resources to do more 

complex, difficult cases, and they will do them faster, sadly that is 

not what happened. More staff just meant they brought more cases, 

not necessarily better cases. 

Additional funding is absolutely essential, but it is absolutely essential that it be coupled with substantive internal change in what 

the agency does and how it does it creatively. Harvey’s idea is just 

one of a number of examples of ways the agency could be imaginative in its use of resources. 

Chairman BACHUS. Right. In fact, I will say this, and I think it 

is very important, I think that is an important point; that increased funding can actually mask the need for reform or retard reform. Sometimes you confront and decide what is the most important and prioritize. That is true not only of a government agency 

or a corporation, but also of a family. 

Mr. PITT. I would say, Mr. Chairman, that is an area where I 

think the Commission would benefit from outside help. When we 

would look at the budget, the first thing that a Chairman is told 

is, that is sacred, we can’t touch that. And if you start to ask questions about why it is sacred and why it can’t be used, you don’t always get great answers. I think that it is important to have somebody outside the agency look at how the agency can use its resources more efficiently, not change the resources, but use them 

more efficiently and determine whether or not subsequent increases are going to be necessary. 

Chairman BACHUS. Thank you. Of course, you know that Congressman Frank indicated earlier in this hearing that he realizes 

that there needs to be some rollback on some of the charges or the 

responsibilities that have been assigned to the Commission by 

Dodd-Frank. He has acknowledged that could be reviewed. 

Mr. CRIMMINS. Mr. Chairman, if I could just add, it is certainly 

something to consider the new jurisdiction, the expanded jurisdiction, the new duties and burdens put on the SEC by Dodd-Frank, 

as you have indicated and as Mr. Frank has indicated. But I would 

also respectfully ask the committee to consider how the old stuff 

that the SEC has to deal with has radically changed in the last 10 

years. And what I am talking about, Mr. Chairman, is high-speed 

computerized trading. We just didn’t have that 10 or 20 years ago 

where computers, without consulting a human being, can put in 

huge orders, change them, test price, change—they get so far ahead 

of the average retail investor that it is a totally different market. 

That has to be—that costs a lot of money to get the sophistication and the people you need on top of it, to get the technology on 

top of it, so you can see the markets in real time; and not only that, 

volume is soaring through the roof where it is 8.5 billion shares 

daily, hugely bigger markets than we ever had before. 

54 

And then lastly, Mr. Chairman, the complex new products that 

we have before—we talked about derivatives earlier today, all 

kinds of complex new products, complicated stuff that sometimes 

the people who create them don’t even understand them. That is 

the old stuff and how it has radically changed. 

So, again, Mr. Chairman, thank you for being open to those additional resources that this Commission really needs. 

Chairman BACHUS. Thank you. You are obviously right. We were 

dealing with products that it was hard for people who were trading 

them or constructing them to explain what they were. 

Mr. Frank, you have 20 minutes of questioning. 

Mr. FRANK. Do I have to use it? 

Chairman BACHUS. As much as you want. 

Mr. FRANK. Thank you. 

Chairman BACHUS. And then the two, Mr. Schweikert and Mr. 

Manzullo. 

Mr. FRANK. Maybe I will take 6 or 7 minutes. I thank the witnesses for staying with us. I think this has been a very useful hearing. I am trying to go back and—Mr. Pitt, was it your statement? 

I am trying to find it again. One of the—I apologize, I read this, 

maybe it was Mr. Atkins had some concerns about FINRA. Was 

that Mr. Pitt or Mr. Atkins? 

Mr. ATKINS. That was me. 

Mr. FRANK. I am interested in your concerns about FINRA, and 

also obviously one of the key questions for us is what is the appropriate devolution and interrelationship between the public agency 

and self-regulatory agencies? There are great advantages to selfregulatory agencies, but there are some problems and limitations. 

Would you expand a little bit on your problems with FINRA and 

how you think we should be generally moving the structure of 

these relationships? 

Mr. ATKINS. Yes, sir. Thank you. Yes, I put that in. I wasn’t, obviously, at the last hearing, but we need to look now at, I think, 

how self-regulatory agencies operate in the current climate. You 

have SROs, historically were the NASD and then also the various 

markets. Now the markets are for-profit agencies, for-profit companies, and so I think a lot needs to be done to step back and really 

look at whether a for-profit company should still be categorized as 

an SRO with all the paraphernalia that goes with that as far as 

rule approvals and that sort of thing, especially when you compare 

to the CFTC and how on that side rules are approved or not. 

With respect to FINRA, it is now basically a monolithic, monopolistic regulator of broker-dealers. Everyone has to be a member of 

FINRA. In the old days, you could be an SEC-only registered 

broker. So, the world has really changed, and my point is, before 

you designate an SRO, like FINRA, it could still be an SRO, then, 

you need to take a step back and look at it. 

Mr. FRANK. I appreciate that. Let’s look at—would it be that you 

would find some of these, if they were for-profit, inherently inappropriate to be given these responsibilities, or would you write a 

code of conduct that was binding from the SEC that protected the 

rights? I mean, you have the State actor issue there. Which general 

direction would you go in? 

55 

Mr. ATKINS. For the most part, the for-profit agencies have bifurcated their enforcement arms, and a lot has gone over to FINRA. 

They still retain oversight over their market itself, but they still 

are subject to SRO-type of regulation with respect to rules and that 

sort of thing. 

Mr. FRANK. Would you tighten them? Should we get more explicit when you talk about— 

Mr. ATKINS. You could actually do the opposite of tightening 

them. You could still have the SEC oversee it, and then ultimately 

wield the regulatory hammer if things are noncompetitive or something like that, but you could take it—to make things more streamlined, you could take a page from the futures industry. But with 

respect to the State action of FINRA, the closer that it gets to 

being the only— 

Mr. FRANK. How close is it now, would you say? 

Mr. ATKINS. If you look at the Quattrone case, I think that is an 

indication of where things could go. 

Mr. FRANK. Do you think—I am trying to get your opinion, not 

your commentary on others. 

Mr. ATKINS. Right. I won’t say that it is a State actor. I think 

there have been some really good points that have been written, 

some articles, and I would be happy to forward them to you, but 

I think it is very dangerously close to becoming a State actor, and 

so that is why I think that— 

Mr. FRANK. But not yet? I mean— 

Mr. ATKINS. It probably depends on the case. It depends on how 

FINRA acts within, like Quattrone. 

Mr. FRANK. Oh, okay, but then the answer is they are to some 

extent, they are a State actor, if—given that, they are a State 

actor. They may not act like one in a particular case, but given 

what you say, they should be treated as a State actor. 

Mr. ATKINS. With the proper challenge, I think they could be 

found that. 

Mr. FRANK. Mr. Atkins, you are surprisingly tentative for someone who is no longer in the job. Should we treat them as—should 

they be treated as a State actor or not in their current form? 

Mr. ATKINS. If they remain a monopolistic type of regulator— 

Mr. FRANK. As of today. 

Mr. ATKINS. I am sorry? 

Mr. FRANK. If they are not—if a year from now, they look the 

same way they look today, should they be a State actor? 

Mr. ATKINS. Again, I will just say, given the right case—I don’t 

want to say yes or no. 

Mr. FRANK. Obviously, you don’t. I don’t know why, though. 

Mr. ATKINS. Sorry. 

Mr. FRANK. Let me ask Mr. Verret, on the question of preemption, you say the Garrett bill should be changed to say the Commission shall consider the impact of new rules on the traditional role 

of States in governing the internal affairs of business entities and 

whether it could achieve its stated objective without preempting 

State law. But of course, the Garrett bill is not confined in its subject matter, only the matters of governance. Should we not, then, 

put that in there for all matters of preemption, or would you— 

should we worry about preemption only of State governance laws 

56 

and not of other State laws preempting other things? Why not just 

say, ‘‘shall consider the impact of new rules on States and whether 

it continues its stated objective without preempting State law?’’ 

Mr. VERRET. I would answer with a very simple distinction that 

there are some types of preemption that are beneficial and some 

that are not. I think there was some bipartisan support, for example, for the National Securities Markets Improvement Act in 1996 

because that tied— 

Mr. FRANK. But you are cutting to a substantive— 

Mr. VERRET. —to official. And I think just to answer your question about the reason why I focus on corporate governance is because that type of preemption deals with the type of regulation in 

which States internalize the cost of their— 

Mr. FRANK. Mr. Verret, that is not what I asked you, and I understand. I am not asking you for the substantive view. People 

have different views, although I must say, I tell you, with a lot of 

my colleagues, a lot of us, people invoke States’ rights versus national, preemption versus not. And my sense is that for many people, the decision on at what level of government a policy should be 

set depends on where they think they are likeliest to get the outcome they want, which by the way is perfectly reasonable. I don’t 

think there is any kind of fundamental moral principle here. People 

should just acknowledge that. So I understand there will be differences. 

But you haven’t answered the question I asked you. You have 

told me why you want to talk about governance, but would you object to broadening that, or would you have us consider the impact 

on preemption only of governance, or would you have a more general requirement in the list of things to be considered the impact 

on the State law? 

Mr. VERRET. To the extent you want to generalize it, what I 

would— 

Mr. FRANK. No, I don’t—excuse me, I don’t want to generalize it. 

Mr. VERRET. I would object to generalization on the following 

grounds. 

Mr. FRANK. At least two of you are an unusually deferential 

panel. It is okay to tell us what you think. I am asking you what 

you think. This is your language, you want to do it for State governance. Would you cover—would you have that cover preemption 

in general, not for or against it, and because this doesn’t say for 

or against it, although it does have somewhat of a nonpreemption 

leveraging. It says, can you do it without State law? But would you 

agree that this should be a general position with regard to preemption? 

Mr. VERRET. I would not agree on the grounds that I think that 

in some instances, some States internalize the cost of regulation 

better than others. For example, in the creation of business entities 

like in Massachusetts, the creation of investment trusts, I think 

that the State does a good job of internalizing the costs and benefits. If it becomes suddenly a bad signal to be a Massachusetts investment trust, I think that your Secretary of State will internalize 

that, your legislature will internalize that, and that is why— 

Mr. FRANK. But that is not a matter of corporate governance. 

57 

Mr. VERRET. —corporate governance specifically. The governance 

of investment institutions is certainly— 

Mr. FRANK. You would cover only corporate governance? 

Mr. VERRET. I would cover the creation of business entities and 

their internal affairs, which would also apply to Massachusetts investment trusts— 

Mr. FRANK. I’m sorry, but I— 

Mr. VERRET. —as well as corporate— 

Mr. FRANK. I am less parochial than you might think, but I still 

don’t understand the answer. Would you think that is covered by 

corporate governance or would you expand it to cover that? 

Mr. VERRET. I think it would be—the focus on business entities 

I would define very broadly. 

Mr. FRANK. So you think that what you just said would be covered by your own language here? 

Mr. VERRET. Yes, I think so, yes. 

Mr. FRANK. All right. But you wouldn’t broaden it beyond that? 

I guess I am somewhat troubled, not troubled, but I am concerned, 

that in other words, you force some preemptions and not others, so 

you—it is okay— 

Mr. VERRET. —when it is efficient and not others along the line— 

Mr. FRANK. I understand that. 

Mr. VERRET. —cost-benefit analysis. 

Mr. FRANK. And I can understand coming down in the end on 

that, but I don’t understand saying that you should only consider 

it in some cases and not others. 

Mr. VERRET. Because in some cases— 

Mr. Frank. I think you are putting— 

Mr. VERRET. —it is sufficient and in some cases it is not. 

Mr. FRANK. Excuse me. You are writing the conclusion into the 

procedure, and I am always troubled by that. 

Mr. VERRET. I am just trying to write the conclusion based on 

sufficient economic analysis, and there is sufficient economic literature on the nature of corporate federalism and States. 

Mr. FRANK. And there is no other preemption, you don’t think 

there is any significant, any economic analysis anywhere else? 

Mr. VERRET. That is a broad statement, ‘‘no other,’’ but I think 

that— 

Mr. FRANK. That is what your language says. 

Mr. VERRET. I would not—I would broaden it, keeping in mind 

that some types of preemption are beneficial and some types— 

Mr. FRANK. I understand. But again you are merging—and I 

think people too often do this—the procedural and the substantive. 

I can understand people say, yes, this preemption is good and that 

one isn’t, and there is no principle that says that is necessarily bad, 

but I am just surprised that—I am not surprised, but I think saying we will only look at preemption in those cases where I think 

preemption is going to be bad, and not look at it elsewhere, writes 

people’s policy conclusions into procedures, which is not a good idea 

in the— 

Mr. VERRET. I would start here, and if you have other ideas 

about— 

Mr. FRANK. No, I don’t have any ideas. 

Mr. VERRET. I would be glad to discuss this with you as well. 

58 

Mr. FRANK. I thought that is what we were doing, Mr. Verret. 

Mr. VERRET. So what other— 

Mr. FRANK. My point is, my substantive point you resist, you are 

writing a procedure which embodies your policy preferences, and I 

think that is a bad idea in the law. I think if there is going to be 

a procedure, it should be policy neutral and should apply to the 

whole topic. That is what we prefer. 

Mr. VERRET. My own policy preference is efficiency. 

Mr. FRANK. That is all, Mr. Chairman. 

Mr. SCHWEIKERT. [presiding]. Thank you, Ranking Member 

Frank. It is always exciting when you come visit. 

Mr. FRANK. You have to get a life, David. 

Mr. SCHWEIKERT. I hear that a lot. Actually—and this is something I just wanted to share quickly—on occasion, when you look 

out and you see not a lot of bodies in the room, understand there 

are a lot of eyeballs watching us, as you walk through some of the 

different rooms, we are up on the television cameras in lots of different places. 

I wanted to do a huge sort of back step and help me do something sort of conceptually, and I will start with the professor. Professor, if you were starting with a clean slate from a regulatory 

standpoint, and not just the SEC, but some of the other agencies 

that also dip their toe into this world, considering that the chairman is starting to put together a package that would have I think 

$100 million for additional technology, and living in the age of the 

Internet, if we were starting from scratch, what would a regulatory 

environment look like? 

Mr. VERRET. I would start with the principle that government actors as well as individual actors are at their best when they compete; that when we compete for resources, that when we compete 

for people to join our group, whatever that might be, we are at our 

best. And so, I would look to the principles of regulatory competition. I would look to reform of SROs, reform of the SEC, potential 

creation of SROs, with all of that in mind. And I think that I am 

in agreement with former Commissioner Atkins on that issue, and 

I think that to the extent we consider creation of new SROs, we 

should consider making them, making membership voluntary and 

giving more deference to voluntary membership organizations rather than mandatory organizations, for instance exemptive relief 

based on—I know you asked me to start from a clean slate, but it 

is hard to think of that sort of state of nature. 

Mr. SCHWEIKERT. Part of the nature of the question is as we are 

moving, and the actual, Chairman Schapiro, as they start to move 

much more of their platform to Web-based access of information 

and those things, I am just trying to get my head around what 

would truly be the optimal, if we had started from scratch, and 

could we possibly move that direction. 

Mr. VERRET. I hope so. That is a very broad question. 

Mr. SCHWEIKERT. Okay. And maybe it is just too far theoretical. 

Chairman Pitt, am I living in fantasy land? Which I get told often, 

as we just had mentioned. 

Mr. PITT. No, I think it is an appropriate question. I am not sure 

whether you are asking just about the jurisdiction of, say, the SEC 

and self-regulatory bodies or all of financial regulation. 

59 

Mr. SCHWEIKERT. I would actually go from almost all types of financial regulation. 

Mr. PITT. Yes. I think we have a terrible system of regulation, 

and I think we missed an opportunity to create a better structure. 

The current structure is based on what you were born as or called 

at birth. It doesn’t depend on what it is you, in fact, do. So we had 

banks that were doing securities work, but they are regulated as 

banks. We had securities firms that were doing banking, we had 

mutual funds that were doing all of that, and depending on what 

they were born as, that is how they got regulated. That is, in my 

view, not the kind of system that we ought to have. 

We should have a central regulatory system for financial services, and the only things that I would exempt out of that are: first, 

monetary policy; and second, systemic risk. Those two issues I 

would give to the Fed, but I would divorce the Fed from all of its 

banking regulation and put that in a central repository of all financial regulation. Then you can have functional regulation as well as 

prudential regulation. I don’t think we will ever get there, but I 

think it would be great to imagine that, and it would be great to 

try and achieve it. 

Mr. SCHWEIKERT. Mr. Katz? 

Mr. KATZ. Congressman, actually, unlike my brethren on this 

panel who have to work for a living, I am retired, so I actually have 

the freedom to think about some of these issues. And in the last 

5 years—I actually do a fair amount of work for the World Bank 

and the IMF as a so-called technical adviser, which means I am 

working with people who are starting from a clean slate in many 

respects. 

Just two or three points that I think go toward this direction. 

The first one is what Harvey just mentioned about the regulatory 

philosophy. There is prudential regulation and there is business 

conduct regulation sales practices. The SEC has historically been 

pretty good at business conduct sales practices. As a prudential 

regulator doing examinations, it has never had the resources and 

it has never really done it very well. I think working on a clean 

slate—maybe the time is now to look at what is referred to internationally as the ‘‘twin peaks’’ model, separating out these two 

functions, point number one. 

Point number two, and I know this has been said, but it just has 

to be emphasized. We are the only country in the world, I think, 

that has a separate futures regulator and securities regulator, and 

I believe firmly that it is an enormous impediment to our capital 

market development and competition. It is a huge problem to the 

industry, not just the regulators. 

Another principle along the same lines is the heart, the core, of 

SEC regulation is corporate disclosure. It is founded on the basis 

of concept of materiality. And our system now has just become so 

bogged down in trivia, and it is still a paper-based system 25 years 

after the development of EDGAR. We need to fundamentally 

change our disclosure system, get away from something built upon 

pieces of paper put in the mail every 90 days, and get away from 

prescriptive trivial requirements for all companies and get back to 

the original concept of, tell us what is material about your company 

for your shareholders. 

60 

Mr. SCHWEIKERT. I appreciate it. You have actually hit on two 

of my favorite fixations. 

Mr. CRIMMINS. Thank you, Mr. Chairman, and Congressman. 

Ten years ago, around the year 2000, the British decided that they 

were going to have a comprehensive regulator called the FSA. It 

was going to cover banking, securities, insurance, everything. Ten 

years down the road, how are they doing? They are breaking it up. 

It was a big organization. There may have been management problems—I am not familiar enough with it—in creating something 

that big and that comprehensive. There were obviously political 

issues, obviously the financial crisis. Can we create something that 

gigantic and make it actually work where we have that experiment 

of failure? Who knows, but—I am sorry? 

Mr. SCHWEIKERT. Mr. Crimmins, I want to sort of redefine the 

question. It was less about creating a superregulator. 

Mr. CRIMMINS. Right. 

Mr. SCHWEIKERT. It was, what would accomplish the goal of maximum of capital formation and velocity of wealth distributed 

throughout the country and keep those investors safe, and just conceptually what would that be? 

Mr. CRIMMINS. Right. No, I think that is true. If we could ever 

create a comprehensive regulator and make it work, or even focusing it on securities or what we can in the turf world that Congressman Frank referred to earlier, whatever we can do, even if it is just 

securities, I think we can make changes. And I think the risk is 

to try to do it all at once and just create a new agency from 

scratch. I don’t think that is viable. 

But that said, I think we can morph the existing organizations 

in positive ways that effectively would achieve that over time. And 

what I am talking about are core focuses on core missions, capital 

formation first and foremost. As Mr. Katz said a moment ago, 

when you look at the reporting requirements, some of them are excellent, and some of them are just a waste. As far as capital formation, the procedures could be simplified and streamlined, without 

question. Capital formation, get it right, get it simple, get it protecting investors so there is full disclosure, but make it so that 

small businesses can raise capital. Capital formation, market surveillance with all this crazy stuff going on, this huge shoot-up in 

volume, computerized trading complex products, we have to be able 

to look at it in real time. 

Congressman, last year when we had the flash crash, they tried 

to deconstruct a few hours; and working on their old computers and 

old software, it took them 3 months just to decode what actually 

had happened in 3 hours. There are packages, software packages 

that Wall Street uses, that are able to tell them in real time what 

is going on. We need to get those to the SEC, and we need to enhance them and then link them, link them with other regulators, 

with the SROs, with the exchanges, so that in a market regulation, 

market surveillance issue, we see what is happening in real time 

in the markets. If there is a manipulation going on, stop it now before the traders get fleeced. And likewise when we do our rulemaking in the market, trading in markets area, we see what is actually happening in the markets, and our rules respond to that and 

not to what we imagine theoretically might be happening. So, effiVerDate Nov 24 2008 18:41 May 18, 2012 Jkt 072603 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\72603.TXT TERRIE
61 

cient capital formation, real-time market surveillance, computerbased, technology-based real-time surveillance, and then lastly, Mr. 

Chairman, the enforcement tools, enforcement, beefing up enforcement with tools they need, tools to deal with the cross-border world 

we live in now where frauds are often perpetrated against Americans by entities offshore. 

The surveillance tools that they need and the enforcement tools 

they need and streamlining of their investigative and litigation 

processes, part of which have been done recently, nationwide service of trial subpoenas and Dodd-Frank, little technical things like 

that which sound picky and arcane but are really, really important 

to make the program run well and run efficiently. So, again, core 

missions, focus on what makes sense, I think go through the organization, but morphing over time with buy-in from all constituencies, I think we could really get there. 

Mr. SCHWEIKERT. Thanks, Mr. Crimmins. 

Mr. ATKINS. Could I add just a couple of points? 

Mr. SCHWEIKERT. Mr. Atkins, you are going to be next. And then, 

we are going to bounce back, because I want to do a little more follow-up on the capital formation, and then there is only one other 

question. Mr. Atkins? 

Mr. ATKINS. I think one thing we can’t forget is that Dodd-Frank 

has really changed a lot of the situation. I think it is a calamity, 

frankly, for the marketplace. The costs, the uncertainty that is 

weighing down on the economy, with regulators struggling to implement it in these unrealistic time limits that the statute sets 

vague directions to them; the huge missed opportunity, like Chairman Pitt was saying, to actually reorganize our broken financial 

services regulatory structure, and the SEC/CFTC thing is just one 

aspect of that. 

The constitution of this Financial Stability Oversight Council we 

are ascribing to bureaucrats sitting around a table that they can 

somehow peer into the future and predict the bubbles and prick 

them before they happen, because ultimately it is always one person’s bubble is another person’s livelihood. And that was the problem with the housing crisis and everything else that went on in the 

build-up there in the 2000s. We have SROs who no longer really 

are self-regulatory organizations. They have lost the ‘‘S’’, they are 

now really regulatory organizations. So that has changed things 

significantly. 

And to the point of trying to beef up the SEC so that it somehow 

will be able to monitor things closely and in real time, I think 

maybe that is a good aspiration in the future, but we have to realize, is that the best thing for the government to replicate things 

that are already in the marketplace? The SEC has subpoena power, 

it has ability to—and it should be working very closely with market 

participants to get this information should the government have 

that separately. And other ways, on national security issues and 

things like that, we don’t do everything always in the government 

realm. There is a lot of working together with people in the private 

sector as well, to make sure that things are kept up-to-date and, 

most importantly, that the expertise, which is always hard to get 

and very costly, that the government can tap into that when it 

needs it. 

62 

Mr. SCHWEIKERT. Mr. Atkins, starting with your side, sort of 

bouncing back to something you actually touched on in your, I 

think, opening statement, and I would like to run this through the 

whole panel. If you were to call out one or two functions or actual 

activities the regulator engages in that slows down, is a barrier to 

smaller organizations gaining capital, gaining economic growth, 

producing jobs which we are all fixated on here, what is that activity and, as a policymaker, how would you change it? 

Mr. ATKINS. I think the major one, frankly, is the threat of litigation. Now, we all know that it is important to have people out 

there, and the private securities litigation aspect in the United 

States is important because the government can’t be everywhere, 

and you have to rely to a certain extent on people out there to police the markets. But on the other hand, in the United States, I 

think it is hard to find anybody who would say that we don’t have 

a surfeit of these sorts of deleterious actions that, just through the 

threat, inhibits capital formation in the marketplace. So that, and 

then plus the red tape that is added through unnecessary filings 

and having to hire lawyers and other things, the costs in the marketplace, because of the threat of private litigation has increased 

for all sorts of market participants. 

Mr. SCHWEIKERT. Thank you, Mr. Atkins. Mr. Crimmins? 

Mr. CRIMMINS. Congressman, as the President said in the joint 

session last week, we have to cut the red tape, enable small businesses to raise capital and promote growth and create jobs, the 

problem is, Congressman, that we are putting Band-Aids on a system that was created in the 1930s for capital raising. We have a 

1933 Act providing for the registration of securities and marketing 

of securities that is a typewriter-era, telegraph-and-telephone type 

of world that has been created. 

We have exemptions from registration, obviously, and we can 

talk about those and rulemaking that the SEC could do, but I think 

you hit on it a little earlier when you said we are in an Internet 

world. We are in a really different world right now where we communicate differently, and there are ways to check on things and 

check on the validity of things that didn’t exist before. 

I would suggest that we at least consider, and I don’t presume 

to be an expert on this, but those who are, at least consider whether we could create in the whole capital formation area an entirely 

electronic platform where people, small businesses could access it 

cheaply with some advisers, but nowhere near the crazy costs that 

they have now to raise capital. An electronic platform where the information could be available to everybody, it could be widely disseminated, but also where there could be electronic verification 

where outside professionals, whether it is financial or lawyers or 

accountants or whatever, could likewise contribute electronically to 

the filing, so you would have that immediate verification of kind of 

real-time electronic reporting. Just an entirely different way of 

thinking of things. 

I think rather than putting Band-Aids on our 1933 system, which 

we have right now—and that is what we are doing, we are putting 

Band-Aids on a 1933 system. It is like repairing a 1933 car. I 

would suggest it is a very, very different era that we live in now, 

the electronic world; that those who are experts in this area tell us 

63 

how we can create an electronic platform that will be safe and secure for investors but that will also let the small businesses, the 

little start-up companies, raise capital cheaply. 

Mr. SCHWEIKERT. Thank you, Mr. Crimmins. Mr. Katz? 

Mr. KATZ. I have a slightly contrarian perspective on this. Again, 

over my years at the Commission, the Commission has tried on numerous occasions to create sort of so-called small markets, and they 

have never really worked that well. At some point, I sort of came 

to the sad conclusion that an IPO was not always the best way for 

a small company to raise the cash that it needs. And right now, 

given the problems in the banking industry, people are saying, 

maybe the IPO is the answer. And I keep thinking at various 

times, there have been these concepts of promoting venture capitalists, promoting business development companies, and I would suggest to you that— 

Mr. SCHWEIKERT. To that point, would that be raising the number of shareholders you can have before you have to— 

Mr. KATZ. That becomes a piece of it. My problem with the 500 

shareholder rule, frankly, is I hate on-off switch regulation, and I 

keep looking for gradations so that it doesn’t become such a dramatic shift from one to the other. And if there was some way to 

develop some sort of model where you had business development 

companies or some variation of that playing like lead shareholder 

or lead investor roles, with some potential for other investors to 

participate, that was an interim step before you become a fully listed company. Intellectually, it seems to me, something in the middle 

like that may be an interesting avenue. 

Mr. SCHWEIKERT. Okay, thank you. Mr. Pitt? 

Mr. PITT. Yes, I think we have a couple of problems. The first 

is, as has been mentioned, we are dealing with an antiquated set 

of foundational statutes, and most of the innovations over time— 

and it is not just for the SEC, it is in the banking area as well— 

have been by jury-rigging existing statutes to sort of get around 

some of the restraints. 

There is not enough attention paid to the fact that government 

is a service business, and when people have new ideas and they 

want to get to market and they have ideas, if they run into the 

kinds of bureaucracy and red tape that they do, they can’t get their 

ideas to market. 

So when I was in private practice, I saw people’s money dry up 

when the staff couldn’t get to those issues because they had other 

issues, and they didn’t know how to juggle their efforts. And so one 

problem is clearly the fact that the statutes are antiquated. 

Second, we have a system that is predicated now on reverse 

logic. If you look at what the most sophisticated investors want 

when they choose to invest their capital, they want current and future information. They are smart enough to know that if you give 

them projections and so on, they are going to have to discount some 

of that, but what they want is what is available now and what you 

are anticipating a year from now and back it up. What we give the 

public is retrospective information. So all the public gets is what 

has already happened. There is this huge disconnect. 

And I think the issues that arose with Facebook and Goldman 

Sachs point out exactly why our system is so bad. You had a comVerDate Nov 24 2008 18:41 May 18, 2012 Jkt 072603 PO 00000 Frm 00067 Fmt 6633 Sfmt 6633 K:\DOCS\72603.TXT TERRIE
64 

pany that was extremely valuable, and it thought it could raise $50 

billion, an unheard of amount for an IPO, without going through 

the SEC process, all because that process takes forever, it induces 

litigation, as Commissioner Atkins said, it requires red tape to get 

through the SEC and get your documents out, and it gives investors the most meaningless of disclosure; namely, what happened 

last year instead of what is happening today and tomorrow. 

Mr. SCHWEIKERT. That is actually helpful conceptually. And because I am out of time, the Chair is going to yield himself another, 

what do you think, 6 hours? Professor? 

Mr. VERRET. Yes, I think on this point, I am largely in agreement 

with the rest of the panel, and I think— 

Mr. SCHWEIKERT. Forgive me, Professor, did you say ‘‘unfortunately’’ or ‘‘fortunately?’’ 

Mr. VERRET. Fortunately, yes. I am in agreement with the panel 

I think on this, and I am particularly excited about the prospect 

of some of the bills that have been introduced on crowdfunding and 

reform of Reg A. And I would pay attention to, I think, what has 

been an unfortunate eventuality in most of the exemptions or reform of rules at the Commission, which is that an exemption is established and either at the beginning or as it is interpreted, it is 

eroded away. Either at the very beginning, an exemption is created, but to make use of the exemption you have to, for instance, 

in a number of regs, you have to issue reports that are maybe not 

audited but still have the same substance as the 10-Q or 10-K. 

In other words, I think we create exemptions sometimes in securities laws that aren’t really exemptions at all. And also in part, 

I think this issue goes to erosion of the exemption through litigation by the agency, and I think part of that goes to the heart of 

the lawyer dominance of the agency. Lawyers have a vital role to 

play at the SEC, and lawyers are always going to be maybe at the 

head of the table, but I think economists should be part of the conversation. 

Mr. SCHWEIKERT. Professor, you had to break my heart there, 

didn’t you? 

Mr. VERRET. Yes, right. But I think economists need to be part 

of the conversation, and I think we can learn a lot from the FTC 

in this. The FTC has a very analogous, in many way analogous 

mission: protect consumers versus investor protection. Different 

types of law that are enforced by those agencies, but in many ways 

analogous. We look at the FTC: 1,000 employees, almost 100 of 

whom are economists. At the SEC: 3,700 employees, about 30 of 

them, counting very liberally, are economists, right? Ten percent at 

the FTC versus about 1 percent at the SEC. I think that is a big— 

that is indicative of a problem. 

Mr. SCHWEIKERT. Gentlemen, why don’t we call it quits. I want 

to thank you for spending this time with us. You actually all are 

grazing an issue that I think is going to be really important, because it is one of those few occasions where I think both on the 

right and the left we have a common agreement that is emerging, 

whether it be the Reg A, whether it be some of the discussions 

about the cloud funding. And with the use of the Internet, does 

that create better public exposure, faster timing, a more current 

look, and is that sort of a more honorable future for the regulatory 

65 

body but also much more cost-effective? And our great hopes as we 

start to move into some of these more current discussions of capital 

formation, does that also provide us an opportunity to go to the 

next generation of regulatory? 

So if any of you ever come across articles or something you think 

we should read, please, send it to us. It is time we get our heads 

around this. 

The Chair notes that some Members may have additional questions for these witnesses that they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit questions to these witnesse and to place 

their responses in the record. 

With that, the hearing is adjourned. 

[Whereupon, at 3:10 p.m., the hearing was adjourned.] 

(67) 

A P P E N D I X 

September 15, 2011 

68 


72603.001
69 


72603.002
70 


72603.003
71 


72603.004
72 


72603.005
73 


72603.006
74 


72603.007
75 


72603.008
76 


72603.009
77 


72603.010
78 


72603.011
79 


72603.012
80 


72603.013
81 


72603.014
82 


72603.015
83 


72603.016
84 


72603.017
85 


72603.018
86 


72603.019
87 


72603.020
88 


72603.021
89 


72603.022
90 


72603.023
91 


72603.024
92 


72603.025
93 


72603.026
94 


72603.027
95 


72603.028
96 


72603.029
97 


72603.030
98 


72603.031
99 


72603.032
100 


72603.033
101 


72603.034
102 


72603.035
103 


72603.036
104 


72603.037
105 


72603.038
106 


72603.039
107 


72603.040
108 


72603.041
109 


72603.042
110 


72603.043
111 


72603.044
112 


72603.045
113 


72603.046
114 


72603.047
115 


72603.048
116 


72603.049
117 


72603.050
118 


72603.051
119 


72603.052
120 


72603.053
121 


72603.054
122 


72603.055
123 


72603.056
124 


72603.057
125 


72603.058
126 


72603.059
127 


72603.060
128 


72603.061
129 


72603.062
130 


72603.063
131 


72603.064
132 


72603.065
133 


72603.066
134 


72603.067
135 


72603.068
136 


72603.069
137 


72603.070
138 


72603.071
139 


72603.072
140 


72603.073
141 


72603.074
142 


72603.075
143 


72603.076
144 


72603.077
145 


72603.078
146 


72603.079
147 


72603.080
148 


72603.081
149 


72603.082
150 


72603.083
151 


72603.084