[Senate Hearing 110-1003]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1003
NOMINATIONS OF: NEEL KASHKARI, CHRISTOPHER
WALL, SHEILA MCNAMARA GREENWOOD,
SUSAN PEPPLER, JOSEPH MURIN, LUIS AGUILAR,
TROY PAREDES, ELISSE WALTER, DONALD MARRON, AND MICHAEL FRYZEL
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
ON
nominations of:
Neel T. Kashkari, of California, to be Assistant Secretary of the
Treasury, International Affairs
__________
Christopher R. Wall, of Virginia, to be Assistant Secretary of
Commerce, Export Administration
__________
Sheila McNamara Greenwood, of Louisiana, to be Assistant Secretary,
Housing and Urban Development, Congressional and Intergovernmental
Relations
__________
Susan Peppler, of California, to be Assistant Secretary, Housing and
Urban Development for Community Planning and Development
__________
Joseph J. Murin, of Pennsylvania, to be President, Government National
Mortgage Association
__________
Luis Aguilar, of Georgia, Troy A. Paredes, of Missouri, and Elisse B.
Walter, of Maryland, to be a Member, Securities and Exchange Commission
__________
Donald B. Marron, of Maryland, to be a Member, President's Council of
Economic Advisers
__________
Michael E. Fryzel, of Illinois, to be a Member, National Credit Union
Administration Board of Directors
__________
TUESDAY, JUNE 3, 2008
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.access.gpo.gov /congress /senate /
senate05sh.html
U.S. GOVERNMENT PRINTING OFFICE
50-404 WASHINGTON : 2010
-----------------------------------------------------------------------
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
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii MIKE CRAPO, Idaho
SHERROD BROWN, Ohio ELIZABETH DOLE, North Carolina
ROBERT P. CASEY, Pennsylvania MEL MARTINEZ, Florida
JON TESTER, Montana BOB CORKER, Tennessee
Shawn Maher, Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Amy S. Friend, Chief Counsel
Mark Osterle, Republican Counsel
Dawn Ratliff, Chief Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
C O N T E N T S
----------
TUESDAY, JUNE 3, 2008
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statements of:
Senator Bennett.............................................. 3
Senator Menendez............................................. 3
WITNESSES
Neel T. Kashkari, of California, to be Assistant Secretary of the
Treasury, International Affairs................................ 5
Prepared statement........................................... 50
Christopher R. Wall, of Virginia, to be Assistant Secretary of
Commerce, Export Administration................................ 6
Prepared statement........................................... 52
Sheila McNamara Greenwood, of Louisiana, to be Assistant
Secretary, Housing and Urban Development, Congressional and
Intergovernmental Relations.................................... 8
Prepared statement........................................... 54
Susan Peppler, of California, to be Assistant Secretary, Housing
and Urban Development for Community Planning and Development... 9
Prepared statement........................................... 57
Joseph J. Murin, of Pennsylvania, to be President, Government
National Mortgage Association.................................. 10
Prepared statement........................................... 60
Luis Aguilar, of Georgia, to be a Member, Securities and Exchange
Commission..................................................... 26
Prepared statement........................................... 63
Response to written questions of:
Senator Dodd............................................. 75
Senator Reed............................................. 78
Senator Carper........................................... 79
Senator Tester........................................... 80
Senator Crapo............................................ 82
Troy A. Paredes, of Missouri, to be a Member, Securities and
Exchange Commission............................................ 28
Prepared statement........................................... 65
Response to written questions of:
Senator Dodd............................................. 83
Senator Reed............................................. 91
Senator Carper........................................... 93
Senator Tester........................................... 94
Senator Crapo............................................ 95
Elisse B. Walter, of Maryland, to be a Member, Securities and
Exchange Commission............................................ 29
Prepared statement........................................... 67
Response to written questions of:
Senator Dodd............................................. 95
Senator Reed............................................. 99
Senator Carper........................................... 100
Senator Tester........................................... 101
Senator Crapo............................................ 102
Donald B. Marron, of Maryland, to be a Member, President's
Council of Economic Advisers................................... 31
Prepared statement........................................... 69
Response to written questions of:
Senator Dodd............................................. 102
Michael E. Fryzel, of Illinois, to be a Member, National Credit
Union Administration Board of Directors........................ 31
Prepared statement........................................... 70
Additional Material Supplied for the Record
Statement of Bob Dole, former Senator from the State of Kansas... 106
Letter to Chairman Dodd from the Security Traders Association.... 107
HEARING ON PENDING NOMINATIONS
----------
TUESDAY, JUNE 3, 2008
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 2:48 p.m., in room SD-538, Dirksen
Senate Office Building, Hon. Christopher J. Dodd (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order.
First of all, let me apologize to our witnesses. We just
had the family photograph taken over in the Senate, an annual--
I guess a--no, a biannual event. So we are a little bit late
getting started.
Let me thank all of you who are here today, thank our
nominees, and the audience that is here, as well as my
colleagues.
How we will proceed, we have got a busy afternoon. We have
got a lot of people before us. And so I am going to move
through an opening statement here rather quickly, turn to my
friend and colleague from Alabama, Senator Shelby, for any
opening comments he may have. Obviously, I invite my colleagues
for any thoughts they may have on the nominees, as well,
although I would encourage my colleagues to, if they could,
restrain themselves. I promise them all of their opening
statements in support or opposition to any nominee will be
included, so we might hear from our witnesses and move through.
We have got two panels of witnesses, so we have got a
crowded afternoon to try and cover an awful lot of ground.
This afternoon we meet to consider 10 of the President's
nominees for offices that are within the Committee--this
Committee's jurisdiction. I want to thank each of these
nominees for their willingness to appear before the Committee,
to serve our country, and welcome them, their families, and
their friends to the Senate Banking Committee.
I would also like to thank them, as I said a minute ago,
for their willingness to serve their country in the positions
for which they have been nominated. In my view, one of the
great virtues of our democratic system is that we allow, and
indeed encourage, private citizens to give back to their
country for periods of time as public servants.
All of today's nominees have made a decision to submit to a
nominating process, enter a term of service that can, in many
respects, be difficult even while at the same time immensely
rewarding. And for that, I commend each and every one of you
who are at the table today, and those who will follow you.
What is particularly noteworthy about these nominees is
that they have allowed their names to be placed in nomination
at the end of the current administration. With the possible
exception of 4 witnesses on the second panel, all of these men
and women understand that, if confirmed, they are likely to
serve a relatively brief amount of time. And yet while they may
serve only a brief time, there is much work to be done in that
time.
All of today's witnesses have been nominated to fill
offices whose missions involve--that addresses some of the
major economic challenges of our time. I have no doubt that
these witnesses are motivated, in no small measure, by a desire
to successfully address those very challenges during their term
of service.
This Committee has worked diligently to address many of
these same challenges, not only by developing and advancing
legislation but also by seeking to consider and confirm
qualified nominees. Thus far in the 110 Congress, we have
confirmed 13 nominees for positions in the administration. As
my colleagues know, last December we were prepared to move 3
additional nominees through the Senate but they were blocked
for reasons unrelated to the merits of the nominees themselves.
Similarly, 12 days ago, on the same day as his confirmation
hearing, the Committee was prepared to move the Senate
confirmation of Steven Preston's nomination to serve as
Secretary of the Department of Housing and Urban Development.
Regrettably, that nomination was blocked for reasons unrelated
to Mr. Preston's qualifications either. I am hopeful that he
will be confirmed, by the way, in very short order. We need a
Secretary of HUD.
With that, let me say a brief word about this afternoon's
first panel of nominees. Our first nominee is Mr. Neel----is it
Neel?--Neel Kashkari of California, to be Assistant Secretary
of the Treasury for International Affairs. This position was
created as part of the Foreign Investment and National Security
Act, which was passed unanimously by this Committee and signed
into law in the first session of this Congress.
Mr. Kashkari currently serves as a Senior Advisor to
Secretary Paulson, and prior to coming to Treasury Department
he worked as Vice President of Goldman Sachs and Company.
Next on the panel is Mr. Christopher Wall of Virginia, to
be Assistant Secretary of Commerce for Export Administration.
Mr. Wall currently serves as the Senior International Trade
Partner of the law firm Pillsbury Winthrop Shaw Pittman. Prior
to this, he served as the firm's managing partner.
Ms. Susan Peppler of California has been nominated to be
the Assistant Secretary of Community Planning and Development
at the Department of Housing and Urban Development. Ms. Peppler
currently serves as the Deputy Associate Administrator in the
Office of Intergovernmental Affairs at the General Services
Administration. Prior to holding that position, she served as
Mayor of the city of Redlands, California. Earlier in her
career, she served as a public affairs specialist at State Farm
Insurance. So we thank you for being with us.
Next we have Ms. Sheila McNamara Greenwood of Louisiana, to
be the Assistant Secretary for Congressional and
Intergovernmental Affairs. Ms. Greenwood currently serves as
the Deputy Chief of Staff at the Department of Housing and
Urban Development and previously she served as the Director of
Legislative Affairs in the Office of the Federal Coordinator
for the Gulf Coast Rebuilding at the Department of Homeland
Security. Earlier in her career she served as the Senior
Legislative Officer in the Office of Congressional
Intergovernmental Affairs at the Department of Labor.
Mr. Joseph Murin of Pennsylvania has been nominated to be
the President of the Government National Mortgage Association,
also known as Ginnie Mae. Mr. Murin previously served as
President and Managing Partner of the Mortgage Settlement
Network. He is the former Chief Executive Officer of the
Basis100 Corporation. Earlier in his career he served as
President and Chief Executive Officers of Lender's Service
Incorporated.
I look forward to the testimony of our witnesses.
Before I ask you to take an oath here, let me turn to my
colleague from Alabama. Senator Shelby.
Senator Shelby. Chairman Dodd, to move on this afternoon I
would like to ask that my entire statement be made part of the
record, and we can move on with the people hopefully.
Chairman Dodd. I thank you for that.
Do any of my colleagues want to be heard?
OPENING STATEMENT OF SENATOR ROBERT F. BENNETT
Senator Bennett. Yes, Mr. Chairman, I apologize that I will
have to leave before we get to the second panel and simply want
the record to reflect that Donald Marron, who is a nominee for
the President's Council of Economic Advisors, served as the
Chief of Staff for the Republicans on the Joint Economic
Committee when my assignment was to be Vice Chairman of that
Committee. And he served with great distinction. He is an
excellent economist. The President has made a very wise choice.
And I hope the Committee will confirm him unanimously.
Chairman Dodd. Thank you, Senator. I appreciate that very
much.
Senator Menendez. Mr. Chairman.
Chairman Dodd. Yes.
OPENING STATEMENT OF SENATOR ROBERT MENENDEZ
Senator Menendez. Mr. Chairman, I just want to--I hope I
can stay for the second panel. But Luis Aguilar is one of the
nominees to the Securities and Exchange Commission. I have
known Luis for a very long time. He is an excellent attorney,
someone who has developed a strong background in the securities
field, and who is the type of balance that we need on the
Securities and Exchange Commission to fulfill the mission that
I think the Commission has and that members of this Committee
believe in. And we certainly need a full quorum of that
Commission, which has lacked the ability I think to move
forward in a way that is important, particularly at a critical
time in the Nation's securities field.
So I look forward to hopefully his successful process here
and his moving forward.
And finally, Mr. Chairman, I am happy to see that the
Administration has nominated someone who actually, in addition
to having the qualities, continues to provide some diversity in
these fields. Roel Campos was the former Securities and
Exchange Commissioner, and the first Hispanic ever to be
nominated to that position. I am glad to see the Administration
has done the same, somebody very qualified to fulfill his
replacement.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator.
If I could ask our witnesses to rise and raise your right
hand while I administer the oath of office--not the oath of
office, excuse me.
[Laughter.]
I am a little ahead of myself here. Just another day we are
in today.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you god?
Mr. Kashkari. I do.
Mr. Wall. I do.
Ms. Greenwood. I do.
Ms. Peppler. I do.
Mr. Murin. I do.
Chairman Dodd. And do you agree to appear and testify
before any duly constituted committee of the U.S. Senate?
Mr. Kashkari. I do.
Mr. Wall. I do.
Ms. Greenwood. I do.
Ms. Peppler. I do.
Mr. Murin. I do.
Chairman Dodd. I thank you for that.
Let me ask you all, if I could just briefly before we
begin, because it is always a day of great import for families.
Beginning with you, Mr. Kashkari, any family members here you
would like to introduce to the Committee?
Mr. Kashkari. Yes, thank you, Mr. Chairman.
My wife Minal is seated right behind me. She is here with
me.
Chairman Dodd. Very good, welcome. Mr. Wall.
Mr. Wall. My wife, Barbara is here today with me. My two
children, Read and Louisa, are college age. They are embarked
on great adventures and projects this summer and unfortunately
could not be here today.
Chairman Dodd. Very good. Ms. Greenwood.
Ms. Greenwood. You will be sorry you asked. My mother, my
husband, my son, two sisters, and several friends are here
today.
Chairman Dodd. Is anyone not with the Greenwood family?
Ms. Greenwood. No.
[Laughter.]
Chairman Dodd. I just wanted to check on that. Ms. Peppler.
Ms. Peppler. Thank you. I am honored to introduce my
husband, Bob, and our two granddaughters here visiting with us
for the summer here in Washington, D.C.
Chairman Dodd. Terrific. Welcome, glad to have them here.
Mr. Murin.
Mr. Murin. Yes, I am with Sheila.
[Laughter.]
Chairman Dodd. We did not know that ahead of time.
Mr. Murin. I think we have the whole audience.
I have my wife, Angela, my daughter, Shannon. And I am
fortunate enough to have my mother and father in the audience,
along with my two brothers today.
Chairman Dodd. Welcome. We are delighted they are all here.
It is a moment of great import.
I want all of you to know that your written statements and
any material you think would be pertinent for the Committee
will be included in the record as part of your remarks, and
that is also true of my colleagues here as well. I want to
thank you for joining us today.
We will begin with you, Mr. Kashkari. Try and keep your
remarks, if you can, to about 5 minutes so we can move along
and get to the questions.
TESTIMONY OF NEEL T. KASHKARI, NOMINEE, TO BE ASSISTANT
SECRETARY OF THE TREASURY FOR INTERNATIONAL AFFAIRS
Mr. Kashkari. Thank you, Mr. Chairman.
Chairman Dodd, Ranking Member Shelby, and members of the
Committee, I am honored to appear before you today as the
President's nominee to serve as Assistant Secretary of the
Treasury for International Affairs.
Please allow me to express my gratitude to the President
and to Secretary Paulson for the confidence and trust that they
have shown in me. I would also like to thank you for your
consideration of my nomination. And, as I just did, I would
like to thank my wife, Minal, who is here with me today, for
her continuous support of my career and my public service.
If confirmed, I look forward to working closely with this
Committee, with your colleagues in the U.S. Senate, and in the
U.S. House of Representatives, to advance U.S. economic
interests at home and abroad.
I would like to briefly discuss my experience and how it
has prepared me for the position to which I have been
nominated. In my role as Senior Advisor to Secretary Paulson, I
have been responsible for developing and executing several
international and domestic policies for the Department to
foster a more conducive investment climate for the U.S., as
well as to support global economic growth.
Prior to my Government service, I worked as an investment
banker, where I executed financial and strategic transactions
that have also prepared me for the position to which I have
been nominated.
Since joining the Treasury Department in July 2006, I have
led several policy initiatives for the Department, including
No. 1, promoting Indian financial sector liberalization and
free trade through strengthened economic engagement and
increased infrastructure investment.
Two, enhancing U.S. energy security by implementing
policies that will, over time, reduce our exposure to the
global oil market by encouraging the development of alternative
fuels and by improving the efficiency of our auto fleet.
And No. 3, spearheading our response to the housing crisis
by mobilizing the private sector to avoid preventable
foreclosures and working to ensure the flow of capital to the
housing market going forward, enabling the housing correction
to move forward as quickly as possible, while minimizing
spillover from housing to the rest of the real economy.
Prior to joining Treasury, I was a Vice President at
Goldman Sachs, where I advised U.S. and international companies
on both debt and equity financings as well as global mergers
and acquisitions. As an advisor to management teams and boards
of directors, I gained firsthand insight into the challenges
that U.S. companies face as they strive to access markets
abroad as well as competing with global players here at home.
This transactional experience will be particularly
important to help implement our critically important investment
security policy through the Committee on Foreign Investment in
the U.S. I will work hard to ensure that our national security
interests are protected, while maintaining an open investment
climate.
Prior to joining the financial services industry, I
strengthened my analytical skills as an aerospace engineer,
developing technology for future NASA space science missions,
such as for the James Webb Space Telescope, that is due to
launch in 2013.
My educational background includes a Bachelor's and
Master's degree in engineering from the University of Illinois
at Urbana-Champaign and an M.B.A. in finance from the Wharton
School.
If confirmed, I look forward to working with the
administration, with the Congress, and with my colleagues at
the Department of the Treasury to promote global economic
growth, financial market stability, and open markets for U.S.
goods and services.
Mr. Chairman, Senator Shelby, and members of the Committee,
I am grateful for the opportunity to appear before you today. I
would be very pleased to answer any of your questions.
Chairman Dodd. Thank you very much.
Mr. Wall.
TESTIMONY OF CHRISTOPHER R. WALL, NOMINEE, TO BE ASSISTANT
SECRETARY FOR EXPORT ADMINISTRATION, U.S. DEPARTMENT OF
COMMERCE
Mr. Wall. Chairman Dodd, Senator Shelby, and Members of the
Committee, it is a great honor as well for me to be here today
as the President's nominee for the position of Assistant
Secretary of Commerce for Export Administration.
I thank the President and Secretary Gutierrez for their
confidence and trust in me.
I would also like to thank the members of the Committee's
staff who have taken the time to meet with me prior to today's
hearing.
If confirmed, I look forward to building on the cooperative
working relationship between the Bureau of Industry and
Security and this Committee.
Of course, I would like to thank my wife, Barbara, as well,
who is here.
Mr. Chairman, I recognize the importance of the obligation
that I will be undertaking, if confirmed. BIS plays a critical
role in advancing U.S. national security, foreign policy and
economic objectives by ensuring an effective export control and
treaty compliance system, while at the same time facilitating
continued U.S. strategic technology leadership.
For close to thirty years, I have had the opportunity to
work on and examine these important issues as a partner at a
large international law firm. I have advised clients on export
controls and other international trade matters. I have also
been active in professional organizations addressing these and
other international trade matters and have chaired and spoken
frequently at conferences which promote a dialog between
industry and Government leaders.
Of course, as a practicing attorney, one is professionally
obligated to focus on the interests of one's clients, but more
important is an obligation to the law itself. The focus of my
practice has always been on assisting clients to comply with
and to achieve results that are consistent with the laws and
guidance in this complex area. At the same time, my continuing
involvement in professional and other organizations has also
enabled me to focus on the larger policy issues that inform
this area. I believe this focus has made me a better counselor,
and has better prepared me to address these issues from the
perspective of a policymaker, if confirmed.
One of the highest priorities in the near term is the
passage of S. 2000, the Export Enforcement Act of 2007. I
believe I can speak on behalf of the entire exporting
community, Mr. Chairman, in thanking you for introducing this
legislation to reauthorize the Export Administration Act. The
legislation is essential to provide the tools for vigorous
enforcement. It is important for the rule of law and good
government.
The threats we face today are very different from those
that we faced when the Export Administration Act was enacted,
principally terrorism, non-state actors, and the proliferation
of weapons of mass destruction.
The economic realities we face today are very different, as
well. Crafting legislation that addresses these 21st century
issues is a task that cannot realistically be accomplished in a
short period of time but I would hope, if confirmed, to play an
active role in stimulating discussion with all parties and to
start the process of building a consensus or at least a broadly
shared approach that may lead to enactment of such legislation
in the foreseeable future.
Even within the existing system, however, important efforts
are underway to address these new threats and economic
realities. These efforts include the President's export reform
initiative, responding to the recommendations of the Deemed
Export Advisory Committee, and continued focus on illegal
transshipment concerns. If confirmed, I would hope to
contribute the knowledge and experience I have acquired over
the years to advancing these efforts and, where possible,
bringing them to a successful conclusion.
If confirmed, I look forward to contributing this knowledge
and experience to the service of our country. I welcome the
opportunity to work with the Committee on these important
initiatives in this area, and I would like to thank the
Committee for its consideration of my nomination.
I would be pleased to answer any questions.
Chairman Dodd. Thank you, Mr. Wall.
Ms. Greenwood.
STATEMENT OF SHEILA MCNAMARA GREENWOOD, NOMINEE, TO BE
ASSISTANT SECRETARY FOR CONGRESSIONAL AND INTERGOVERNMENTAL
RELATIONS, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Ms. Greenwood. Chairman Dodd, Ranking Member Shelby, and
distinguished members of the Committee, thank you for inviting
me to appear before you today. I am both honored and humbled to
come before you as the nominee for the position of Assistant
Secretary for Congressional and Intergovernmental Relations at
the U.S. Department of Housing and Urban Development.
I would like to express my gratitude to President Bush for
nominating me for this position and am grateful for the
confidence he has placed in me. Interestingly, in over 15 years
of working before Congress, I have either prepared a witness,
written the testimony, or both, any number of times. And I
realize that, up until today, I have been in the cheap seats.
This actual being the witness is a far more daunting prospect
and I have newfound respect for all those I have cajoled to a
witness table over the years.
I also would like to again thank my husband, and our son,
Tripp, who are here today. I must take this time to thank my
husband for all of his patience and support throughout my years
in this Administration. He and my son are my proudest
accomplishments.
In the course of my years working before Congress on a wide
range of topics, I became increasingly interested in housing,
specifically while working on the rebuilding of the Gulf Coast
after Hurricanes Katrina and Rita. I was the Director of
Legislative Affairs for the Office of Gulf Coast Rebuilding,
Chairman Donald Powell, and worked closely with HUD on one of
the more daunting post-hurricane challenges: which was finding
housing for so many after the diaspora.
Through that assignment, I came to better realize the true
meaning of home and the complex socioeconomic factors that go
into both where and how families live across the United States.
The Assistant Secretary for Congressional and
Intergovernmental Relations at HUD is the primary resource to
the Congress for the information it needs in carrying out its
Constitutional responsibilities. I have a proven history of
above-board and honest discourse with members and their staff
and plan to maintain that open dialog in the Assistant
Secretary's position, should I be confirmed. It is my promise
before you today to work tirelessly and expeditiously in the
remaining months of this Administration to ensure that the
information you request from HUD is provided in a timely and
thorough fashion.
Clear and thoughtful information allows us to work together
on the myriad of legislative initiatives that remain and to
better inform the difficult policy choices before us all.
I last want to take this opportunity to thank my family and
many friends who are here today. My sisters, brother and
parents have always been there for me over the years and I am
eternally in their debt.
Mr. Chairman and Senators, thank you again for your time
and your courtesy in listening to my remarks, and I am happy to
answer any questions you might have.
Chairman Dodd. Thank you very much.
Ms. Peppler.
STATEMENT OF SUSAN PEPPLER, NOMINEE, TO BE ASSISTANT SECRETARY
FOR COMMUNITY PLANNING AND
DEVELOPMENT, DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT
Ms. Peppler. Thank you.
Good afternoon Chairman Dodd, Ranking Member Shelby, and
distinguished members of the Committee. It is a true honor and
privilege to appear before you today as President Bush's
nominee for Assistant Secretary for the Office of Community
Planning and Development at the Department of Housing and Urban
Development.
I would like to thank the Committee members and your staff
members for taking the time to meet with me over the past few
months, and if confirmed, I look forward to continuing frequent
and open communication to address affordable housing and urban
issues facing our Nation today.
HUD is a good organization that needs to be reinvigorated
with strong leadership. And while I realize there is but a
short amount of time in which my colleagues and I can effect
positive change, I can assure the Committee that I will roll up
my sleeves and make significant contributions with the time
that I am given.
With over 17 years of experience in affordable housing and
community development, I bring strong leadership qualities from
the grassroots, community and executive levels, as well as a
unique perspective and understanding of HUD programs and their
effect on families and communities.
I first became interested in housing issues during the
early 1990s, when I became involved with a HUD-affiliated non-
profit organization called Neighborhood Housing Services of the
Inland Empire. I initially joined Neighborhood Housing as a
volunteer, working with them on the weekends with neighborhood
clean-up and revitalization projects, home repairs, et cetera.
After seeing first-hand how successful the program was and what
a positive difference it made in many communities, I joined
Neighborhood Housing's Board of Directors and became involved
in the administration and management of the organization's
programs, including Neighborhood Revitalization/Rehabilitation,
Homebuyer Education, Downpayment Assistance, and the Youthbuild
job training program.
Working from the grassroots level up to the business and
financial side of this organization, I developed a deep
appreciation for the important role homeownership plays in
fostering strong, healthy and safe communities.
During my nearly 8 years on the Redlands City Council and
as Mayor, I took that hands-on education in community
revitalization and housing, together with the program and
business knowledge I gained as an Executive Board Member at
Neighborhood Housing, and put it to work in our city.
One of my top priorities as Mayor was the improvement of
the city's affordable and multi-family housing stock. By
working with the community, establishing and building
relationships, we developed an improvement plan of action. The
city began cracking down on absentee landlords whose property
had fallen into disrepair and substandard condition. Through
enforcement of building and safety codes, including placing
non-responsive homeowners' properties in receivership, our
neighborhoods began to improve.
The city utilized several HUD programs, including Community
Development Block Grant funds, to improve the properties and
assist some of the apartment renters in becoming homeowners.
Additionally, we began improving economic development by
promoting small business ownership and recruiting larger
businesses to the area, which created jobs, accomplishing a
dramatic positive change in a community that had been neglected
for generations.
I have also had the honor of serving for 4 years as a
member of the Governor's Task Force on Affordable Housing, and
as the League of California Cities' Director of Housing, Inland
Empire Division. The Task Force studied the lack of affordable
housing in California, developed innovative solutions, and made
recommendations to the Governor and state legislature. Our work
to update the State's housing laws led to the use of tax
increment financing to provide incentives for the development
of low-income and affordable housing, bill language that
clarified and strengthened the anti-NIMBY law relating to the
approval of affordable housing projects, and the ability for
cities to receive housing credits for rehabilitation of
existing affordable housing stock.
As I mentioned, I bring a unique perspective and
understanding of HUD programs, as I have seen firsthand how
those programs change the lives of children, their families and
our communities. I also know firsthand the benefit of CPD
programs on local and State government. Simply put, these
programs work.
From working with HUD programs as a grassroots volunteer,
to my involvement in the financial management of HUD programs
through NHSIE, to implementing and managing affordable housing
and economic development programs as Mayor, to effecting change
in housing and economic development laws at the state level, I
believe I have the experience of leadership, teamwork and
commitment needed to serve as the Assistant Secretary in the
Office of Community Planning and Development.
I thank you for this opportunity to address the Committee
and I look forward to your questions.
Chairman Dodd. Thank you very, very much.
Mr. Murin.
STATEMENT OF JOSEPH J. MURIN, NOMINEE, TO BE PRESIDENT OF THE
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GINNIE MAE),
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Murin. Chairman Dodd, Ranking Member Shelby, and
distinguished members of the Committee, I sincerely appreciate
the opportunity to appear before you today. Thank you, Chairman
Dodd, for your kind words of introduction, and thank you to all
of the members of the Committee and their staffs who have met
with me over the last few months. Those meetings have provided
valuable insight into the position for which I have been
nominated.
It is a privilege to appear before you today as President
Bush's nominee for the position of Ginnie Mae President. I
bought my first home with an FHA-insured loan. I have spent my
entire career in the housing industry, from lending to back
office operations and even construction. For a man who has
worked in just about every job in the housing and mortgage
finance industry, it is an honor to seek your confirmation as
president of an organization I consider critical to sustaining
and promoting homeownership opportunities in America.
They say behind every successful man is a woman. My wife,
Angela, is here today. Without her love and support, I simply
would not be here today, nor would I have my wonderful family
or enjoyed such a successful career. It has been a 37-year
partnership between us, and I would be remiss if I did not
thank her for her steadfast love and support.
Angela and I bought that first FHA home in 1977. Since
then, because my career required it, we have moved 7 times. In
every new city, we designed and built a home. We understand the
importance of owning a home, how it ties you to your community,
how children benefit from the stability it provides, and the
manner in which it helps to build wealth. That is why I believe
in homeownership and I am committed to helping others achieve
the dream of owning a home.
But homeownership is not just about families and
communities. For the last few years, it has served as the
primary engine of our economy. Buying, building, renovating,
all of these have a tremendous impact on jobs growth and sales
revenue, the heart of the economy in our cities and towns. It
is not just local economies that are helped or hurt by whether
a family can afford to buy a home. National and international
credit markets are also affected. We are witnessing this today.
The mortgage-backed securities industry is the reason local
housing markets impact international credit markets. In 1971,
Ginnie Mae issued the first ever mortgage-backed security. In
doing so, they revolutionized the way housing is financed.
Because an investor in Asia can buy into a pool of U.S.
mortgages, a family in Pennsylvania can own a home.
It has been 30 years since Ginnie Mae issued the first MBS.
The industry has evolved enormously since then. In the 1980s, I
ran a mortgage bank. Government loans were our bread and
butter. My loan officers fed their families on the income
received from processing FHA and VA loans. But as capital
became more available through the growth of the MBS industry,
interest in government products declined.
Today, that is no longer true. The housing market is much
different. The MBS that spurred investment in real estate is
less attractive to investors. Home values are declining and
foreclosure rates are increasing. Consequently, it has become
more difficult for low- and moderate-income borrowers to obtain
a mortgage.
The industry has come full circle on its view of
government-insured loans. There is recognition that FHA and
Ginnie Mae are important elements of a diverse housing finance
system, necessary elements when credit tightens.
We are at a turning point in this industry, and Ginnie Mae
is in a unique position to help the industry navigate its way
through those challenges. Leading the agency at this critical
juncture would be a formidable opportunity, and yet it is one I
look forward to because it is a role that brings together a
lifetime of skills. More than 35 years in this industry--in the
title business, in building, and in banking--have provided me
with invaluable insight into its inner workings, insight that
will guide decisionmaking at Ginnie Mae.
Ginnie Mae's mission is to expand affordable housing by
linking the global capital markets to the Nation's housing
markets. That mission is about making the connection between
local communities and international economies, never forgetting
that behind the current discussion of credit crunches and
fluctuating markets is a family that wants to buy a home or
keep the one it has.
If confirmed, I will be committed to that mission, to
drawing the link between homeownership, strong communities, and
a thriving economy.
Ginnie Mae may be in the best position to meet its mission
since its inception. Even with the challenges that we face
today, we can continue to help American families become
homeowners. Like the thousands who labor daily at HUD, I
respect and care deeply about its programs, and I am committed
to making a difference in lives throughout America. It would be
an honor to participate in HUD's efforts as President of Ginnie
Mae.
Mr. Chairman and Senators, thank you for your courtesy in
listening to my remarks. I will be happy to answer any
questions you may have.
Chairman Dodd. Well, thank you very much, and I thank all
of you for your statements and also the brevity of them, I
appreciate that in terms of our ability to move along. I will
take a few minutes. I will ask the clerk to--why don't you put
5 minutes up on the clock here, and we will try and keep to
that time, if we can. And let me also just suggest to you at
the outset that because of the number of you here and the
second panel coming, I am going to leave the record open for
several days for questions to come from colleagues, either who
are here or are not here, to raise with you. And the quicker--I
will not leave it open forever. I will leave it open for a few
days. And I would urge you to respond as quickly as you can so
that we can create the possibility of moving these nominations
along should my colleagues so desire.
With that, let me turn to you, Mr. Kashkari, if I can, and
the position you have been nominated for was created in part by
the legislation this Committee adopted, as I pointed out in my
opening statement, unanimously, and was signed into law last
year. It all began, I think, as a result of the Dubai Ports
issue that emerged, and then the question was whether or not we
could balance the interests of attracting foreign investment
and also maintaining the security of the country. So you have
been nominated for a position that was created by this
Committee, and a very short time ago, and a very important
issue to all of us here.
So I would like you, if you could, to discuss the
importance of this new law and your commitment to the
appropriate enforcement of it, and aside from the specific
duties that this legislation would require, I would like to
comment as well on how you envision as the regional
responsibilities associated with this post that may require
greater engagement in various parts of the world--the Middle
East, Latin America, Africa, Asia. Share with us your thought
about that as well as the specific duties.
Mr. Kashkari. Thank you, Mr. Chairman. There is no question
that our responsibilities under CFIUS are of paramount
importance and striking the balance, making sure our national
security is protected, while also encouraging foreign
investment in the U.S., which helps creates jobs.
Let me just give you a little background. One of my
colleagues, Assistant Secretary Lowery, has been leading our
work on CFIUS and will continue to do so. As you can imagine,
over the past few years the case volume has really increased,
and the workload has increased, the staffing has increased. So
I'm going to be joining the team to help carry some of the
caseload and leading individual cases as appropriate.
But in my job, if confirmed, working with the regional
offices within Treasury and, as you said, going to the Middle
East or going to Asia, I think part of our responsibility and
part of our opportunity is to help educate other countries to
make sure that they put the right foot forward. How can they be
more transparent in their own investment decisions? Think about
the issue of sovereign wealth funds. We are working with the
IMF right now to try to put together a set of best practices to
get the sovereign wealth funds to make sure that they are
transparent in their motives and they are making investment
decisions for commercial reasons only.
So I think not only is CFIUS really important in terms of
protecting us and finding the right balance, I think our
responsibility at Treasury is to help educate potential
investors around the world how they can behave in a more
responsible manner.
Chairman Dodd. Let me just in that regard--because there
are very specific triggers in the legislation. Just over the
last year or so, there have been--you can gimmick and game the
triggers a little bit. It is not just the letter of the law but
the spirit as well, and I wonder if you might address this,
because I have recommended in a couple of cases where I have
been asked as to whether or not--while not meeting the
thresholds, whether or not it would make some sense just to
make the Department aware of some transactions going forward.
And while they would not be required specifically under the
law, the idea, again, of transparency, of a spirit of trying to
make sure that we are not gaming the system in some way to
avoid the balance and creating the very perceptions we were
trying to avoid with the legislation.
I wonder if you might comment on that, if you would.
Mr. Kashkari. Chairman, I will be honest, I have not
drilled into as much depth because this has not been where I
have been spending my time at Treasury. If confirmed, I will
get into it in a lot of detail, as you can imagine. I think
everything that you have said in the spirit of we agree with. I
can't comment on the specific triggers that you are talking
about just because I haven't spent my time there. But I would
be happy, if confirmed, to follow up with you in more detail.
Chairman Dodd. Well, I would appreciate that, and I think
you might want to do that. Again, I am not interested in
changing the law in any way, but make sure we do exactly what
you have described here, and that is to make sure this works so
that people understand that we want the investments to come, we
want them for commercial reasons. We also want the ability to
be able to have that transparency to make sure that we are not
falling prey to some of the problems that can arise.
Mr. Wall, thank you again for being willing to step
forward. For over two decades, you have practiced export law
exclusively in the private sector, representing companies
seeking licenses either from the State Department to export
weaponry or from the Commerce Department to export dual-use
technology. I wonder if you might discuss with us the
appropriate balance that you see made in the area of export
administration between protecting our national security--not an
unrelated question--and ensuring expeditious licensing
procedures for U.S. companies, sort of the same line, in a way,
that I asked Mr. Kashkari.
Mr. Wall. Yes, thank you, Mr. Chairman. The fundamental
premise, of course, of the Export Administration regulations,
the whole reason for regulating exports from the United States,
is, of course, to protect national security as well as U.S.
foreign policy interests in some cases. But at the same time,
there is a balance, as you note, that is critical to find in
every case, in every issue that arises before the agency, of
doing so in a way that addresses that particular national
security or foreign policy concern, but also in a way that
doesn't squelch, doesn't stifle economic development, the
ability to export. Exports are, of course, a powerful source of
jobs and economic development in the United States. And that,
of course, is something that as a policymaker, if confirmed, I
would want to ensure that we continue.
But the foundation, of course, is to focus on the national
security issues that arise in transactions and to drill down
and understand exactly what those issues are. And in some
cases, it is simply not possible to continue the business
because the risks are not able to be addressed. But where they
can be addressed, I would hope that they could be, and that is
something that I would certainly focus on in my position, if
confirmed.
Chairman Dodd. Let me, if I can, on your Committee
questionnaire, you discussed your role in the licensing dispute
between the State Department and two U.S. aerospace companies
who were fined a total of $22 million in civil penalties. In a
2004 Export Practitioner article, you suggested that this case
demonstrated the challenges of determining whether export
licenses should be sought from State or Commerce, and I wonder
if you might comment on whether or not you think the State
Department's characterization of your licensing practices is
now outdated because of subsequent regulations issued by the
Department of State and Commerce. And if so, how?
Mr. Wall. Well, thank you, Mr. Chairman. Yes, the State
Department and I certainly had a disagreement over that
particular issue. It had to do with the commodity jurisdiction
over a civil avionics device, civil certified, used in
virtually every civil aircraft that flies in this country. And
there is, frankly, a lack of clarity in the jurisdiction
between which agency, the State Department or the Commerce
Department, controls the export licensing of those items.
Now, back then--this is probably 1999, 2000--the State
Department had never before asserted the position that it had
jurisdiction over civil commercial end items containing what
would be termed ``defense article components,'' the so-called
see-through rule. This is something that had never been
announced, never been published, never been spoken about in any
sort of guidance.
We prepared a commodity jurisdiction request to confirm the
determination with respect to this particular item, fully in
compliance with all published rules, regulations, and guidance.
And yet, 4 years later, the State Department came back and
said, well, it did have this jurisdiction over defense articles
incorporated in civil end products, and that the information in
that request wasn't fully--it didn't fully disclose the
contents.
Obviously, we disagreed. It fully complied with all
regulations. The State Department was simply looking back,
changing its mind after the fact, expecting us perhaps to be
mind readers. I don't know. But in any case, it has been my
position, as I wrote in that particular article, that I thought
the effort to enforce an unpublished rule retroactively is
simply not consistent with due process.
But, be that as it may, that is a historical footnote. That
was 8 years ago. The jurisdiction over these components has
still been an issue over these years. And, interestingly, as a
result of recent very good work between the Department of
Commerce and Department of State, those issues have been to a
certain extent clarified. Those regulations as they currently
exist are essentially the same regulations that I and other
practitioners in the area assumed existed back in 1998. It has
been a period of controversy, a period of evolution, and those
rules have now become clarified. And certainly if confirmed, I
would hope to continue that effort, to try to clarify----
Chairman Dodd. Are they clarified to your satisfaction?
Mr. Wall. Well, to a large degree, yes. There are certainly
questions that companies have regarding the fine points, but in
essence, the issue is that a civil aerospace item that is
certified by the FAA, that is integral to the operation of the
aircraft, is essentially going to be considered a Commerce
Department jurisdiction matter as opposed to State Department
jurisdiction, unless there are certain specific criteria that
are articulated, such as whether it is considered to be an item
of significant military equipment, or unless there is some
doubt. But the point is that for most garden variety, what I
would call aerospace component matters, there will be
significantly greater clarity in knowing which agency has the
jurisdictional control. And those items that are essentially
military or have military origins or are used in military
activities are properly licensed by the State Department. That
is the way the jurisdictional issues divide themselves. But
there is absolutely room for greater coordination, for greater
transparency, and greater cooperation between the two agencies
in dealing with close cases, cases where there are some doubts,
so that companies can have certainty in knowing the type of
business they can conduct.
Chairman Dodd. Well, thank you, and that is obviously a
very important point and issue for all of us.
Ms. Greenwood, you have been nominated to fill a position
that is responsible for ensuring that Congress has accurate and
timely information, and we have had some difficulty in
obtaining accurate and timely information from the Department
in the past. That information we request of the Department is
obviously vital to our oversight function. You may have been
familiar that we raised this issue back in previous hearings
about having access to that information, and I will ask you
here because it is very important that you would commit to give
this Committee the data and information that we request in a
timely fashion.
Ms. Greenwood. Absolutely, Senator.
Chairman Dodd. I thank you for that. Also, I understand you
spent almost the last 2 years working on Gulf Coast recovery
efforts----
Ms. Greenwood. Yes, sir.
Chairman Dodd [continuing]. And have continued to work
since joining HUD. And as you know, the ability of people who
are displaced to return home depends on there being housing
available and affordable to them.
Last year, I introduced with Senator Mary Landrieu of
Louisiana the Gulf Coast Housing Recovery Act, which would have
provided funds to replace assisted housing that was destroyed
in the hurricanes of 2005. And since coming to HUD, have you
had an opportunity to play a role in how affordable housing is
rebuilt in the Gulf Coast? And do you have an opinion as to
whether more needs to be done to replace assisted housing that
was destroyed as a result of the hurricanes?
Ms. Greenwood. The affordable housing has been the slowest
and the hardest component to come back. I mean, the two bigger
States, Louisiana and Mississippi--in terms of monies, I should
say--both chose to triage their programs. They gave money to
homeowners first, and so unlike a major metropolitan area,
these are for the most part rural areas. So unlike New York
City, where you have large apartment buildings that are
primarily owned by investors and businessmen, you had a lot
of--in New Orleans, we call them ``duplexes'' or ``triplexes''
or ``four-plexes''--that, you know, somebody owns, but they
themselves lost their own house. And so the small--both States
have--I think Louisiana now has roughly $1 billion committed to
small, affordable renting programs, and Mississippi has about
$250 million, and Haley Barbour has promised to do more if
necessary.
I think that that has been in the triage--I mean, the Road
Home Program was slow to get checks out the door, and so if you
are the homeowner who lost both your home and your rental
properties, your first priority, of course, is going to be to
repair your house, and then you will get to doing your
affordable rental houses.
So as of today, I know that it is an ongoing problem in the
Gulf Coast, specifically in New Orleans. It is our hope that as
time goes on, that the monies start moving more rapidly and the
States shift their focus away from the homeowner portion of it
and into the affordable rental programs.
Chairman Dodd. Well, I hope so. This has been just an
ongoing tragedy and too long a time has gone on. I will not go
into the great details of it, but it has been a tragedy to
watch people have to pick up and move and change their lives
entirely because of the absence of available housing.
Ms. Greenwood. Yes, sir.
Chairman Dodd. So we are going to watch this carefully and
urge greater action in the coming months, if we can. But we
appreciate your willingness to work at it.
Let me thank you, Ms. Peppler, for being with us. You are a
mayor, so I can't help resist: What do you think of the
Community Development Block Grant Program?
Ms. Peppler. I can tell you it was probably, of all of the
responsibilities I had as mayor, it was one of the most
important times of the year spending with the Community
Development Block grant funding. We had the nonprofits come
before us. I think I could handle most everything. Those were
the ones that gave me the sleepless nights. We had a lot of
excellent nonprofits that came before us that needed the
funding, and it was a very difficult choice to have to make to
have a small amount of money to go a long way. So a very, very
important program to the city and the county.
Chairman Dodd. Well, I appreciate that. I would just point
out to you that the administration has proposed significant
cuts in the CDBG program each year, including a 22-percent cut
for fiscal year 2009, and, again, the importance of this. If we
are cut by 20 percent, I just know a number of initiatives and
proposals have been put in place as a result of that program.
So I appreciate your comments about the value of it, and
through HUD, I want to just mention as well the homeless
assistance programs. We have a couple of our colleagues here
who have been very involved in the homeless programs. Certainly
Senator Allard has been one of them involved, along with
Senator Reed. The two of them have been pushing trying to get
better coordination of that. It is shocking that over 3 million
people experience homelessness each year, including over 1.3
million children. We passed legislation, again unanimously, out
of this Committee to consolidate and streamline the homeless
assistance accounts as well as provide funds to help
communities prevent homelessness. And as mayor or in your other
positions, were you involved in the McKinney-Vento homeless
assistance programs, and do you support a move to greater
consolidation?
Ms. Peppler. Yes, actually I was involved in the McKinney-
Vento not only as mayor, but also in my position with GSA.
Housing or any of our disposal properties that we had would
always go to the homeless--nonprofits that served the homeless
population first. I am very supportive of it, worked with the
programs, homeless programs, significant in the city of
Redlands. We were very lucky that we had a nonprofit that
worked in transitional housing for homeless families. Often,
generally people look at homeless as one person and putting him
overnight in a place certainly takes care of the problems, and
there are many issues involved with homeless, including
families and children are living out of their cars. And we had
a significant problem in Redlands and worked closely with many
of the homeless programs and were very successful in either
transitioning them into permanent housing and at least getting
their vouchers so that they had a place, warm, dry, a clean
place to live, and the children to live as well.
Chairman Dodd. Well, we would like you to urge to continue
to work with our colleagues up here who have a strong interest
in the subject matter.
Ms. Peppler. I look forward to it, yes. Thank you.
Chairman Dodd. Last, Mr. Murin--and I have gone over the
time I set myself, but to cover all of you here before turning
to Senator Shelby, just a couple of quick questions. We have
seen an increased demand at Ginnie Mae, obviously, about Ginnie
Mae as a result of the present foreclosure crisis. I wonder,
one, how Ginnie Mae is keeping up with the increased volume and
making sure that quality stays high, if you have an opinion on
that. And, second, just your opinions, we passed out of this
Committee about 2 weeks ago, 19-2, the Hope for Homeowners Act,
along with several other provisions dealing with a permanent
affordable housing program as well as reforms of Fannie Mae and
Freddie Mac. And Senator Shelby and I are both interested in
having--if we can get these bills through the Senate and work
out our differences with the House as quickly as we can and put
the matter on the President's desk.
I presume you have had a chance to look at what we've done
out of this Committee.
Mr. Murin. I have, sir.
Chairman Dodd. We would like your comments on it and any
additional thoughts you have about how we might either
strengthen this legislation or other suggestions you have for
the Congress to be taking to try and do what we can do, to the
extent we can at all, through some intervention here to try and
reduce the number of foreclosures that are occurring and
getting our housing back on a solid footing.
Mr. Murin. Yes, sir. I think to answer your first question,
the increased--you know, Ginnie Mae has gone from roughly $5
billion a month in issuances to over $22 billion in May. So
it's increasing at an--the rate is increasing each and every
month. That is the good news. That tells us that there are
things working in the marketplace that we had hoped would work.
We are comfortable, you know, I think Ginnie Mae is
comfortable with the insistence on FHA to continue prudent
underwriting standards. That would give Ginnie Mae a comfort
that the loans that are coming across and in the pools are
being underwritten to ensure that the homeowner can afford the
payments. So from that perspective, I think that is a comfort
level, at least for me.
As time goes on, we are going to be faced with, I think, a
market that is going to increasingly look at Ginnie Mae as a
means to liquidate but, more importantly, I think it is a means
to provide the market best execution on the securities. And
what some folks don't really realize is that best execution
means a better rate that moves downstream to the borrower. So
we have to do everything we can. Ginnie Mae will ultimately
have limited resources. It has a very unique business model
right now where it utilizes roughly 65 full-time FTEs to manage
third-party contractors, facilitate pool processing, you know,
master subservicing, trusteeship, whatever it may be. But as
time goes on and the volume increases, Ginnie Mae will be faced
with issues.
I personally believe that the legislation that is pending
is needed. I think every option that we can provide the market
to facilitate the increase in foreclosures is necessary. I
think the big problem in the market right now may be just the
fact that it is a huge bubble that needs to be absorbed, but
that does not mean that we should not, in fact, utilize every
means by which it can facilitate the problem we are seeing.
If it is enacted, I think the investor community will
embrace it, from what I am told and what I see. And we are
going to work diligently to make sure that we can expedite as
much of the fruits of that labor as we possibly can and
facilitate not only the issuers but also the investment
community to do the best execution we can.
Chairman Dodd. I thank you for that very much.
Senator Shelby.
Senator Shelby. Thank you, Chairman Dodd, for covering so
many issues here.
On international investments, Mr. Kashkari, I believe, as
you do, I am sure, that we must maintain the open investment
climate for the United States of America and work also to
ensure our national security is not compromised at the same
time.
What role do you foresee yourself playing in the CFIUS
process, Committee on Foreign Investment in the U.S., which we
have more than a passing interest in this Committee in? And how
will you work to keep our economy open to foreign investment,
which we need and it benefits all of us, while ensuring
national security issues are addressed? I think that is a
central question that comes before this Committee from time to
time, and probably all Americans.
Mr. Kashkari. Thank you, Senator. As I mentioned with my
answer to the Chairman's original question of me, I envision
myself leading individual cases as appropriate and splitting
them with my colleague, Assistant Secretary Lowery. As I
mentioned, he has been running the process for the past couple
years, and so there is going to be a little bit of time for me
to come up to speed to really understand the details of the
process.
Now, as you know, Senator, the President issued an
Executive order that really strengthened the process, made sure
all the national security agencies were at the table and have a
voice.
Senator Shelby. That is right.
Mr. Kashkari. And we think having them all at the table is
really important to maintaining that balance. So part of what
we are going to do and part of what we do already is run a very
rigorous process where all the voices are heard around the
table, both the economic interests as well as the national
security interests. But in terms of keeping it an open
investment climate, I feel like the burden is on us to go out
proactively to regions around the world to help, as I mentioned
with the sovereign wealth fund example, to help educate them on
how they could help themselves.
For example, these best practices that the IMF is working
on, we are hopeful that this is going to create a race to the
top so that sovereign wealth fund can compete amongst
themselves to be more transparent in how they are making their
investment decisions, because it is in their own interest. If
they are good actors making commercial decisions, more
countries around the world are going to welcome their
investment.
So, Senator, I do not have a perfect answer. It is a
delicate balancing act that we take very seriously and would
welcome suggestions as we move forward.
Senator Shelby. But your role is going to be more--it is
important today, but next month and the months to come, it is
going to be very much more important as the sovereign wealth
funds grow and look for somewhere, either here or in Europe and
other places in the world, to make a solid investment for
themselves. And what we want is their investment, but we don't
want to give away our Nation. Right?
Mr. Kashkari. Absolutely.
Senator Shelby. OK. Mr. Wall, could you provide your
assessment of the current effectiveness of the multilateral
export control regimes to which the U.S. is party? Just
roughly.
Mr. Wall. Well, I can speak, Senator Shelby, from my
perspective as a private practitioner.
Senator Shelby. Yes, sir and you have great experience
here.
Mr. Wall. Thank you very much, sir. And in that capacity, I
have had little dealings directly with these institutions.
These are institutions that are governmental institutions.
Governments, of course, gather and coordinate their policies
and such. It is very important for the United States to work
closely with our allies in these various bodies where we share
interests, such as the Wassenaar arrangement, which is the
larger group dealing with dual-use technologies; the Nuclear
Suppliers Group, which deals with obviously countries
manufacturing and producing nuclear technologies; the Missile
Technology Control Regime; the Australia Group, dealing with
chemical weapons and so forth; the CWC. All of these are very
important bodies for the U.S. Government to participate in.
From the companies' perspective, it is very important to
harmonize these rules to the extent we can, recognizing that in
some cases it is simply not going to be possible. We simply
share different interests and objectives than our allies, and
we----
Senator Shelby. Well, you might have a higher standard.
Mr. Wall. We might have a higher standard, yes, indeed,
Senator. That is correct. That is correct, Senator Shelby. And
we should not relax those standards.
Senator Shelby. In those kind of situations, are you saying
that we should reserve the right to unilaterally control
certain technologies in certain areas where there are other
multilateral agencies perhaps lax?
Mr. Wall. From my perspective, again, as a private
practitioner, I would say that appears to be an appropriate way
to resolve the issue, because while companies may complain that
we can't sell to a particular regime because other countries
can, that doesn't make it right.
Senator Shelby. I agree.
Mr. Wall. And they are prepared, the companies at least
that I have had the good fortune to work with in my career,
they are prepared to comply and to further U.S. interests. They
are not interested in subverting or undercutting any interest
that would advance the interests of the United States. And so
in some cases, that is recognized, it is essential. Our rules
may well be stricter. We should argue for those stricter rules
in these multilateral forums and achieve harmonies where we
can.
Senator Shelby. Well, it is very important, isn't it, that
your position that you would balance the commercial needs of
our companies with the security needs of our Nation, we have
got to have a balancing act there, have we not?
Mr. Wall. Yes, indeed, Senator Shelby.
Senator Shelby. In other words, we cannot sell everything.
Everything is not for sale.
Mr. Wall. That is precisely the case, and in a similar vein
as the question to Mr. Kashkari, there is a balancing between
national security on the one hand and the policy on the other
hand, within the Treasury portfolio of maintaining open foreign
investment markets and the Commerce portfolio of ensuring U.S.
technological leadership and economic growth. But that doesn't
mean, as you say, we can sell everything to everybody. There
are some individuals, there are some entities that are inimical
to our interests, and the regimes as they currently exist focus
on restricting sales to those entities.
There is a major focus right now, for example, on
identifying who are trusted end users. Who can we do business
with and have a low risk that the items will be diverted or
used for activities that are against our interests? And that is
an important development to lessen the risk of these sorts of
transactions.
Senator Shelby. You better know your customer, hadn't you?
Mr. Wall. Precisely. precisely.
Senator Shelby. Senator Dodd, you have gone through some of
the other nominees. I just want to tell you I support all the
nominees and hope that we can have a vote on them as soon as
possible.
Thank you.
Chairman Dodd. Well, you are getting off awful easy there,
I tell you.
Senator Shelby. Today.
[Laughter.]
Chairman Dodd. Wait until you see his written questions.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Congratulations to all the nominees on your nomination and
your families.
Mr. Kashkari, I want to just understand something in your
response to the Chairman's questions about your role in CFIUS.
You said that you are taking a secondary role, an equal role on
CFIUS? I would like to know if you get ultimately approved by
the Senate, what role are you going to have in CFIUS?
Mr. Kashkari. Sure. If I am confirmed, I am going to be
working very closely with my colleague, Assistant Secretary
Lowery. I can't tell you that I am going to spend--that I am
going to be in the lead or he is going to be in the lead. I
think given his expertise leading the process thus far, it does
make sense for him to continue his leadership in that capacity
until I come up to speed. But as an example, both of us, I
imagine will have active travel schedules as we go to regions
around the world. While Assistant Secretary Lowery is on the
road, I will be holding down the fort, so to speak, and vice
versa.
Senator Menendez. OK. I ask that question because the title
itself indicates that CFIUS will be under your jurisdiction, so
I am trying to figure that out in your responses to question.
Let me ask you this: Do you believe that--are you
comfortable with the CFIUS review process in place to
successfully avert a repeat of what we had in the Dubai Ports
World deal?
Mr. Kashkari. I am, Senator. I think that a lot of thought
went into the FINSA law, which is very well done, obviously, by
the Committee. The President's Executive order I think was an
important step forward. And then the Treasury has put out draft
regulations for the CFIUS process right now that are also
important in the comment period. And I think that given how
much thought has been put into this, we feel very confident
that we're not going to have a repeat of Dubai Ports.
Senator Menendez. I am glad to hear that as someone who
opposed it very strenuously. Let me ask you this about the
clarity of controlling interest. There are a lot of questions
going on about that because that is, in essence, what triggers
a CFIUS review.
What is your sense of the Treasury Department's position as
to what is the essence of a controlling interest?
Mr. Kashkari. Senator, it is a great question, and very
respectfully----
Senator Menendez. I am looking for a great answer, too.
[Laughter.]
Mr. Kashkari. Very respectfully, I will have to ask if I
may, if confirmed, drill down into great detail. Again, it has
not been where I have spent my time over the last 2 years at
Treasury, and I would be more than happy to come up and spend
time with you in detail, if I am confirmed, sir.
Senator Menendez. I appreciate that. Let me ask you this
with reference to sovereign wealth funds. Do you believe that
they are adequately limited in their ability to act politically
or the dangers of using investments as a political tool greater
for less regulated markets such as hedge funds?
Mr. Kashkari. It is hard to say, Senator. I do not know if
it is greater or less. I understand the concern around
sovereign wealth funds given the growth in assets that they
have had and given that they are regionally based, as opposed
to hedge funds which it is clear that they have more commercial
interests. But, clearly, I think that our focus right now is on
best practices, working with the IMF and working with the
global community.
Again, what we are trying to do, Senator, is create a race
to the top so that sovereign wealth funds who want to have
access to the best commercial opportunities, they are hopefully
going to compete with each other, because the more transparent
they are, the more welcoming we are going to be to their
foreign investment, not just the U.S. but, Senator, as you
said, around the world--in Europe and other regions.
And so it's hard for me to say sovereign wealth funds
behave a certain way, hedge funds behave a different way. It's
hard to characterize them all as one lump. Not all sovereign
wealth funds are going to behave the same, just as not all
hedge funds behave the same. But I think that we have got the
right process in place to deal with it while also encouraging
their investment.
Senator Menendez. I share Senator Shelby's concern that we
want to have the ability of investment, foreign investment to
take place, but at the same time, we want to make sure that at
the end of the day, particularly in critical infrastructure and
critical entities of this country, that we don't have
investments that ultimately can be used in a way that
undermines our national interests, our national security
interests. And in that respect, do you believe that--or have
any concern that foreign investors, particularly sovereign
wealth funds, are trying to avoid a review by holding their
investment stakes to under 10 percent?
Mr. Kashkari. Not to my knowledge, Senator. But, again,
this is an area that I am going to drill into in a lot more
detail, and I would be happy to follow up. But, again, I mean,
I think that we have a lot of confidence in the CFIUS process
that has been put together. That doesn't just govern foreign
companies making acquisitions. It covers foreign entities. And
so sovereign wealth funds, to the extent that they pass these
triggers, as you mentioned, would fall into the CFIUS review,
which we think strikes the right balance of national security
and open investment.
Senator Menendez. I know you are not going to have a lot of
time, at least in the first instance, but I certainly would
hope that your attention will be focused on some of the key
issues as to how we balance this investment desire with
national security and national interest desire.
Finally, Mr. Chairman, Ms. Peppler, Mrs. Peppler, I
appreciate you being a mayor as having been a mayor. It's the
toughest job in America, even tougher than this job. But as I
understood your answer about CDBG, it sounded--and correct me
if I am wrong. It sounded like what your regret was is that you
didn't have more CDBG money, that you had to make tough
decisions with the amount of money here.
Ms. Peppler. Well, we have to make tough decisions. It is
always nice to have more money, but I can tell you that, you
know, unfortunately, I wasn't part of the HUD budget process,
and I know that they are trying to put together a budget and
submit a budget in very tough financial times. I understand
that some programs were cut. Some were added to. What I can
tell you, though, is that the appropriations that Congress
gives for those programs, my job is to make sure that the funds
are administered fairly and equally and there is proper
oversight. So that will certainly----
Senator Menendez. But if you were here to testify here as
mayor under oath, your--I am not going to push you to--you
think I am going to push you, so don't worry about it.
Ms. Peppler. Thankfully, I am not.
Senator Menendez. But I do want to ask you, if you were
here as a mayor under oath, you would say that the CDBG program
is a valuable tool to you as a mayor, is it not?
Ms. Peppler. Absolutely.
Senator Menendez. And that it is one that, in fact, can
often meet some of the challenges a community cannot meet on
its own resource?
Ms. Peppler. That is correct.
Senator Menendez. OK. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much. Thank you, Senator, and
we will leave the record open unless colleagues have any
additional questions.
Thank you again, all of you, for your willingness to serve,
and I admire you for doing it, and we will see what happens
here. We will try and move things along if we can and get you
confirmed into your positions, at least give the Senate an
opportunity to vote on your confirmation. So thank you very
much, and thank you for bringing your families. As you get up
and leave, we are going to ask our second panel to join us, and
we will try and do this in a neat fashion. I will give you a
minute or so here in recess while you adjust yourselves.
[Recess.]
Chairman Dodd. The Committee will come to order. I would
ask our audience to find seats.
Once again, I would like to thank our panel of witnesses
here for all your willingness to serve and for your
understanding of how these will be maybe abbreviated terms if
you are confirmed, as you are all aware, given the lateness of
the year.
What I would like to do, as I said to the first panel,
there will be--probably some additional questions will be
submitted by our colleagues here, and I would ask you to ask
them, firstly through their staffs, to make sure they are
submitted promptly so that you have a chance to respond to them
promptly so we don't end up losing any valuable time in terms
of the possible confirmation of these important posts.
Well, let me, if I can, ask you to rise. I won't ask you to
take the oath of office. I will just swear you in here this
afternoon. Raise your right hands, if you would for me, please.
Do you swear or affirm that the testimony that you are about to
give is the truth, the whole truth, and nothing but the truth,
so help you God?
Mr. Aguilar. I do.
Mr. Paredes. I do.
Ms. Walter. I do.
Mr. Marron. I do.
Mr. Fryzel. I do.
Chairman Dodd. And do you agree to appear and testify
before any duly constituted Committee of the U.S. Senate?
Mr. Aguilar. I do.
Mr. Paredes. I do.
Ms. Walter. I do.
Mr. Marron. I do.
Mr. Fryzel. I do.
Chairman Dodd. I thank all of you. Thank you very much for
your willingness, again.
Let me introduce our witnesses if I can, briefly, and then
turn to each of you to make some opening statements, if you
would.
Mr. Luis Aguilar, of Georgia, has been nominated to serve
as a member of the Securities and Exchange Commission. He is
currently a partner in the law firm of McKenna Long & Aldridge
and has worked on issues pertaining to international
transactions, investment companies and advisers, securities law
and corporate finance. Previously, he served at the general
counsel and executive vice president of INVESCO, an
institutional investment company with over $380 billion in
assets under management. He has also served on the staff of the
SEC. And, in fairness, I should also say that I know Mr.
Aguilar. We have had a chance to meet and talk on a number of
occasions over the years, and welcome here to the Committee
this morning.
Next is Professor Troy Paredes. Did I pronounce that
correctly? Is that close enough?
Mr. Paredes. Yes.
Chairman Dodd. OK. Of Missouri. He has also been nominated
to serve on the SEC. Professor Paredes is a professor of law at
Washington University School of Law where he teaches securities
law, corporate governance, and corporate finance. Previously,
he worked in private practice on corporate transactions,
including leveraged buyouts, mergers and acquisitions, and
private equity and other financings.
Our third SEC nominee is Elisse Walter, of Maryland. Ms.
Walter is the senior executive vice president for regulatory
policy and programs with the Financial Industry Regulatory
Authority, and she serves on the board of the Investment
Education Foundation of that organization. Previously, Ms.
Walter served as the General Counsel of the Commodity Futures
Trading Commission and Deputy Director of the Division of
Corporate Finance. And, again, I know Ms. Walter, and I thank
you very much for your willingness to serve and to appear
before us today.
Third in our panel is Donald Marron, of Maryland--and
again, I know Mr. Marron as well. We have known each other for
some time--to be a member of the President's Council of
Economic Advisers. Dr. Marron is known to many of us due to his
service as Deputy Director of the Congressional Budget Office.
Prior to this, he served as the chief economist on the Council
of Economic Advisers. Earlier in his career, he served as the
executive director and chief economist on the staff of the
Joint Economic Committee.
And, finally, we have Michael Fryzel. Is that how you
pronounce that, Fryzel?
Mr. Fryzel. Yes, sir.
Chairman Dodd. Of Illinois, to be a member of the Board of
Directors of the National Credit Union Administration. If he is
confirmed by the Senate, the administration has indicated its
intent to name Mr. Fryzel to be Chairman of the Board of
Directors. Mr. Fryzel is currently an attorney in the city of
Chicago, also serves on the Illinois Governor's Board of Credit
Union Advisers and prior to this he served as director of the
Department of Financial Institutions for the State of Illinois
and as a member of the Governor's Cabinet.
So we look forward to hearing from all of you this
afternoon, and, again, we will begin with you, Mr. Aguilar, if
you could make an opening statement. Your full statements, by
the way, if you have additional materials you wish to share
with us, we are glad to have them included as part of the
record.
Why don't we begin with your families, by the way. I don't
want to discriminate here against families. Who do you have
with you today, Mr. Aguilar?
Mr. Aguilar. Thank you, Chairman Dodd. Today with me I have
my wife, Denise, who is right behind me, who has always
supported and encouraged me. She's my closest friend, most
trusted adviser.
Also with us today are my nephews, Mark and Jon Mark
Traylor from the great State of Alabama.
Chairman Dodd. Very smart. There you go.
[Laughter.]
Any other relatives from around the country?
Senator Shelby. Let's confirm him.
Chairman Dodd. Let me go down the rest of the row here and
do the families as well. Mr. Paredes?
Mr. Paredes. Thank you, Mr. Chairman. Today with me is my
lovely wife, Laura, sitting right here behind me.
Chairman Dodd. Very good. Thank you. Nice to have you with
us.
Ms. Walter.
Ms. Walter. Mr. Chairman, I have with me my husband of 34
years, Ron Stern.
Chairman Dodd. Good. Ron, how are you? Nice to see you as
well. Welcome.
Mr. Marron.
Mr. Marron. Mr. Chairman, it is my honor to introduce my
wife, Esther, who I would like to thank for all of her support.
And I believe I have a few family members watching on the
Internet at home.
Chairman Dodd. Ah, very, very good. Technology.
Mr. Fryzel.
Mr. Fryzel. Thank you, Mr. Chairman. Unfortunately, my
wife, Gloria, cannot be with us today. She is with her job
responsibilities in Chicago, but certainly her thoughts are
with me, as is her support.
Chairman Dodd. Thank you very much. Well, I am sorry she is
not with us.
Mr. Aguilar, we will begin with you.
STATEMENT OF LUIS AGUILAR, NOMINEE, TO BE A MEMBER, SECURITIES
AND EXCHANGE COMMISSION
Mr. Aguilar. Thank you, Chairman Dodd, Ranking Member
Shelby, Senator Menendez, distinguished Members of the
Committee.
Chairman Dodd. You need that on, Luis.
Mr. Aguilar. Chairman Dodd, Ranking Member Shelby, Senator
Menendez, and distinguished Members of this Committee, I am
deeply appreciative for the opportunity to appear before you
today. I am deeply grateful and honored to have been nominated
to serve my country on the Securities and Exchange Commission.
It would be a special honor to follow into the footsteps of
Roel Campos. I would be proud to continue his efforts toward
well-functioning, effective capital markets and a Commission
that effectively fights for all through a strong enforcement
program. With your indulgence, I would like to briefly share
some of my life's experiences and perspectives and then mention
a few of the unique challenges facing the Commission.
The United States remains the land of opportunity and it is
the beacon of freedom and democracy for the world. Our
Declaration of Independence and our Constitution are an example
to all. The opportunities that are available to us in our
country are endless and allow us to dream big and then be able
to make our dreams a reality.
I am one of the many examples of what can be achieved. I
came to the United States from Cuba when I was 6 years old,
basically with little more than the clothes on my back, and I
have been a beneficiary of this country's terrific generosity.
When I first arrived as a refugee from Cuba, we received many
of our essential needs from the generosity of the American
people, and gratefully, this country's public school system
provided me a strong education which has been the foundation of
any success I have achieved.
This country also provided the opportunity for me to work
and earn some money. In my early years, I had a number of jobs
including delivering newspapers, putting up fences, being a
stock boy in a yarn store, and working at the Miami
International Airport loading baggage and cargo into the
bellies of airplanes. These activities allowed me to pay for my
education. And, fortunately, I had the support of an extended
family. I was able to live with various relatives my first
years in the United States, and I was reunited with both my
parents when I was 10 years old. Between the ages of 10 and 16,
my family lived in various parts of the United States, from
Miami, Florida, to Ravenne, Ohio; Little Rock, Arkansas; and
Rome, Georgia.
When I was 16, my parents moved back to Miami where my
father had a good job offer. I stayed in Rome to finish school.
I was fortunate that a friend told his parents about my desire
to finish school in Rome, and his parents asked to meet me and
ultimately welcomed me into their home. This experience had its
challenges. Among other things, I was in the process of
improving my English, and my Spanish accent took time for them
to get used to. I have always been grateful for the generosity
of a Southern Baptist family who opened their home to a
complete stranger from another country. It is a generosity many
Americans have.
I believe in the American dream. I believe it is achieved
through hard work, commitment, and perseverance. I believe the
Commission plays a crucial role in helping to secure the
American dream. The Commission does this by facilitated access
to investment capital by growing businesses, by maintaining the
credibility and integrity of our capital and financial markets,
and by working vigorously to protect investors. The
Commission's vigilance and its efforts to prevent and address
fraudulent activity helps secure the savings and retirement
assets of American families.
I have spent most of my professional life dealing with our
securities laws. My professional career started at the
Commission, and my involvement with the securities laws
continued in private practice and as an in-house attorney to
large global investment managers. I have regarded the
Securities and Exchange Commission as one of the finest
agencies of the U.S. Government, with the legacy of exercising
fair and tough-minded regulatory authority. For 75 years, the
Commission has been an example of regulatory excellence. I
fully believe in the Commission's mission to protect investors,
maintain fair, orderly, and efficient markets, and facilitate
capital formation.
The Commission's focus on fully protecting investors is
particularly significant at a time when many of our citizens
participate in the capital markets through direct investments,
pension plans, mutual funds, and other vehicles. It is
generally recognized that our Nation has the highest level of
retail investor participation in the world. In our rapidly
moving and innovative marketplace, it is very important that
the Commission maintains pace with the continuing changes to
protect investors and maintain confidence in the financial
market.
For example, the recent issues surrounding certain credit
ratings have shaken investor confidence and focused attention
on how regulators can more effectively address potential
conflicts of interest and make the process more transparent and
increase accountability.
With respect to these and other matters, if I am confirmed,
I pledge to work tirelessly with you and with my colleagues at
the Commission to ensuring that the public has confidence in
the integrity and efficiency of our financial markets. If I am
fortunate enough to be confirmed, I will strive to meet the
challenges of protecting the interests of investors without
burdening the conduct of business, and to promote an
environment in which enterprises can raise capital efficiently,
whether they are large established entities or small
entrepreneurial and emerging companies. I will also try to
fairly and carefully determine the appropriate enforcement
actions and sanctions in pending and future investigations.
Thank you for the opportunity to appear before you today. I
would be honored if you would permit me to be a Commissioner of
the Securities and Exchange Commission. I would be pleased to
try to answer any questions that you may have.
Chairman Dodd. Thank you very much, Mr. Aguilar.
Mr. Paredes.
STATEMENT OF TROY A. PAREDES, NOMINEE, TO BE A MEMBER,
SECURITIES AND EXCHANGE COMMISSION
Mr. Paredes. Mr. Chairman, Ranking Member Shelby, and
Members of the Committee, I am deeply honored and humbled to be
before you today and to have been nominated by the President to
serve as a Commissioner of the Securities and Exchange
Commission. If I am fortunate enough to be confirmed, I can
assure you that I will do my best each and every day to serve
the public interest.
I am delighted that my wife, Laura, is here with me today.
Her love and support are immeasurable. Also, I would like to
express how much I appreciate all the love and support of my
parents.
Justice Brandeis famously observed, ``Sunlight is said to
be the best of disinfectants; electric light the most efficient
policeman.''
Louis Loss, whom I have the pleasure of calling a co-author
on the Securities Regulation treatise, put it more colorfully,
once writing, ``People who are forced to undress in public will
presumably pay some attention to their figures.''
These quotes drive at mandatory disclosure, a cornerstone
of securities regulation that deserves credit for the
longstanding success of U.S. securities markets.
Today we discuss disclosure in terms of transparency.
Transparency is a linchpin of a market-based financial system.
Investors need access to high-quality information. When
investors are armed with accurate information, they make better
decisions, and the efficiency and integrity of U.S. securities
markets are promoted.
The SEC is responsible for administering and enforcing not
only the mandatory disclosure regime, but the entirety of the
Federal securities laws. As such, the Commission is uniquely
positioned to instill investor confidence, which in turn
underpins capital formation and well-functioning securities
markets. Securities markets are not stagnant but evolve. While
new opportunities present themselves, so do new challenges.
Whether we focus on Enron, the recent credit market turmoil,
technological advances, or increasing globalization, the SEC
should reassess this facts-on-the-ground change and as
developments unfold.
It is important for the Commission to be nimble and for the
regulatory system to be state of the art. This means working
collaboratively to fulfill the agency's goals in a way that is
reasoned, balanced and based on the evidence and that weighs
the benefits of regulation against the costs.
I care deeply about our financial system and recognize the
SEC's integral role in overseeing our securities markets and
helping to ensure that the U.S. continues to have the world's
deepest, most liquid, and most competitive markets.
If the Senate confirms me, it would be an honor to have the
opportunity to contribute to the agency's important mission. I
have the highest regard for the Commission and for its expert,
professional, and dedicated staff. It would be a pleasure to
work with the staff as well as the other Commissioners. I also
appreciate the important work that this Committee and its staff
perform as the Committee discharges its oversight and
legislative responsibilities. If confirmed, I look forward to
working together with this Committee and its staff to serve the
public interest.
Finally, if confirmed, I will fill the seat vacated by
Commissioner Paul Atkins. I would like to recognize
Commissioner Atkins for his years of service at the SEC.
I thank you for the opportunity to appear before you today
and would be happy to answer any questions.
Chairman Dodd. Thank you very, very much.
Ms. Walter, welcome.
STATEMENT OF ELISSE B. WALTER, NOMINEE, TO BE A MEMBER,
SECURITIES AND EXCHANGE COMMISSION
Ms. Walter. Thank you, Chairman Dodd.
Chairman Dodd, Ranking Member Shelby, distinguished Members
of the Committee, I am extremely pleased to appear before you
today, and I am honored that President Bush has nominated me to
serve as a member of the Securities and Exchange Commission. I
would like to thank Chairman Dodd for the confidence he has
shown in me, and I am particularly grateful to Senator Jack
Reed and also to Senator Schumer for their support.
I wouldn't be here today were it not for the support of my
family, so, again, I would like to reintroduce Ron Stern, who
is sitting behind me, my husband. And I also know that my
parents, Shirley and Arthur Walter, would be bursting with
pride and here today if were still with us. And speaking of
pride, I would like to mention our two sons, Jonathan and Evan,
who unfortunately couldn't be with us today because they are
pursuing graduate degrees and careers of their own on the West
Coast.
I would also like to thank my friends and colleagues, a
number of whom are here today, for their invaluable support.
My family has come a long way since my four grandparents
immigrated to this country. If confirmed, I am committed to
giving back by doing my utmost as a Commissioner to serve the
public.
I worked for the SEC for 17 years and know firsthand what
an exceptional institution it is. The SEC has had a number of
outstanding Commissioners, including Irv Pollack, who recently
turned 90. Irv was a Commissioner when I first arrived at the
SEC in 1977. He always went straight to the essence of each
matter that came before the Commission and was guided by one
overriding standard of conduct: Do the right thing. He remains
today my symbol of integrity and excellence in public service.
Since those days at the SEC, protecting investors has
continued to be at the heart of my career. I am privileged to
have been a securities regulator for more than three decades.
During that time, I have worked on many issues, including the
regulation of the markets, disclosure questions, investor
education, and protection of seniors--issues that are front and
center today. I have had the honor of serving as the General
Counsel of the CFTC and as a senior executive of FINRA, the
self-regulatory organization that regulates broker-dealers. In
all of these positions, I have been able to pursue my passion
for the protection of investors and preserving fair and honest
markets.
The U.S. securities markets are the crown jewels of our
Nation's economy. We should be proud that the United States has
the highest level of retail investor participation in the
world. And with that high level of participation, the SEC has a
critical job: protecting investors, facilitating capital
formation, and assuring the integrity and transparency of those
markets.
If confirmed, I pledge to join with the Chairman, my fellow
Commissioners, and the agency staff to fulfill our mandate in a
vigorous, balanced, fair, and pragmatic manner. I am committed
to pursuing both strong enforcement and creative approaches to
resolving the issues confronting our ever evolving financial
markets. There is much for the Commission to accomplish, and I
hope to have the opportunity to return and help it meet these
challenges.
John F. Kennedy once said that there are four qualities
that measure the success of a public servant: courage,
judgment, integrity, and dedication. If confirmed, I will
strive to act in a manner that reflects each of those traits.
Thank you very much. I would be pleased to answer any
questions.
Chairman Dodd. Thank you very, very much, Ms. Walter.
Mr. Marron.
STATEMENT OF DONALD B. MARRON, NOMINEE, TO BE A MEMBER,
PRESIDENT'S COUNCIL OF ECONOMIC ADVISERS
Mr. Marron. Thank you, Mr. Chairman. Chairman Dodd, Ranking
Member Shelby, and Members of the Committee, it is a great
honor to appear before you today as a nominee to become a
member of the President's Council of Economic Advisers.
The Council was formed in 1946 to provide the President
with sound, objective advice on the economic policy issues that
face our Nation. Those issues span a wide spectrum--
macroeconomic performance, health care, globalization,
regulation, and fiscal policy, to name just a few. Of
particular importance today, of course, are the recent turmoil
in credit markets, the ongoing downturn in housing, and the
rapid escalation of food and energy prices.
The role of Council members is to provide policymakers with
objective analyses that reflect the insights of the larger
economics community. To do so, Council members rely on their
past experience in research and policy. My experiences include
a wide range of policy-related work in academia, the private
sector, and, most recently, in public service. Since 2002, it
has been my honor to serve both Congress and the administration
in a series of economic policy positions. That service began
here in the Senate, where I became staff director of the Joint
Economic Committee under Senator Bennett. I then served as
chief economist on the staff of the Council of Economic
Advisers.
In 2005, I joined the Congressional Budget Office, serving
as Deputy Director for almost 2 years, including more than a
year as its Acting Director. It was a great honor to lead CBO's
outstanding team of professionals who provide the Congress with
objective, nonpartisan analyses of economic and budget issues.
I left CBO last August, returning to the Council where I now
serve as Senior Economic Adviser.
Before my public service, I had a diverse career in
academia and the private sector. I served as chief financial
officer of a medical software startup, provided business
consulting and litigation support to companies in a variety of
industries, and taught microeconomics, environmental policy,
and entrepreneurial finance at the University of Chicago
Graduate School of Business. I hope that my broad background
will provide me with a solid base for my work at the Council.
Thank you for considering my nomination and for allowing me
to appear here today. I would be happy to answer any questions.
Chairman Dodd. Thank you, Mr. Marron.
Mr. Fryzel.
STATEMENT OF MICHAEL E. FRYZEL, NOMINEE, TO BE A
MEMBER, NATIONAL CREDIT UNION ADMINISTRATION BOARD OF DIRECTORS
Mr. Fryzel. Thank you, Chairman Dodd, Senator Shelby, and
Members of the Committee. I very much appreciate this
opportunity to come before you to discuss my views relating to
my nomination as Chairman of the National Credit Union
Administration.
I am humbled by the trust and faith placed in me by the
President in nominating me to the NCUA Board. I am also
grateful for the chance to have met with some of you in person
in recent weeks and discussed the responsibilities and
expectations inherent in the NCUA chairmanship. If confirmed by
the Senate, I look forward to discharging those
responsibilities to the best of my ability.
For the past 19 years, I have been in the private practice
of law in Chicago, Illinois, representing financial institution
clients before the various regulatory agencies that license,
examine, and monitor their activity. Prior to that time, I was
the Director of the Illinois Department of Financial
Institutions for almost 8 years. In that position, I was
responsible for the regulation of credit unions, consumer
credit lenders, currency exchanges, foreign exchange companies,
and the administration of the Unclaimed Property Act. During my
tenure, there were 700 State-chartered credit unions with
assets exceeding $4.3 billion.
I have also worked with various credit union trade
associations and for the last 16 years have been a Member of
the Governor's Board of Credit Union Advisers for the State of
Illinois. Based on my time as a State regulator of credit
unions and my experience in the private sector in various legal
and advisory capacities, I strongly believe that credit unions
and other financial institutions need prudent and far-sighted
regulatory oversight during these turbulent days for the
financial marketplace.
There are specific principles that have guided and will
continue to guide my regulatory philosophy if confirmed by the
U.S. Senate.
First, safety and soundness must be the central focus of
any Federal financial institution regulator. Both the Congress
and President entrust tremendous responsibility to those who
regulate, supervise, and ensure financial institutions. As
Chairman of NCUA, I will be extremely vigilant in this area.
Consumers place not only their money in credit unions; they
place their trust; and I intend to maintain the most rigorous
and diligent safety and soundness standards possible. federally
insured credit unions have never cost a U.S. taxpayer a penny,
and the high bar that has been set will remain intact
throughout my tenure.
A closely related second element of my regulatory
philosophy involves the consumers. I firmly believe that strong
regulatory control that aggressively protects the rights of
consumers is essential, particularly in this extremely complex
and fast-moving financial marketplace. The multitude of choices
presented to the consumer must be accompanied by plain language
disclosures and understandable options. We must pursue common
sense rules of the road that benefit both credit unions and the
members they serve. As member-owned financial cooperatives,
credit unions naturally gravitate toward giving consumers a
fair deal. NCUA will continue to monitor credit unions to
ensure that long-standing practice remains in place.
Finally, I want to stress the need for balance between
regulators and the industry they supervise. Independence is an
essential component of being an effective regulator. In
Illinois, that was one of my core principles. At the same time,
there needs to be a healthy and dynamic arm's-length
relationship with the industry characterized by active
listening, open-mindedness, and a willingness to work together
to achieve a shared goal of a strong and vibrant credit union
industry. We will work cooperatively with the industry, but
will not hesitate to exercise regulatory authority when
necessary.
I also understand the importance of being accountable to
Congress. Your oversight right is an essential aspect of the
regulatory process, and I will always be willing to work with
Capitol Hill in maintaining the well-regulated credit union
industry. Government's role in regulating and insuring
financial institutions should be as minimal as possible and as
much as necessary. The credit union industry has proven itself
a very valuable resource for the American consumer. This is
due, at least in part, to a strong and credible Federal
regulatory presence. My commitment to you is to continue this
track record and build upon it.
I look forward to facing the challenges that all regulators
face today and welcome the opportunity to work with the
Congress in building a strong network of financial
institutions.
Again, I appreciate the time afforded me today and will be
happy to answer any questions you may have.
Chairman Dodd. Thank you very much.
Again, I will try and limit our questions on this side and
leave the record open for some additional ones.
We have been joined by Senator Reed of Rhode Island. I
thank the Senator for joining us.
Let me begin with our SEC nominees. I will ask all three of
you to comment on these questions. I want to raise the issue of
proxy access and I want to raise the issue of the credit rating
agencies. There are a lot of issues to talk about, but those
are two that are of particular interest to me.
Obviously, we need a strong Commission that inspires
investor confidence. In thinking of one word, the most
important, confidence of investors is the critical word and has
been during my tenure on the Committee. And addressing
challenges that arise in our markets.
The proxy access, last year the SEC voted to deny
shareholders access to the proxy for proposing procedures to
nominate directors. Proxy access was the subject of a November
1, 2007 letter that, I, along with several members of this
Committee, sent to Chairman Cox in which we stated, and I
quote, ``Shareholders' rights to place their proposals on the
proxies of the public companies they own is extremely
important.'' It was the subject of a Committee hearing, as
well, I might point out.
After the Commission's decision, Chairman Cox stated, and I
am quoting him, ``I believe we can move forward and reopen this
discussion in 2008 to consider how to strengthen the proxy
rules to better vindicate the fundamental State law rights of
shareholders to elect directors'' end of quote.
So my questions for the three of you are the following: do
you support the Commission reconsidering this issue and
determining whether shareholder proposal rules should permit
proxy access proposals? What are your views on when
shareholders should have that proxy access? And what are your
views on the process that the Commission should use in making
significant changes in policy? That is a broader question.
In this case, the Commission had a policy of allowing
shareholder proxy access that dated from 1976 until 1990. Then
the staff at the Division of Corporation Finance reversed the
policy and denied proxy access in a no action letter for
reasons that, as the Second Circuit Court of Appeals said in
the AFSCME v. AIG case, and I quote, ``the SEC has not
provided, nor has the Division ever provided.''
If confirmed, would you support transparent decisionmaking
processes on these important issues?
Mr. Aguilar, I will begin with you.
Mr. Aguilar. Mr. Chairman, thank you for that question.
I am aware that the Commission passed last year a status
quo, if you will, to maintain the status quo. And I understand
the Chairman hopes to revisit the issue when he has a full
Commission. I welcome that opportunity.
I believe that shareholders, as owners of our companies,
are entitled to a voice. I believe that State corporate law
that gives them the right to vote for directors is something
that the SEC should facilitate to the extent appropriate. So I
would support Chairman Cox reopening that issue. I understand
there were 34,000-plus comment letters that arrived and I would
be interested in knowing what they say.
I believe that answers your first two questions.
The response to my views on the process in terms of making
broad policy changes is that they should be subject to some
notice and due consideration so that we can hear all sides of
the views on the policy, how it has been, the reason why it
was, the reason why changes are now required, for whatever
reason they may be.
Chairman Dodd. Mr. Paredes.
Mr. Paredes. Thank you, Mr. Chairman.
The role of the shareholders in corporate accountability is
certainly vitally important as we try to strike a balance
between the discretion that managers and boards have to run the
enterprise, but ensuring that there is the proper
accountability to the shareholders. And so I would certainly
welcome any consideration of ways in which that balance can be
improved and the ways in which it can be appropriately struck
in order to get the appropriate result.
And so to be sure, if this issue comes before us, I would
be welcoming of considering it with an open mind.
Chairman Dodd. But would you support--Chairman Cox is
talking about reopening it. Would you support reopening?
Mr. Paredes. I certainly support the fact that it is
important for this issue to get a full----
Chairman Dodd. We all acknowledge it is important. No one
said it was not important.
Mr. Paredes. I appreciate that, Mr. Chairman. To get a full
hearing and assessment of this issue. It has been an issue that
has been out there for some time, as Mr. Chairman, you all
know. And to have it finally before the body of the SEC to
hopefully have a final resolution at this particularly
important time, I think, is a worthy step in the direction of
bringing to conclusion and to end the uncertainty that I think
surrounds the question of shareholder access.
In terms of the process of decisionmaking, I certainly am
in favor of a transparent decisionmaking process. An action
letter process is an important process within the Commission.
But transparency is certainly important, and the role of the
Commissioners in assisting in the crafting of policy decisions
is certainly of utmost significance and importance.
Chairman Dodd. Putting aside whether or not you agree or
not with the decision that was made here, but that was the
policy from 1976 to 1990. To basically change a policy that had
been in place for that long, without the kind of due
deliberation and consideration, how does that strike you?
Mr. Paredes. Mr. Chairman, I think when there is a
significant change, it certainly--I am open to the fact that it
needs to be properly vetted by the Commission. I am only
cautious in not wanting to unduly abrogate the new action or
the process. But I am certainly recognizing that there are some
issues that are sufficiently important, to be sure, and of
great magnitude that they warrant the Commission as a body
weighing in and making the final determination as----
Chairman Dodd. Does that decision strike you as one of
those?
Mr. Paredes. I certainly think the ways in which things
have developed since then, at this particular moment in time,
it certainly has received a great deal of attention. I would
have to consider the circumstances back at that particular
time. But right now, we have a renewed, if you will, attention
on shareholder access. And certainly at this particular moment
in time, shareholder access is a vitally important matter that
needs to be finally resolved, I believe, by the Commission.
Chairman Dodd. Ms. Walter.
Ms. Walter. Thank you, Mr. Chairman.
I think questions of proxy access have to be--as many other
issues under the securities laws--approached from the vantage
point of individual investors. And in this case, as my fellow
nominees have pointed out, a shareholders job, in effect, as an
owner of a corporation is to elect those stewards of the
corporation. And I think those issues in getting access to the
proxy under important circumstances are quite important.
So I would welcome reconsideration of this decision. I
think it is an extremely important one. And I think it is one
that the Commission should approach as soon as possible, given
the complications of the issue and the amount of input.
I also do think, in general, it is important to have a
vigorous staff process that allows things to get done. It is
also important, though, when long-standing positions are
reversed, for that to be done in a transparent and thoughtful
way so that both within and outside the Commission people can
understand the reasons for change, which are appropriate from
time to time but in fact are not appropriate in other
occasions.
Chairman Dodd. I thank you for that.
Let me ask you about the credit rating agencies. Senator
Shelby and I have had hearings on this issue and obviously they
help facilitate the sales of collateralized debt obligations.
And during the past several months the delinquencies and
foreclosures of subprime loans have prompted rating agencies to
downgrade the ratings on thousands of tranches of residential
mortgage-backed securities, as we all know.
Significant concerns have been raised about the performance
of the rating agencies. The Committee had a full hearing on the
subject matter. Chairman Cox has said he intends to recommend
additional rulemaking in this area.
In your view, what types of additional rules should the
Commission consider adopting to promote investor confidence and
enhance the performance of credit rating agencies?
For example, would you seek to require nationally
recognized statistical rating organizations to provide more
information about their rating methodologies, the default rates
of company comparatively rated debt to reduce conflicts of
interest in the business model, to require more timely updates,
or other measures that you might share with us as thoughts that
you have about these matters, given the long-standing
experience you have all had--the three of you have had--in this
area.
And I will begin with you, Ms. Walter, just what different
direction here? Any thoughts on this?
Ms. Walter. It is a terribly important issue and it is one
that is not a new one. It was a very important issue in the
mid-1980s and one that, in my view, was not addressed as
vigorously as it really needed to be. And I am glad to see that
the Commission is going to be moving forward with rules in the
very near term.
I do not have definitive views about exactly what those
roles should look like, but the topics that you have outlined
in terms of further information, addressing conflicts of
interest, and addressing default rates are very important.
As I understand it, the Commission has also committed to
look at its own rules and the extent to which those rules place
a great deal of emphasis on ratings as an entre into the system
in a lot of different ways and in ways that facilitate easier
treatment under the Commission's rules. And I think those need
to be looked at carefully, as well.
And I look forward, if confirmed, to participating in that
process.
Chairman Dodd. Thank you. Mr. Paredes.
Mr. Paredes. Thank you. I agree with the sentiments of what
was expressed. This is a critically important issue that needs
further attention by way of potential action when it comes to
conflicts of interest, potential disclosure of track records. I
know the Commission is presently considering a rulemaking. And
if I am fortunate enough to be confirmed, I certainly welcome
the opportunity to consider what the Commission puts forward
and what other changes perhaps might be reasonable in light of
all that we have learned in recent months concerning the credit
rating agencies.
Chairman Dodd. Do you have any specific ideas, Mr. Paredes,
that you think might work?
Mr. Paredes. Thank you, Mr. Chairman.
You know, one possibility which I think is worth giving
serious consideration to is the disclosure of track records and
performance by way of trying to get a sense of the performance
of the particular rating agencies. I certainly do not want to
rule anything in. I think it would be premature on my part to
rule anything in at a particular moment in time, or rule
anything out.
But I think if there are steps that can perhaps promote
transparency and competition in this base, they certainly
deserve serious consideration.
Chairman Dodd. Mr. Aguilar.
Mr. Aguilar. Mr. Chairman, the credit rating agency
involvement--the relationship with the SEC is relatively new.
It began to be first registered by them I think within the last
year. I think the first round of SEC rulemaking was roughly the
summer of last year.
I think in light of what has happened in recent months, I
think it is appropriate that the SEC take a hard look at the
credit rating agencies and how they have been performing.
I understand from the newspapers and otherwise that there
is a series of rules that the Commission is planning revolving
around three main issues as I understand it: transparency,
accountability, and increasing competitiveness, which I think
are the three important issues. How they go about doing that
and what the rules are I am not informed of currently, but I
would look forward to, if confirmed, looking at the rules and
trying to determine whether they, in fact, do what needs to be
done to protect the American public.
Chairman Dodd. But this is all three of you--I draw the
conclusion that all three of you believe that this is a very
important area for the Commission to engage in some serious
rulemaking on? That you are as concerned as we are about the
problems with the credit rating agencies as part of the overall
problem we have seen over the last several years and the whole
issue of the credit markets.
Mr. Aguilar. Absolutely.
Mr. Paredes. Absolutely.
Ms. Walter. Absolutely.
Chairman Dodd. Let me jump to you, Mr. Marron, very
quickly, if I can. Ben Bernanke, the Chairman of the Federal
Reserve, highlighted the importance of preventing foreclosures
in a recent speech. Let me quote him to you. He said ``high
rates of delinquency and foreclosure can have substantial
spillover effects on the housing market, the financial markets,
and the broader economy. Therefore, doing what we can to avoid
preventable foreclosures is not just in the interest of lenders
and borrowers, it is in everyone's interest.''
Do you agree with that? And do you have any opinions you
want to share with us about the matter that this Committee just
took a position on? We covered a lot of subject matters, but
the Hope for Homeowners Act was a very important piece of it,
the GSE reforms, the permanent establishment of affordable
housing programs which Senator Reed had championed along with
others.
Will you share with us very quickly your views of that
piece of legislation, that has only come out of Committee. And
we have yet to go to the floor of the Senate on?
Mr. Marron. Certainly. Thank you, Mr. Chairman.
First of all, I would absolutely like to affiliate myself
with Chairman Bernanke's remarks on the issues that are
important in this basis.
I think for me a helpful way to frame that up is to look a
little bit at the history of what we have gone through over the
last 8 or 10 months on this issue, where I think looking back
actually there are a lot of positive things to say about the
policy response, both from the administration efforts to try to
get the private sector to work better to avoid preventable
foreclosures through Hope Now.
And I think also from a recognition, which I think has
broadened over time, that for more direct Government action the
FHA is the right instrument and the right institution to do
that. And then what we have seen on that is basically a
trajectory on which first, the focus was on addressing the
potential problem of resets and then in the intervening months
we have come to recognize that because interest rates have
fallen and because house prices have gone down resets are not
as severe a problem as we were once concerned about and that it
is really prices going down, house prices falling, that is
really going to be the key driver for challenges in the housing
market.
And that it therefore makes sense to think about, on the
FHA front, sort of expanding it in directions that are more
responsive to that challenge that is out there. The
administration has taken some steps in that direction and my
understanding of the bill that this Committee passed was that
it will take some additional steps in that direction and in
essence provide a carrot and incentive for lenders, for
servicers to do some write-downs in situations where it makes
sense for them to do that and it enables people to stay in
their homes.
That seems to be to be exactly the right logical place to
be looking.
Chairman Dodd. So you indicate you are supportive of what
we have done here in the Committee?
Mr. Marron. I am personally supportive of the general
outlines of it. I understand that the Administration has some
concerns about some of the specifics.
Chairman Dodd. I was not asking about them. I was asking
about you.
Mr. Marron. No, I was just setting out the--so, I am very
supportive of the general structure. Being a--I am a CBO guy, I
am a green eyeshade guy, I am a budget guy. I was brought up in
that tradition. I was introduced to the Credit Reform Act. And
I was taught about how FHA was structured to be, in essence,
cost neutral for the Federal Government.
And so I recognize that it is a shift to move in a
direction where that is no longer true and I think that is--I
can understand why that is an issue on the table, but I think
that is a change that one needs to focus on and take seriously
before doing.
Chairman Dodd. I would just point out to you that,
according to some economics, the consumers have lost $2
trillion as a result of foreclosures that have already
occurred. So as a numbers guy, I would presume you would be
deeply concerned about the loss of value that is occurring and
what that means to people in terms of the overall economy of
the country and the contagion effect that has spread out to
commercial and mortgage-backed securities, student loans,
municipal finance. All of these areas have been adversely
affected.
And we have got a tranche coming, a wave coming, of
foreclosures after July 1 that may make the first wave look
small by comparison. So my hope would be we would get some
strong positive statements from people who are sitting in
critical positions in support of these ideas. I am not asking
that they support every dotted I and crossed t, but I think the
longer we wait, failing to act, could even exacerbate the
problem further.
Any additional comments you want to make?
Mr. Marron. You know, my role thus far has been kind of
advising on these issues. And again, I think the basic
structure outline of using FHA in this way is the logical,
reasonable way to go. And I hope and expect that folks will be
able to reach some agreement on how to move forward.
Chairman Dodd. Mr. Fryzel, I am going to move right along
here. And again, there is lots to talk to you about, as well.
Let me just ask you, as credit unions behave more and more like
traditional banks and concerns are being raised all the time. I
have been a strong supporter of credit unions. But more and
more some ask why should they continue to be regulated
differently?
How would you answer such a question?
Mr. Fryzel. Well, Senator, credit unions are different from
banks in that they are cooperatives owned by the members of the
credit unions. In that sense, they are owners of the financial
institutions themselves.
I think we need to look upon credit unions as what they
really started as, as community-type financial institutions for
individuals who needed those financial institutions. They have
since grown. But keeping in mind the fact that they continue to
serve those individuals of those communities.
Chairman Dodd. What are your views on the expansion of the
common bond requirement? That was sort of a unique moniker, in
many ways, the branding of the credit union, was the common
bond. And the expansion of the common bond requirement and the
implication for credit unions and their competitors.
Mr. Fryzel. Well, the common bond issue has been, of
course, as you well know in the forefront for many years, in
regards to the fact that many individuals felt that credit
unions were going beyond what they were required to or allowed
to initially serve.
But the position NCUA has taken is that if the credit union
is able to serve a particular community, the common bond
remains. So that it is still a defined area of which they can
serve, be it a community or industrial area or what have you.
The bond of the credit union or the ability to serve certain
individuals is specifically designed and specified in their
charter.
Chairman Dodd. I just raise a flag of caution in this area.
This is expanding. And the arguments of those who feel as
though there has been a disadvantage from a tax standpoint and
others are raising, begin to raise some legitimate questions.
And I am a strong backer of credit unions over the years, and
the value that they provide for their members.
But this is an area where I think to continue to expand
those parameters is going to raise more and more questions with
people if it is not carefully thought out. So I urge you to
consider that as you move into this new role.
Let me turn to Senator Shelby.
Senator Shelby. Thank you, Senator Dodd.
I will address this first in my statement and then a
question to the SEC nominees.
The Financial Times recently reported that Moody's had
erroneously awarded AAA ratings to certain securities due to an
error in its rating model, and that it took considerable time
for this error to be corrected. In light of the significant
role that rating agencies play in our markets, as Senator Dodd
has brought up, such errors by the rating agencies are simply
not acceptable, it seems to me.
My question to all three of you, are you committed to using
the tools Congress provided the Commission in the Credit Rating
Agency Reform Act of 2006, which we passed here in this
Committee, to ensure thorough oversight of the rating agencies?
I think Chairman Cox and the other members of the Commission
are already undertaking that and he has testified here before
that.
But the question is are you three committed to looking
seriously at the failings of the rating agencies under the
auspices of the Act that I referenced in 2006?
Mr. Aguilar. Yes, sir. Absolutely, no doubt.
Mr. Paredes. Yes, sir.
Ms. Walter. Yes, sir.
Senator Shelby. Due diligence, I will ask you this
question, all three of you. Several commentators have suggested
that in the rush to book the large profits associated with
structured financial products many underwriters during the last
few years did not conduct sufficient due diligence to uncover
the poor quality of the subprime loans being used to create
many of these securities. We know that now.
Do you believe, the three of you, do you believe that due
diligence standards in the structured financial products market
suffered in the last few years? And if--I think that is a
given. And if so, what steps could be taken to improve the
quality of due diligence for offerings of these products?
I believe I will address this first to Ms. Walter. She has
been on the staff there a long time.
Ms. Walter. Thank you, Senator Shelby.
Due diligence clearly is always an important issue in the
offering process. I do believe----
Senator Shelby. It goes to the heart of it, does it not?
Ms. Walter. Yes, it does. And I do believe that the SEC has
the tools to address this issue. Some of it obviously has to be
done in an investigative kind of way in the enforcement
process. We also do need to look at whether or not there needs
to be additional rulemaking of some sort. I am not at all sure
that that is the case, but I think it is an issue that should
be put on the table.
It is necessary for all of the participants in the offering
process to play their appropriate role and at the level of
quality that is really required in order to make the process
work correctly.
And I think that is particularly important in the
structured finance arena where the products that are being
created can be quite complex, the ways in which they behave
under a variety of economic circumstances need to be looked at
very closely.
Mr. Paredes. I agree with the sentiments of Ms. Walter and
yours, Senator Shelby, that due diligence is at the heart of
the offering process, that due diligence has to be adequate and
up to snuff so that individuals know what the nature of the
investment, what the investment is.
So in that spirit, certainly there should be a
consideration of what might be able to be done in this basis
and needs to be done. But the enforcement tools and the
investigation tools that are presently before the Commission
are certainly at their disposal and should be used in an
appropriate way.
Senator Shelby. Yes, sir.
Mr. Aguilar. Senator, as the end of the train here in this
discussion, I am in agreement with my other nominees. I believe
that the failings have been so systemic, so pervasive, that I
think the SEC----
Senator Shelby. It is unprecedented, is it not?
Mr. Aguilar. In my lifetime for sure.
Senator Shelby. Senator Dodd and I have been on the
Committee here together a long, long time. I have never seen
anything like it in the rating agencies.
Mr. Aguilar. Senators, I am in agreement that this requires
a careful, measured look to make sure that if we do not have
the necessary rules and the necessary authority to address this
to prevent future actions, then I think I would be among the
first to come back to this Committee with any suggestion or
recommendation I may have as to what additional authority or
action should be taken.
Senator Shelby. Rulemaking, expedited rulemaking. A recent
report by the SEC's Inspector General has brought to light the
long delays U.S. exchanges and other self-regulatory
organizations, SROs, experience when seeking the Commission's
approval of proposed rule changes. Under the securities law,
certain SRO rule changes--it is my understanding--must be
approved by the Commission before they can become effective.
The Inspector General for the SEC found that the Commission did
not consistently approve proposed rule changes within the
prescribed statutory timeframe.
You are going to the SEC, I believe all three. Ms. Walter,
you have worked at the SEC a long time, as well as at an SRO,
the financial industry regulatory authority.
How can the SEC improve its review of the proposed SRO rule
changes? And as a Commissioner--and I will ask the other two
this, too--will you be supportive of efforts to improve the
SEC's processes and performance in this area? Because I think
they are a little lacking right now.
Ms. Walter, I will pick on you again and then move down.
Ms. Walter. As an SRO employee, I must say I do think that
the SEC approval process for rules is at times longer than it
should be. And that has happened on more than one occasion in
my own experience.
I do think that the Commission has the ability and the
Commission staff has the ability to expedite that. It needs to
be done, in part, perhaps by a triage process in terms of which
rules----
Senator Shelby. What do you mean by the triage process?
Ms. Walter. There are some rules that could be moved
through--SRO rules that could be moved through extremely
quickly because they do not present the same level of critical
issues that others do, whereas there are others that obviously
require more time and attention. But I do think----
Senator Shelby. Well, some are more complex.
Ms. Walter. That is absolutely right.
And I do believe that the Commission has said that it is
committed to fixing this process, and of course it is
particularly critical with respect to SROs that have
competitors that are not regulated in the same sort of way.
And as a Commissioner, if I am fortunate enough to be
confirmed, I would be very pleased and anxious to work with the
staff and my fellow Commissioners to making sure that this
process is expedited.
Senator Shelby. What about you two gentlemen?
Mr. Paredes. I, too, Senator, would be supportive of
considering efforts to expedite the process in a prudent
matter. Certainly, complicated issues need due consideration
and deliberation. But without question there would be some
rules that could be moved in a more expeditious manner. And
ways to strike that appropriate balance is certainly worth
serious consideration.
Mr. Aguilar. Senator, I am in full agreement with what you
just heard.
Senator Shelby. Thank you.
I want to move to our economist here. The dollar and the
oil prices, we have seen the U.S. dollar depreciate
significantly against the euro in the past several years. At
the same time, Gulf states such as Saudi Arabia link their
currencies to the U.S. dollar and price oil in dollars.
What portion of the dramatic increase in oil prices could
be explained by the trend in the value of the dollar? And what
would you recommend as an appropriate policy response for the
Administration with respect to the Gulf states and their link
to the U.S. dollar? I think that is important.
Go ahead.
Mr. Marron. Thank you, Senator.
I am not going to have a specific number for you, but it is
clearly the case that if you look at the rapid rise of oil
prices that we have seen over the last 3 years or 2 years,
supply and demand have been key drivers of that. But in dollar
terms there is clearly also an effect in the change in exchange
rates.
I am not going to have a specific number for you, but if it
were something in the 10 to 20 percent range----
Senator Shelby. But a dollar that is too weak or perceived
as getting weaker is not necessarily in our best interest, is
it?
Mr. Marron. Well sir, we are getting into delicate terrain,
as you know, in that the usual talking point is that for things
about the dollar the only people allowed to speak about that
are the Treasury Secretary and the President. But subject to
that constraint, clearly a rapid decline in the dollar would be
bad for the U.S. economy in the long run. You do not want a
disorderly unwinding.
And clearly, the change that we have seen in the exchange
rate over the last several years, as I have said, has been one
of the factors that has been contributing to the rise in oil
prices. And, I should note, other commodities.
Senator Shelby. Is part of the price of oil that closed
today because of the feeling of the dollar in the world market?
Mr. Marron. I think it is certainly the case that----
Senator Shelby. It has got to be.
Mr. Marron. Oh absolutely. The change in the dollar, the
change in its value over time, has lifted basically most
commodity or all commodity prices that trade on the world
market.
Senator Shelby. It is priced into the price of oil, is it
not?
Mr. Marron. Absolutely.
Senator Shelby. There is some evidence of contradictory
forces that play in the economy right now. Chairman Bernanke
has recognized that. In the middle of the present economic
slowdown, commodity and food prices have continued to increase.
What do you judge to be the threat of slow growth continuing
with inflation remaining above the Federal Reserve's comfort
level? In other words, some people believe that we--can we--how
do we fight a turn down in the economy and suspect or maybe the
reality of some inflation out there, too. Is that not a
dilemma?
Mr. Marron. It is a dilemma. We clearly face a very
challenging time. When you tote up the challenges the economy
faces at the moment between credit and housing and oil and food
prices, there are a lot of headwinds. Obviously we have seen
that in the economy in the fourth quarter of last year, the
first quarter of this year, where we have had very slow growth,
close to just going sideways.
I would separate a little bit, both oil and food are
significant challenges for American families. I would separate
them a little bit on their overall macro effect, where oil is I
think a much bigger challenge for us because we import so much.
Whereas again, from the macro economy as a whole, food has a
little bit of--on the one hand, it is a major hit to many
American families. But on the other hand, we do have a very
strong agricultural sector that is getting some lift from that.
And so from the macro point of view, it is not quite as
much of a challenge, even though it is a significant challenge
again for families and for kind of the inflation that folks
face.
Senator Shelby. Do you believe that in America we have many
challenges? We have many successes, as you know, economically.
But do you believe, doctor, that our biggest challenge, looking
at the economy in the future, is the availability and the price
of oil?
Mr. Marron. I would--again, putting on my CBO hat for a
moment, the standard talking point--which I actually agree with
and embrace--is when you look sort of at the multiple decades
point of view, the real No. 1 challenge is the long-run fiscal
situation. But putting that aside, as you look at the next few
years, I would say oil prices is clearly in the top 5 list of
challenges that we face. We have gone from an environment in
which oil prices----
Senator Shelby. What is our No. 1 economic problem and
challenge? Is it oil and the price of oil? Availability and
price?
Mr. Marron. I would say in the short run it would be
housing and making sure that the financial markets do not
basically go back to the way they were in some previous months.
And then I would probably get to oil and $130 oil is a
major challenge for the economy and we are going to need to
figure out ways to respond to that on both the demand and
supply side.
Senator Shelby. Do you see any answers to it, quickly,
other than more supply?
Mr. Marron. Some more supply, you see some response on the
demand side and over time we will see more of it. Today's
announcement from GM, frankly, is one aspect of what will be
the response to this, which is a shift to more fuel efficient
vehicles and away from larger ones which clearly has a lot of
costs associated with it. But I think that will be part of the
solution.
Senator Shelby. One question on credit unions and I will be
through.
Mr. Fryzel, in this continued period of unrest in the
financial markets, housing markets and so forth, what do you
see as the biggest challenge facing the stability and the
continued profitability of our Nation's credit unions?
Mr. Fryzel. Senator, fortunately, the majority of credit
unions are not involved in the housing crisis. The ones that
are, NCUA has taken swift action to monitor that situation and
make sure that those credit unions have been----
Senator Shelby. Are you telling us here today that the
credit unions--that the housing downturn and the prices--
downward trend of houses, the surplus of houses, the
foreclosure problem, will not have any effect on the financial
stability of the credit unions?
Mr. Fryzel. No, sir.
Senator Shelby. Well, what are you saying?
Mr. Fryzel. Senator, I am saying that the majority of
credit unions will not be impacted in a financial way by this
downturn.
Senator Shelby. But some will.
Mr. Fryzel. There are some that will. And those are the
ones that are being closely monitored.
Senator Shelby. And some banks will, too, we have been told
by the FDIC Chairman right here.
Mr. Fryzel. But at NCUA, moves have been made to make sure
that those credit unions are absorbed into stronger credit
unions and those situations corrected. But for the most part,
the credit union industry is still very strong.
Senator Shelby. OK. Thank you, Mr. Chairman.
Chairman Dodd. Thank you.
Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman. Gentlemen
and Ms. Walter, welcome.
First, Mr. Paredes, as a distinguished academic, you have
the opportunity to write a lot. That is a problem sometimes,
but I do not think in your case.
But one quote, you talk in one of your articles about the
overload in information and perhaps to scale back on
disclosure, which tends--at least superficially--to argue
against the mantra we all use, transparency, transparency,
information.
Can you qualify that and put it in perspective?
Mr. Paredes. To be sure. And quite frankly, in the article
I also go on to talk about the very important virtues of the
mandatory disclosures and what any costs would be to any
scaling back.
What the paper drove at at its core was trying to recognize
that the mandatory disclosure regime wants to ensure that
individual investors, institutional investors have the
information they need but are also able to process that
information in a way so that it is usable, as usable as
possible.
It turns out there are a lot of studies to suggest that
that is a very complicated analysis when you engage the
question of the volume of information. And so it started with
the recognition that there was a lot of information which needs
to be disclosed and appropriately so.
But the question is are there ways in which we can consider
how information is used to suggest that we could actually come
up with a more effective mandatory disclosure regime. And to
the extent that the volume of information can be a challenge,
one obvious response is to say perhaps there should be less
disclosed.
There are a lot of reasons why disclosing less is not a
wise policy choice. So I go on in the paper to consider other
possibilities in terms of the presentation of information and
the like, so that the information which is disclosed is
actually much more able to be used, and so therefore we end up
with a more effective disclosure regime than what might
alternatively be the case.
Senator Reed. And based, I presume, on some behavioral
model of how we process information?
Mr. Paredes. Precisely, based on what we have learned about
decisionmaking and psychology and the ways in which we tend to
process information. It is obviously not a one-size-fits-all
approach in terms of how we process information. It varies from
context to context and person to person. But there are a lot of
studies that have been done in this regard and it is building
on that literature.
Senator Reed. Ms. Walter, your comments on this whole issue
of disclosure? Because we all pick up 10-K and the annual
reports, and the agate print--or whatever the small size print
they use--is daunting.
Ms. Walter. It certainly is to someone like me who needs
reading glasses, I will say.
It is an incredibly important issue. And again, it is one
that we really need to look at from the vantage point of the
investor. And I think particularly I am concerned about the
retain investing public.
And I agree with Professor Paredes that we really need to
look at issues like presentation and issues--there are
solutions, for example the layer of disclosure.
At FINRA, I have been a proponent of a point of sale
disclosure document for mutual funds that makes use of
technology to do that, where you can present easily accessible,
understandable disclosure to investors and at the same time
allow them to access greater detail that they may want on one
or more issues.
So we do have to deal with presentation. We do have to deal
with understandability. And one of the things I have learned
over the last few years is never to trust any of our instincts
as to what is going to be accessible and understandable by the
average person on the street, because I think when we have done
testing through focus groups and interviews with retail
investors we have gotten some surprising results.
So we need to make use of those kinds of techniques to test
our judgment.
Senator Reed. Mr. Aguilar, any comments?
Mr. Aguilar. Senator Reed, I am in agreement with what Ms.
Walter and Mr. Paredes have said. I would only add that with
the advent of technology there may be ways to have disclosure
better disseminated and when disseminated better manipulated by
the ultimate investors so they can get out of the information
what they want. Different investors in today's world look at
different things. And it is hard to decide in an overarching
umbrella manner that only X amount of disclosure is all people
really need to have. So we need to be sensitive to what
investors need.
With the advent of technology, there may be ways to provide
it, allow it to be layered, to allow it to be disseminated in a
more effective manner.
Senator Reed. Let me flag another disclosure issue. That is
that there are some secondary markets--in fact, as an example,
the public reports of Merrill Lynch selling auction securities
to Springfield, a municipality, in which because it was not a
primary offering but a secondary offering, they felt no legal
obligation to disclosure or have a prospectus or anything like
that. In discussing with people, that seems to be not uncommon.
Is there a need to look beyond the initial disclosure to
the secondary markets, the secondary aspects?
This is a jump ball, in college bowl terms. Any thoughts?
Ms. Walter?
Ms. Walter. There is a real balance that needs to be struck
and the SEC has struggled with this in terms of its point of
sale disclosure proposals between the desire to get the right
information into the hands of investors and at the right time,
and also not interfere with the ability to invest when they
want to.
Again, technology ultimately will be the answer to this,
and it is partially today given the fact that the investor
community is becoming increasingly technologically--perhaps not
savvy but at least marginally literate. So that you can get
information into the hands of investors before they are making
decisions.
But even if you go back to primary offerings, there is a
flaw in the disclosure system in that for the most part
prospectuses arrive after the fact. That is not the right time.
So we do have to work very hard to ensure that people are not
only getting the right information but getting it at the time
when it matters.
Senator Reed. Let me raise a general topic and ask if
anyone has a comment. That is, Mr. Paredes and I had an
opportunity to have a very thoughtful discussion much earlier
today about a financial world that has changed dramatically in
20 or 30 years where so many of the institutions that were
central to the economy were regulated, by the Federal Reserve,
by the SEC, by the Comptroller, et cetera.
Now we have the proliferation of private equity funds,
hedge funds, a huge amount of leverage is at work, raising the
question how do you deal with this in your role as regulators
of financial markets with this whole unregulated world out
there where counterparty risks might be a serious issue, the
ability of some of these institutions to manage these risks is
basically something that you only can touch indirectly.
And I wonder, Mr. Aguilar, do you have any thoughts about
this as you go forward?
Mr. Aguilar. Senator, I do have some thoughts. I am afraid
at this moment I do not have any solutions for you. I do agree
with you that to have these pooled funds that can be very large
in today's market, totally unregulated, is something that needs
to be discussed and dialogued. Going back to 1990 and long-term
capital management and the effect that it had on the market.
I think it is worthy of a serious thought and exactly what
the answer is I look forward to getting input from this
Committee and from other interested individuals.
Senator Reed. My time is rapidly expiring. Mr. Paredes and
Ms. Walter?
Mr. Paredes. Thank you, Senator.
Certainly the degree and leverage in the marketplace and
the degree to which there is financial innovation is something
that we should be taking very seriously and whether there are
steps that are prudent to take without chilling the productive
behavior, whether there are steps that could be taken to
facilitate market discipline or otherwise from a regulatory
perspective are certainly a set of issues that need serious
consideration.
Senator Reed. Ms. Walter, quickly?
Ms. Walter. I also think from an informational standpoint
it is important for those who regulate markets to have
information that goes across the board without significant gaps
in parts of the market that are not transparent.
Senator Reed. Thank you very much.
Mr. Marron, very quickly, one question is that we passed
here a few months ago a stimulus package which let me ask you
first, how would you evaluate its effectiveness in stimulating
the economy to date?
Mr. Marron. Well, as you might imagine, the answer is going
to be the typical economist, sort of we do not know yet, on the
one hand. On the other hand, on the consumer side, about half
the money is out the door and about half the money is yet to
come.
To be honest, we have not seen any obvious wiggles in the
real-time data that we have, but the real-time data are not
that good. And so this will be something where to really
fundamentally evaluate it is going to be at least several
months in the future when we start having good data.
Senator Reed. I guess the impression I have, and my
colleagues have the same sort of data, which is going back home
and talking to people is with the gas prices accelerating,
those checks got eaten up pretty quickly, just thinking ahead
of how do we keep the gas tanks full in people's automobiles,
and all the other issues we talked about, accelerating
commodity costs, et cetera.
It seems that the initial data does not suggest a decisive
impact, which raises a second question in your capacity of
advising the president on the economy. Would you advise him to
contemplate and to request a second stimulus package which
might focus more on infrastructure rather than simply a rebate
approach?
Mr. Marron. I guess two parts to that. The first is, and I
absolutely agree that the increase in energy prices and food
prices is a serious headwind on consumers. That does not mean
the stimulus is not working. It just unfortunately means that
the stimulus will be working off of, in essence, a worse
baseline than we had originally intended and will also make it
a little harder to tease out the effect. Because it might be--
because part of the effect of the stimulus is basically going
to be offsetting that.
My posture on any kind of additional policy actions is
mostly at this point a watch and wait and see where we end up.
In particular, on the infrastructure front--and this is part of
the discussion that we had several months ago--I think the
concern there is largely a spend out rate concern in that if we
are trying to target a downturn that we expect in a particular
time period, it is challenging to design spending on that front
that actually ends up within the time period that we are
worried about.
Senator Reed. Thank you very much, Mr. Chairman.
Mr. Fryzel, good luck.
Chairman Dodd. Thank you, as well.
I want to just follow up with Senator Reed's last point,
and that is we have had a hearing here already. There has been
a proposal that Senator Hagel and I have made after about a
two-and-a-half year study done by the Center for Strategic
International Studies on infrastructure need. There is a gap of
around $1.3 or $1.6 trillion just in maintenance of where we
are with basic infrastructure, whether it is sewage systems,
wastewater treatment facilities, transportation, mass transit
systems. We have literally a collapsing and decaying
infrastructure in the country.
And it seems to me, given the residual effects and the
implications of having some investments made by luring private
capital with some seed money, initially there is some very
exciting data that comes up here in terms of what we can be
doing in this area for employment but also we have never had a
period of economic growth in the history of our country without
having a significant investment in basic infrastructure, as
well.
And I would urge the Administration to take a closer look
at this. There have been some pretty responsible people around
the country who are looking at the issue as a way of
stimulating some growth in the Nation. It does not have the
kind of snappy quick answers, but it is clearly a part of what
needs to be done, I think, for those of us that are looking at
it.
Our intention is to try and mark up something here in this
Committee, hopefully before the end of this Congress, on a
matter like this, hopefully with some strong bipartisan
support, as well.
So we would urge the Administration, if you are going to be
confirmed, to take a look at this very seriously as a way in
which to create some economic growth and stimulation.
Senator Reed. Mr. Chairman, there is also another aspect,
which is employment. In our neck of the woods, we are running
about a 6.1 percent unemployment rate which understates, I
think, real unemployment. One of the virtues of some of these
programs is they actually put people to work as well as putting
money into the economy for consumption.
So I would echo the Chairman's sentiment.
Thank you very much.
Chairman Dodd. According to the American Society of Civil
Engineers, the current condition of our Nation's major
infrastructure systems earns a grade of an average of D,
jeopardizing prosperity and quality of life for all Americans.
So it goes beyond just sort of a stimulation idea but rather
one that there is a crying need for, as well, in the country.
And it has gone unattended for too long.
I have a letter here from Bob Dole in support of you, Mr.
Fryzel, and your nomination. We will include this as part of
the record.
I think it is intriguing that he asked me to put this and
not Elizabeth, but we will let that go.
You have all been very good and we appreciate your time. We
appreciate the participation of our members here. There is a
lot to chew and swallow on this afternoon but I am very
grateful to all of you for your willingness to serve and to try
and move these things along.
Again, I cannot predict outcomes, but we would like to see
if we cannot get you up before this Committee and before the
full Senate sooner rather than later.
With that, the Committee will stand adjourned.
[Whereupon, at 5:05 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD FROM LUIS AGUILAR
Q.1. Regulation of Investment Banks: The current credit crisis
and its impact on the markets, including the failure of Bear
Stearns, has raised issues regarding the effectiveness of the
Commission's regulation of investment banks, as well as other
market participants. If confirmed, will you carefully review
the Commission's regulatory oversight of the investment banks
and support adding regulations and adding staff resources if
necessary to protect investors and promote the stability of the
markets? If so, what steps do you feel the Commission should
take?
A.1. Yes. If confirmed, I would welcome the opportunity to
review the SEC's program for supervision of investment banks
and, if necessary, I would support adding regulations and staff
resources. My understanding is that the SEC is already taking
action, and looking into what additional authority and
resources may be needed to better supervise investment banks
through the Consolidated Supervised Entities (CSEs) program. I
support such an effort. Among the things that the Commission
should consider is dedicating more staff to the program, and
working with Congress to review the regulatory framework, as
currently there appears to be no regulatory agency with the
explicit statutory authority and responsibility for the
supervision of investment bank holding companies with certain
bank affiliates.
Q.2. Investment Advisors: The RAND Study on ``Investor and
Industry Perspectives on Investment Advisers and Broker-
Dealers'' reported that there is widespread confusion among
investors about key differences between investment advisers and
broker-dealers in their duties (advisers have a fiduciary
duty), their titles and their services.
What would you do as a Commissioner to reduce or eliminate
this confusion for the protection of investors? For example,
what actions would you support so that investors better
understand the differences pursuant to which investment
advisers owe them a fiduciary duty while broker-dealer
registered representatives observe a standard of suitability?
A.2. It is my understanding that the SEC staff is developing a
number of options for future regulation of investment advisers
and broker-dealers that take fully into account the findings in
the RAND Study. In addition, I would also urge a strong
proactive educational initiative to better inform investors of
the differences in the duties owed to by them by each regulated
entity. If confirmed, I will look forward to participating in
the process.
Q.3. Cooperation with State Securities Regulators: State
securities regulators are vital to the protection of investors.
They have made important contributions identifying and
prosecuting misleading and fraudulent stock analyst
recommendations, leading to the Global Settlement; late trading
and market timing involving mutual funds, leading to
enforcement actions and regulatory reforms; and in responding
to retail investor concerns. Would you encourage strong
cooperation by the Commission with State securities regulators?
A.3. Yes, such cooperation is a key element in investor
protection.
Q.4. Mutual Recognition: The Commission is considering whether
to implement mutual recognition, in which citizens in the U.S.
could purchase or trade securities directly with foreign
broker-dealers or on foreign exchanges and be regulated for
many purposes by the foreign regulator instead of the SEC. The
Commission announced that it has begun discussions with
Australia, and such discussions are intended to enhance
regulatory cooperation and investor access to foreign capital
markets, and is making a schedule for a process intended to
open discussions with Canada.
When considering a mutual recognition framework that would
allow U.S. citizens to directly invest in foreign markets and
be solicited by foreign brokers, what factors do you feel the
SEC should take into account? For example, do you feel that the
Commission should find comparability not only of laws but also
of a foreign regime's enforcement and inspection resources,
independence from the government, respect for the rule of law,
culture of fair dealing, tradition of investor protection,
impartial regulation over market participants, or other
factors?
A.4. The factors mentioned are appropriate for any
consideration in a mutual recognition program. Other additional
factors may include the transparency and perceived fairness of
the court system and the ease or difficulty in seeking redress
if necessary.
Q.5. Adequacy of the SEC Budget: A key factor in maintaining
investor confidence is having a Federal securities regulator
that is fully funded. Do you feel that the President's proposed
SEC budget for FY 2009 at $913 million is adequate to
effectively perform its functions, including ramping up the
regulation of credit rating agencies, investigating conduct
related to the sub-prime crisis, reviewing corporate
disclosures, overseeing rules for new markets and other
important activities? If you are confirmed and, as a
Commissioner, find that more resources are needed, will you
support an agency request for additional funding?
A.5. I haven't reviewed the budget and staffing levels in
detail but it is my understanding that Chairman Cox has
indicated that the FY 2009 request is sufficient for the SEC to
fulfill its mission. If I'm confirmed and I find that
additional resources might be needed I will support a request
for additional funding.
Q.6. International Convergence of Financial Reporting
Standards: The SEC is currently considering allowing U.S.
companies to file financial statements using the International
Financial Reporting Standards, which would give them a choice
between GAAP and IFRS. Such a change at this time raises
serious questions.
A. While the FASB and IASB have undertaken efforts at
convergence and made important progress, do you feel there are
at present still significant differences between GAAP and IFRS?
B. Would investors, particularly retail investors, be able
to make accurate comparisons for purposes of making investment
decisions between U.S. companies reporting material financial
information in GAAP and in IFRS at this time?
C. If given a choice between GAAP and IFRS, do you feel
that there are circumstances under which a public company could
choose one standard above the other to enhance the
representation of its finances to investors? If so, do you feel
that such a choice is consistent with the Commission's investor
protection mission?
D. Do you feel that adequate capacity exists today in
accounting firms to provide auditing services for all companies
that might select IFRS, if given the choice, and do you feel
such a change would have an impact on the cost of audit fees to
public companies, particularly small businesses?
A.6. As a U.S.-trained lawyer, rather than an accountant, my
present understanding of GAAP is limited and I have less
information about the substantive details of IFRS. It is my
understanding, however, that both GAAP and IFRS are high-
quality accounting standards. I'm also aware that the SEC has a
mandate to oversee accounting standards so that investors can
receive an understanding of an issuer's financial performance,
as well as be able to draw comparisons between investment
options. With increased globalization there have also been
greater opportunities for investors to diversify their holdings
among both U.S. and foreign companies. As a result there have
been efforts to develop IFRS to serve as an international set
of global accounting standards. It is my understanding that
over 100 countries have adopted IFRS and more are considering
its adoption, to the exclusion of U.S. GAAP. It is my
understanding, however, that at the present time many U.S.
auditors and accountants are not very familiar with IFRS and
that it is not currently broadly taught by U.S. educational
institutions. I also understand that there are still efforts
underway to align the content of GAAP and IFRS and that the SEC
continues to work toward a roadmap and timetable to develop a
transition process.
The questions posed above are appropriate questions that
need to be fully considered in the process of considering
whether, and if so when, to allow transition to IFRS. If
confirmed, I will look forward to acquiring more information
about GAAP, IFRS and related issues and addressing those
questions in depth, as well as others that may arise on this
subject.
Q.7. Opt-In for Proxy Materials: A recent SEC new rule requires
investors to make individual requests, or opt-in to obtain
paper copies of proxy materials from companies in which they
own stock. Reportedly, this rule has significantly reduced the
number of individual shareholders who vote. The Wall Street
Journal in late April reported that of ``80 companies that have
switched to the electronic model, dubbed e-proxy . . . on
average, just 4.6% of individual shareholders voted on company
matters using e-proxy, a sharp decline from the 19.2% who voted
in the year-earlier period, when the companies sent out
traditional paper ballots, according to Broadridge Financial
Solutions Inc., which processes proxy votes.''
Do you feel the Commission should monitor the impact of
this rule and determine whether the opt-in to receive a paper
proxy is having an unintended or undue negative impact on
shareholder voting participation?
A.7. Yes, it's important to avoid adversely impacting
shareholder participation in exercising their voting rights. I
understand the SEC staff has been monitoring the impact that
this rule has had on the industry, including retail shareholder
turnout.
Q.8. Short Sales in Shareholder Votes: Some have raised a
concern that institutions which hold investors' stock in
``street name,'' such as brokers and banks, may not be able to
accurately account for shares that are sold ``short'' in
corporate elections and this could cause problems in producing
a reliable shareholder vote count in a close, contested
election. Would you assess this concern and seek to take any
appropriate action?
A.8. Yes, I would look forward to doing so if confirmed.
Q.9. SEC-CFTC Memorandum of Understanding: In March 2008, the
SEC and CFTC signed a Memorandum of Understanding (MOU) to
enhance coordination and facilitate review of new derivative
products. SEC Chairman Christopher Cox and Acting CFTC Chairman
Walt Lukken jointly stated portfolio margining is an issue that
should be addressed under the MOU.
Do you support addressing the customer protection issues
presented by cross-margining futures and securities in customer
portfolio margin accounts in the MOU process? If so, do you
feel analyzing and potentially resolving this should be an
important priority among the issues to be considered under the
MOU?
A.9. Yes, these are important issues that need to be addressed
whether through the MOU process or some other joint mechanism
for resolving the issue.
------ --
----
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM LUIS AGUILAR
Q.1. Please explain if you believe the adoption of IFRS by U.S.
companies meets the requirements of Sarbanes Oxley for such
companies to use professional accounting standards established
by an independent standard setting body?
A.1. At present my understanding of the substantive details of
IFRS is limited. I look forward to studying the entire issue of
the potential use of IFRS by U.S. companies. It is my
understanding from materials I have read, however, that IFRS
are high-quality accounting standards. I believe that it is
important that those standards be established and maintained by
an independent standard setting body, free from undue conflict
of interests. If confirmed, I will look forward to obtaining
more information about how the standards are developed and
interpreted to determine whether IFRS satisfies the intent and
letter of the Sarbanes-Oxley Act.
Q.2. Financial services firms have become much more complex,
and the markets have likewise become more complex. We have many
non-bank entities engaging in banking activities and other
players active in the markets, such as hedge funds. Many of
these newer players remain unregulated, or are only lightly
regulated, leaving some gaps in oversight throughout the
financial system.
What should the SEC be doing to better review risks in a
more complex and global financial system? How can the SEC have
a better handle on emerging risks because of this complexity?
A.2. The U.S. and global financial capital markets continue to
evolve at a rapid pace and seem to be more interconnected so
that the dangers of systemic or ``mega-risks'' are potentially
more feasible. Preparing to deal effectively with the complex
market of the 21st century is a major challenge. I'm not fully
informed about what steps the SEC may be taking or planning to
take to better review risks but some possible suggestions
include, among others: utilizing new technologies to more
rapidly and efficiently collect and access information to
determine trends or spot potential issues; being able, where
appropriate, to provide information in ``real time'' to allow
for quicker analysis and consideration; improving communication
with the public and media so that accurate information can be
disseminated when required; and enhancing international
coordination and cooperation to better address globalization
and cross-border issues.
Q.3. What is your perspective on the Treasury's ``Blueprint For
A Modernized Financial Regulatory Structure'' reform as it
relates to the SEC?
A.3. While I have not reached any conclusions about any of the
particular proposals in the Paulson Blueprint or the other
recent proposals on regulatory reform, I do believe that it's
appropriate to periodically revisit the regulatory framework to
assure that it continues to meet the needs of the American
public.
Q.4. What is your viewpoint on a non-binding shareowner's right
to vote on a company's executive compensation program?
A.4. As a general matter, it's always beneficial when
shareholders are able to communicate their views to management
and other shareholders on important issues. In connection with
the legislative efforts underway in the House and the Senate,
there have been reports discussing the advantages and
disadvantages of having a mandatory vote (e.g., the benefits of
shareholders' ability to voice a collective opinion versus the
possibility that a mandatory vote would add a costly burden on
companies and unnecessarily intrude into the affairs of
corporate boards). If confirmed, I would be interested in
seriously considering the benefits and costs of a non-binding
shareholder vote on a company's executive compensation program.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER FROM LUIS
AGUILAR
Q.1. There is evidence that the U.S. has experienced some
erosion in its leadership position in capital markets. Unless
reversed, this may hurt Main Street as well as Wall Street.
When companies choose to do IPOs outside the United States,
they are locating not only investment banking deals, but also
jobs, outside our country. A portion of this problem may be
attributable to the securities litigation risk of being an
American public company.
Our colleague, Senator Schumer, together with Mayor
Bloomberg, issued a report on this problem in 2007. It was
preceded by work done by Professor Scott of Harvard Law School
and his colleagues at the Committee on Capital Markets
Regulation. The Schumer-Bloomberg and the CCMR reports called
for the SEC to take action.
Last August, a group of prominent academics from across the
ideological spectrum wrote Chairman Cox with their concerns
about securities class action lawsuits and the implications of
such suits for U.S. capital markets and investor protection.
This letter expressed concern about the compensatory and
deterrence rationales for these lawsuits, as well as the
burdens the existing system places on small investors.
The conclusion of these experts is that litigation is
effective at driving business and jobs out of the U.S., but is
ineffective at deterring actual fraudulent conduct because
``settlements almost never come out of the pockets of the
managers who allegedly executed the fraud.''
Chairman Cox has promised to convene an SEC roundtable to
study these and other issues related to the existing securities
class action system. However, little is happening at the SEC,
at least as far as we can tell. Do you share the concerns
raised by this group of prominent scholars?
In addition, do you support the idea of convening such a
roundtable, as proposed by Chairman Cox? If so, will you work
with Chairman Cox to schedule it expeditiously?
A.1. I do not presently have enough information to have reached
a conclusion as to the validity of the concerns raised by the
scholars. I understand that certain reports have suggested
discussion around various issues, such as: whether to limit
settlement amounts in SEC enforcement cases; whether it is
necessary to provide clarity on fraud statutes frequently used
in private lawsuits; who should bear the cost of attorney fees;
the role of insurance in indemnification, etc. I am aware that
Chairman Cox had announced plans to hold a roundtable forum on
litigation reform and that the Chairman subsequently thought it
best to delay it until such time as there was a full
Commission. I would support the Chairman's effort to schedule
it as soon as practicable once there is a full Commission.
If confirmed, I will keep an open mind as to whether any
changes should be recommended. It is important to consider the
balance between protecting investors' rights and avoiding
frivolous lawsuits that may adversely impact the U.S. financial
markets' competitive position.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER FROM LUIS
AGUILAR
Last Wednesday, May 28, 2008, The Wall Street Journal ran a
front page story entitled, `SEC Will Scour Bear Trading Data'
stating that the SEC has an ongoing investigation into
``whether there was insider trading or market manipulation of
Bear Stearns, people familiar with the matter say.''
Q.1. Without asking for you to comment on the accuracy of the
story, as I understand the SEC--nor its nominees should comment
on an ongoing investigation--can you tell me whether the SEC
should look into the possibility of insider trading and/or
market manipulation as it relates to the Bear Stearns
situation?
A.1. Market manipulation, whether it's through spreading false
rumors or other action, would be a violation of securities
laws. It is important that the SEC continues to demonstrate
that illegal market manipulation will not be tolerated. That
would be particularly the case if it occurs in high profile
events such as the rapid collapse of Bear Stearns.
Q.2. Also, do you believe that the SEC has all of the tools
necessary to investigate the possibility of impropriety in a
case like Bear Steams and to a lesser extent Lehman Brothers?
A.2. I am not currently sufficiently informed about what the
SEC has done in these matters to have reached a conclusion as
to whether the SEC has all of the tools that would facilitate
an investigation of the kinds of improprieties that have been
rumored to have occurred with respect to Bear Steams or Lehman
Brothers. Any investigations of these kinds of issues are,
however, an obviously important function for the SEC and, if
confirmed, I would regularly take stock of the adequacy of the
SEC's enforcement and investigatory tools and would be
supportive of addressing any gaps that might come to light.
Q.3. From your perspectives, are the Insider Trading Sanctions
Act of 1984, Insider Trading and Securities Fraud Enforcement
Act of 1988 and The Securities Exchange Act of 1934 sufficient?
A.3. It is important for the SEC to vigorously pursue
violations of insider trading laws. The American public is
investing in the stock market more than ever before. It is
important that they trust and have confidence in the fairness
and integrity of our securities markets. An essential part of
our regulation of the securities market is the vigorous
enforcement of our laws against illegal insider trading. In its
basic form, illegal insider trading occurs when certain persons
having confidential, non-public information about materially
important events use that unique knowledge to profit, or avoid
loss, on the securities market, to the detriment of investors
who would buy or sell their securities without the advantage of
such ``inside'' information.
In order to address the dangers of illegal insider trading
Congress passed The Insider Trading Sanctions Act of 1984
(ITSA), and increased sanctions against trading in securities
while in possession of material, nonpublic information. ITSA
authorized the SEC to seek in federal court civil money
penalties of up to three times the profit gained or loss
avoided by a person who commits illegal insider trading.
Four years later, amidst several major Wall Street scandals
involving insider trading, Congress again considered the
adequacy of the Commission's remedies to combat insider trading
and passed The Insider Trading & Securities Fraud Enforcement
Act of 1988 (ITSFEA) to, among other things, broaden the scope
of ITSA by requiring written policies of various regulated
entities, increasing maximum criminal penalty from $100,000 to
$1,000,000 and jail term from 5 years to 10 and expanded the
potential exposure to civil penalties beyond primary insider
trading violators to securities firms and other ``controlling
persons'' who knowingly or recklessly fail to take appropriate
measures to prevent insider trading violations by their
employees.
In addition to these laws passed by Congress, there have
also been numerous court cases that have contributed to the
parameters of illegal insider trading, e.g. cases such as U.S.
v. O'Hagan, Chiarella v. U.S. and Dirks v. U.S. These decisions
have dealt with the concepts of duty owed, and to whom, duties
of a ``tippee'', theories of misappropriation, and other
issues.
With developments in technology and globalization come new
potential legal issues. In a recent speech the SEC's Director
of Enforcement discussed issues raised if a computer expert,
who could be located anywhere in the world, were to hack
undetected into corporate databases and trade on the basis of
information found there. It is unclear how those activities
would be treated under current insider trading law.
Clearly this is a very complex and fluid area of the law.
If I'm fortunate enough to be confirmed, I will keep an open
mind as to what additional legislation or regulatory actions
may be needed.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM LUIS
AGUILAR
Q.1. Secretary Paulson's blueprint for a modernized financial
regulatory structure, along with other studies, recommends both
regulatory and legislative changes to modernize the SEC's
oversight of the securities market. That means addressing the
increasing global nature of the financial marketplace, speeding
up the rule approval process, and updating and harmonizing
existing statutes governing brokers and investment advisors to
reflect current market conditions and client needs. The SEC is
currently working on a broad array of issues including mutual
recognition, principal trading relief, and short selling. What
are the two or three issues you believe the SEC needs to
resolve this year to enhance the competitiveness of our capital
markets?
A.1. The U.S. capital markets continue to be the deepest, most
efficient, and most transparent in the world. By most
measurements we remain the uncontested world leader. Our
markets, however, are not immune to challenges. To promote the
conditions for American prosperity and economic growth, it is
essential that we maintain the competitiveness of our capital
markets.
The SEC has a number of matters under consideration which
would have a positive impact on enhancing the competitiveness
of our capital markets. A few that I believe could be resolved,
hopefully, this year include: the proposals for additional
rules regarding NRSROs to enhance accountability, transparency
and competition, and restore market confidence in the credit
rating agencies; the various proposed rules changes relating to
foreign private issuers that are intended to improve
accessibility to the U.S. public capital markets; consideration
of whether U.S. domestic issuers should be given the option of
reporting in either International Financial Reporting Standards
(IFRS) or U.S. Generally Accepted Accounting Principles, and,
if so, what transition process would be appropriate; and
consideration of amendments to the cross-border tender offer
rules to decrease the burdens of bidders and issuers who must
comply with multi-jurisdictional regulatory systems, and
facilitate the inclusion of U.S. securities holders in such
transactions.
These and other initiatives are commendable and, if
confirmed, I welcome the opportunity to participate in the
process of considering them. It is important, of course, to
move forward in such a manner so as to maintain the credibility
and integrity of our capital markets and vigorously protect
investors.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD FROM TROY A.
PAREDES
Q.1. Regulation of Investment Banks: The current credit crisis
and its impact on the markets, including the failure of Bear
Stearns, has raised issues regarding the effectiveness of the
Commission's regulation of investment banks, as well as other
market participants. If confirmed, will you carefully review
the Commission's regulatory oversight of the investment banks
and support adding regulations and adding staff resources if
necessary to protect investors and promote the stability of the
markets? If so, what steps do you feel the Commission should
take?
A.1. The regulation of investment banks is a very important
matter that deserves the serious attention it is receiving.
Recent credit market events, including the Bear Stearns
situation, instantiate concerns about systemic risk and the
importance of proper risk management. If I am fortunate enough
to be confirmed, I am committed to working with the Chairman,
the other Commissioners, and the staff in carefully evaluating
the SEC's regulatory oversight of investment banks. Without
having the benefit of all that I will learn if confirmed and
given the opportunity to serve as a Commissioner, it would be
premature to speculate on what precise regulatory changes may
be called for given this matter's complexity. Indeed, there may
be different responses for the short-, medium-, and long-terms.
That said, some possibilities include a reconsideration of the
Consolidated Supervised Entity program and additional
coordination among regulators to ensure proper risk management.
Another possibility is to consider what additional disclosures
by investment banks may be appropriate to bolster market
discipline. In general, I would support regulatory changes and
additional staff resources if necessary to ensure the proper
oversight of our markets in order to protect investors and
promote the stability of U.S. securities markets. Indeed, I
understand that the SEC already has undertaken a more active
oversight role in response to recent events.
Q.2. Investment Advisors: The RAND Study on ``Investor and
Industry Perspectives on Investment Advisers and Broker-
Dealers'' reported that there is widespread confusion among
investors about key differences between investment advisers and
broker-dealers in their duties (advisers have a fiduciary
duty), their titles and their services.
What would you do as a Commissioner to reduce or eliminate
this confusion for the protection of investors? For example,
what actions would you support so that investors better
understand the differences pursuant to which investment
advisors owe them a fiduciary duty while broker-dealer
registered representatives observe a standard of suitability?
A.2. The RAND study makes an important contribution to the
understanding of the investment adviser and broker-dealer
industries and investor perspectives of them. The SEC should be
commended for initiating this project, and it may serve as a
useful template for other studies. The distinctions between
investment advisers and broker-dealers have blurred.
Nonetheless, the legal obligations of investment advisers and
broker-dealers differ, and so whether one is an ``investment
adviser'' or a ``broker-dealer'' matters. (Interestingly, the
RAND study found that despite investor confusion regarding the
differences between investment advisers and broker-dealers,
investors generally were pleased with the services they
received.) I understand that the staff is considering the RAND
study and, if confirmed, I welcome the opportunity to
participate in that process. One possibility to consider to
reduce confusion is to require a short (perhaps one- or two-
page) disclosure document that explains to investors in plain
English (perhaps with the use of bullet points and tables) the
key differences between an investment adviser and a broker-
dealer, including differences in their duties. The disclosure
document could include representative examples that illustrate
in more concrete terms the practical consequences of these
differences. Investors could then be directed to the SEC's web
site for additional information.
Q.3. Cooperation with State Securities Regulators: State
securities regulators are vital to the protection of investors.
They have made important contributions identifying and
prosecuting misleading and fraudulent stock analyst
recommendations, leading to the Global Settlement; late trading
and market timing involving mutual funds, leading to
enforcement actions and regulatory reforms; and in responding
to retail investor concerns. Would you encourage strong
cooperation by the Commission with State securities regulators?
A.3. State securities laws predate the federal securities laws.
As the question suggests, state ``blue sky'' laws remain an
important part of our system of securities regulation. Indeed,
the federal securities laws contemplate a continuing role for
the states. In addition to recognizing the contributions of
State securities regulators, it is also important to recognize
the value of national law crafted at the federal level, for
example to achieve uniformity and advance national interests.
If confirmed, I would encourage strong cooperation by the
Commission with State securities regulators. One area where
there seems to have been successful recent cooperation has
concerned seniors, as evidenced by the joint 2007 report by the
SEC Office of Compliance Inspections and Examinations and the
North American Securities Administrators Association, along
with the Financial Industry Regulatory Authority, on
``Protecting Senior Investors: Report of Examinations of
Securities Firms Providing `Free Lunch' Sales Seminars.''
Q.4. Mutual Recognition: The Commission is considering whether
to implement mutual recognition, in which citizens in the U.S.
could purchase or trade securities directly with foreign
broker-dealers or on foreign exchanges and be regulated for
many purposes by the foreign regulator instead of the SEC. The
Commission announced that it has begun discussions with
Australia, and such discussions are intended to enhance
regulatory cooperation and investor access to foreign capital
markets, and is making a schedule for a process intended to
open discussions with Canada.
When considering a mutual recognition framework that would
allow U.S. citizens to directly invest in foreign markets and
be solicited by foreign brokers, what factors do you feel the
SEC should take into account? For example, do you feel that the
Commission should find comparability not only of laws but also
of a foreign regime's enforcement and inspection resources,
independence from the government, respect for the rule of law,
culture of fair dealing, tradition of investor protection,
impartial regulation over market participants, or other
factors?
A.4. Securities regulation should not ignore globalization.
Increasing globalization has spawned an important debate,
including concerning mutual recognition. There are benefits to
be gained from a well-conceived system of mutual recognition.
For example, U.S. investors may gain expanded and more
efficient access to foreign markets, which provide additional
investment opportunities. Further, mutual recognition may be a
productive starting point for expanded cross-border cooperation
among regulators. Any mutual recognition arrangement should
ensure the adequate protection of U.S. investors. This requires
a careful assessment of a foreign regime's regulatory structure
and practices. More than just the ``laws on the books'' make up
a country's securities regulation regime, and different
countries may achieve investor protection in different ways.
Indeed, one can conceptualize a country's securities regulation
regime as a system comprised of a number of legal and non-legal
parts that work together, hopefully in a constructive,
complementary fashion. Recognizing this, it follows that no two
countries' systems will be mirror images, although they may
both ensure adequate investor protection and market integrity.
A careful comparability analysis would engage a range of legal
and non-legal factors--such as those identified in the
question--that are part of the institutional mix that makes up
a country's securities regulation system.
The SEC has taken some steps down the road of mutual
recognition, including work with Australia and Canada. The SEC
also held a roundtable on the topic in 2007. If confirmed, I
look forward to participating in the ongoing deliberations.
While there are potential benefits for investors from mutual
recognition, the details of any such arrangement are
complicated. It is important to proceed in a deliberate and
well-informed fashion.
Q.5. Sarbanes-Oxley Act: SEC Chairman Cox has pointed out that
as a result of the Sarbanes Oxley Act, ``Investor confidence
has recovered. There is greater corporate accountability.
Financial reporting is more reliable and transparent. Auditor
oversight is significantly improved.'' [Quoted in ``Sarbanes-
Oxley Has Been a Pretty Clean Sweep; Most Agree It's a Big
Success,'' USA Today, July 30, 2007.] Former SEC Chairman Bill
Donaldson has said ``Corporate boards are working better.''
Thomas Healey, a retired partner of Goldman Sachs and Senior
Fellow at Harvard's Kennedy School said, ``The last five years
have made it irrefutably clear. Sarbanes-Oxley (Sarbox) is a
textbook case of how regulations should ideally work in a
democracy: A scandal is addressed through strong legislative
reaction, followed by fine-tuning by relevant agencies . . . Is
it any wonder that variations of Sarbox and its rigorous
internal controls are being adopted in Japan, France . . . and
other countries around the world?'' [``Sarbox Was the Right
Medicine,'' The Wall Street Journal, August 9, 2007.] The GAO
published a report that found from 1997-mid-2002, 10% of public
companies restated their financials due to accounting
irregularities and these restatements cost investors 18% of
stock value from 60 days before to 60 days after the
restatement. [GAO Report to the Chairman, Committee on Banking,
Housing, and Urban Affairs, U.S. Senate ``FINANCIAL STATEMENT
RESTATEMENTS: Trends, Market Impacts, Regulatory Responses, and
Remaining Challenges.'' GAO-03-138, October 2002.] The reforms
in the Act improved internal controls and financial reporting.
Professor Paredes, in ``Lessons Learned: A Brief
Retrospective on Sarbanes-Oxley'' (April 23, 2007) published as
a slip opinion in the Washington University Law Review, you
stated that ``lawmakers need to undertake thorough and rigorous
cost-benefit analyses when making law.'' When performing such
an analysis, would you include and how would you calculate the
following types of benefits that these and others resulting
from the Act?
A. Improved investor confidence.
B. Greater corporate accountability.
C. More reliable financial reporting.
D. Improved auditor oversight.
E. Improved board governance and performance.
F. Influence on foreign countries to improve their
securities regulation.
G. Improved internal financial controls which when fully
effective reduce the number of accounting restatements.
A.5. The Sarbanes-Oxley Act of 2002 (SOX) is an historic piece
of legislation. It helped restore investor confidence, improve
internal controls over financial reporting, and spur more
active board oversight. The question appropriately references
these and other benefits flowing from SOX.
For any cost-benefit analysis (CBA) to be effective, it
must account for both benefits and costs. Focusing on the costs
without giving due credit to the benefits inappropriately skews
the analysis and vice versa. The general goal of CBA is to try
to maximize the net benefit of whatever is being considered,
say a piece of legislation or a proposed regulation. A careful
analysis might reveal opportunities for greater benefits,
opportunities to mitigate costs, preferable alternatives, and
the like. Unfortunately, not all benefits and costs are readily
quantifiable. Accordingly, CBA also should involve a more
qualitative analysis that endeavors to capture the nature of
certain benefits and costs, recognizing that hard numbers
simply may not be available. Since CBA is forward-looking and
anticipatory, it is inherently uncertain, even when the
benefits and costs seemingly are quantifiable. There is always
a range of possible outcomes. This uncertainty, rooted in
imperfect information, is what makes CBA challenging. Still, so
long as its limitations are appreciated, CBA remains a useful
analytical tool.
Focusing on the benefit-side of SOX, I would include the
benefits mentioned in the question as central to any CBA,
although such benefits are difficult to reliably quantify
generally, let alone when it comes to isolating and calculating
the impact attributable to a particular variable, such as the
adoption of SOX or particular provisions of SOX. That said, the
available empirical literature may have shed light on the
analysis. From a more qualitative perspective, these benefits
are central to investor protection, capital market integrity,
the well-functioning of U.S. securities markets, and capital
formation. Investors need to be confident in the integrity of
securities markets; financial and other disclosures need to be
reliable; corporate actors need to be accountable; and
corporate governance needs to be effective. A qualitative
analysis would look to assess the nature of the impact of SOX
in these and other respects. This could include, for example,
assessing the incentive effects of particular provisions and of
SOX as a whole and the impact on organizational dynamics and
investor perceptions. Such an analysis also may benefit from a
consideration of the available empirical literature. In
addition, whatever the limitations are of CBA, well-conceived
empirical studies may capture the actual impact of legislation
such as SOX after the fact, which can help inform future
lawmaking.
Q.6. Options Backdating: Professor Paredes, you have been
quoted in the press about options backdating as saying ``We are
talking about what is, in the grand scheme of things, a
relatively minor restatement of earnings for a practice that
has already ceased.''
This quote raises concerns. Full and fair disclosure and
accurate financial reporting are vital to investor confidence
and the integrity of the markets. Companies that improperly
backdated options, inflated their earnings, and deceived
investors violated core financial reporting and disclosure
laws.
The improper backdating practices led to over one-hundred
Enforcement investigations and continue to result in SEC
sanctions, criminal actions, and private suits. For example, in
April 2008 the SEC sanctioned Broadcom Communications for
overstating its income by $2.2 billion over five years. On June
2, 2008, The Wall Street Journal reported that ``Brocade
Communications Systems Inc. agreed to pay $160 million to
settle a securities class-action lawsuit related to backdating
of stock options, in the largest such settlement to date'' in
an article that noted that the former CEO ``was sentenced to 21
months in federal prison in January.''
Do you feel that individuals and firms that engaged in
improper options backdating have committed a serious violation
of the securities laws and should be sanctioned appropriately?
If confirmed, would you monitor the incidence of improper
options backdating until it reaches levels that are not a
problem? For example, we understand that the SEC has found
during 2007 that over 1000 stock options grants were reported
more than 100 days late.
A.6. The federal securities laws are premised on a philosophy
of disclosure. Disclosure is effective when it is complete,
accurate, and timely. Improper options backdating is
problematic in that it leads to incorrect financial statements
when the option grants are accounted for inaccurately and may
also render certain qualitative (or narrative) disclosures
inaccurate. Any widespread improper activity may erode investor
confidence more generally. Options backdating in violation of
the federal securities laws is a serious matter that should be
sanctioned appropriately. If confirmed, I look forward to
working with others at the SEC to monitor and address options
backdating and will take steps to be kept apprised of relevant
developments. This includes learning more about any late
filings reporting option grants, which filings, as a result of
the Sarbanes-Oxley Act, now have to be filed more quickly.
Q.7. Adequacy of the SEC Budget: A key factor in maintaining
investor confidence is having a Federal securities regulator
that is fully funded. Do you feel that the President's proposed
SEC budget for FY 2009 at $913 million is adequate to
effectively perform its functions, including ramping up the
regulation of credit rating agencies, investigating conduct
related to the sub-prime crisis, reviewing corporate
disclosures, overseeing rules for new markets and other
important activities? If you are confirmed and, as a
Commissioner, find that more resources are needed, will you
support an agency request for additional funding?
A.7. The SEC is responsible for administering and enforcing the
federal securities law. As the question suggests, the SEC has a
number of specific responsibilities, and additional priorities
have emerged in the aftermath of the recent credit market
turmoil. It is key that the SEC have adequate resources. I do
not presently have the perspective or information needed to
ascertain what the appropriate budget is for the SEC. If I am
fortunate enough to be confirmed, as a Commissioner, I will
gain the type of insight needed to better evaluate the SEC's
budget needs; and if, in my judgment as a Commissioner, I
believe that the SEC needs more resources, I will support an
agency request for additional funding.
Q.8. International Convergence of Financial Reporting
Standards: The SEC is currently considering allowing U.S.
companies to file financial statements using the International
Financial Reporting Standards, which would give them a choice
between GAAP and IFRS. Such a change at this time raises
serious questions.
A. While the FASB and IASB have undertaken efforts at
convergence and made important progress, do you feel there are
at present still significant differences between GAAP and IFRS?
B. Would investors, particularly retail investors, be able
to make accurate comparisons for purposes of making investment
decisions between U.S. companies reporting material financial
information in GAAP and in IFRS at this time?
C. If given a choice between GAAP and IFRS, do you feel
that there are circumstances under which a public company could
choose one standard above the other to enhance the
representation of its finances to investors? If so, do you feel
that such a choice is consistent with the Commission's investor
protection mission?
D. Do you feel that adequate capacity exists today in
accounting firms to provide auditing services for all companies
that might select IFRS, if given the choice, and do you feel
such a change would have an impact on the cost of audit fees to
public companies, particularly small businesses?
A.8. There is much to recommend having a single set of
accounting standards given the increasing globalization of
capital markets. A priority in considering whether to allow
U.S. companies to use IFRS when filing financial statements is
to ensure that the U.S. continues to have high-quality
accounting standards. I have not had the opportunity to study
carefully the particular differences between GAAP and IFRS,
although I understand that there are significant differences
and that efforts at convergence are ongoing. I look forward to
learning more about these differences and their practical
impact on financial reporting and U.S. securities markets if I
am confirmed. Appreciating the differences between GAAP and
IFRS is important in considering how to navigate the road
toward allowing U.S. companies to use IFRS. For example, it is
worth considering whether U.S. companies, if given a choice
between GAAP and IFRS, will choose between GAAP and IFRS based
on which enables the company to report stronger financial
results and what this means for investors. This eventuality
might be addressed by requiring companies making the switch to
IFRS to do so irrevocably and to show financial results from
earlier years as if IFRS had been used. Further, if given a
choice, different companies in an industry may report using
different accounting standards. This could compromise
comparability. On the other hand, comparability might be
enhanced if U.S. companies, by choosing to use IFRS, brought
their financial statements in line with those of foreign
competitors that use IFRS. It is important to understand the
challenges investors may face understanding IFRS-based
financial statements, let alone comparing them to GAAP-based
financial statements, and to consider investor education
strategies, particularly for retail investors.
Additionally, it is important that the auditing profession
have enough individuals with the requisite expertise if there
is a switch from GAAP to IFRS, and it is important to assess
how the audit function might adapt to a change to IFRS and at
what cost to issuers. If confirmed, I look forward to learning
more about the capacity of the auditing profession to audit
IFRS-based financial statements and what steps the profession,
as well as business schools, plan to take in light of the
potential move toward IFRS in the U.S.
Each of the concerns at the core of subparts A-D of the
question merits careful evaluation. Indeed, as I understand it,
the SEC's 2007 Concept Release on Allowing U.S. Issuers to
Prepare Financial Statements in Accordance with International
Financial Reporting Standards solicited comments that would
assist in any such evaluation. If I am fortunate enough to be
confirmed, I look forward to working with the Chairman, the
other Commissioners, and the staff on these complex matters in
considering how best to proceed. In short, this means not only
assessing the substance of IFRS as compared to GAAP, but also
carefully considering the practical challenges of any
transition from GAAP to IFRS and how such challenges might be
mitigated.
Q.9. Opt-In for Proxy Materials: A recent SEC new rule requires
investors to make individual requests, or opt-in to obtain
paper copies of proxy materials from companies in which they
own stock. Reportedly, this rule has significantly reduced the
number of individual shareholders who vote. The Wall Street
Journal in late April reported that of ``80 companies that have
switched to the electronic model, dubbed e-proxy . . . on
average, just 4.6% of individual shareholders voted on company
matters using e-proxy, a sharp decline from the 19.2% who voted
in the year-earlier period, when the companies sent out
traditional paper ballots, according to Broadridge Financial
Solutions Inc., which processes proxy votes.''
Do you feel the Commission should monitor the impact of
this rule and determine whether the opt-in to receive a paper
proxy is having an unintended or undue negative impact on
shareholder voting participation?
A.9. In general, it is important for securities regulation to
adapt to new developments, including technological
developments. Technological advances provide a host of new
opportunities. But in taking advantage of these opportunities,
one must account for potential costs, some of which may not be
fully appreciated until after some change is implemented. In
terms of e-proxy in particular, the SEC should monitor the
consequences of the new rule in an effort to evaluate the
rule's actual impact; such monitoring is an important step in
identifying adverse consequences and what steps might be
appropriate for mitigating them. I understand that staff in the
Division of Corporation Finance and the Office of Economic
Analysis are doing so, including being in contact with service
providers and other groups, such as the Society of Corporate
Secretaries and Governance Professionals, that are part of or
uniquely interested in the shareholder voting process. Any
consideration of rule changes that may be appropriate should
factor in the extent to which any observed negative
consequences may subside over time if investors become more
accustomed to e-proxy and companies learn to make the
transition more effectively.
Q.10. Short Sales in Shareholder Votes: Some have raised a
concern that institutions which hold investors' stock in
``street name,'' such as brokers and banks, may not be able to
accurately account for shares that are sold ``short'' in
corporate elections and this could cause problems in producing
a reliable shareholder vote count in a close, contested
election. Would you assess this concern and seek to take any
appropriate action?
A.10. The ``mechanics'' of shareholder voting have received
increased attention recently. As the question indicates, some
have raised concern about the implications of shorting for
voting. For example, it has been said that a broker could loan
such a number of shares that the broker is not entitled to vote
enough shares to comply with instructions it receives from
clients on how to vote. Some have discussed this in terms of
the potential for ``overvoting.'' I agree that it is important
that a shareholder vote count be reliable in a close, contested
election. If confirmed, I look forward to working with the
Chairman, the other Commissioners, and the staff to evaluate
the concern that has been expressed and to undertake
appropriate action needed to help ensure reliable voting.
Q.11. SEC-CFTC Memorandum of Understanding: In March 2008, the
SEC and CFTC signed a Memorandum of Understanding (MOU) to
enhance coordination and facilitate review of new derivative
products. SEC Chairman Christopher Cox and Acting CFTC Chairman
Walt Lukken jointly stated portfolio margining is an issue that
should be addressed under the MOU.
Do you support addressing the customer protection issues
presented by cross-margining futures and securities in customer
portfolio margin accounts in the MOU process? If so, do you
feel analyzing and potentially resolving this should be an
important priority among the issues to be considered under the
MOU?
A.11. Cooperation and coordination among regulators can improve
the oversight of our financial markets. Speaking generally,
regulatory cooperation and coordination may help modernize the
U.S. financial regulatory structure and enable it to anticipate
and respond to developments more effectively and efficiently.
This includes cooperation and coordination between the SEC and
CFTC, particularly in light of ongoing financial innovation and
the blurring of regulatory lines and interests.
Cross-margining futures and securities is an important
issue to address and one that I look forward to having the
opportunity to consider further if I am fortunate enough to be
confirmed. In terms of ``process,'' while MOUs can be a
constructive means of cooperation and coordination between the
SEC and CFTC, I do not presently have a firm view on whether
the MOU or some other approach is the optimal means of
cooperation and coordination between the agencies when it comes
to addressing such cross-margining. But I do believe in
principle that efforts at cooperation and coordination are
important and, if confirmed, welcome the chance to consider how
best to achieve a productive collaborative process.
------ --
----
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM TROY A. PAREDES
Q.1. Please explain if you believe the adoption of IFRS by U.S.
companies meets the requirements of Sarbanes-Oxley for such
companies to use professional accounting standards established
by an independent standard setting body?
A.1. If confirmed, I look forward to having the opportunity to
study carefully the range of issues that must be addressed in
deciding how to proceed when it comes to the prospect of
allowing U.S. issuers to use IFRS. An overarching objective is
to ensure that the U.S. has high-quality accounting standards.
In assessing a transition to IFRS, whether the international
accounting standards setter (namely, the IASB) meets the
Sarbanes-Oxley Act requirements is an important consideration.
I understand that in its Concept Release on Allowing U.S.
Issuers to Prepare Financial Statements in Accordance with
International Financial Reporting Standards the SEC discussed
and solicited public comment on the governance and operation of
the IASB. I agree that these matters need to be resolved, and I
look forward to participating in the ongoing assessment of
these issues if I am confirmed.
Q.2. Financial services firms have become much more complex,
and the markets have likewise become more complex. We have many
non-bank entities engaging in banking activities and other
players active in the markets, such as hedge funds. Many of
these newer players remain unregulated, or are only lightly
regulated, leaving some gaps in oversight throughout the
financial system.
What should the SEC be doing to better review risks in a
more complex and global financial system? How can the SEC have
a better handle on emerging risks because of this complexity?
A.2. Questions of systemic risk and risk management are very
complex. Systemic risk is often conceptualized in terms of
externalities, which can be challenging to address. Concerns
about systemic risk and risk management have magnified in light
of the recent credit market turmoil and events at Bear Stearns.
I understand that the Banking Committee scheduled hearings on
risk management and its implications for systemic risk.
These issues deserve careful study, as the financial system
has become more global and more complex. There are benefits to
be gained from the introduction of new products and an evolving
mix of financial market participants; but there are risks,
particularly given the degree of interconnectedness. If
confirmed, I look forward to learning more and am committed to
working with the Chairman, my fellow Commissioners, and the
staff to assess opportunities for the SEC to better serve its
role in the identification and management of risk.
Possibilities might include changes to the Consolidated
Supervised Entity program or coordinated efforts with other
members of the President's Working Group on Financial Markets.
I understand that the SEC already has become more active
following the recent credit market turmoil, but it is important
to continue considering what else might be done, including how
best to address any gaps in the regulatory structure.
Q.3. What is your perspective on the Treasury's ``Blueprint For
A Modernized Financial Regulatory Structure'' reform as it
relates to the SEC?
A.3. As financial markets continue to develop and evolve, they
present new opportunities and new challenges. For example, new
financial products and market participants in an increasingly
global marketplace may add liquidity and provide a new set of
investment options. On the other hand, systemic risk may become
more worrisome. Accordingly, efforts to modernize the financial
regulatory structure deserve close study. The Treasury
Department's ``Blueprint for a Modernized Financial Regulatory
Structure'' is an important starting point for discussion. If a
reconfiguration of the financial regulatory structure
ultimately is undertaken, it is important to do so in a
deliberate, considered fashion given the complexity of the
undertaking. Any modernization effort must consider, among
other things, how best to achieve the SEC's core goals of
investor protection, well-functioning securities markets, and
capital formation. Insofar as the SEC is concerned, the
Blueprint suggests merging the SEC and CFTC and creating a new
``business conduct regulator.'' Merging the SEC and CFTC has
been debated before; the proposed business conduct regulator is
a new idea, as far I can tell. If confirmed, I will have the
opportunity to learn more in my capacity as a Commissioner and
look forward to giving careful scrutiny to the Blueprint and
alternatives to it that emerge with the goal of doing my part
to help ensure that we have the optimal regulatory structure
for our financial markets.
Q.4. What is your viewpoint on a non-binding shareowner's right
to vote on a company's executive compensation program?
A.4. State corporate law generally allocates authority to run
an enterprise to a corporation's board of directors and, in
effect, its management team. However, this allocation of
authority presupposes that directors and officers will be held
to account. This includes a fundamental role for shareholders
in corporate governance through the franchise. (In addition to
exercising the right to vote, shareholders also may express
their views about the business and how it is being managed
through other channels. One new prospect for increased
shareholder participation is the electronic shareholder forum.)
Put differently, the effort has been to strike a balance
whereby the board and management team have the room needed to
run the business while ensuring that they are appropriately
accountable to shareholders so that the directors and officers
discharge their duties in the best interests of the corporation
and its shareholders.
The balance is never perfectly struck in practice; thus, it
is important to assess carefully ideas for improving the
balance, such as by giving shareholders a stronger voice in the
area of executive pay. This includes assessing proposals for a
shareholder advisory vote or so-called shareholder ``say on
pay.'' (Presently, shareholders have the ability to weigh in on
executive pay, at least in certain respects, through the
shareholder proposal process.) Designing an optimal
compensation arrangement is complicated, yet it is very
important. Among other things, compensation arrangements can
influence top managers' incentives when running the business
and perceptions about executive pay may challenge investor
confidence.
------ --
----
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER FROM TROY A.
PAREDES
Q.1. There is evidence that the U.S. has experienced some
erosion in its leadership position in capital markets. Unless
reversed, this may hurt Main Street as well as Wall Street.
When companies choose to do IPOs outside the United States,
they are locating not only investment banking deals, but also
jobs, outside our country. A portion of this problem may be
attributable to the securities litigation risk of being an
American public company.
Our colleague, Senator Schumer, together with Mayor
Bloomberg, issued a report on this problem in 2007. It was
preceded by work done by Professor Scott of Harvard Law School
and his colleagues at the Committee on Capital Markets
Regulation. The Schumer-Bloomberg and the CCMR reports called
for the SEC to take action.
Last August, a group of prominent academics from across the
ideological spectrum wrote Chairman Cox with their concerns
about securities class action lawsuits and the implications of
such suits for U.S. capital markets and investor protection.
This letter expressed concern about the compensatory and
deterrence rationales for these lawsuits, as well as the
burdens the existing system places on small investors.
The conclusion of these experts is that litigation is
effective at driving business and jobs out of the U.S., but is
ineffective at deterring actual fraudulent conduct because
``settlements almost never come out of the pockets of the
managers who allegedly executed the fraud.''
Chairman Cox has promised to convene an SEC roundtable to
study these and other issues related to the existing securities
class action system. However, little is happening at the SEC,
at least as far as we can tell. Do you share the concerns
raised by this group of prominent scholars?
In addition, do you support the idea of convening such a
roundtable, as proposed by Chairman Cox? If so, will you work
with Chairman Cox to schedule it expeditiously?
A.1. Studies have suggested that the leadership position of
U.S. capital markets may have eroded, at least to a degree. One
reason for this may be that the economies and financial markets
of other countries have continued to develop, better
positioning such countries to compete against the U.S. It also
has been suggested that securities litigation risk may
contribute to an erosion of U.S. competitiveness. On the other
hand, vigorous but fair enforcement of the federal securities
laws can advance transparency and the integrity of U.S. capital
markets, thus promoting U.S. capital market competitiveness. I
agree with those who believe that it is worth undertaking a
careful consideration of the U.S. securities class action
system to ensure that the system is effective and efficient.
Accordingly, I support efforts such as convening a roundtable
to study this issue and, if confirmed, look forward to working
with the Chairman and others to do so.
------ --
----
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER FROM TROY A.
PAREDES
Q.1. Last Wednesday, May 28, 2008, The Wall Street Journal ran
a front page story entitled, ``SEC Will Scour Bear Trading
Data'' stating that the SEC has an ongoing investigation into
``whether there was insider trading or market manipulation of
Bear Stearns, people familiar with the matter say.''
Without asking for you to comment on the accuracy of the
story, as I understand the SEC--nor its nominees should comment
on an ongoing investigation--can you tell me whether the SEC
should look into the possibility of insider trading and/or
market manipulation as it relates to the Bear Stearns
situation?
Also, do you believe that the SEC has all of the tools
necessary to investigate the possibility of impropriety in a
case like Bear Stearns and to a lesser extent Lehman Brothers?
From your perspectives, are the Insider Trading Sanctions
Act of 1984, Insider Trading and Securities Fraud Enforcement
Act of 1988 and The Securities Exchange Act of 1934 sufficient?
A.1. The SEC has longstanding authority to enforce the federal
securities laws against those who engage in illegal insider
trading and market manipulation; and Congress has seen fit to
enhance the SEC's authority in the past. I believe the SEC
should--and does--take seriously allegations of illegal insider
trading and market manipulation, as such illegal behavior can
result in investor losses and compromise the integrity of the
marketplace. This would include the Bear Stearns situation. Of
course, it is important that any enforcement decision be based
on the facts as they come to light. I have confidence in the
ability of the SEC staff to investigate potential illegal
conduct. However, there may be room for improvement. If I am
fortunate enough to be confirmed, I look forward to learning
more about the precise tools the SEC brings to bear when
investigating possible illicit behavior and what additional
resources or authorities may be warranted to assist the SEC in
fulfilling its responsibility to enforce the federal securities
laws.
------ --
----
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM TROY A.
PAREDES
Q.1. Secretary Paulson's blueprint for a modernized financial
regulatory structure, along with other studies, recommends both
regulatory and legislative changes to modernize the SEC's
oversight of the securities market. That means addressing the
increasing global nature of the financial marketplace, speeding
up the rule approval process, and updating and harmonizing
existing statutes governing brokers and investment advisors to
reflect current market conditions and client needs. The SEC is
currently working on a broad array of issues including mutual
recognition, principal trading relief, and short selling. What
are the two or three issues you believe the SEC needs to
resolve this year to enhance the competitiveness of our capital
markets?
A.1. An efficient and effective regulatory structure that can
respond to new challenges and take advantage of new
opportunities is vital to ensuring the competitiveness of U.S.
capital markets and that the U.S. continues to be the global
leader in finance. A strong financial system promotes the
interests of investors, companies, employees, and communities,
as well as other stakeholders. The Treasury Department's
``Blueprint for a Modernized Financial Regulatory Structure''
is a constructive starting point for discussion. If confirmed,
I look forward to the opportunity to participate in the ongoing
consideration of how to improve the U.S. financial regulatory
structure, and I look forward to working with others, including
members of the Banking Committee, to ensure that the U.S.
financial system remains strong and resilient when challenged.
As the question suggests, there are a number of areas that
deserve careful attention. Among these, let me highlight two.
First, the SEC should continue to consider the options for
adopting international financial reporting standards (IFRS) for
U.S. issuers and, in so doing, assess a roadmap for proceeding.
That said, it is important not to rush, but to give this
complex issue due deliberation to ensure that there are high-
quality accounting standards and that any transition to IFRS is
manageable. Second, so-called ``gatekeepers'' play a central
role in U.S. capital markets. Accordingly, it is important that
the SEC move expeditiously, but prudently, to reassess the role
of credit rating agencies in the securities law system and to
improve the regulatory regime governing credit rating agencies
themselves. To this end, the SEC has already embarked on an
important new rating agency rulemaking in the aftermath of the
recent credit market turmoil.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD FROM ELISSE B.
WALTER
Q.1. Regulation of Investment Banks: The current credit crisis
and its impact on the markets, including the failure of Bear
Stearns, has raised issues regarding the effectiveness of the
Commission's regulation of investment banks, as well as other
market participants. If confirmed, will you carefully review
the Commission's regulatory oversight of the investment banks
and support adding regulations and adding staff resources if
necessary to protect investors and promote the stability of the
markets? If so, what steps do you feel the Commission should
take?
A.1. If confirmed, I will carefully review the Commission's
regulatory oversight of investment banks and other market
participants and would support adding regulations and staff if
necessary to protect investors and promote market stability.
The Commission should vigorously oversee investment banks under
the Consolidated Supervised Entities program. In particular,
the Commission should evaluate the risk management and
financial stability of investment banks and take the steps
necessary to address the systemic issues raised by the events
of recent months.
Q.2. Investment Advisors: The RAND Study on ``Investor and
Industry Perspectives on Investment Advisers and Broker-
Dealers'' reported that there is widespread confusion among
investors about key differences between investment advisers and
broker-dealers in their duties (advisers have a fiduciary
duty), their titles and their services.
What would you do as a Commissioner to reduce or eliminate
this confusion for the protection of investors? For example,
what actions would you support so that investors better
understand the differences pursuant to which investment
advisors owe them a fiduciary duty while broker-dealer
registered representatives observe a standard of suitability?
A.2. The current regulatory divide between the regulation of
broker-dealers and the regulation of investment advisers does
not serve the investing public well. Public investors should
not bear the burden of understanding the current differences in
regulatory standards. This is an area where, in my view,
disclosure may not be sufficient. The Commission should
implement or propose the implementation of changes in the
regulatory standards so that the application of regulation will
be driven by what an investment professional does, not the
label that applies to his or her profession.
Q.3. Cooperation with State Securities Regulators: State
securities regulators are vital to the protection of investors.
They have made important contributions identifying and
prosecuting misleading and fraudulent stock analyst
recommendations, leading to the Global Settlement; late trading
and market timing involving mutual funds, leading to
enforcement actions and regulatory reforms; and in responding
to retail investor concerns. Would you encourage strong
cooperation by the Commission with State securities regulators?
A.3. I endorse and would encourage strong cooperation by the
Commission with State securities regulators.
Q.4. Mutual Recognition: The Commission is considering whether
to implement mutual recognition, in which citizens in the U.S.
could purchase or trade securities directly with foreign
broker-dealers or on foreign exchanges and be regulated for
many purposes by the foreign regulator instead of the SEC. The
Commission announced that it has begun discussions with
Australia, and such discussions are intended to enhance
regulatory cooperation and investor access to foreign capital
markets, and is making a schedule for a process intended to
open discussions with Canada.
When considering a mutual recognition framework that would
allow U.S. citizens to directly invest in foreign markets and
be solicited by foreign brokers, what factors do you feel the
SEC should take into account? For example, do you feel that the
Commission should find comparability not only of laws but also
of a foreign regime's enforcement and inspection resources,
independence from the government, respect for the rule of law,
culture of fair dealing, tradition of investor protection,
impartial regulation over market participants, or other
factors?
A.4. There is a wide array of steps that can be taken to make
it easier and less expensive for U.S. investors to invest in
foreign securities and those steps have varying impact. It is
critical that any steps taken not undercut the protections
afforded to investors. The impact of any steps to be taken
under the rubric of mutual recognition depends on the standards
applied in determining comparability, as well as the scope and
the particulars of the proposal. For example, the Commission
should carefully consider the range of investors impacted and
the extent to which enforcement and interpretation affect
comparability. In addition, there are steps other than mutual
recognition that should be considered. I look forward to
learning more about the specifics of the Commission's current
steps toward mutual recognition.
Q.5. Adequacy of the SEC Budget: A key factor in maintaining
investor confidence is having a Federal securities regulator
that is fully funded. Do you feel that the President's proposed
SEC budget for FY 2009 at $913 million is adequate to
effectively perform its functions, including ramping up the
regulation of credit rating agencies, investigating conduct
related to the sub-prime crisis, reviewing corporate
disclosures, overseeing rules for new markets and other
important activities? If you are confirmed and, as a
Commissioner, find that more resources are needed, will you
support an agency request for additional funding?
A.5. I do not yet have an opinion as to the adequacy of the
Commission's budget. However, if I am confirmed and find that
more resources are needed, I will support an agency request for
additional funding.
Q.6. International Convergence of Financial Reporting
Standards: The SEC is currently considering allowing U.S.
companies to file financial statements using the International
Financial Reporting Standards, which would give them a choice
between GAAP and IFRS. Such a change at this time raises
serious questions.
Q.6.A. While the FASB and IASB have undertaken efforts at
convergence and made important progress, do you feel there are
at present still significant differences between GAAP and IFRS?
A.6.A. There are still differences between GAAP and IFRS. If
confirmed, I will delve into this issue to reach a conclusion
as to the significance of the differences and the import of
those differences for Commission action.
Q.6.B. Would investors, particularly retail investors, be able
to make accurate comparisons for purposes of making investment
decisions between U.S. companies reporting material financial
information in GAAP and in IFRS at this time?
A.6.B. It is difficult for retail investors to compare
financial statements prepared under differing accounting
standards. In determining whether to move forward with IFRS for
U.S. companies, the Commission should consider whether
disclosure can help to solve this problem.
Q.6.C. If given a choice between GAAP and IFRS, do you feel
that there are circumstances under which a public company could
choose one standard above the other to enhance the
representation of its finances to investors? If so, do you feel
that such a choice is consistent with the Commission's investor
protection mission?
A.6.C. Giving companies a choice between GAAP and IFRS does
present the possibility that a company would choose one
standard over another to enhance the representation of its
financial condition. However, the choice should be offered only
if both sets of standards can fairly represent the financial
position of an entity. If companies were permitted to choose
between the two sets of accounting standards, the Commission
should consider a requirement that the companies present
several years of past financial statements using the new
standard to ensure comparability and mitigate this problem.
Q.6.D. Do you feel that adequate capacity exists today in
accounting firms to provide auditing services for all companies
that might select IFRS, if given the choice, and do you feel
such a change would have an impact on the cost of audit fees to
public companies, particularly small businesses?
A.6.D. I am concerned about the capacity of accounting firms
today to provide auditing services for all companies that might
select IFRS. For that reason, the Commission, if it chooses to
move forward with IFRS for U.S. companies, should assure that
the program is implemented in a fashion that does not strain
resources and unduly burden U.S. companies.
Q.7. Opt-In for Proxy Materials: A recent SEC new rule requires
investors to make individual requests, or opt-in to obtain
paper copies of proxy materials from companies in which they
own stock. Reportedly, this rule has significantly reduced the
number of individual shareholders who vote. The Wall Street
Journal in late April reported that of ``80 companies that have
switched to the electronic model, dubbed e-proxy . . . on
average, just 4.6% of individual shareholders voted on company
matters using e-proxy, a sharp decline from the 19.2% who voted
in the year-earlier period, when the companies sent out
traditional paper ballots, according to Broadridge Financial
Solutions Inc., which processes proxy votes.''
Do you feel the Commission should monitor the impact of
this rule and determine whether the opt-in to receive a paper
proxy is having an unintended or undue negative impact on
shareholder voting participation?
A.7. It is important to facilitate shareholders' exercise of
their right to vote. Technological advances should be used to
benefit shareholders. The Commission should monitor the impact
of the e-proxy rule and determine whether any change is
warranted in light of experience under the rule.
Q.8. Short Sales in Shareholder Votes: Some have raised a
concern that institutions which hold investors' stock in
``street name,'' such as brokers and banks, may not be able to
accurately account for shares that are sold ``short'' in
corporate elections and this could cause problems in producing
a reliable shareholder vote count in a close, contested
election. Would you assess this concern and seek to take any
appropriate action?
A.8. It is important that shareholder vote counts be reliable,
particularly in close, contested elections. The impact of
activity in street name stock on corporate elections and the
accuracy of tallies should be evaluated and appropriate action
should be taken to address any problem.
Q.9. SEC-CFTC Memorandum of Understanding: In March 2008, the
SEC and CFTC signed a Memorandum of Understanding (MOU) to
enhance coordination and facilitate review of new derivative
products. SEC Chairman Christopher Cox and Acting CFTC Chairman
Walt Lukken jointly stated portfolio margining is an issue that
should be addressed under the MOU.
Do you support addressing the customer protection issues
presented by cross-margining futures and securities in customer
portfolio margin accounts in the MOU process? If so, do you
feel analyzing and potentially resolving this should be an
important priority among the issues to be considered under the
MOU?
A.9. It is important to address the customer protection issues
raised by cross-margining futures and securities products in
customer portfolio margin accounts. I do not, however,
currently have a view as to whether the MOU process is the most
appropriate manner in which to address those issues.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM ELISSE B. WALTER
Q.1. Please explain if you believe the adoption of IFRS by U.S.
companies meets the requirements of Sarbanes Oxley for such
companies to use professional accounting standards established
by an independent standard setting body?
A.1. I look forward to addressing the important and complex
questions presented by the evolution of IFRS and the potential
adoption of IFRS by U.S. companies, if I am confirmed. Among
other questions, the funding, governance, accountability and
practicality of operations of the standard setting body are
significant issues. The legal question whether IFRS are
professional accounting standards established by an independent
standard setting body is one of the questions that I would
examine closely.
Q.2. Financial services firms have become much more complex,
and the markets have likewise become more complex. We have many
non-bank entities engaging in banking activities and other
players active in the markets, such as hedge funds. Many of
these newer players remain unregulated, or are only lightly
regulated, leaving some gaps in oversight throughout the
financial system.
What should the SEC be doing to better review risks in a
more complex and global financial system? How can the SEC have
a better handle on emerging risks because of this complexity?
A.2. The differing regulatory systems applicable to players in
the financial system--and particularly the differing
information about financial market participants available to
regulators--present great challenges for the SEC and its fellow
regulators. It is critical that the Commission exercise fully
and vigorously the authority it has over many capital markets
participants. It is equally critical that the SEC work closely
with its fellow regulators--who have access to information
about other market participants--sharing information and
analysis to develop as full a picture of emerging risks as
possible.
Q.3. What is your perspective on the Treasury's ``Blueprint For
A Modernized Financial Regulatory Structure ``reform as it
relates to the SEC?
A.3. I believe that the Treasury Blueprint raises important
issues to be addressed by Congress and financial regulators. It
is a good starting point for discussion. The issues raised with
respect to the SEC, such as potential merger with the CFTC,
deserve careful attention. I believe strongly that any change
in regulatory structure must preserve the important roles that
the SEC plays in protecting investors and maintaining fairness
in the securities markets.
Q.4. What is your viewpoint on a non-binding shareowner's right
to vote on a company's executive compensation program?
A.4. I believe that there are non-binding shareholder
resolutions concerning executive compensation that, at the
present time and under current rules, should be included in the
company's proxy materials and presented to the shareholders for
a vote.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER FROM ELISSE B.
WALTER
Q.1. There is evidence that the U.S. has experienced some
erosion in its leadership position in capital markets. Unless
reversed, this may hurt Main Street as well as Wall Street.
When companies choose to do IPOs outside the United States,
they are locating not only investment banking deals, but also
jobs, outside our country. A portion of this problem may be
attributable to the securities litigation risk of being an
American public company.
Our colleague, Senator Schumer, together with Mayor
Bloomberg, issued a report on this problem in 2007. It was
preceded by work done by Professor Scott of Harvard Law School
and his colleagues at the Committee on Capital Markets
Regulation. The Schumer-Bloomberg and the CCMR reports called
for the SEC to take action.
Last August, a group of prominent academics from across the
ideological spectrum wrote Chairman Cox with their concerns
about securities class action lawsuits and the implications of
such suits for U.S. capital markets and investor protection.
This letter expressed concern about the compensatory and
deterrence rationales for these lawsuits, as well as the
burdens the existing system places on small investors.
The conclusion of these experts is that litigation is
effective at driving business and jobs out of the U.S., but is
ineffective at deterring actual fraudulent conduct because
``settlements almost never come out of the pockets of the
managers who allegedly executed the fraud.''
Chairman Cox has promised to convene an SEC roundtable to
study these and other issues related to the existing securities
class action system. However, little is happening at the SEC,
at least as far as we can tell. Do you share the concerns
raised by this group of prominent scholars?
In addition, do you support the idea of convening such a
roundtable, as proposed by Chairman Cox? If so, will you work
with Chairman Cox to schedule it expeditiously?
A.1. It is important both that the U.S. retains a leadership
position in the capital markets and that there are effective
remedies for investors who have been victims of violations of
the U.S. securities laws. The impact of securities litigation
on our capital markets is a hotly debated issue and, if
confirmed, I would welcome the opportunity to obtain further
information and analysis from academics, practitioners and
others. I would be happy to work with Chairman Cox on a
roundtable and on any other appropriate steps.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER FROM ELISSE B.
WALTER
Last Wednesday, May 28, 2008, the Wall Street Journal ran a
front page story entitled, `SEC Will Scour Bear Trading Data'
stating that the SEC has an ongoing investigation into
``whether there was insider trading or market manipulation of
Bear Stearns, people familiar with the matter say.''
Q.1. Without asking for you to comment on the accuracy of the
story, as I understand the SEC--nor its nominees should comment
on an ongoing investigation--can you tell me whether the SEC
should look into the possibility of insider trading and/or
market manipulation as it relates to the Bear Stearns
situation?
A.1. I believe that the SEC should look into the possibility of
violations of the securities laws with respect to Bear Stearns.
Q.2. Also, do you believe that the SEC has all of the tools
necessary to investigate the possibility of impropriety in a
case like Bear Stearns and to a lesser extent Lehman Brothers?
A.2. To the best of my knowledge, the SEC does have the tools
necessary to investigate the possibility of impropriety in such
a case. If confirmed, I will analyze possible cases of
impropriety closely to determine whether the Commission has
sufficient tools to address violations of the securities laws
and recommend that the Commission seek additional authority if
needed.
Q.3. From your perspectives, are the Insider Trading Sanctions
Act of 1984, Insider Trading and Securities Fraud Enforcement
Act of 1988 and The Securities Exchange Act of 1934 sufficient?
A.3. I currently believe that the Commission has adequate tools
to address insider trading and market manipulation but will
review this issue if confirmed.
------ --
----
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM ELISSE B.
WALTER
Q.1. Secretary Paulson's blueprint for a modernized financial
regulatory structure, along with other studies, recommends both
regulatory and legislative changes to modernize the SEC's
oversight of the securities market. That means addressing the
increasing global nature of the financial marketplace, speeding
up the rule approval process, and updating and harmonizing
existing statutes governing brokers and investment advisors to
reflect current market conditions and client needs. The SEC is
currently working on a broad array of issues including mutual
recognition, principal trading relief, and short selling. What
are the two or three issues you believe the SEC needs to
resolve this year to enhance the competitiveness of our capital
markets?
A.1. The competitiveness of our capital markets is a critical
issue for our nation and for the SEC. It requires that the
Commission consider and resolve or participate in the
resolution of a number of complex questions, some of which may
require legislation or international agreements and others that
can be addressed through Commission rulemaking or other action.
The Commission should address these questions in a timely
manner, assuring that it takes the proper steps to buttress our
competitiveness while also maintaining the high level of
investor protection that has been a hallmark of U.S. markets.
Given the evolution of the marketplace over the last decade and
the events of the last year, I am confident that the SEC,
working with other regulators, will be taking prompt action to
determine the optimal way in which to assure that the goals of
financial service regulation are achieved.
The Commission should move forward in the near future on
several matters, such as the elimination of inefficiencies in
the self-regulatory organization rulemaking process. In
addition, the Commission should develop a plan to address the
issues raised by the increasing convergence of the businesses
of broker-dealers and investment advisers. If confirmed, I look
forward to working on each of these issues.
------ --
----
RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD FROM DONALD B.
MARRON
Q.1. Dr. Marron, the Pew Center conducted a recent survey on
Americans' views on not only the economy as a whole, but on
their personal well-being. The Washington Post characterized
the Pew Centers findings as--and I quote: ``Offering the
gloomiest assessment of economic well-being in close to half a
century, a new survey has found that most Americans say they
have not made progress over the past five years as their
incomes have stagnated and they have increasingly borrowed
money to finance their lifestyles.''
Dr. Marron, what economic policies over the past five years
do you think led to this failure?
A.1. Our economy enjoyed a period of strong growth from the
middle of 2003 through the third quarter of 2007, but then
slowed substantially in the fourth quarter as weakness in the
housing sector and turmoil in the credit markets spread to the
broader economy. Together with recent increases in energy
prices, the economic slowdown has created substantial
challenges for many families and has weakened assessments of
economic well-being.
It is inevitable that the macroeconomy will experience
slowdowns from time to time. It is also the case, however, that
policy actions could have softened the housing, credit, and
energy challenges that are now creating economic concerns for
many families.
A key aspect of recent challenges in the housing market is
that in the past several years some homeowners entered into
mortgages that they did not understand or could not afford.
Such problems could have been reduced in the past, and would be
reduced in the future, if (a) borrowers received better and
more timely disclosure of mortgage terms before closing, (b)
mortgage brokers met some minimum qualification standards
before they could advise prospective borrowers, and (c)
borrowers were qualified for adjustable rate mortgages based on
the fully-indexed rate, not just an initial ``teaser'' rate.
Together these policies would have reduced the number of
borrowers who ended up in inappropriate mortgages and, as a
result, have run into difficulties making their mortgage
payments.
Failures by the credit rating agencies stand out among the
contributors to the credit market turmoil we have experienced
over the past year. In retrospect, the ratings on many complex,
structured financial instruments, including mortgage-backed
securities, were often too optimistic. Moreover, investors
often did not appreciate that a structured security with a
particular rating, e.g., AAA, might pose different risks than
another security, e.g., a corporate or municipal bond, with the
same rating. Strengthening the credit rating process and
reducing the potential for conflicts of interest could lessen
the potential for a recurrence of these problems in the future.
Rising gasoline prices have been another challenge, eating
into family incomes substantially and undermining consumer
confidence. As we discussed at the hearing, these increases
have primarily been driven by a combination of strong worldwide
demand for oil, coupled with limited expansion in supply. In
recent years, Congress and the Administration have taken some
steps that may soften gasoline price increases--e.g.,
encouraging alternative transportation fuels and increasing
efficiency standards--but more could be done (e.g., expanding
domestic petroleum supply).
Finally, it is important to recognize policy successes.
Congress and the Administration both deserve credit for the
rapid, bipartisan agreement on a fiscal stimulus package early
this year. That package should help soften some of the economic
challenges now facing American families.
Q.2. Dr. Marron, you mentioned in response to a question from
Senator Shelby that over time there will be changes in cars and
fuel efficiency due to the high price of oil. We have also seen
a surge in transit ridership recently, with record levels of
ridership, which at times are straining the existing capacity
of some transit systems. Do you think that transit use and
demand for transit is rising due to soaring gas prices? If
transit demand remains elevated due to higher gas prices, would
this also justify and require increased investment in mass
transit to meet the increased demand?
A.2. Yes, I believe that the use of mass transit has increased
because of rising gasoline prices. I have not yet seen any
definitive econometric studies of the issue, but recent media
accounts indicate substantial increases in ridership on some
systems. It would be surprising if those increases weren't due,
in significant measure, to rising gasoline prices. Mass transit
is thus providing an important benefit--softening the blow of
higher gasoline prices--to Americans who have been able to make
that switch; more Americans have that option today due to
support from the Administration and the Congress for new
transit investment as authorized in SAFETEA-LU.
Given the recent increase in ridership, it makes sense to
continually assess the needs of our transit system. The
Administration has proposed more than $1.6 billion for new
transit projects for fiscal year 2009. Whether the recent
demand increase will require increased investment levels under
the next surface authorization will depend on several factors.
First, there will be differences across systems. Some mass
transit systems may have been operating below their capacity or
may already have expansion plans underway; those systems may be
able to accommodate increased demand without increased
investment. Other systems, however, may be pushed above their
current or planned capacity, in which case new investment could
be considered.
Second, a key issue is whether the increased transit demand
will persist long enough to warrant long-term investments. If
gasoline prices were to fall in the future, for example, the
recent growth in demand for transit might reverse. If gasoline
prices climb even higher, however, growth in transit demand
would likely be even greater.
Finally, some transit system managers may respond to the
recent growth in demand by taking steps to reduce usage, such
as encouraging employers to stagger employee work hours (thus
reducing peak demand). Such steps could moderate pressure on
transit system capacity. Transit system planners should balance
the impacts of such changes against the costs of any
investments to expand capacity.
Q.3. Dr. Marron, at the hearing you indicated that the real-
time incoming economic data are not as accurate as is needed to
conduct optimal economic policy. Do you believe that there are
opportunities to collect better data that would result in
better policy decisions? Would the relatively small additional
cost to collect this information be worth the potentially large
benefits associated with better policy making? As one of the
President's economists, will you serve as a voice in the
Administration in support of collecting better economic data?
A.3. Yes, I will absolutely be a voice in favor of better
economic data; I think that is one of the key roles for any
member of the Council of Economic Advisers. I see two basic
strategies for improving economic data, both of which I believe
should be pursued.
The first strategy is to make more effective use of the
data that we already collect. One example would be allowing the
Bureau of Economic Analysis (BEA), the Bureau of Labor
Statistics (BLS), and the Census Bureau to link their business
data (while maintaining confidentiality). Such linking would
improve the accuracy and reliability of economic statistics and
could also reduce the burdens placed on survey respondents.
With Administration support, the Congress took an important
step toward facilitating such linkage in 2002 with the passage
of the Confidential Information Protection and Statistical
Efficiency Act (CIPSEA), which allowed for limited data sharing
among BEA, BLS, and the Census Bureau. Full implementation of
CIPSEA would require, however, changes to the Internal Revenue
Code to authorize BLS to use business tax data which are used
currently in the Census Bureau's business list, in the same
manner as the other statistical agencies.
The second strategy is to collect more data. One example
would be collecting more timely data on the services sector.
Today, the United States conducts a complete survey of the
services sector--which comprises 55% of economic activity--only
once every five years. We collect some services data more
frequently (we have quarterly data for service industries that
account for 17% of GDP and annual data for a broader group of
services that account for 30% of GDP), but for a full 25% of
GDP, data are collected only once every five years. The lack of
timely data on such a large portion of the economy can make it
difficult to identify trends--and changes in trends--that may
be important to both policymakers and the private sector.
Expanding surveys to cover the entire services sector on both a
quarterly and an annual basis would require additional
resources, but I believe that the benefits of improved insight
into our economy would justify those costs. In addition, there
is a need to expand coverage of price statistics in the
services sector. There are significant gaps in our coverage of
domestic services such as business, educational and medical
services, and currently there is virtually no coverage of
exported and imported services.
------
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]