[House Hearing, 112 Congress]
[From the U.S. Government Printing Office]





                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS
                             SECOND SESSION
                     JO ANN EMERSON, Missouri, Chair
 RODNEY ALEXANDER, Louisiana        JOSE E. SERRANO, New York
 JO BONNER, Alabama                 BARBARA LEE, California
 TOM GRAVES, Georgia                ED PASTOR, Arizona           
 KEVIN YODER, Kansas                
 STEVE WOMACK, Arkansas             

 NOTE: Under Committee Rules, Mr. Rogers, as Chairman of the Full 
Committee, and Mr. Dicks, as Ranking Minority Member of the Full 
Committee, are authorized to sit as Members of all Subcommittees.
     John Martens, Winnie Chang, Kelly Hitchcock, and Ariana Sarar,
                           Subcommittee Staff


                                 PART 5
 Federal Communications Commission................................    1
 Securities and Exchange Commission...............................  163
 Federal Trade Commission.........................................  247
 FDIC--IG Testimony for the Record................................  335



         Printed for the use of the Committee on Appropriations
                                 Part 5





                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS
                             SECOND SESSION


                     JO ANN EMERSON, Missouri, Chair
 RODNEY ALEXANDER, Louisiana        JOSE E. SERRANO, New York
 JO BONNER, Alabama                 BARBARA LEE, California
 TOM GRAVES, Georgia                ED PASTOR, Arizona          
 KEVIN YODER, Kansas                
 STEVE WOMACK, Arkansas             

 NOTE: Under Committee Rules, Mr. Rogers, as Chairman of the Full 
Committee, and Mr. Dicks, as Ranking Minority Member of the Full 
Committee, are authorized to sit as Members of all Subcommittees.
     John Martens, Winnie Chang, Kelly Hitchcock, and Ariana Sarar,
                           Subcommittee Staff


                                 PART 5
 Federal Communications Commission................................    1
 Securities and Exchange Commission...............................  163
 Federal Trade Commission.........................................  247
 FDIC--IG Testimony for the Record................................  335



                     U.S. GOVERNMENT PRINTING OFFICE
 74-464                     WASHINGTON : 2012

                                  COMMITTEE ON APPROPRIATIONS

                    HAROLD ROGERS, Kentucky, Chairman
 C. W. BILL YOUNG, Florida \1\      NORMAN D. DICKS, Washington
 JERRY LEWIS, California \1\        MARCY KAPTUR, Ohio
 FRANK R. WOLF, Virginia            PETER J. VISCLOSKY, Indiana
 JACK KINGSTON, Georgia             NITA M. LOWEY, New York
 TOM LATHAM, Iowa                   ROSA L. DeLAURO, Connecticut
 ROBERT B. ADERHOLT, Alabama        JAMES P. MORAN, Virginia
 JO ANN EMERSON, Missouri           JOHN W. OLVER, Massachusetts
 KAY GRANGER, Texas                 ED PASTOR, Arizona
 MICHAEL K. SIMPSON, Idaho          DAVID E. PRICE, North Carolina
 ANDER CRENSHAW, Florida            LUCILLE ROYBAL-ALLARD, California
 DENNY REHBERG, Montana             SAM FARR, California
 JOHN R. CARTER, Texas              JESSE L. JACKSON, Jr., Illinois
 RODNEY ALEXANDER, Louisiana        CHAKA FATTAH, Pennsylvania
 KEN CALVERT, California            STEVEN R. ROTHMAN, New Jersey
 JO BONNER, Alabama                 SANFORD D. BISHOP, Jr., Georgia
 STEVEN C. LaTOURETTE, Ohio         BARBARA LEE, California
 TOM COLE, Oklahoma                 ADAM B. SCHIFF, California
 JEFF FLAKE, Arizona                MICHAEL M. HONDA, California
 MARIO DIAZ-BALART, Florida         BETTY McCOLLUM, Minnesota         
 CHARLES W. DENT, Pennsylvania      
 STEVE AUSTRIA, Ohio                
 CYNTHIA M. LUMMIS, Wyoming         
 TOM GRAVES, Georgia                
 KEVIN YODER, Kansas                
 STEVE WOMACK, Arkansas             
 ALAN NUNNELEE, Mississippi         
 1}}Chairman Emeritus    

               William B. Inglee, Clerk and Staff Director




                                            Monday, March 19, 2012.



    Mrs. Emerson. The hearing will come to order. I would like 
to welcome our two witnesses, Chairman Genachowski and 
Commissioner McDowell from the Federal Communications 
    Thank you all so much for being here today and for 
testifying on the FCC's fiscal year 2013 budget request.
    While the FCC is funded by fees, congressional oversight 
over your budget is an important check on agency activities. 
This committee is committed to fiscal responsibility, and we 
intend to make sure that all agencies under this subcommittee's 
jurisdiction are operating both efficiently and effectively.
    The FCC is an agency that plays an important role in our 
country's telecommunications, television, radio, Internet, and 
cable industries. These are services that are critical to 
American communication and business. With technology changing 
faster and faster and the fact that you all have to keep up, it 
is amazing that you can do so while not hindering innovation.
    Overregulation of American communications systems hurts our 
economy at a time when we are still coming out of a recession.
    And I will say, and Chairman Genachowski knows this, that I 
still have serious concerns about the net neutrality order, as 
well as the Commission's proposed disclosure of broadcasters' 
political files, which we will talk about after you all give 
your opening statements.
    While I appreciate the agency's eagerness, I think, in many 
cases, it would be helpful to slow down and consider the 
ramifications of Commission rulemaking in lots of different 
    I should also note that you have made some in-roads in 
reforming the Universal Service Fund. However, I think there 
are some serious concerns about the fund that have yet to be 
addressed. And just so you all know, I heard a lot about this 
while I was home last week.
    We do appreciate the job that both you and your staff do. 
And once again, I welcome you, and I look forward to your 
testimony. And now I would like to recognize my friend and 
colleague, Joe Serrano, for his opening statement.
    Mr. Serrano. Thank you so much, Madam Chair.
    You should know that whenever we meet here, the first thing 
we discuss quietly here is baseball. But today, we are 
discussing the fact that both of our district plans for our 
future political districts are in the Federal courts, and we 
have no idea where we are running this year.
    Mrs. Emerson. Actually, I think ours are at the Supreme 
Court. Ours has been in the Federal courts, the State courts, 
to the State Supreme Court, and back to the Federal court. I am 
not sure that most judges undertake their judicial 
responsibilities thinking they are going to draw congressional 
lines at the same time. But good luck to you. I sort of know 
where my district is.
    Mr. Womack. Let the record reflect Arkansas is done.
    Mrs. Emerson. Missouri was actually the third done, and 
then we had a lawsuit filed very late.
    Mr. Womack. We measure twice, cut once in Arkansas.
    Mr. Serrano. Amazing. Thank you, Madam Chair.
    I would like to join you--I should not have started that--I 
would like to join you in welcoming Chairman Genachowski and 
Commissioner McDowell.
    Like many of the agencies we deal with in this committee, 
the FCC plays a vital role in our everyday lives, even though 
much of its important work takes place behind the scenes. The 
role of the FCC grows in scope and importance as technology 
becomes more affordable and as more people have access to the 
Internet through a variety of devices. I will be interested in 
hearing whether, with these rapid innovations, you have the 
resources to ensure that consumers are protected in the 
    As improvements in technology give more people access, they 
also mean that resources move online, and therefore, Internet 
access has become vital to being able to get a good education, 
find a job, or simply to connect with family around the world. 
Therefore, I am interested in the steps you are taking to 
broaden access and make sure that everyone who wants access can 
get it.
    One way to increase access to broadband is by allowing more 
spectrum to be used for that purpose. I know that in the coming 
year, an important goal for the FCC is to increase the 
available spectrum for broadband uses through congressionally-
mandated spectrum auctions. I look forward to hearing more 
details about how you plan on conducting these auctions and 
what you expect the results of them to be.
    We will have time to discuss these issues as well, and your 
other priorities, during the question period. So, for now, I 
want to thank you both for your service and for appearing 
before us today.
    And please make sure that my new iPad works properly. Make 
sure nothing interferes. Thank you.
    Mrs. Emerson. You have the new new one? Pass it over.
    I now recognize you, Chairman Genachowski. If you could try 
to limit your opening remarks to 5 minutes, that will give us a 
little bit more time for questions. Thanks.
    Mr. Genachowski. Great. Thank you very much Chairwoman 
Emerson, Ranking Member Serrano, and the other members who are 
here. I appreciate the opportunity to appear before you on the 
FCC 2013 budget.
    I am proud to say that few, if any, Federal agencies 
deliver a higher return on investment than the FCC. Spectrum 
auctions have raised more than $50 billion for the U.S. 
Treasury in the past two decades, and economists regard the 
economic value created by FCC auctions as being about 10 times 
that number, about $500 million in value.
    A few weeks ago, Congress authorized the FCC to conduct 
voluntary incentive auctions, a new market-based mechanism to 
repurpose spectrum for flexible use, such as mobile broadband. 
Incentive auctions, which I am proud to say were originally 
suggested by the FCC 2 years ago, are an opportunity to unleash 
vitally needed additional spectrum for mobile broadband and 
create tremendous value for American consumers, while raising 
billions of dollars for deficit reduction.
    At the FCC, we are focused on faithfully implementing the 
incentive auction provisions and maximizing the opportunities 
of the new law for our economy and all Americans. It is a 
privilege for the FCC to be entrusted with this responsibility, 
which of course will require a great deal of work and effort by 
the agency.
    Incentive auctions are unprecedented. The U.S. will be the 
first country in the world to conduct them. It will be a multi-
faceted task affecting major parts of our economy, involving 
many challenging questions of economics and engineering. FCC 
staff is analyzing the complex incentive auctions law--it is 
well over 100 pages--assessing the challenges ahead, and 
developing a plan for implementation.
    Incentive auctions are part of our overall agenda to 
unleash the opportunities of modern communications technology 
to benefit our economy and all Americans. We focused the agency 
on broadband communications, wired and wireless. Together with 
my colleagues at the FCC, we have made tremendous progress in 
the past 3 years, taking many steps to unleash investment, 
innovation, and job creation. These include freeing spectrum 
for both licensed and unlicensed use, modernizing and reforming 
major programs, like the Universal Service Fund, and removing 
barriers to broadband buildout.
    And indeed, private investment, innovation, and job 
creation are up across the broadband economy. These metrics, 
which are outlined in my written statement, are up both when 
looking at broadband applications and services, and also when 
looking at broadband providers and network infrastructure.
    In 2011, the U.S. information and communications technology 
sector grew three times faster than the overall economy. 
Broadband is helping create new jobs all across the country, 
and not just for engineers, although it is vitally important 
that we lead the world in engineering talent, but also for 
salespeople, construction workers, and small business owners 
increasingly using the Internet to boost sales and lower costs.
    We are also now ahead of the world in deploying 4G mobile 
broadband at scale, with 64 percent of the world's 4G LTE 
subscribers here in the U.S. And these next generation networks 
are projected to add $151 billion in GDP growth over the next 4 
years, creating an estimated 770,000 new American jobs. In 
today's hyper-connected, flat world, the success of American 
companies, as well as global prosperity, depends on a dynamic 
and open global Internet. And so we are working to preserve the 
Internet as a free market globally, and oppose international 
proposals that could stifle innovation.
    The health of our broadband economy would also be enhanced 
by closing broadband gaps. And so the FCC is focused on 
bringing universal service into the broadband era. Today, 
millions of rural Americans live in areas with no broadband 
infrastructure. Our plan, adopted unanimously in October to 
modernize the Universal Service Fund, will spur wired and 
wireless buildout to hundreds of thousands of rural homes in 
the near term, and puts us on the path to universal broadband 
by the end of the decade, while keeping the fund on a budget. 
Together with my colleagues, we drafted a set of reforms that 
will drive efficiency, honor fiscal responsibility, and help 
bring broadband to rural America.
    In addition to the broadband deployment gap, we are making 
strides on the broadband adoption gap. Nearly one-third of 
Americans, 100 million people, haven't adopted broadband. The 
Connect to Compete Initiative enlists government, nonprofit, 
and private sector leaders to tackle the barriers to adoption, 
one of several public-private initiatives driven by the 
commission to promote solutions to major challenges.
    Public safety is a core mission of the FCC. And the agency 
is working to harness the power of communications to make our 
communities safer. We are working with multiple stakeholders to 
advance next generation 911. We accelerated the launch of 
Wireless Emergency Alerts that allows local, State and Federal 
authorities to send targeted alerts to mobile devices in an 
    The FCC also provides value by protecting and empowering 
consumers. Working with wireless providers, we found a 
commonsense solution to bill shock, a problem that has cost 
millions of consumers tens, hundreds, and sometimes thousands 
of dollars in unexpected charges.
    Working with private sector, public, and nonprofit 
partners, we developed a Small Business Cyber Planner to help 
small businesses guard against cyber attacks, which are 
estimated to cost small businesses who are targeted an average 
of $200,000 in damages for each attack.
    Our work on cybersecurity continues. And I am hopeful that 
working with private and public stakeholders on our advisory 
committee called CSRIC, we can make real progress on solutions 
that will promote greater security in our communications 
    I would like to highlight not only what the FCC has 
accomplished but how we conduct our work. The FCC is committed 
to smart, responsible government. We have taken significant 
steps to modernize our programs and ensure that they are 
efficient and fiscally responsible, saving billions of dollars. 
USF, which I mentioned, Intercarrier Compensation, Lifeline, 
our video relay service; in each case, these are examples of 
modernized programs whose reforms are collectively yielding 
hundreds of millions of dollars in annual savings already.
    In addition to our programmatic changes, we have also 
reviewed the agency's rules and processes, asking tough 
questions to make sure the agency is operating efficiently and 
effectively. In connection with this review, we have already 
eliminated more than 200 outdated rules and five unnecessary 
data collections, and we have identified two dozen more data 
collections for elimination.
    Internal reforms, like consolidated IT maintenance and a 
new financial system, have already saved the agency millions of 
dollars. And we have done everything I have listed and more 
with the lowest number of full-time employees at the FCC in 10 
years. Maximizing the ability of 21st century communications 
technology to deliver value to the American people and doing so 
in a smart and responsible way, that is the FCC's record the 
past 3 years. And that is our plan for the year and years ahead 
as reflected in our 2013 requested budget.
    To implement our responsibilities under the Communications 
Act, the budget requests a 2 percent increase over the previous 
year, from about $339 million to $347 million. This proposal is 
essentially flat, adjusted for inflation. As in previous years, 
the amount will be derived entirely from fee collections. The 
budget includes a few small new initiatives, primarily 
technology investments designed to save money and public safety 
investments aimed at saving lives. The budget also provides a 
flat number of full-time employees, which represents, as I 
said, the lowest number of FTEs in 10 years.
    Let me just conclude, the wired and wireless broadband 
sectors are critically important to our economy and our global 
competitiveness. I look forward to working with the committee 
on implementing the new incentive auctions law and unleashing 
the opportunities of communications technology for our economy 
and the American people. Thank you.
    [The prepared statement follows:]

    Mrs. Emerson. Thank you, Chairman Genachowski. I do want to 
compliment you all on finding the $6 million plus in cost 
savings and efficiencies. That is something that we can talk a 
little bit about. I wish all agencies were doing what you all 
were on that front.
    Commissioner McDowell. Thank you.
    Mr. McDowell. Thank you, Chairwoman Emerson and Ranking 
Member Serrano, and all the members of the committee. It is 
terrific to be here today. This is my first appearance before 
your subcommittee. So thank you for having me.
    I would like to focus today on three matters currently 
before the commission: Number one, implementing the new 
spectrum incentive auction law the chairman outlined; number 
two, adopting universal service contribution reform; and number 
three, examining the complexities and burdens of proposed rules 
governing the maintenance of political advertising files by TV 
broadcasters; and lastly, I would like to address the specter 
of possible regulation of Internet governance by an arm of the 
United Nations.
    First, spectrum reform to make more parts of our airwaves 
available to American consumers: As a result of the spectrum 
law recently passed by Congress, the FCC will create and 
conduct the most complicated spectrum auction or auctions in 
history. Meanwhile, a debate continues over whether or how the 
FCC should shape the outcome of this process. History has 
proven that regulators' attempts to over-engineer spectrum 
auctions often backfire. So I hope all of us can apply the 
lessons learned from the Commission's past missteps as we 
implement this new law.
    Our auction rules should be minimal and ``future proof'', 
allowing for flexible uses of spectrum as technology and 
markets change in the years to come. Furthermore, I am 
optimistic that we can create a structure that offers 
opportunities for small, medium, and large companies to bid for 
and secure licenses without having to exclude any player from 
the auctions. I am confident that the FCC can get it right this 
time if it avoids regulatory hubris.
    Second is the urgent need to fix the taxing side of our 
Universal Service Fund subsidy. Last fall, the commission 
accomplished the complicated task of modernizing the high cost 
portion of USF by repurposing it to support next-generation 
communications technologies, all while keeping a lid on 
spending. And the chairman and my colleagues, Commissioner 
Copps, who has since retired, and Commissioner Clyburn deserve 
a lot of credit for that.
    Thus far, however, the commission has addressed only some 
of the spending side of the USF equation. Perhaps even more 
urgent is the need to fix the taxing side of the ledger. In 
other words, how do we pay for all of this? The contribution 
factor, or the tax on American phone consumers, has risen each 
year from approximately 5.5 percent in 1998 to almost 18 
percent this year. This trend is unacceptable because it is 
unsustainable. We need to abate this automatic tax increase as 
soon as possible.
    Third is my concern regarding proposed new rules affecting 
TV broadcasters' maintenance of the so-called political file. 
Now, transparency is a laudable public policy goal, especially 
in the context of political spending. Furthermore, providing 
broadcasters with more cost-effective means to comply with FCC 
rules is also a noble endeavor.
    Congress should be aware, however, that the proposed rules 
create many factual, legal, and pragmatic complexities that are 
not obvious at first glance. The political file contains 
information regarding candidates seeking to purchase political 
ads on TV, and it can shed light on the spending patterns of 
campaigns, political committees, third-party groups, SuperPACs, 
and such.
    Unlike other parts of broadcasters' public inspection 
files, however, the contents of the political file do not speak 
to whether a broadcaster is serving its local community of 
license. The political file is a tool, instead, for examining 
campaign spending rather than broadcaster behavior. Congress 
should be aware that this requirement could be experiencing 
mission creep at the FCC.
    In October of last year, the commission proposed to reverse 
its 2007 position regarding political file mandates, with 
little to no evidence that candidates, their representatives, 
or members of local communities served by broadcasters have 
been unable to access the required information, let alone that 
the benefits outweigh the costs. In fact, the evidence before 
the commission today illustrates that the proposed new rules 
could cost the TV broadcasting industry $15 million in upfront 
expenses to upload existing paper files to a new government Web 
site, while also forcing each station to incur upwards of 
$140,000 per year in recurring costs to maintain the 
information in real time, as the FCC has proposed.
    Before going further, policymakers should be thoughtful and 
deliberative when examining the implications and nuances that 
could arise as a result of the proposed rules. I still see many 
unanswered questions.
    For instance, number one, if the public policy goal of new 
rules is to produce more transparency in campaign spending, is 
the FCC the best agency to achieve such ends rather than the 
Federal Election Commission? Number two, would FCC requirements 
that are duplicative to FEC rules violate the Paperwork 
Reduction Act? And number three, among many others, and there 
are more in my written testimony, where are the equities in 
singling out only TV broadcasters for such disclosure 
requirements when political campaigns spend money on a plethora 
of outlets to contact and influence voters such as radio, 
newspapers, the Internet, direct mail, outdoor advertising, 
cable television, satellite radio and TV, paid activists to 
knock on doors, and many, many more avenues for voter outreach?
    I am hopeful that we as policymakers can strike the right 
balance between protecting core political speech and 
encouraging transparency without disproportionately burdening 
one of many outlets.
    Finally, all of us should be concerned with a well-
organized international effort to give an arm of the United 
Nations, known as the International Telecommunication Union, 
new powers over Internet governance through a renegotiation of 
a treaty. The Internet has flourished under deregulation, not 
only within our country but throughout the globe as well. But 
some countries, such as China, Russia, India, Iran, and Saudi 
Arabia, among many, many others, are working hard to change 
that, and we must stop them.
    Thank you again for the opportunity to appear before you 
today, and I look forward to your questions.
    [The prepared statement follows:]

    Mrs. Emerson. Many thanks, Commissioner McDowell. It is 
nice to have you here, too.

                       POLITICAL BROADCAST FILES

    I want to get into this whole issue, if we could, of 
political files. I am sure you all read the Washington Post 
article this morning.
    I am curious, Chairman Genachowski, where in your governing 
statute does it say that the FCC is, or has responsibility, the 
authority over campaign finance issues? I am kind of confused 
by this.
    Mr. Genachowski. Sure. Congress, in 2002, directed, 
required broadcasters to disclose information about campaign 
ads, et cetera. That was a codification of FCC rules that had 
been in effect for a long time. And the statute provides, 
orders the FCC to carry out those provisions. But if I could, 
the issue that is raised in this proceeding is part of a broad 
effort to move from paper to digital.
    And in fact, the suggestion in the proposal that was made 
in October, which was based on a widely praised report from 
about a year ago, identified the broadcaster public file as one 
of the last pieces of disclosure that was purely on paper. And 
in fact, the files literally are in filing cabinets at TV 
stations. And so the proposal in the notice was to enable the 
movement of all of that information from physical public files 
to digital. It is a proceeding that is open now. We are looking 
carefully at the record. And all of the issues that have been 
raised will be looked at.
    Mrs. Emerson. Okay. So tell us what information is 
available in the political files. I know that I personally do 
not have to go to a TV station, that I can get this information 
instantaneously, as my campaigns, as all of our campaigns, can 
do today. So, consequently, I am curious as to why you are 
doing this. What is it in the political file that you all are 
after. Tell us all of the pieces of that.
    Mr. Genachowski. Again, the proposal in the notice would 
apply to all of the different elements of the public file. The 
items that broadcasters have to maintain in their public file 
are actually prescribed by statute.
    [Clerk's note.--Subsequent to the hearing, the FCC Chairman 
provided the following information:]



    Mrs. Emerson. Right.
    Mr. Genachowski. The date and time of ads, the purchaser, 
the rates. It is listed in statute.
    Mrs. Emerson. Right.
    Mr. Genachowski. They are in the public file. And the 
intended audience of the public disclosures is the public at 
large. Any member of the public now who wants to see that 
information can get it.
    Mrs. Emerson. Right.
    Mr. Genachowski. But they have to go to the station, knock 
on the door, and ask to see the public file.
    Mrs. Emerson. I do not agree with you on that. Because, for 
example, our media buyers gave us all of that information in 
the last campaign instantaneously. I mean, we knew within 10 or 
15 minutes. And I can assure you my media buyer was not able to 
go to a Paducah, Kentucky, TV station, when they were in St. 
Louis. So I think a lot of that information is available now.
    I guess I am confused as to why you all are doing this when 
I can still get the information from the Federal Election 
Commission. In other words, for example, it says ``Emerson for 
Congress'' made this ad buy. Then I can certainly go to the FEC 
online and find out who all my contributors are. So I am 
confused by whether there is a problem that exists out there 
that we are trying to correct.
    Mr. Genachowski. The information that is in broadcaster 
public files, and broadcasters have been required by statute 
and by commission rules for many years as part of their 
obligations as public trustees to maintain certain information 
available for everyone in the public, for any citizen, for 
anyone to have access to it. The question in this proceeding is 
whether in the 21st century a disclosure obligation that is 
fulfilled by a filing cabinet alone makes sense, or whether 
common sense says, if broadcasters are required to disclose 
anything, as they are by statute, shouldn't that be online?
    Most obligations that broadcasters have to disclose, in 
fact, in general, at the FCC, increasingly interactions are 
digital, not paper, whether it is applications, consumer 
complaints, license information. And the suggestion in the 
report that came out last year was, as part of a general effort 
to move from paper to digital, as part of a general effort for 
transparency, if we are going to have any obligations at all on 
broadcasters as public trustees to make information public, 
shouldn't that be online? And if it should, why should we 
exempt any particular category? Now, again, there have been 
questions raised in the record, and we will look at all of 
those as part of proceeding.
    Mrs. Emerson. But Commissioner McDowell said that you are 
just requiring this of broadcasters. What about cable 
companies, or radio stations? Where I live, you buy more radio 
than you do TV. So is this to apply across the board to every 
single electronic media outlet platform?
    Mr. Genachowski. We have not proposed expanding the 
obligations on others. Broadcasters have had unique obligations 
as public trustees. In this case, the 2002 law singles out 
broadcasters to make these disclosures. There is a lot of 
history of broadcasters, as public trustees, having these 
obligations. We are not looking at new requirements. We are 
looking at the existing landscape of broadcaster disclosures, 
should they or shouldn't they move online.
    [Clerk's note.--Subsequent to the hearing, the FCC Chairman 
provided the following information:]

    Mr. Genachowski.  I appreciate this opportunity to clarify the 
issue of why only television broadcasters are affected by this Further 
Notice of Proposed Rulemaking (FNPRM). This FNPRM is part of a larger 
DTV Public Interest Obligation proceeding that has focused on 
television broadcast stations since its inception in 1999. As our 
record in this proceeding indicates, approximately 60% of all political 
advertising dollars have been spent to date in the 2012 election cycle 
on affiliates of the four largest networks in the top 50 markets.
    The Commission has been working to ensure increased access to 
information online in other areas. Mother proceeding at the Commission 
has sought comment on whether to require online disclosure of public 
file information for radio licensees. (See Digital Audio Broadcasting 
Systems and Their Impact on the Terrestrial Radio Broadcast Service, 
Second Report and Order, First Order on Reconsideration and Second 
Further Notice of Proposed Rulemaking, 22 FCC Rcd 10344, 10391 (2007)).

    Mrs. Emerson. So what percentage of broadcasters are not 
putting this online?
    Mr. Genachowski. I am not aware that any broadcasters are 
    Mrs. Emerson. Or have this in a database--let's put it that 
way, not necessarily online. They keep electronic files as 
opposed to paper in filing cabinets.
    Mr. Genachowski. Well, the only way that I am aware that 
broadcasters make this information available to the public now 
is in paper at filing cabinets. If a citizen wants access to 
this information, which the law requires broadcasters to 
disclose, I am not aware of another option they have to get it 
from broadcasters.
    Many people do go to the stations, knock on the door, look 
at the public files, have access to the information. But in the 
21st century, the question is whether common sense says let's 
have that be online.
    Mrs. Emerson. So if I buy a series of TV spots, and the 
broadcaster has all of this information because I have paid for 
it. It says paid for by ``Team Emerson.'' Anybody's media buyer 
can see this. So you are just asking the TV stations to then 
put this on a Commission-run website so the public can access 
it, as opposed to looking it up through the FEC.
    Mr. Genachowski. In fact, the disclosure goals of the 
statute and FCC rules are about the public in general. And the 
ordinary public does not have access to that information right 
    Your point suggests that for broadcasters to make the 
information available online would not be a difficult step. One 
of the options that is possible here is moving the obligation 
of broadcasters so that the paper file could be eliminated 
completely, eliminating a step, since broadcasters have this 
information in online formats anyway. They could make it 
available online, eliminate the physical public file, and have 
information that is already required to be disclosed publicly 
available in easy, accessible ways for anyone who is 
    Mrs. Emerson. Why do you care about this? You have plenty 
of other things that are far more important to deal with, 
especially since we already have a Federal Election Commission 
who has jurisdiction over campaign finance. I mean, I am just 
saying in the whole scheme of things, you are working on the 
spectrum auction, you are working on other regulations, on USF; 
I mean why in the world is this a big priority?
    Mr. Genachowski. Well, again, across the board the FCC has 
been looking to move from paper to digital. Just in the last 
year alone, we have taken steps to move tariffs from paper to 
digital, radio renewal applications from paper to digital. 
Consumer complaints are now 95 percent digital. Licenses are 
digital. And so it should be really an easy thing to say 
anything that if it is paper, let's move it to digital. Let's 
allow companies that have obligations to not file anything in 
paper and move to digital. It should not be a time-consuming, 
difficult process.
    Mrs. Emerson. Commissioner McDowell, let me have your 
thoughts on this. I can tell you are not in favor of it based 
on this Washington Post article. But I am still perplexed as to 
why this is such a priority.
    Mr. McDowell. Well, good question. First of all, I have two 
key points to emphasize. This, as proposed by the FCC, with the 
word immediately, implies real-time online posting and also 
proprietary information, something I did not get a chance to 
talk about in my opening remarks. So broadcasters have actually 
come to us--actually came to us in 2007, when the FCC actually 
first moved to have most of the public inspection file posted 
online. And the chairman is right; in most cases, that is much 
more cost-effective and easier for everybody and also is more 
easily accessible so that public interest groups, or academics, 
or just general members of the public can look to see what kind 
of programming of local interest broadcasters are providing to 
their local communities of license. And that is the important 
core mission of the FCC.
    As you pointed out, though, this is an election law issue 
regarding transparency in campaign spending. So broadcasters 
have actually come to us now in a couple of ways, in 2007 and 
2011 and 2012 now, to say that actually this is not cheaper for 
them to do, the political file component of it, because of the 
implication that this would be real-time updating. And so some 
estimates are maybe $140,000 per year per TV broadcaster. And 
keep in mind, most broadcasters are not big businesses. Most 
are small businesses. This might be sort of an unfunded Federal 
mandate of sorts.
    But also, the second component is that it would require 
them to disclose to the public immediately proprietary pricing 
information. Candidates' campaigns are sort of entitled to the 
cheapest rate. And that becomes a competitive issue. So one of 
the potential unintended consequences actually could end up 
being price signalling among broadcasters in a particular 
market regarding what the lowest rate should be.
    Now, there is sort of, as you pointed out, buyers sort of 
know what the lowest rates are anyway. But having it out there 
in real time could cause some unintended consequences as well.
    So I think, you know, we need to sort through a lot of 
these. The chairman is right in that as part of BCRA, the 
Bipartisan Campaign Reform Act, also known as McCain-Feingold, 
of 2002, the FCC is charted with requiring broadcasters to keep 
political files with some of this information, including, by 
the way, if the campaign committee just calls the station 
inquiring about ads, not just if there is a buy of the ads. And 
so that is important.
    But broadcasters are coming to us, not campaigns, saying 
the proposed rules might be unduly burdensome to them. So, you 
know, I think it is important for us to ask, what is the cost-
benefit analysis here and to weigh that very carefully and 
deliberately? And also maybe, generally speaking, as 
policymakers, we should be asking if we want transparency in 
campaign spending, shouldn't we turn the microscope around off 
of TV broadcasters and look at the campaigns or the political 
committees that are spending the money, and where is that money 
going? In that way, we get a more comprehensive view. I am not 
advocating that one way or the other, but I am saying if that 
is the goal, the FCC is not necessarily the best agency to do 
that, especially when we are just focusing on the narrow issue 
of TV broadcasters and no other media.
    Mrs. Emerson. So then this begs the question that if in 
fact this rule goes forward, and broadcasters are forced do 
this, then I assume that you would then move to require them to 
do this for all advertising. In other words, let's say you have 
got Kellogg's and General Mills, and the Kellogg's folks have a 
TV buy, and then General Mills wants to make sure that on its 
TV buy, it gets the same information. Would that be the next 
step here? Because I don't know why you have to do it just for 
political ads and not all advertising. If you want people to be 
digital, then they got to be digital for everything, not just 
for political ads.
    Mr. Genachowski. That wouldn't be the next step. And in 
fact, again, the political file is not the goal here. There are 
existing obligations on broadcasters that are part of their 
long-standing requirements as public trustees. And the question 
is, as with everything else that is happening, it is common 
sense to say it is time to move from paper to digital. So the 
commission is not looking at new requirements, new disclosure 
requirements, expanding disclosure requirements, but rather 
moving from paper to digital and in fact giving broadcasters 
the option to eliminate paper disclosures and move to digital.
    If I could comment very quickly on the proprietary point, 
it flows from that as well, we are not proposing to require any 
disclosures of information that already is not disclosed 
publicly. The issue is simply, should we move from paper to 
digital? And if we do, should we exempt any category, like 
political ads, from the general trend toward using digital for 
greater transparency?
    Mrs. Emerson. So you are going to require broadcasters to 
not only digitize political ads, but any buy that is made.
    Mr. Genachowski. No, no, no. The statute applies to 
political ads.
    Mrs. Emerson. I understand that. But if you are in fact so 
intent on digitalizing the political ads, then why would you 
not digitize all media buys?
    Mr. Genachowski. It is not in the statute. It is not in our 
rules. It is not something that has been raised. It is not 
something that we are looking at. The question that the 
commission is considering--and again, we have a record before 
us. There have been a number of legitimate issues raised. And 
the staff is looking at all of those. But the general question 
is once there are disclosure obligations, should they move from 
paper to digital, as across the board, we are moving from paper 
to digital?
    Mrs. Emerson. I understand what you are saying, but it 
still does not compute to me. Have you all done a cost-benefit 
analysis on determining how much this would cost?
    Mr. Genachowski. The record, in response to our notice, 
contains a good deal of information on costs and benefits. We 
will certainly look at the costs and benefits before doing 
anything. That would be part of the analysis, and I think an 
important part of the analysis.
    Mrs. Emerson. Okay.
    Commissioner McDowell, do you have anything else to add?
    Mr. McDowell. Just to underscore for broadcasters, it is 
they who have come to us, it is they who came to us for the 
2007 portion when we wanted certain parts of the public 
inspection file to be put online. But they are the ones coming 
to the commission saying this might be unduly burdensome with 
the requirements that it be posted in real time. That means 
hiring one or more people to staff that and post these things 
in real time. And for a small broadcaster, especially in 
smaller markets, or even larger markets, that is very 
    Keep in mind that there is legislation that was voted out 
of the House that would require the FCC to conduct appropriate 
cost-benefit analyses when adopting new rules that are sort of 
real and not cursory. So that might be something to think about 
in this context as well.
    Mrs. Emerson. Yes. And we will pursue that at some other 
point, because sometimes I wonder how those cost-benefit 
analyses are actually performed. But I have taken way, way more 
than my 5 minutes.
    So, Joe.
    Mr. Serrano. You are El Jefe.
    Mrs. Emerson. I know. It is just I wanted to finish this. 
    Mr. Serrano. No, thank you. And I understand. Because I had 
no intention to discuss this subject, but it has become an 
interesting subject. And I think it is important, as we look at 
it, to remember a couple of things.
    First of all, broadcasters complaining. I do not know in 
the history of this country there has ever been a business 
person who gladly was told to do something and said, great, I 
want to do that. Most people will tell you it costs money to do 
that, and they cannot do it until they are told: do it, in 
another way.
    Secondly, I do not know that what Kellogg's has to say 
about granola or vice versa has any bearing on who the next 
President of the United States will be or who will be elected 
to Congress. And I think we have to understand that at the 
bottom of this issue is the fact that some folks in the 
political arena, and therefore people associated with them, 
have been for the last few years very happy, and I must say on 
all sides, very happy with the fact that they do not have to 
disclose as much as some people would like them to disclose as 
to who is paying for these ads and who is behind it.
    So it is okay to talk about the FCC mandating. It is okay 
to talk about unfunded mandates. It is good to talk about 
everything else. But I think we can kid ourselves in 
understanding that there is a bottom line issue here, and that 
is the understanding by some folks that this information should 
not be available. Now, to me----
    Mrs. Emerson. Will you yield?
    Mr. Serrano. Sure.
    Mrs. Emerson. No, go ahead and finish that sentence, but 
then would you yield?
    Mr. Serrano. But to me, what the Chairman has said, and Mr. 
McDowell, the Commissioner, has not spoken against, is that 
everybody is putting information online. Why not this 
information also? It costs Congress money, more than it used to 
spend, to go online and put this information forward of what we 
do. It is costing them right now to broadcast this online, this 
hearing. But that is important. I am sure it costs the Supreme 
Court to put all their findings online. It will cost the Census 
Bureau--a great story I read today about the 1940 census coming 
out, and it will be online soon. And after that, you will be 
able to trace it by name and so on as to what happened after 
the Great Depression and the migration, for instance, of 
African Americans from the South to the North, and in my case, 
from Puerto Rico and other places to New York. This is 
information that is being put out that is necessary. It costs 
    So I think on one hand, we should understand that there is 
a need to take all the information and put it online. That is 
just the world we live in now. Otherwise, I would not have 
spent all this money on an iPad, you know, that I paid for 
myself. This way I can watch baseball, too. And the other 
thing, too, is that there is this desire not to tell. Somehow 
it bothers people--and I am not speaking about you--but it 
bothers a lot of people in this country that you should know 
who is saying, I am a great Congressman, or that I am not a 
great Congressman. And I think we should know.
    Mrs. Emerson. And I would just ask you to yield for one 
second to say that all of that information is available online 
through the Federal Election Commission.
    Mr. Serrano. Right. But these are commercials put on a TV 
station. These are commercials also put eventually on a radio 
station. There is a role, as mandated by Congress, and a role 
just mandated by the circumstances. This is using our airwaves. 
And our airwaves belong to the public. And who is paying to say 
that that guy should not be elected and that he once was a 
member of a group that he should not have been a member of, 
whatever; we should know who is paying for that. So I do not 
have a problem with that kind of disclosure. We disclose a lot 
personally. We need to do more of that. But that is just my two 


    Now, let me ask a Republican-type question, since somebody 
might say I asked a Democrat-type question, or made a comment. 
As you well know, this Administration has instructed each 
Federal agency, even the independent ones, such as the FCC, to 
examine and eliminate, if appropriate, unnecessary regulations. 
How is this effort going at the FCC?
    And Commissioner McDowell, do you see an uptick in this 
effort given your history at the FCC?
    Mr. Genachowski. We have taken our obligation to review 
unnecessary rules for elimination very seriously. It was 
something that I talked about in my very first day as chairman. 
As soon as the President issued an executive order asking the 
independent agencies to join the other agencies in doing 
reviews of rules, we said, one, we are already doing it, and we 
will continue doing it. We have eliminated over 200 unnecessary 
regulations. We have eliminated five data collection 
obligations. We have identified another dozen data collection 
obligations for elimination. And we will continue to do that. 
And we run a regular process to identify outdated rules for 
    Mr. Serrano. Can you give me, before you answer, just for 
an example, for the record, one that was eliminated, one that 
we would be familiar with perhaps.
    Mr. Genachowski. So they extend both from eliminating rules 
like ones that were still on the books that applied to 
telegraph. Second, we eliminated the fairness doctrine 
requirements from our books. We have also eliminated 
requirements that restrict spectrum use, promoting flexible use 
of spectrum that Commissioner McDowell talked about. So the 
regulations that we eliminated, they extend from the why is 
that still on the books, to there are barriers and burdens to 
innovation investment that should not there, and we should 
eliminate them.
    Mr. Serrano. Mr. McDowell.
    Mr. McDowell. Thank you.
    And I take the Chairman at his word. And by the way, we 
have a very good working relationship. And he does not take it 
personally when I dissent. So that is worth a lot in this town 
I think. So I would love to see a comprehensive list of those 
200. I do not have one. So that would be helpful, I think. In 
some cases, we would have to vote on them. In other cases, we 
do not have to vote on them. So I will take him at his word 
that he says there are 200 requirements that have been removed 
from the books. At the same time, I know I have dissented from 
a few orders where there were rules added to the books. So I 
think numerically saying maybe there are 200, that is terrific, 
let's continue that trend. But at the same time, let's make 
sure we are not taking one step forward, two steps back with 
more regulation.
    Mr. Serrano. But you do not know of any that have been 
withdrawn? You say there are 200, but you have not seen that 
    Mr. McDowell. You know, I do not have the list. I may have 
voted on a fraction of those. But I have not seen a 
comprehensive list of those 200. And that might be helpful to 
disclose that.
    Mr. Serrano. I am sure this friendly hearing, and the 
example that we set here, will allow you guys to share that 
information so that we know.
    Mr. McDowell. I am sure.


    Mr. Serrano. Chairman Genachowski, please tell us about 
your Connect to Compete Initiative, and update us on how this 
effort to increase Internet accessibility to disadvantaged 
families is working. And you know, this is an issue that 
continues to trouble many of us. And it is really a bipartisan 
thing. We have grown and we have grown, and the Internet and 
all these other gadgets we have and everything, and yet we 
still manage to leave some folks behind. And that is not right. 
That is not right anywhere. And we are not the best in the 
world--we are the best in the world as a country--we are not 
the best at including everybody in these new technologies. So 
what are we doing?
    Mr. Genachowski. About a third of Americans who could have 
broadband do not. And as you indicate, in a world where, for 
example, job postings have moved almost completely online, and 
job applications are in almost all cases required to be 
submitted online, not having access to broadband is a very big 
deal. The percentages that I mentioned are highest in 
particular communities from rural Americans, the elderly, and 
minority communities. There are a number of different reasons 
for it. There is no silver bullet to moving the needle on 
    The Connect to Compete Initiative is something that we have 
great hope for. One of the issues that some people face in 
signing up for broadband is cost. Another issue is digital 
literacy. Some people do not know how to use a computer. They 
do not know how to upload documents. The cable industry, to 
their credit, announced a program to offer low-cost broadband, 
$9.95 a month, to families who have kids on school lunch 
programs. And companies, other companies joined this initiative 
to help on the digital literacy side. Microsoft, for example, 
is offering more courses to help people understand how to use 
basic software. Best Buy is deploying its Geek Squad to help 
people understand the basics of the Internet.
    This is a bipartisan issue. It is a broad national 
challenge. And I look forward to working with the committee and 
with my colleagues to find ways to improve the broadband 
adoption metrics.
    Mr. Serrano. Thank you so much.
    Mrs. Emerson. Mr. Alexander.
    Mr. Alexander. Thank you, ma'am.
    Mr. Chairman, we are glad to have you here today.

                           BUDGET REDUCTIONS

    You submitted a budget to the Congress about 2 percent 
above last year's budget. And you know, in Washington 
standards, that is good. But if you look at some of the other 
agencies, the FTC, for instance, 4 percent less than last year. 
Since those that you regulate pay that bill, is there anything 
in your department that could be trimmed back a little bit so 
we could get down to less than the 2 percent?
    Mr. Genachowski. I am concerned about whether we can 
accomplish our mission with the budget. And we did a lot of 
work in developing the budget to save as much money as we can. 
We received a letter, for example, from Apple, and we have 
heard from some other device makers very concerned about 
whether we have the resources we need to deal with the 
proliferation of new devices like that iPad. Because each of 
those devices has to be certified by the FCC as being compliant 
with emissions obligations. So I am concerned about that. I am 
concerned about the growing complexity of our work. And some of 
the increase that you mentioned is directly related to saving 
money. And so, for example, we have proposed data center 
consolidation initiatives and Cloud computing initiatives that 
will cost, I think the number is about $6 million in 2012. But 
those we project will save about $2.5 million on an annual 
basis once they are completed. It is exactly the kind of thing 
that every private sector company is doing, looking to make 
targeted investments to save money and lower the baseline.

                          UNIVERSAL BROADBAND

    Mr. Alexander. Okay. A minute ago you said about a third of 
the public could have but do not have broadband. Tell me what 
that means.
    Mr. Genachowski. Well, there are two universal broadband 
gaps both presenting very significant issues, but they are 
somewhat different. So one is the broadband deployment gap. 
There are millions of Americans who live in rural areas where 
there is no broadband infrastructure at all. And in our 
universal service reform that we worked on together, 
Commissioner McDowell and I and our colleagues, we sought to 
reform an outdated program to efficiently drive broadband 
deployment to rural America where there is no infrastructure at 
    And then there is the broadband adoption gap. These are 
areas where the infrastructure is there, but people haven't 
signed up. So if you haven't signed up, you can't look for a 
job on line. And if your kid is required as part of their 
schoolwork to be on line, they can't do it. There is a teenage 
girl in Florida who wrote us to say that to do her homework, 
she goes to the library at night and sits outside because the 
library is closed to get access to their WiFi because her 
family doesn't have broadband at home. That is the broadband 
adoption issue, and the metric is about one-third of Americans 
have not adopted broadband.
    Mr. Alexander. There are few things out there when you are 
having town hall meetings that stir anger any more than the 
reports about the cell phones. Does the Universal Service Fund 
buy cell phones for those below poverty?
    Mr. Genachowski. Well, there is a program called Lifeline 
that has existed for many years to help low-income people have 
access to basic telecommunications service like a telephone. 
Just last month, 2 months ago, we adopted some major reforms to 
that program, many significant reforms, to make sure that we 
tackle any waste and inefficiency and abuse in those programs. 
Every dollar in a program like that should go toward its 
intended purpose.
    Mr. Alexander. I didn't get an answer. Do you buy cell 
phones for people?
    Mr. Genachowski. There is a program that subsidizes 
communications access, and it does subsidize mobile phone use. 
Only one per person allowed, so people can choose under the 
program between landline access or mobile access. The program 
is designed to make sure that low-income people have access to 
basic communications services.
    Mr. Alexander. Do we have any idea how many phones there 
are out there that the taxpayers have paid for?
    Mr. Genachowski. I would hesitate to guess, but we can get 
that information for you.
    [The information follows:]

                         FCC'S Lifeline Program

    Mr. Genachowski. The FCC's Lifeline Program does not provide cell 
phones or handsets to beneficiaries; Lifeline only subsidizes service. 
The Commission has not provided funds for free cell phones except 
during the Hurricane Katrina crisis. The Commission Order in that 
instance noted:
    ``To facilitate the access of evacuees and other displaced persons 
to telecommunications services, any person approved for individual FEMA 
housing assistance or determined by FEMA to be eligible for such 
individual housing assistance relating to the hurricane will be 
eligible for federal Lifeline support for a free wireless handset and a 
package of at least 300 minutes of use, not to exceed $130 per 
household, until March 1, 2006.''
    During that program, the Commission did not track the number of 
phones, but total support was estimated at $14 million.

    Mr. Alexander. Okay. Thank you.
    Mrs. Emerson. Mr. Womack.


    Mr. Womack. Thank you, Madam Chairwoman.
    And thank you, Mr. Chairman and Commissioner, for being 
here today. I have got a couple of questions, and as I 
explained to the Chairman before the hearing began today, I 
have got a little background in broadcasting, small-market 
radio, and I have a couple of questions about that. And I know 
a lot of the discussion has been about public inspection files 
as it concerns TV broadcasters and what have you, but I have 
got a constituent in my district that owns five radio stations. 
He also happens to be my father. And when we talk--because it 
has been a while since I have been in the trade. My 
relationship to the business now is he interviews me once in a 
    But his argument is the onerous recordkeeping that he has 
to keep specifically in the area of equal opportunity 
employment. Now, you have to understand that his business is in 
an area where there is a pretty significant population of 
Latinos in the area, and he has to, I think, according to him, 
if I understand his explanation, that he has to keep these--he 
has to go to great extremes to promote and to try to recruit 
potential applicants into his operation from a certain ethnic 
minority or other minorities, and he is finding it increasingly 
difficult to do because of the available pool. But at the same 
time the FCC has these requirements for this massive 
    Now, understand this is a small business. You have already 
alluded to the fact that so many of the things that we are 
talking about--the Commissioner said it a minute ago--a lot of 
these businesses are very small businesses, and, in his case, a 
very, very small business. And this is an extraordinary 
hardship on the company to try to meet these demands. So what 
    Mr. Genachowski. Well, the EEO obligations in general are 
very long-standing at the Commission and serve very worthy 
    Mr. Womack. I don't dispute that at all.
    Mr. Genachowski. I understand that. I am not aware of the 
specific concerns. I will say that as a general matter, 
anything that we can do to reduce unnecessary burdens 
particularly on small businesses we would be very open to 
looking at. We do run general proceedings asking for input on 
how we can reduce unnecessary burdens.
    I appreciate the question, and we will go back and look at 
any issues in that area and make sure that any recordkeeping 
requirements are required necessarily and efficiently meet the 
purposes of the rules.
    Mr. McDowell. I will take him at his word that we will take 
a look at that, and obviously the EEO requirements are a matter 
of law and also a good idea. But if they can be streamlined, I 
would certainly support it, as you might have guessed, so we 
can get working on that.
    Mr. Womack. Fantastic. Thank you.
    I was kind of captivated by the discussion about the 
inspection file. And I can certainly appreciate the fact that 
in a digital age we are in right now, it shouldn't be a problem 
to upload a lot of the stuff that would be in a paper file to 
an on-line presence. I guess my question comes down to what--do 
we have mission creep, as we call it, in the military between 
FEC, FCC? How do we decide and discern between the two Federal 
agencies who is responsible for what? Because it appears to me 
that we have the FCC involved in something that is clearly a 
matter of the FEC. So help me understand that.
    Mr. Genachowski. To the extent the FCC is involved in this 
area, it goes back many, many years. Part of the public trustee 
obligations of broadcasters--as I mentioned, Congress codified 
this in 2002.
    Mr. Womack. Sorry to interrupt, but does it precede the 
FEC, these rules that go back as you say?
    Mr. Genachowski. I am not sure, but I think it might. The 
basic obligations of broadcasters to make disclosures when it 
comes to elections and candidates goes back many, many years 
and has been implemented by administrations of both parties. 
And in this proceeding the question isn't should we change 
those, add to those, subtract to those, but rather should they 
move from a physical public file to on line?
    And you mentioned small businesses, and Commissioner 
McDowell mentioned that as well. One of the suggestions that 
came into the record was to look at ways to exempt small 
businesses from this move, or give them more time to make their 
transition. In general, even small broadcasters are engaging 
with the FCC on line. Renewal applications have to be on line. 
They are, after all, broadcasting.
    But to the extent that there are big issues that can be 
addressed, those are issues that can be addressed on the 
record, and we will look at them.
    Mr. McDowell. I want to clarify that broadcasters came to 
us and wanted us to move a lot of those file requirements to be 
on line, but they wanted the political component carved out 
because of the costs. So that is really, I think, what is at 
issue here. It is not transparency; it is the cost to 
broadcasters of, first of all, uploading the old files and then 
maintaining in real time.
    I don't think anything is against disclosure, transparency. 
That is a very good thing, and it is a good point for Congress 
to consider, which is the FCC the best-equipped agency to be in 
the Federal election law business, or is that the role of the 
FEC? So I think we should keep all of that in mind.


    Mr. Womack. The Chairman mentioned earlier today in 
discussions about some of the regulatory burdens that have been 
dropped over time, and you mentioned specifically fairness 
doctrine. What are the requirements today? Help me out there 
understand in regard to the fairness doctrine what is the 
requirement today and whether or not there is any initiative 
under way or thought process under way to bring back, shall we 
say, this fairness doctrine.
    Mr. Genachowski. Just the opposite. I feel very strongly 
about the First Amendment, free speech. The fairness doctrine, 
in my view, was a bad First Amendment idea from the start, and 
I was pleased to work with my colleagues to eliminate the last 
vestiges on the books.
    Mr. McDowell. So about a year ago I was giving a speech, 
and we were going through--and I asked my legal team to go 
through the FCC's rules to find instances of rules that could 
be gotten rid of, ones that had outlived their usefulness. 
Everyone thought the fairness doctrine died in 1987, and 
actually parts of it, the heart and soul of it really, remained 
on the FCC's books. The FCC just decided not to enforce it back 
in 1987. So the Chairman, I think, very graciously took that 
cue and got rid of it from our books.
    But the bigger issue can also be, you know, when you say 
``fairness doctrine,'' all of a sudden all the phones at radio 
stations do light up, and the blogosphere starts to light up as 
well. But there are other ways the FCC can regulate speech 
through broadcast license renewals. I am not saying 
constitutionally they can, but pragmatically they can. So as we 
go through our quadrennial review of our media ownership rules 
which could determine what the licensing term is, will it be 8 
years, will it be 3 years, what will be the criteria for 
getting your license renewed, et cetera, it is important to 
look at those rules as well.
    And I take the Chairman again at his word, but anything in 
a perhaps future Commission that could constructively be a 
resurrection of the fairness doctrine, mark my words, it won't 
be called the fairness doctrine, it would be called something 
else. So we have to keep that in mind always.
    Mr. Womack. One final question in this round, and then I 
have some questions about broadband to come up later. Is the 
FCC the proponent agency on--I and won't get this term right, 
but I can explain it--the royalty fees paid to the songwriters, 
artists? It is not under an FCC umbrella; is that correct?
    Mr. Genachowski. Correct.
    Mr. Womack. Whose umbrella is that under?
    Mr. McDowell. I don't know, but it is not us.
    Mr. Womack. That is a good thing. That will save a couple 
of minutes of my round of questions. I yield back.
    Mrs. Emerson. ASCAP and BMI are in charge of that.
    Mr. Diaz-Balart.
    Mr. Diaz-Balart. Thank you very much, Madam Chairwoman.


    Mr. Commissioner, good to see you.
    Let me first start, Madam Chairman, by telling you that the 
Chairman and his staff have been exceedingly open to us and to 
my staff, and I thank you for that. I had the opportunity to 
not only speak to you, but meet with you, and I want to thank 
you for that. We spent a lot of time today speaking about 
transparency in a number of different areas.
    Now, we were preparing for this meeting and then the issue 
of LightSquared kind of came back. Obviously since you have 
been so open to me, I was a little shocked at some of the 
things that I read about LightSquared, about the fact that you 
had a Member of the Senate in essence saying that he couldn't 
get the information. The FCC told him that the information of 
that sort is only given to members of relevant committees, 
which obviously this one would be included in that. But because 
of that, I started digging in a little bit, because I was 
frankly shocked because of the fact that you have been so open 
to me and to my staff.
    And one of the things, obviously, that a cynic would say, 
well, that was something that they were reportedly contributors 
to the administration, and so therefore it kind of smelled bad. 
But since I don't buy that, we did a little bit of our own 
digging, and I will tell you what I came up with, something 
that frankly kind of shocked us a little bit, speaking of 
transparency, and that is the issue of Freedom of Information 
Act requests.
    And I will tell you what the source is. It is a U.S. 
Government website. It is FOIA.gov website. You look at just 
the number of Freedom of Information Act requests and denials, 
and according to that website, the FCC is denying more FOIA 
requests, Freedom of Information Act requests, under this new 
FCC than in the past; as a matter of fact, significantly 
greater percentage of denials compared to other government 
    For example, in 2010, the FCC denied 48 percent of Freedom 
of Information Act requests, while the rest of the government 
denied only 7.3 percent. That is a pretty darn huge difference.
    Let me also, then, to put into perspective, some of that 
data on that website indicates that the FCC has started denying 
an unusually large percentage of Freedom of Information 
requests because of this thing called ``not reasonably 
    Now, under your watch, the FCC denied about 16.4 percent of 
FOIA requests based on records that were not, quote, 
``reasonably described.'' But not only is that a huge increase 
from previous FCC years, only 3 percent denial based on that, 
but much higher than even the CIA, which I thought was a big 
deal. I mean, the CIA denied 0.7 percent denial rate the same 
year on that same issue.
    So why is the FCC all of a sudden have more secrets than 
the CIA when you are dealing with FOIA requests?
    Mr. Genachowski. Well, I am not familiar with those 
numbers, and I hadn't heard them before. I would be happy to 
look at them together with you and try to understand the 
trends. Certainly we recognize our obligations under FOIA, and 
we have a team of professionals who handle FOIA requests and 
understand their obligations to comply and meet their 
obligations under law.
    Mr. Diaz-Balart. And the reason I wanted to mention that 
first, the reason I was taken aback is precisely because the 
relationship that I have had and my staff has had with you, and 
we have been able to get information. But it seems outside of 
me or us or Congress, and even with some Members of Congress, 
it seems that there may be a difference. Again, if you look at, 
for example, those that are denied for ``not reasonably 
described,'' if you look at, again, 16.4 percent for the FCC; 
the CIA, 0.7 percent; the NSA, 0.5 percent; DHS, Homeland 
Security, 0.2 percent, there seems to be a problem there. And 
that is a huge increase, because just previously to that it was 
about 3 percent. It was still high and higher than these other 
    And, by the way, I am sure there is a reason for it, but 
there seems to be a huge increase of denials of Freedom of 
Information particularly under this category of ``not 
reasonably described'' that I don't think shows transparency 
and clearly does not reflect the President's call, at last 
public call, for transparency.
    So again, because of the relationship, I would like to 
maybe spend some time with you all and look at what is going on 
there, because I think there is a serious issue there, and I am 
sure there is a good explanation, but I don't understand what 
it would be. That is one.
    Number two, Madam Chairman, on another issue I ran into, we 
were talking about budgetary issues now, about, I guess, your 
personnel requests are basically flat; is that correct?
    Mr. Genachowski. Correct.
    [Clerk's Note.--Subsequent to the hearing, the FCC Chairman 
provided the following information:]

                          FCC FOIA Compliance

    Mr. Genachowski. To clarify on the matter of the FCC's FOIA 
compliance, the FCC publishes a FOIA Report annually and it is 
available at http://transition.fcc.gov/foia/2011_foia_report/
2011foiareport.pdf. The FCC's FOIA record demonstrates that it grants, 
in whole or in part, the vast majority of the requests it receives and 
denies in full very few requests. Accordingly, the FCC compares 
favorably to other agencies.
    Data from www.foia.gov, which is drawn from the agency's FOIA 
Annual Reports, show that only 3.4% of the FOIA requests received by 
the FCC in FY 2011 were denied in full; 2.5% were denied in full in FY 
2010; and 3.2% were denied in full in FY 2009. These statistics do not 
include instances where a FOIA request did not reasonably describe the 
records sought, was withdrawn, or otherwise was categorized by the 
Department of Justice as denied for reasons other than a FOIA 
    The Commission will deny a FOIA request for failure to ``reasonably 
describe'' the records sought when the requester fails to provide 
enough information to allow the FCC to do a reasonable search. The 
Department of Justice considers ``not reasonably described'' responses 
(and other responses not related to a FOIA exemption) as a ``denial'' 
of the request for FOIA annual reporting requirements, but these 
denials are not considered to be ``full denials.''
    For FYs 2009 through 2011, the FCC denied a total of 246 FOIA 
requests because the requesters did not ``reasonably describe'' the 
records sought. This number represents 11.4% of the FOIA requests filed 
in FY 2009, 16.5% of the requests filed in FY 2010, and 12.5% of the 
requests filed in FY 2011. These percentages are substantially lower 
than the government-wide figures for requests denied as not reasonably 
described, according to Department of Justice statistics. In FY 2010, 
the most recent year for which data are available, 25% of FOlAs filed 
government-wide were denied as ``not reasonably described.'' See http:/
/wwwjustice.gov/oip/foiapost/fy2010-ar-summary.pdf at page 6.
    The Commission and its staff work diligently to ensure that the 
agency is transparent and responsive. House Oversight Committee 
Chairman Darrell Issa recently gave the FCC an ``A'' for its FOIA 
record-keeping. The report is available at the website below. Also, the 
Attorney General recently recognized the FCC for its ``particularly 
exemplary'' use of the FCC.gov website to proactively release agency 
records and data.

    Mr. Diaz-Balart. But one of the things that also struck me 
as rather large was--it is too small, I apologize. I am going 
to complain to my staff about that. Particularly after 49 and a 
half and a half and a half. My eyesight is not that good--but 
it is salaries, the increase on the FCC of employees earning 
$150,000 or above. So even though the number of employees may 
be flat, those earning $150,000 and above have increased rather 
dramatically. That is, Madam Chairwoman, what this chart 
    Mrs. Emerson. Would you like to have that submitted for the 
    Mr. Diaz-Balart. That would be great if I could. Thank you.
    [The information follows:]

    Mr. Diaz-Balart. It is a huge increase of individuals that 
are now earning over $150,000 in salary. So let me see if I can 
get you some of those numbers.
    It jumped from 46--in 2008--individuals to 431 in 2009, to 
535 in 2011. That is a pretty astonishing increase. So what 
changed between 2008 and 2009 that requires such an increase in 
pay? Is it different individuals? I am not sure what that 
actually shows us other than the fact that the numbers are 
pretty astonishing.
    Mr. Genachowski. Sir, I am not familiar with the reasons 
for that particular increase. In general, the work of the FCC 
increasingly requires highly skilled engineers, economists, 
others with advanced degrees to do our work. Over time, the 
employee base at the FCC has become more and more focused on 
that as we moved from paper to digital, and there have been 
consequences for the employee base in that regard. So that is 
part of the reason for the trend.
    A second is--and I am proud of this--the retention at the 
FCC has been reasonably high, and that has affected those 
numbers as well.
    But I would certainly offer to work with you on 
understanding the numbers. The work that the FCC does in terms 
of generating auction revenue, unleashing investment innovation 
in the States, I am convinced after my time at the agency that 
it requires talent, engineering talent, economists, lawyers. 
And we certainly lose many, many, many prospective potential 
employees because we can't come close to competing with other 
offers that they have. And that is just life in government, and 
I understand that.
    Mr. Diaz-Balart. I understand that. I am not being 
accusatory. But when you look at the numbers in 2006, there 
were 38 employees, if this was totally accurate, and this is 
what we found. This is from a Web site also, a Federal 
Government Web site. All of this is public, and I do commend 
you for that. 2006, there were 38 employees in your agency 
earning $150,000 or above. In 2007, there were 48, a small 
increase; in 2008, 46, so basically flat or even a few less. 
And then it went from 2008 of 46 to 431 in 2009, 517 in 2010, 
and 535.
    I am not great at math, but that is a pretty substantial 
increase no matter what. And we are not dealing with people 
that went from 75 to 85,000 or from 50 to 70. We are talking 
about people making over $150,000.
    So again, those are astonishing numbers. And again, I want 
to thank you for being open, but you understand that these 
raise some serious questions to--Mr. Alexander mentioned about 
maybe you could look at ways to reduce that 2 percent increase. 
When you have these increases in salaries, number of 
individuals making this much money, these large increases, that 
right there may be where that 2 percent is alone. And I would 
like to sit down with you and further explore this.
    Thank you, Madam Chairwoman.
    Mrs. Emerson. Thank you, Mr. Diaz-Balart.
    Mr. Yoder.
    Mr. Yoder. Thank you, Madam Chair.


    I appreciate you both being here, and I appreciate your 
service to our country and a chance to have a conversation this 
afternoon as we look at what our budget priorities are and how 
we move forward. Certainly this committee and this Congress 
continues to be focused on job creation, economic growth, 
reducing and bringing our Federal expenditures in line with our 
available revenue. I am sure you share those goals, and so I 
have appreciated your comments this morning.
    One of the questions that Mr. Diaz-Balart was asking was 
related to LightSquared, and I don't know if that has been 
discussed today. It harkens back to last year while we were 
dealing with this issue, many of us were getting a flood of 
concerns, complaints from various industries from across the 
country, Federal agencies even, that the progression of 
LightSquared would have an effect on GPS. I think we are all 
familiar with how that has progressed.
    And we move forward in the Appropriations Committee, myself 
and Congressman Austria moved forward with an amendment to 
instruct the FCC to tighten up its process on LightSquared, to 
hit some benchmarks, and to ensure Congress that LightSquared 
was not going to violate existing GPS spectrum. Part of the 
challenge is folks like myself have Garmin in their district 
and other companies that rely on certainty in these markets 
before they invest and grow and build technology, it can scare 
off potential job growth and potential investment.
    So, I guess, first of all, and my understanding is that is 
in the President's budget this year, the same language that was 
placed by the committee last year.
    My questions, are, one, where are we going with 
LightSquared in particular? What is the latest? Two, how do we 
avoid getting back into this situation again where there is 
this concern across the spectrum, no pun intended, of folks who 
are concerned about this? How do we avoid getting back into 
this position again? Assuredly there will be other companies in 
the future who want to expand and grow jobs, which is what we 
want them to do, but how do we do it in a way that doesn't 
offend the GPS situation we already have in the country and the 
investment we have made there?
    Mr. Genachowski. There were really two fundamental goals. 
One was to free up more spectrum for mobile broadband, because 
we do have significant capacity challenge that has the risk of 
restraining growth and private investment in mobile, and the 
second was deregulatory. That spectrum had an old regulation on 
it prohibiting terrestrial use, and the effort in connection 
with that was to remove that barrier to terrestrial mobile 
broadband buildout. From the start we said that if doing so 
would lead to legitimate interference issues, we would have to 
take that into account. And as you saw from the actions, we are 
taking those into account. It is an open proceeding still, and 
so we are continuing to analyze the record, but we were very 
clear from the start of it that we would have to address that.
    There is a larger issue that I do look forward to working 
with you, all the members of the committee. There is no reason 
it shouldn't be a bipartisan issue, which is how do we make 
sure that we can remove barriers to spectrum use, and that the 
incentives are in place to avoid interference being caused by 
devices being interfered with by spectrum outside their lanes? 
And this particular proceeding revealed that that is a real 
issue. It could get in the way of unleashing the full 
opportunity, the investment and innovation in terrestrial and 
mobile broadband.
    And to your question, learning what we have learned from 
this, how do we make sure that we can move across the boards in 
the flexible use that Commissioner McDowell and I both agree 
should be the norm for spectrum policy, get rid of regulations 
that limit use, but also have incentives to make sure that we 
don't wake up and say, oh, there are interference issues here 
that prevent us from deregulating.
    Mr. McDowell. Well, the number one rule in spectrum policy 
is to prevent harmful interference. And beyond that, I have 
advocated for almost 6 years at the Commission flexible uses. 
Sometimes in the past the FCC has said certain frequencies 
should be only used for specific, narrow purposes. By the time 
that is actually adopted and investors invest and engineers 
build out networks, then the market has passed that option by. 
And you have to go back to the FCC with another rulemaking, 
which can take years, to change what the next micromanagement 
might be from the government. So I think it is good to have 
flexible uses.
    As far as the LightSquared issue itself goes, that did not 
rise to the level of an FCC vote of the Commissioners, what we 
call the 8th floor at the FCC, but of the Commissioners; that 
was handled by the bureau and the Chairman's office, so any 
detailed questions I would defer to them on that.
    Mr. Yoder. Well, I just think it is useful to continue to 
keep that situation relevant as we discuss how we are going 
forward. I think there were a lot of fears that, whether they 
were going to come true or not, those fears in themselves have 
an impact on investment decisions that other companies make. 
And so as we go forward, there are companies that are making 
investments today in GPS technology that may have an impact on 
future decisions and future lane issues that a long-term 
guidance, or a long-term vision might help avoid some of these 
problems down the road.
    There was a general concern we were getting that they were 
unsure whether the FCC would assure the world that LightSquared 
or other companies that are competing for that spectrum would 
have zero impact, or it is such a negligible nonimpact, and 
that seems like something that should never be in doubt. It 
seems like the effort we were taking should already be in the 
prime directive of what you are utilizing to make this 
determination already.
    So I don't know how we got to that situation and the 
premise that the FCC would approve it even though it would 
impact GPS, but that was the belief in a lot of--I know you are 
still going through it, but that was the belief that that would 
occur. And so whatever we can do to, I guess, reassure those 
companies that are currently invested in GPS that we won't 
approve technology that would affect their lane I think would 
be useful and helpful going forward.
    I also wanted to ask just briefly about broadband fiber and 
just as it pertains to partnerships with public-private usage. 
It is my understanding that in some of the federally funded 
broadband projects, that not all of the fiber is utilized. What 
is the opinion of the FCC on sharing, selling, or leasing of 
excess fiber in those situations?
    Mr. Genachowski. Excess fiber of the government-supported 
fiber? I am not sure.
    Mr. Yoder. Right. Government-supported fiber. To what 
extent do we have government-supported fiber? Is it all private 
sector? Do we have public-private partnerships in that regard?
    Mr. Genachowski. This is I question that we follow up 
afterwards. I am not sure I completely understand it. 
Overwhelmingly broadband in the U.S. is private-sector-funded 
and built. In the Universal Service Fund context, there is 
support for private companies so that rural America can get 
broadband. There may be some local municipal broadband efforts, 
but perhaps I could offer to follow up with you on the 
    Mr. Yoder. That would be fine. That would be fine.
    [The information follows:]

                       Government Supported Fiber

    Mr. Genachowski. Thank you for this opportunity to provide 
additional information for the record. After following up with your 
staff, I understand that you were referring to fiber projects financed 
under the American Recovery and Reinvestment Act. The National 
Telecommunications and Information Administration (NTIA) administers 
the Broadband Technology Opportunities Program (BTOP), which is 
designed to develop and expand broadband services to rural and 
underserved areas and improve access to broadband by public safety 
agencies. The FCC has played only a consultative role in the 
administration of BTOP.
    Another initiative included funding for the Broadband Initiatives 
Program, which is administered by the Rural Utilities Service (RUS) of 
the United States Department of Agriculture (USDA). This program is 
designed to support the expansion of broadband service in rural areas 
through financing and grants to projects that provide access to high 
speed service and facilitate economic development in locations without 
sufficient access to such service.

                         AIRPLANE COMMUNICATION

    Mr. Yoder. And the final question I have for this round 
deals with airplane communication. Some of this has to do with 
the FAA, but we constantly deal with concerns of constituents 
and folks related to travel and communication that occurs on 
airplanes. And even the most recent--I think it was Alec 
Baldwin playing games and the plane was taking off. This is in 
the news a lot. To what extent is the FCC engaged for the 
ability of telecommunication devices to be utilized on 
airplanes, and what is the opinion of the FCC related to the 
restrictions that currently occur on the airlines today?
    Mr. Genachowski. I saw today that the FAA is taking a fresh 
look at its rules regarding iPads and other devices and 
exploring the possibility that it might adjust its rules to 
accommodate the new kinds of devices the way people use that. I 
would encourage that. And some of the traditional concerns 
about people talking on phones on planes may not apply to 
Kindles or iPads or other uses. And I would encourage the FAA 
to look at that and to ensure that it is doing as little as 
necessary to protect public safety.
    Mr. Yoder. Madam Chair, I have one more related to mobile 
DTV. I have Sprint based in my district. I know both of you 
have been strong advocates for auctioning wireless spectrum to 
meet the demand for wireless broadband. Launch of mobile DTV 
will be another way for consumers to access video. It will be 
an important tool for consumers to access local news and 
information, especially in times of emergency. What steps is 
the FCC taking to ensure that mobile DTV will flourish and not 
be negatively impacted in the upcoming repacking of broadcast 
    Mr. Genachowski. Well, we have made it clear that the 
flexibility that broadcasters have to launch mobile DTV on the 
6 megahertz they have shouldn't and wouldn't be affected by the 
incentive auction process and repacking. They have flexibility 
to launch it. I encourage innovation in the space. The market 
will decide whether or not it is something that will work, but 
I think that is an area where there is no reason for the FCC to 
discourage innovation. Just the opposite. And I think we have 
given those assurances to broadcasters.
    Mr. Yoder. I appreciate it. Thank you, Mr. Chairman.
    Thank you, Madam Chairman.
    Mrs. Emerson. You are welcome.
    First let me ask you, Chairman Genachowski, could you 
submit to us a list of the 200 regulations that you have 
eliminated? That would be very helpful to have. Then we could 
use it to coerce others to follow suit.
    [The information follows:]

    Mrs. Emerson. Let me just ask you both a little something 
about the Universal Service Fund because I think it was 
Saturday afternoon I was meeting with some constituents who are 
a little mom-and-pop cable company, and the contribution rate 
for the Universal Service Fund has doubled over the last 10 
years or so, which obviously has led to an increase in fees to 
consumers. Have you all done anything to address that 
particular piece of it, or fees and the like?
    Mr. Genachowski. The contribution factor reform is 
something that staff is working on and that we expect to move 
forward with at the FCC in the near future.
    On the other side of it, in our USF reform and our Lifeline 
reform pushing out, Commissioner McDowell and I and our 
colleague Mr. Clyburn worked together to limit the growth of 
those funds, because, on an aggregate basis, that sets the fees 
that are collected from consumers.
    The contribution proceeding will look at the allocation of 
those fees, basically who pays it in. The most important thing 
on the ensuring that the aggregate level of burden on consumers 
is minimized were issues that we addressed in the proceedings 
that set the outflows.
    So we do have to address contributions, because the world 
has changed, and the ways that that money is collected needs to 
be looked at very carefully. But I do want to emphasize that 
the putting the programs under budgets, setting savings 
targets, et cetera, has already put in place an assurance that 
the aggregate burden on consumers will be within the limits 
that we identified.

                        THE CONNECT AMERICA FUND

    Mrs. Emerson. Tell me how the new Connect America Fund will 
impact rural areas.
    Mr. Genachowski. Well, it will efficiently disburse funds 
to local communications providers to build out broadband in 
their areas. Over the years a whole series of inefficiencies, 
wastes developed in the program. It would have been hard to say 
that the money that the program was distributing was going to 
its intended purpose, and its intended purpose was traditional 
telephone service, not broadband. So the fundamental purpose of 
the reforms that we adopted was to modernize the program from 
telephone to broadband, eliminate waste and inefficiency, and 
ensure accountability so that any money going into the program 
gets spent on meeting the goals of the Connect America Fund, 
getting broadband to rural America.
    Mrs. Emerson. I had a meeting with a small cable company 
from my district and had another meeting earlier in the week 
with a small telecom as well. I should probably call it cable 
company because there is a difference. They are really worried 
that the new changes to the Connect America Fund are going to 
put them out of business. How am I supposed to respond to those 
    Mr. Genachowski. Well, we are listening to those concerns 
very carefully as we implement the program. The easiest way to 
make sure that there are no effects at all would have been to 
not constrain the size of the fund and to allow the increase in 
the burden on consumers to go up. And we agreed on a bipartisan 
basis at the Commission that that wasn't the right answer, that 
we needed to make the program efficient, accountable, and that 
is what we have done. We have established a waiver and other 
processes that, as we go forward, we can hear the concerns from 
companies and take them into account.
    I would mention one other thing, which is that a core 
principle of our reforms is not to have a flash cut, but to 
look at transition periods. So the various accountability-
enhancing, efficiency-enforcing measures that we adopted 
generally speaking will roll in over the next few years, 
because we all wanted to make sure that companies would have 
time to adjust.
    Mrs. Emerson. Good. Well, are you available at 3:45 
tomorrow? I have another constituent coming to talk about this. 
That would allow me to go to my Ag hearing, because you can do 
a lot more to help her than I can.
    Mr. Genachowski. It may be that they are coming to us after 
you or before you. But our doors are open, and getting the 
input directly and the data and information to companies that 
are affected is very important to us.
    Mrs. Emerson. I appreciate that.

                        UNIVERSAL SERVICE REFROM

    Commissioner McDowell, can you explain to the committee 
your thoughts on Universal Service Fund reform? What I read in 
your comments is that you agreed with some reforms, you had 
concerns about others, and you disagreed with others. So if you 
wouldn't mind explaining to all of us here your specific 
    Mr. McDowell. Sure. One of the concerns is that we have not 
yet addressed the taxing side of universal service reforms. 
That is how you pay for all of this. There are four funds where 
we spend money under the universal service umbrella, and we 
have gotten to most of those, reforming the spending side, but 
we haven't gotten into the contribution or taxing side. The 
Chairman and I talk about this on a regular basis. It is my 
hope that we can launch another notice of proposed rulemaking 
as quickly as possible and conclude it this year.
    We need to expand the--broaden the base of contributors and 
lower the contribution factor, make it a flatter tax of sorts. 
Right now we are taking a lot from a shrinking pool of revenue, 
and we do need to broaden that base and reduce the overall 
burden. And that is something that I have maintained pretty 
much since I got to the FCC. So the sooner we can get on with 
that, the better.
    There is this automatic tax increase. It is not a hidden 
tax because it does show up on the consumers' phone bills. But 
it is all of that inexplicable language at the end of your 
phone bill regarding FCC fees and taxes and funds and things. 
And it has grown from about 5.5 percent in 1998 to 18 percent 
today, and that is a huge spike just in the past couple of 
years especially and in part because of increased spending, but 
also because of the shrinking pool so that the less of the tax 
base you have, the higher the rate is going to be.
    So it needs to be fixed and needs to be fixed very 
urgently. And my concern is it being an election year, it won't 
get done as quickly as we like, and that is why we are keeping 
the pressure on. And I know the Chairman appreciates me keeping 
the pressure on.
    And then on the spending side, I just addressed an 
association this morning of rural phone companies, and we 
talked a lot about this year. So for a lot of the rural phone 
    Mrs. Emerson. So you got to have the meeting with them, not 
the Chairman. Because I am sure my folks are there. Excuse me 
for interrupting.
    Mr. McDowell. Yes, 600 of them all at once from all 50 
States, I believe, or most of the 50 States anyway. And a very 
honest, open discussion. I know what their concerns are. Some 
of these rules start to go into effect July 1st, but some of 
these rules also don't phase in for a period of 9 years. And 
they also have a steady income stream of $2 billion, which is 
where it was before for rural carriers. The Commission will 
look at this again in 2017, so 5 years from now. But that is 
    On the other side, some of them did express their concern 
to me that there are certain loans from the Federal Government, 
for instance, through the Department of Agriculture or even 
some other things where they are concerned about being able to 
repay those loans, those money borrowed for fiber deployment 
and other such things in rural America. If that is indeed the 
case, and I know there is a lot of anxiety right now because 
there is a little bit of uncertainty about what the reality 
will be, I think the executive branch has an obligation here to 
look at working out those loans if need be.
    We also did establish a waiver process. It is very frugal. 
Being of Scottish descent, I liked that very much. If indeed 
there is a carrier that is experiencing undue hardship because 
of the reform, they can file a waiver with the FCC where they 
have to open their books in a very detailed fashion so we know 
exactly what is going on with the money, but they can get a 
    We will learn a lot should that happen. The Commission is 
going to learn a lot about what might be happening as a direct 
result. But I had an opportunity to bend the growth curve of an 
entitlement, and I took that opportunity.
    Mrs. Emerson. Well, that is great. We need to do the same 
on lots of different entitlements. Thanks for that explanation.
    Yes, there are some issues with the Rural Utilities Service 
with some of those loans being called in, in spite of the fact 
that companies haven't yet utilized all the funds. So we will 
have to deal with Rural Development and USDA, but thank you 
very much.
    Mr. Serrano.
    Mr. Serrano. Thank you.


    Mr. Chairman, we are very aware that you prepared the 
fiscal 2013 budget in advance of recent congressional action on 
voluntary incentive auctions, which will greatly affect the 
future of spectrum availability. These will be the most complex 
auctions the FCC has conducted to date.
    Please update us on the agency's plan for these auctions as 
it stands now, understanding that things will change as we move 
forward. We won't press you for a figure today, but I imagine 
there will be additional administrative costs associated with 
these auctions. Can you comment on that?
    Mr. Genachowski. Well, the auctions will be an opportunity 
to deliver a great return for the American economy and the 
American people, raise billions of dollars for the Treasury, 
free up spectrum for iPads and other mobile devices. It also 
will be incredibly complex.
    The two-sided auction that Congress authorized, this will 
be the first of its kind. It will require a great deal of hard 
work, engineering work, economists' work, and we are privileged 
to have that responsibility. The staff is now analyzing the 
statute; developing an implementation plan; determining what 
effect it will have; and, most importantly, developing a view 
on what needs to be done to maximize the benefits to the 
public, the benefits to the Treasury, the benefits to our 
    The FCC has a good track record here in delivering a major 
return on investment, and we would like to make sure that, the 
challenges ahead, that we do not shortchange the American 
public because we do not bring the right engineering and 
economics resources to bear.

                            FTE AND STAFFING

    Mr. Serrano. You tell us that you are at the lowest 
staffing level in 10 years. So in view of these 
responsibilities, what can you tell us about the present level 
of staff and taking on what you need to do now?
    Mr. Genachowski. You know, I am completely in favor of 
having a lean, highly talented team taking on these issues, and 
have no interest in looking to hire people we don't need. I am 
concerned in general about the engineering and economics 
resources at the FCC. Whether it is interference issues like we 
were talking about before, the complexity of auctions, there is 
a basis level of talent that the FCC needs to sustain over time 
in order to realize these benefits for the American public.
    So our goal is to do the most we can with the fewest 
resources and the fewest people. As I said, I am--we have a lot 
of work to do to make sure that we continue to bring in great 
engineers, great economists, great lawyers to meet the 
opportunities of mobile and broadband.
    Mr. Serrano. Right. Now, we know that a feature, an 
important aspect of this new spectrum auction is the set-aside 
for first responders. Everyone here is concerned with that, but 
if you come from New York City, that is still an issue that is 
with us every day in terms of what happened September 11th.
    How will that go, and how successful do you think you will 
be at being able to deal with that issue? Because I suspect--
I'm sorry I am interrupting you--I suspect that is an issue 
that will have bipartisan support, people saying make sure that 
you are doing the right thing in that department.
    Mr. Genachowski. Well, it is an extremely important issue. 
The 9/11 Commission recommended too many years ago that we have 
an interoperable mobile broadband network for first responders. 
It is a very important thing that Congress has now moved 
forward on that. A great deal of the responsibility for 
implementing that lies with NTIA. There are pieces that we will 
work on at the FCC. We have a Public Safety and Homeland 
Security Bureau that is very focused on it, making sure that we 
harness modern communications for our first responders with a 
mobile broadband public safety network, with next-generation 
911, with outbound mobile alerts so they can reach people. 
These are very high priorities, and in each case they present 
some very challenging issues to work through.
    Mr. Serrano. All right. We wish you the best, because that 
is going to be a challenge, and one that everybody will be 
looking at.
    There is a question I have asked, the last couple of years, 
every agency that has come before us, and it is of special 
interest to me. What about the territories? As you know, the 
territories are always an afterthought in Congress, in 
corporate America and everywhere else. And, in fact, if you 
were to ask Americans, ``Are the folks who live in the 
territories American citizens? '', we may be shocked at how 
many Americans do not know that we are talking about American 
citizens because they don't live in a State.
    It got so bad that a couple of years ago at an FCC hearing, 
I was told that satellite radio was not available in Puerto 
Rico, and I asked why, and someone sitting right there--I hope 
it wasn't you; no, it wasn't you--said, the satellite doesn't 
reach there. And I said, it is a satellite. So I suggested they 
borrow one from the CIA which could reach anywhere in the 
world. So now they have satellite radio.
    What are you hearing from the territories? What issues do 
they have that may be different than the folks in the 50 States 
or in the continental States, as some people call them? And 
what is still missing to bring about equality under the 
umbrella of the FCC?
    Mr. Genachowski. I would say the issue we most hear is the 
same issue we hear from rural America, which is ensuring 
adequate broadband infrastructure and broadband adoption. And 
so whether it is the Universal Service Fund or other policies 
and programs that we have, we certainly look at the 
territories, the issues the territories have. To the extent 
they are unique issues, of course, we take those into account. 
But many of the issues are similar, and hopefully that will 
help accelerate solutions across the board.
    Mr. Serrano. Well, and I must say to both you and Mr. 
McDowell--you may comment on this if you wish also, please--
that if you think it is rough for the rural areas--and this is 
not a political statement; at least most of those rural areas, 
all of them have two Senators and a couple of Congressmen, at 
least one, to call the FCC--the territories is a whole 
different situation. They are treated equally only by the 
military. And I am speaking that in the positive term for their 
service. So I just want you to always stay on top of that, as 
we will on this subcommittee. And I know the chairwoman shares 
that thought with me.
    Mr. McDowell.
    Mr. McDowell. Thank you for the opportunity to speak.
    So, we do keep them in mind, the territories. In fact, just 
last October I had a terrific conversation with the Governor of 
Puerto Rico about our universal service reform and the need to 
make sure that Puerto Rico, all of its unique circumstances 
were taken into consideration.
    So whether it is the upcoming spectrum auctions or other 
things regarding injecting more spectrum in the hands of 
consumers, or broadband deployment or adoption, as the Chairman 
said, we do take them into account very seriously and do all 
that we can. And a lot of them do have unique circumstances, 
and we do try to incorporate that in our policies.
    Mr. Serrano. Thank you for that.
    And I think it is also very important, Madam Chairman, to 
always be aware of what is happening in the territories and 
what they are thinking, as a certain Presidential candidate 
found out this weekend in Puerto Rico.
    Mrs. Emerson. Indeed.
    Mr. Womack.
    Mr. Womack. I have a couple of follow-up questions. I am 
not going to be near as understanding or forgiving for what my 
colleague Mr. Diaz-Balart brought to the attention of this 
panel just a few minutes ago in regard to the number of 
employees that are now receiving in excess of $150,000 annually 
in earnings. He went through the full list.
    I am just going to take 2008 and 2009 and just set them 
side by side, because I can't imagine an explanation that can 
justify this, that in 2008 there were 46, and in 2009 there 
were 431. I mean, those numbers, I cannot wrap my head around a 
1-year growth pattern, unless magically hundreds of those 
workers were making $149,000 a year and then got a couple of 
1,000-dollar raises, and it took them over that threshold.
    So what I am specifically asking is not necessarily an 
explanation today, because there may not be one that can be 
supported better by what research might be able to uncover. But 
I sit in hearings with the National Nuclear Security 
Administration, and health institutes, and other very, very 
high-level, high-energy, high-competency-level bureaucracies in 
this government, and I would be shocked if they all came with 
this kind of appreciated number between 2008 and 2009. So I 
will give you a chance just to comment about that significant 
jump in 1 year. But I do for the record would like to see the 
justification and where we are headed on this glide path.
    Mr. Genachowski. Sir, we certainly will provide you a more 
detailed explanation.
    [The information follows:]

                            FCC FTE Salaries

    Mr. Genachowski. The primary reason for the increase in FCC staff 
earning $150,000 or more from FY08 to FY09 was the change in the 
federal government pay scale, which is determined by the Office of 
Personnel Management. In FY08 the maximum pay for a GS-15/10 was 
$149,000. In FY09, the maximum pay for GS-15/ step 9/10, was 
approximately $153,000 (step 94153,053; step 10-$153,200). In FY10, the 
automatic government-wide pay increase moved the $150,000 threshold 
from GS-15/9 down to GS-15/8 for Washington area staff.

    Mr. Genachowski. I understand from our staff that in that 
period from 2008 to 2009, a certain class on the GSIS pay scale 
went from just under 150- to just over 150-. We will get back 
to you on whether that is the explanation. I can certainly tell 
you in my time as Chairman, there was no effort to say, let's 
inflate the salaries of employees, and I expect the explanation 
will be something like the one that was reported to me.
    Mr. Womack. I hope so. Surely you, Mr. Chairman, and the 
Commissioner here would certainly agree on paper in front of 
the discerning public out here that is an astonishing jump in 1 
    Mr. Genachowski. I would like to understand the numbers 
better myself. Again, it is possible that the pay scale went 
from just under 150- to over 150- in that year. But we will 
work with you and the committee to provide the underlying 
factual information.
    Mr. Womack. At the risk of being hardheaded and not 
satisfied with that particular response, let me say it again, 
that a member of the discerning public, you would have to 
agree, would look at that discrepancy--46 in 2008, 431 in 
2009--unless there is a general support argument like you have 
indicated that a change in the pay scale--which goes back to 
what I said a minute ago. If hundreds of those people were all 
of a sudden went from 148,500 or 149,000 or even 145- to in 
excess of 150- overnight, that would be a logical explanation. 
But absent that, if that is not what we get back, would you 
agree that that is a hard number to justify?
    Mr. Genachowski. I would agree that number needs to be 
understood. It appears to have taken place before I got to the 
FCC. But in any event, we will provide that information to you 
and the committee and understand it.
    Mr. Womack. Thank you.

                       BROADBAND IN RURAL AMERICA

    I promised a broadband question, and I am going to make 
this kind of a softball, generalized question, because there 
has been a lot of talk about rural broadband. I represent an 
area in Arkansas that is very cosmopolitan, along the 
Interstate 540 corridor, and home to some great companies in 
America. But I also represent an area of Arkansas that is very 
rural. I mean, very rural; so rural that I have got areas in my 
district that probably don't get the Grand Ole Opry until 
Tuesday. It is that rural. I will have to explain that to my 
colleague from Kansas.
    But assure me and help me assure rural America that given 
the tremendous pressure on our public schools and distance-
learning programs, health care, and the enormous impact that 
broadband is having on the delivery of healthcare services, and 
the whole plethora of other issues impacted, I would even go so 
far as to argue that in some cases adequate broadband is as 
important, if not more important, than highways were once upon 
a time in our Nation's history. So assure me, help assure rural 
America that we are going to do what it takes to get broadband 
services of sufficient bandwidth to the people that need it.
    Mr. Genachowski. I completely agree on your statement about 
the importance of broadband to basic participation in our 
economy, in education, and health care. And it is what drove 
our effort to reform and modernize the Universal Service Fund.
    The challenge we face, and we look forward to working with 
the committee and Congress together, is we made the decision, 
driven by fiscal responsibility, to fund the Connect America 
Fund out of savings from the program and, to respond to some of 
the concerns from other parts of rural America, phase in some 
of the steps we took to increase efficiency and accountability. 
And so it will be a step-by-step process to get broadband to 
rural America.
    I have argued that the return on investment to our economy 
and particularly to rural America of a one-time capital 
infusion into the Universal Service Fund would have a very 
significant payoff because it would allow us to accelerate 
deployment without turning the dial on the other side so fast 
that we hear more complaints and concerns from that side. It 
was in our national broadband plan, that suggestion, and I look 
forward to working with you on that because I think it would 
have a very positive payoff in terms of increased economic 
opportunity in rural America as well as improvements to 
education and health care.
    Mr. Womack. Thank you.

                             UNITED NATIONS

    Commissioner, the last question is for you. Last month 
there was an op-ed that I think you wrote in the Wall Street 
Journal on the Internet, and it was largely about the United 
Nations potentially having more significant authority over the 
Internet. This issue has not received a great deal of 
attention, and I was hoping you could discuss for this panel 
just briefly what is happening in this arena.
    Mr. McDowell. This is a very real problem, and for the past 
several years actually there have been a group of countries 
throughout the world that have been pushing for international 
regulation of the Internet. It sounds crazy, but it actually 
happens to be true, unfortunately. And in the years past, the 
United States and the U.K. and other allies have been able to 
use parliamentary maneuvers to table some of these actions.
    But this coming December in Dubai, there will be a treaty 
negotiation or renegotiation--so back in 1988, most of the 
countries in the world got together and negotiated a treaty 
that set up the trend for the Internet to be not regulated by 
governments, but be regulated from the bottom up in what we 
call the multistakeholder model, which is the private sector, 
academics, nonprofits and such, with engineers, and academics, 
and user groups and all sorts of folks to come and make the 
sort of bottom-up rules for how the Internet works and how it 
is going to grow, and thrive and succeed.
    But in the past couple of years in particular, there has 
been a bit of a gathering storm of some countries, perhaps led 
by Russia and China. Vladimir Putin himself, and I quote him in 
the Wall Street Journal op-ed, has said--this is pretty much a 
direct quote--he wants international control of the Internet 
through the International Telecommunication Union, the ITU, 
which is an arm of the U.N. based in Geneva. It does a lot of 
good things. It helps negotiate and manage international 
telecoms traffic, but it has been, up to this point, relegated 
to telecommunications and some international aspects of 
spectrum management, but not Internet governance.
    So everything from cybersecurity and privacy, to domain 
name administration, to engineering, which is currently 
administered by the Internet Engineering Task Force, again a 
nongovernmental group, and other technical aspects of the 
Internet governance through the Internet Society, again another 
nongovernmental group, as well as the peering arrangements, the 
long-haul Internet backbone where there are privately 
negotiated traffic-swapping agreements between backbone 
providers, et cetera, all of that, there are proposals on the 
table to have that be subsumed through the ITU and to give it 
jurisdiction over that, among many others.
    So it is of real concern. The Obama Administration and I 
and others are all in agreement on this. There seems to be 
bipartisan support in this country, but it is becoming a bit of 
an issue of the developed world versus the developing world. 
And the irony is that should a treaty go the distance and 
actually become effective, it would actually undermine economic 
and political progress in the developing world. The developed 
nations, hopefully our own, would opt out of such a treaty, but 
in the rest of the world, that might not be the case. They see 
an opportunity to charge some Web sites or some application 
providers--a Google or Facebook or whatever--to charge them on 
a per-click basis and have the money flow to state-owned 
telephone companies in their country.
    So there are a lot of issues there. I don't want to blather 
on and filibuster here, but it is of very real concern, and we 
should all be working very hard to make sure that it doesn't 
happen. And I am quite concerned about it because it doesn't 
just take place in December; there are meetings throughout the 
globe between now and December where positions across the globe 
will start to harden.
    And I do want to thank Chairman Genachowski for also 
voicing his concern over this as well.
    Mr. Womack. Mr. Chairman, I will give you a second to 
    Mr. Genachowski. Preserving Internet freedom globally is of 
vital importance. It is important to the American economy. It 
is important to the global economy. It is important to the 
economy of developing economies, and it is important to freedom 
    And it is important that we work together on countering 
proposals that some countries have made that would not be 
consistent with Internet freedom and that would have the 
opposite effect of that claim. So it is a very important topic, 
and it is important that we all work together to preserve the 
free flow of data and Internet freedom globally.
    Mr. Womack. I want to thank both of you gentlemen 
personally for your service to our country and for being at 
this hearing today and answering these questions. I yield back.
    Mr. Diaz-Balart [presiding]. Thank you, Mr. Womack, and we 
all echo what he has just said about thanking you both for your 

                       FTE AND STAFFING SALARIES

    Let me very briefly go back to what Mr. Womack--follow up 
on what he just said about the salaries. You are absolutely 
right. There may be a very good explanation for it, if there is 
a whole category of individuals that went up. However, if you 
look at the change between 2009 and 2010 and 2010 and 2011, 
there is a rather large increase.
    I am sure that there is an explanation. What gives me a 
little bit of a reason to pause is the fact that--by the way, 
I, for one, have no problem if you need qualified people and 
you have to pay them well. If that is the policy, I don't have 
a problem with that. But we should know that is the case if 
that is the policy, and if it isn't the policy, then, again, 
why are these numbers taking place? I think that obviously has 
to be answered, and I know you will. I know you will.
    But in kind of an almost a technical question, in several 
places in your budget request, you indicate that you expect to 
keep 1,917 employees, and, again, that is keeping it flat. Then 
I believe the request is $245.9 million to fund that staffing 
level. In other places there seems to be an indication that the 
FCC expects to maintain only 1,776 employees. What is the 
actual number?
    Mr. Genachowski. The number is the lower number. The 
flexibility is requested so that we can continue to look at 
more efficiency in the overall budget by, for example, moving 
from contractors to FTEs. We don't have any specific plans on 
the table, but if it would save the government money by doing 
something in house instead of contracting it out, we should 
look at that as part of it. But the number in our planning is 
the lower number, 1,776.
    Mr. Diaz-Balart. What would the actual amount be, however, 
if you are requesting the funding for 1,776 versus 1,917? What 
are we talking about moneywise? In other words, I know that is 
not the case, but some skeptics might say that sounds like a 
slush fund. You will have 1,776 employees, but you are asking 
for funding for 1,917 employees. What is the difference in the 
    Mr. Genachowski. It is the opposite. We are asking funding 
for the 1,776. If within that funding----
    Mr. Diaz-Balart. You want the flexibility of being able to 
get to the 1,900 within the funding of the 1,700?
    Mr. Genachowski. Yes. Exactly right.
    [Clerk's note.--Subsequent to the hearing the FCC Chairman 
provided the following information:]

                            FCC FTE Salaries

    Mr. Genachowski. To clarify for the record, the FCC's FY13 Budget 
did not request 1,917 FTEs. Footnote 2 on page 6 of the budget states 
that the Commission is only asking for finding for 1,776 employees. The 
1,917 is a maximum cap of employees. However, on April 20, 2012, the 
Commission submitted a reprogramming request to fund components of the 
new incentive auctions process required by legislation passed after the 
budget submission. The reprogramming requests 19 additional FTEs to 
cover specific technological, engineering and legal work tied to 
legislative implementation.

    Mr. Diaz-Balart. Could you get me the number for the 
difference if it was 1,900, because you said you might be able 
to save money?
    Mr. Genachowski. In the past we have reduced the number of 
contractors at the FCC fairly significantly over the years. I 
think in general it is a better model. Either you need someone 
or you don't. There are some circumstances, and the auctions 
may be an example, where for a limited period of time 
contracting with an expert makes sense. But for tasks that are 
basic recurring tasks, as a general rule it is more efficient 
to do it in house. We don't have any specific plans to do that, 
but the team that developed the budget did that with that in 
    Mr. Diaz-Balart. Great. Thank you.
    Mr. Serrano.
    Mr. Serrano. I just have one more question, and then I will 
submit a couple for the record, okay?
    Mr. Diaz-Balart. Without objection.

                           BROADBAND ADOPTION

    Mr. Serrano. Mr. Chairman, one of the FCC's ongoing goals 
is to increase broadband adoption. Since this is a long-term 
goal, and applications on the Internet seem to be consuming 
more and more bandwidth as people move from just checking their 
email and reading news to playing games and watching more 
things online, how do you define broadband, and does your 
definition change as people need faster speeds to fully use the 
    Mr. Genachowski. So, over time I expect that our basic 
definition of broadband will go up. I would note without being 
too theoretical that the challenge of universal broadband is 
different and harder than the challenges of universal telephone 
or universal electricity, because telephone and electricity 
were binary. Either you had a dial tone, or you didn't. Either 
you had electricity, or you didn't. Broadband is different 
where, as you point out, you could have different speeds.
    And so in some ways it is the first time that the country 
is wrestling with these issues of how to promote broadband as a 
universal service everywhere in the country to all people when 
it can mean different things over time.
    What we have done at the FCC is two different things. We 
have set goals for where the country should try to strive to on 
broadband. For example, we set a goal of 100 megabits--
affordable 100 megabits to 100 million people by 2020, 1-
gigabit access in every community in the country.
    At the same time, for the Universal Service Fund, where we 
have to decide what are we going to actually pay for, it 
doesn't make sense to say that we are going to pay for 100 
megabits for everyone in the country, at least based on current 
usages. And in the Universal Service Fund order from a few 
months ago, we defined that level as 4 megabits basically, with 
an ongoing obligation at the FCC to look at the uses that are 
essential for participation in our economy, for small 
businesses, for looking for a job, for education, and making 
adjustments to that over time.
    Mr. Serrano. Let me close with something that you both 
know, but it merits repeating in public. You have one of the 
most important responsibilities in our society, in our 
government, and I mean that, because a lot of people who work 
in government and who head agencies, who sit on boards, they 
affect certain segments of the population, they don't affect 
others. But the most important person in corporate America is 
touched by your decisions, and the poorest child in a classroom 
in a rural area or the inner city is touched by your decisions. 
And I think your challenge, and certainly what I think should 
be your mission, is to make sure that while we don't interfere 
with those up here's ability to use the Internet, to use 
technology, to move ahead, that we leave no one behind. And we 
are running the risk already of leaving a lot of people behind, 
and you should always keep that in mind.
    And also, something you are not allowed to comment on, I 
know, but you have one of the greatest jobs around, because you 
know before we know, what is being tested out there, and we all 
would love to know what is next. But I know you can't tell us. 
There would be a rush on the market tomorrow, and it would be a 
bad scene.
    But for my part I want to thank you for your testimony, 
thank you for your work. We disagree at times on some issues, 
but in general we approve of the work that you are doing. And 
just keep doing it, and remember that it is broadband for all 
folks. It is broad, not just for some. Thank you.
    Mr. Genachowski. Thank you.
    Mr. Diaz-Balart. Thank you, Mr. Serrano.
    By the way, just because Mr. Serrano is one of the most 
tech-savvy Members of Congress, and, I don't know, you might be 
responsible on your iPad just by--you are probably consuming 
half the bandwidth in the entire Congress just on your iPad.
    Mr. Serrano. Just when I am watching baseball.
    Mr. Diaz-Balart. I didn't realize the Yankees were on more 
than one channel. I thought that is why you watched.
    Mr. Serrano. The Yankees are throughout the world. There is 
baseball, and then there is the Yankees.
    Mr. Diaz-Balart. On that note let me thank both of you for 
your service. I also echo the words of our colleagues. And I 
also want to finish as I started. I want to thank you 
particularly for being exceedingly accessible to me and my 
staff. And you always have been. I know we will get the answers 
to some of these questions that we have.
    And with that, this meeting is adjourned. Thank you very 
    [The information follows:]

                                            Tuesday, March 6, 2012.



    Mrs. Emerson. The hearing will come to order.
    Thank you all for being here.
    I would like to welcome our witness, SEC Chairman Schapiro. 
Thanks so much for being here today.
    Thanks to my colleagues for being here as well.
    Joe and I decided not to talk baseball today since both of 
our teams lost yesterday, so we are sad, but it is only the 
beginning of the season, so hopefully it will all turn out well 
at the end, and we will be playing each other in the World 
Series, right?
    Mr. Serrano. Yes.
    Mrs. Emerson. Again, welcome, Chairman Schapiro.
    The SEC has the complicated mission of protecting 
investors, maintaining fair, orderly and efficient markets and 
facilitating capital formation, while at the same time not over 
regulating our markets and hindering economic recovery.
    The Committee must be vigilant in our oversight of 
regulatory agencies like the SEC that play an influential role 
in our economy and have the power to help and hinder American 
consumers and businesses.
    Since 2001, the SEC's budget has increased over 200 
percent. Despite this tremendous growth in resources over the 
past decade, the SEC failed to detect Ponzi schemes, such as 
Madoff and Stanford; the U.S. Financial system nearly 
collapsed; and judges continue to question SEC settlements and 
    In recent years, the SEC has also had several embarrassing 
management lapses, such as purchasing unneeded space, 
destroying investigative documents and repeating material 
weaknesses in the SEC's own financial statements, to name a 
few. I believe many of these problems are symptoms of 
fundamental problems within the SEC's organization and 
    The fiscal year 2013 request proposes another substantial 
funding increase of 18.5 percent over fiscal 2012. I think this 
body is reticent to throw more money at the SEC until you all 
have proven you have addressed the structural problems from 
within in a comprehensive way. We want to have confidence that 
the SEC is, one, issuing regulations based on sound data and 
analysis that can stand up in court; two, taking strong 
enforcement actions against individuals committing fraud; 
three, helping to facilitate access to capital for American 
businesses; and four, effectively managing the resources 
provided to run your operations.
    Just because the SEC is funded through fees doesn't absolve 
you all from rigorously managing the funding entrusted to the 
SEC and doesn't absolve this Subcommittee from providing 
extensive oversight. You are faced right now with many 
challenges, including implementing Dodd-Frank, modernizing your 
technology and reforming your organization. I encourage you not 
to rush or throw money at any of these challenges. There's 
something to be said for getting these changes right the first 
time. Deliberate thoughtful change is what is necessary to make 
our financial markets and this agency work better on behalf of 
the American public.
    Chairman Schapiro, we recognize that you have an incredibly 
difficult job, and I know you and your staff are working very, 
very hard to meet today's challenges, and we do appreciate your 
efforts. I look forward to your testimony.
    I would now like to recognize my friend, Ranking Member 
    Mr. Serrano. Thank you, and it is okay to mention baseball, 
as we always do; except that, it is early. No worry, in 
October, we will be talking to each other again. Then November, 
we will not be talking to each other, but that is how it goes.
    I would like to join you in once again welcoming the 
Chairman of the Securities and Exchange Commission, the 
Honorable Mary Schapiro, before our Committee. I think all of 
us here agree with the vitally important mission that the SEC 
plays in protecting consumers and investors. The financial 
crisis highlighted a need to have a robust cop on the beat to 
make sure the American people are protected.
    Dodd-Frank gave the commission important new 
responsibilities in this regard, and implementing and enforcing 
the numerous changes of the law is a vital part of making sure 
the SEC can better address abuses of the securities markets and 
protect investors.
    I know that you have implemented about 75 percent of the 
regulations mandated under the new act, but that some of the 
most crucial changes are upcoming. There is still much to be 
done to ensure that past problems are not repeated.
    Toward that end, your budget request asks for significant 
new resources. In particular, I was heartened to see the 
continued focus on some of the SEC's core enforcement and 
compliance activities. These areas in particular are crucial to 
deterring bad behavior in the securities markets. With a record 
number of enforcement actions last year, it is clear that the 
SEC takes its mission seriously, and new resources will help in 
this regard.
    I would also like to commend the progress on your IT 
upgrades and note that the most recent IT audit found no 
material weaknesses. I look forward to hearing more about the 
current and future challenges the SEC faces as well as how your 
requested budget increases will be used to address those 
    We welcome you, and just a reminder, you know, so many of 
us in Congress and throughout the country speak about not 
having what happened before happen again. And there are many 
people who will be responsible for making sure it doesn't 
happen again, but I think no one is more responsible than the 
SEC. And it confuses me at times that some people would attack 
it, without mercy, and I am not talking about anybody on this 
committee, without understanding that without you and your 
enforcement and your oversight, things cannot change.
    One last point, I have been in Congress 22 years, and in 
the State Assembly 16; 38 total years in public service. And in 
years past, this was the only commission that ever came before 
Congress and said, we don't need any more money, and that's 
because obviously they didn't want to enforce what they had to 
    And so I hope that that has changed. I think it has 
changed, and you are responsible for making sure that what 
happened in the past doesn't happen again. And I thank you.
    Mrs. Emerson. And now I recognize you, Chairman Schapiro, 
for an opening statement. And if you would keep your comments 
to 5 minutes, more or less, that will give us more time for 
    Thank you so much for being here.
    Ms. Schapiro. Thank you very much, Chairwoman Emerson, 
Ranking Member Serrano and members of the Subcommittee.
    Thank you for the opportunity to testify in support of the 
President's fiscal year 2013 budget request of $1.566 billion 
for the Securities and Exchange Commission and about how the 
SEC would make effective use of those funds.
    Over the past 3 years, with this Subcommittee's support, 
the SEC has significantly improved its core operations; 
revitalized and restructured our enforcement and examination 
functions; taken critical steps to enhance safeguards for 
investor assets; improved collaboration within the agency; and 
improved our risk assessment capacity.
    These efforts are paying off. In 2011, the commission filed 
more enforcement actions than it has ever before filed; 
obtained orders for more than $2.8 billion in penalties and 
disgorgement; and added to the number of financial crisis 
related cases by filing actions against an additional 16 CEOs, 
CFOs and other senior corporate officers.
    In addition, our broader enforcement activities have 
benefited from a more sophisticated use of risk analytics to 
identify and act on suspicious actions earlier. We implemented 
a risk focused examinations program and completed over 1,600 
oversight exams. This strategy resulted in both improved 
guidance in the financial industry regarding risky practices 
and actionable information for SEC enforcement investigations.
    We implemented a new whistleblower program that is already 
providing high quality information regarding difficult-to-
detect wrongdoing and permitting investigators to focus 
resources more efficiently. We improved our internal financial 
controls, which resulted in a GAO audit opinion for fiscal year 
2011 with no material weaknesses.
    SEC staff, with the assistance of targeted contracted 
expertise, implemented a number of internal reforms designed to 
improve the agency's structure, strengthen capabilities, 
improve internal controls, and enhance workforce competencies. 
And finally, we have used external hiring opportunities to fill 
strategic vacancies and to obtain specialized industry 
expertise in the areas as diverse as quantitative analysis, 
computerized trading and structured products.
    In addition to improving our core operations, we have 
worked to implement the significant new responsibilities 
assigned to the agency under the Dodd-Frank Act. The SEC 
already has proposed or adopted rules for over three-fourths of 
the more than 90 provisions that require SEC rulemaking. 
Additionally, the SEC has finalized 13 of the required 20 
studies and reports.
    While the agency's budget has grown in recent years, so 
have our responsibilities in the size and complexity of the 
markets we oversee. During the past decade, trading volume in 
the equity markets has more than doubled, as have assets under 
management by investment advisors, with these trends likely to 
continue for the foreseeable future.
    At the same time, we recognize that it is incumbent upon us 
to maximize our efficiencies and continue our organizational 
modernization efforts. As we protect investors, we have an 
obligation to be good stewards of the resources provided to us 
and to carefully review our activities to identify efficiencies 
and cost savings wherever possible.
    Our request for 2013 would permit us to add approximately 
676 positions to improve core operations and implement our new 
responsibilities, and it would be fully graphic by the matching 
collections of fees on securities transactions.
    The resources would allow us to achieve four high-priority 
initiatives in fiscal year 2013. First, this funding level 
would allow the commission to enhance its investor protection 
activities by bolstering staff resources in our enforcement and 
examination programs and continuing to develop and implement 
robust analytical models that identify regulated entities with 
high-risk profiles.
    Second, these resources would support staffing levels 
sufficient to speed capital formation by eliminating regulatory 
bottlenecks, improving economic analysis and more quickly 
providing authorizations to firms to engage in new lines of 
    Third, these funds would allow us to strengthen market 
stability efforts. Currently, the SEC has fewer than 25 staff 
to monitor the eight agencies that clear and settle an average 
of $6.6 trillion in transactions every day. We believe a 
greater presence is needed. Increased funding also would enable 
us to address important issues, such as market structure 
improvements, high frequency trading, exchange-traded funds and 
enhanced efforts against cybersecurity threats.
    Finally, the budget request would support needed IT 
investments in data management, disclosure review, internal 
accounting and financial reporting and electronic discovery. In 
particular, it would fund much needed modernization of the 
EDGAR corporate filing public database and sec.gov, which is 
such an important portal for investor information and is one of 
the Federal Government's most visited Web sites, with 450 
million hits per month.
    For 3 years, the Subcommittee's support for increased 
funding of the SEC has allowed us to fashion a better equipped, 
more expert and effective agency. I look forward to working 
with you to build on this progress in fiscal year 2013, and of 
course, I am happy to answer any questions that you might have.
    [The prepared statement follows:]

                               SEC BUDGET

    Mrs. Emerson. Thank you so much, Chairman Schapiro.
    I am going to start out with just some plain, old budget 
questions. You outlined in your testimony how you would spend 
the increase of several hundred million dollars, or let's just 
say $245 million over last year's enacted level. Last year's 
enacted level was a $200 million increase over the previous 
year. I realize that you do have a lot of added 
responsibilities as a result of Dodd-Frank, but most agencies 
haven't received increases like you all, nowhere close.
    And so, in spite of the fact that the agency's budget is 
really funded by fees, we do take our oversight role quite 
seriously, and it just worries me that in spite of how much 
money we threw into the SEC, that you all still missed Madoff. 
I realize that was before your time. Can you tell me how 
investors have benefited from such large SEC funding increases?
    Ms. Schapiro. I would be happy to. I want to start by 
saying we are very grateful for the funding increases we have 
received, and we recognize that we have been not quite unique 
but close to unique among Federal agencies.
    I do believe the agency was underfunded for many years, and 
the task of regulating these enormously diverse and important 
and complex markets far outstripped the agency's capabilities. 
We are responsible for about 35,000 regulated entities, some of 
which engage in some of the most complex financial transactions 
anywhere on the earth. And it is really incumbent upon us to do 
a number of things to keep up with the markets and to remedy 
the flaws that were exposed by events like the failure to catch 
Madoff or the failure of the Consolidated Supervised Entity 
    In the first instance, we have successfully restructured 
the enforcement program to create specialized units that focus 
on particularly high-risk activities, such as the construction 
and sale of structured products, violations of the Foreign 
Corrupt Practices Act, insider trading, and fraud in connection 
with municipal securities. We removed a layer of management in 
the enforcement division and put people back on the front lines 
of investigating. We also created an office of market 
intelligence, to keep up with new issues and trends. And we 
developed technology to take all the many hundreds of thousands 
of tips and complaints that come into the agency and collect, 
triage and manage them in one coherent and cohesive way.
    So, with respect to enforcement, I think the changes have 
been quite dramatic, and the results are clearly demonstrating 
the wisdom of the choices that we have made. We had a record 
year, as I mentioned, in our enforcement program.
    The other area where I think really fundamental change has 
taken place is the examination program, where we are using a 
much more risk-based approach to examination. We are focusing 
our efforts and our energy on those regulated institutions that 
create the highest level of risk for the public. And, as you 
mentioned in your remarks, we are also transforming our 
technology, in rather dramatic ways to catch up to where our 
fellow regulators have been for a while but where the SEC has 
lagged for a long time.
    Mrs. Emerson. So all of which is putting you all on the 
right track, I know. Are there any areas within the SEC that 
you think you could manage more efficiently or better?
    Ms. Schapiro. Without a doubt. And I am pretty humble about 
that; there are lots and lots of things to continue to work on 
within the agency. When I arrived 3 years ago, there was alot 
to fix. And we have systematically gone through the 
organization and worked on enforcement, worked on examination. 
We have bolstered the capabilities in the Corporation Finance 
Division and our Investment Management Division, aided very 
much by new leadership across the board and tremendous new 
talent that is coming with a very fresh and current 
understanding of the markets of trading, of products and so 
    We are now working on reforms in a number of important 
infrastructure areas that really support our ability to do our 
job. Our human resources office is going through a redesign. 
The Office of Financial Management is also going through a 
redesign. We are off-loading our financial management system. 
We are outsourcing it to the Department of Transportation, 
because we think that they have core skills in that area that 
we would rather not build ourselves; but rather rely on another 
agency to provide.
    There are a number of areas where we are very focused. For 
example, we are analyzing the regional structure of our 
organization to see if we have the right offices in the right 
places. There are many efforts ongoing to continue to improve 
the operations of the agency.
    Mrs. Emerson. Well, I will come back and ask you some more 
specific questions about some of the things that you mentioned 
with regard to your regional offices.
    Now do you find that you may be competing now with the 
Consumer Financial Protection Bureau for staff? I am just 
    Ms. Schapiro. I don't think we have been. We tend to hire 
people with particular expertise in securities markets, 
options, or derivatives. So we have not had any head-to-head 
competitions that I know of at any point.
    Mrs. Emerson. I am curious, this is a real process 
question, but I would like to know how exactly do you put your 
budget together? Exactly how do you come up with it? Are the 
other commissioners involved? Do they have any input? I would 
be curious about that. And then I would like to know how OMB 
works with you all in paring down or enhancing your budget 
request, precisely how that works.
    Ms. Schapiro. Sure. The way we put the budget together is 
to ask all of our senior leadership what their expectations are 
for their needs for that particular fiscal year, and what 
legislative changes may be required. For example, Dodd-Frank 
obviously influenced the budget rather dramatically in 2012 and 
2013 because of all the required work we have with respect to 
hedge funds, credit rating agencies and the over-the-counter 
derivatives market. So we ask our senior management to give us 
their evaluation of what resources will be necessary--sorry.
    Necessary to fulfill their obligations. What are the risks 
if we don't have sufficient resources? How will we prioritize 
responsibilities that we have? Where can we make cuts? Where 
can we delay certain activities, particularly in the IT area, 
if the funding isn't sufficient?
    The Chairman at the SEC under the Reorg Plan 10, has 
responsibility for the budget. We do share with the 
commissioners the justifications, but the full commission at 
the SEC does not vote on the budget.
    And we work with OMB much the way other agencies do and we 
provide them with our budget. Under Dodd-Frank, we provide it 
at the same time that we provide it to Congress, which is a 
change for us, the simultaneous submission of the budget to 
both OMB and to Congress and then get feedback.
    Mrs. Emerson. Does OMB oversee the spending of your fees 
with the same rigor that it oversees regular appropriations? I 
am just curious. They do?
    Ms. Schapiro. Yes.
    Mrs. Emerson. I appreciate that. I was just curious more 
than anything.
    They are sometimes easy and sometimes difficult to work 
with on appropriations issues. And so I wondered about the fee 
    I am going to hold the rest of my questions, which are many 
and pass it along to you, Joe.
    Mr. Serrano. Thank you, thank you.
    Chairman Schapiro, the President's budget request of 1.566 
billion is an increase of $245 million over your current 
operating level. The budget request states that this level of 
funding will support 676 new positions. I have a question in 
various parts: One, what would happen to what you want to 
accomplish if you were not to get funding for these new 
positions? Secondly, if you were to get them, how quickly could 
you hire?
    Ms. Schapiro. I think if we were not to get the new 
positions or that level of funding, a couple of things would be 
implicated: Our investments in information technology, which 
are sorely needed to make us a more efficient and more agile 
and, frankly, more expert regulator would be severely impacted.
    And we have a number of major technology programs that are 
of significant interest not just to us and how we do our job, 
but to the public, public corporations and investors generally. 
The modernization of the EDGAR system, which has 21 million 
corporate filings in it and is not only how public companies 
file their information with us, but how investors search public 
company information; and sec.gov, which is our website, which 
has extraordinary amount of public interaction with it.
    We would also reduce our enforcement coverage and 
examination coverage. And as you know, we are already 
examining, in my view, far too few of our regulated entities on 
an annual basis, only about 8 percent of investment advisors 
and around 10 percent of mutual funds where $12 trillion in 
assets of regular Americans resides. I do not think that's 
adequate coverage. I believe those numbers would be further 
strained, if our budget is cut.
    I am sorry the second part of your question was?
    Mr. Serrano. If you got it----
    Ms. Schapiro. Can we hire? Yes, these are large numbers, 
obviously, but in fiscal year 2010, when we also had a budget 
increase, we were able to hire over 500 people into the SEC. 
And one of the reasons for the changes in our human resources 
department is actually to better support the hiring pipeline, 
the identification of the specialized skill sets that we need 
and to make us more efficient. We are also making use of the 
excepted hiring authority that we have and have become much 
more efficient over the last several years in the hiring 
process. So I believe we will be able to do it.
    Mr. Serrano. Let me ask you a question related to that, and 
this is an easy one for you to answer if you want to spin on 
behalf of the agency, is it because people want to work for you 
folks, or is it because the labor market also is weak for folks 
with that kind of expertise?
    Ms. Schapiro. It is probably a little bit of both, to be 
perfectly honest; although I would like to believe it is 
because the SEC is actually great place to work. I have to say 
that I have been blown away by the talent that we have been 
able to hire into the agency. People who are at the top of 
their fields. Not just people who are out of work, but people 
who have very important positions in investments banks, 
exchanges, ratings agencies, on trading desks, at markets, and 
who wanted to come to the SEC at a time that is very 
consequential, where important, interesting work is happening, 
and new tools are being provided to do that work.
    It is an opportunity to sit on our side of the table. Many 
people, clearly all of you, want the opportunity to serve the 
public and so do lots of people in the securities industry. We 
have been able to tap into that and bring in amazing talent to 
supplement our great career civil servants.

                           IT INFRASTRUCTURE

    Mr. Serrano. Let me just ask you one more question at this 
point to elaborate a little more on the whole issue of your IT 
infrastructure. In the last 3 years, there has been a very 
serious improvement in the IT infrastructure, and there are 
signs that show that that is getting much better. Where would 
you want it to be, say, in 2 or 3 years from now in terms of 
your IT infrastructure?
    Ms. Schapiro. Sure. Our chief technology officer, who is 
here today, Tom Bayer, has done an extraordinary job in a 
relatively short period of time. He is really improving the 
SEC's governance over IT, so that we are thoughtful and careful 
and prioritize how we are going to spend our money. He also 
brings great depth of knowledge about technologies generally to 
the agency.
    I would hope that in 2 or 3 years, the EDGAR system, which 
was built in the 1990s and last modernized in 2001, would be a 
simple-to-use, positive, user-friendly experience for the 
public companies, SEC staff and investors who use it, and that 
we decrease the cost of operation and maintenance of that 
system rather dramatically.
    Also that sec.gov, which was designed in the 1990s and has 
never been updated, which is the gateway to EDGAR and many 
other sources of SEC information, is again updated, has 
interactive capacity, and works in realtime to get information 
out. And again, we believe we could cut the cost of operating 
that system by as much as 45 percent.
    Most importantly and most fundamentally, we would like to 
have, and Chairwoman Emerson and I have talked about this, a 
data warehouse that is the single gold source of information 
from all SEC systems, and from which different applications can 
pull data so that we don't replicate and have all of these 
siloed data stores within the agency. Again, there would be 
cost savings and there would be security benefits from doing 
that as well. We also have lots of individual systems that can 
benefit from enhancements and updating throughout the agency.

                       DODD-FRANK IMPLEMENTATION

    Mr. Serrano. We are getting quite a good show to my left, 
not my political left but my physical left. I am just going to 
take one second to ask you, can you describe briefly the 
progress in implementing Dodd-Frank? How far along do you think 
you are?
    Ms. Schapiro. Sure. We had more than 90 required 
rulemakings under Dodd-Frank. We have adopted or proposed, 
mostly proposed three quarters of them. We have put in place 
the registration system for hedge funds; the systemic risk 
reporting system for hedge funds, which will kick in this 
summer; and the whistleblower program. We have proposed all the 
rules under the OTC derivatives section, with the exception of 
capital, margin and segregation. We will shortly finalize the 
rules on conflict minerals from the Democratic Republic of the 
Congo and extractive resources disclosure. So we have 
accomplished a number of things, particularly in the area of 
the hedge fund and private fund registration, and we have 
proposed many rules in the areas of Title VII derivatives, 
credit rating agencies, municipal advisors and some of the 
other areas.
    Mr. Serrano. So you are about three quarters there?
    Ms. Schapiro. We are three quarters there, but to be 
honest, some of the heavy lift is yet to come to go final on a 
number of the rules that have been particularly controversial; 
for example, the Volcker rule, where we received more than 
15,000 comment letters. There is a lot of work to do.
    Mr. Serrano. 14,000 are from Members of Congress. You don't 
have to comment.
    Ms. Schapiro. Many Members, yes. Thank you so much.


    Mrs. Emerson. Let me just ask one quick follow up. I am 
sorry guys, it will just take a second. Of those that you all 
haven't finish yet or of the 75 out of 90 that you have, how 
many of those are the ones that have to be coordinated with 
Commodity Futures Trading Commission?
    Ms. Schapiro. Many of the Title VII derivatives rules are--
they are all done in coordination with the CFTC. The ones that 
are actually joint rules are the definitions of the entities 
that will be subject to the OTC regulation, swap dealers, 
security based swap dealers, and the products--what is a 
security based swap, what is a swap, what is a mixed swap--
those have to be done jointly. Those are hard and complicated 
to do. For an agency to do them jointly is complex.
    We also have to do asset-backed securities rules jointly 
with the bank regulators, and define qualified residential 
mortgage jointly with bank regulators. We are trying to do 
evertything in coordination as much we can with all of our 
regulatory colleagues.
    Mrs. Emerson. So your goal for getting them completed is 
the end of the year?
    Ms. Schapiro. I would hope that Title VII would be done by 
the end of the year. Some other areas, including conflict 
minerals, specialized disclosure rules, mining safety, are 
already proposed; those specialized disclosure rules should be 
done by the middle of the year. And the municipal advisors 
regulatory regime should be completed this year also.
    Mrs. Emerson. Okay, thank you. I am sorry to have done 
    Mr. Alexander.
    Mr. Alexander. I go before the mayor.
    Mrs. Emerson. Yes, because you are more senior.
    Mr. Alexander. Okay.

                              VOLCKER RULE

    Thank you and good morning Ms. Chairman. I would like to 
ask you a question about the Volcker rule and how it applies to 
insurance companies. I am kind of concerned that the rule 
doesn't capture the congressional intent or follow the statute 
by exempting from the Volcker rule an insurance company's 
ability to engage in proprietary trading while it exempts or 
doesn't extend the exemption to the investment in its covered 
funds. Cutting off that ability to insurance companies to make 
those investments in those covered funds would directly impact 
the constituents, whom we all represent and who depend on 
insurance companies to guarantee protection from the 
uncertainties in life.
    The goal of the Volcker rule clearly was not to make 
retirement or long-term care more costly for Americans, but 
that would be the result if the regulators have raised the 
proposed rule as it is. So my question is, can you give us your 
thoughts on whether there is any flexibility within the 
statute, which would allow the agencies to extend the exemption 
to allow insurers to invest in covered funds?
    Ms. Schapiro. I am happy to do that, Congressman. As you 
rightly point out, the proposed rule, which followed the 
statutory language very closely, expressly permitted 
proprietary trading by insurance company general accounts, but 
did not allow for investment in any covered funds by insurance 
company general accounts. We received a lot of comments on that 
issue when the Volcker rule was out for comment and 
particularly from insurance companies expressing real concern, 
just as you articulated.
    This is really an important issue. We understand that. And 
we are reviewing the comment letters carefully. Our staff has 
also met with a large group of insurance companies to talk 
about this issue, and we are looking at whether there could be 
flexibility on this point.
    We do have exemptive authority under the Volcker rule, but 
the standard is high. We can provide further exemptions where 
it would promote the stability of U.S. financial system and the 
safety and soundness of the banking system. So, that said, we 
are looking very carefully whether there is the possibility for 
us to provide further exemption here. And as I said, we 
followed closely the statutory language, but we understand the 
intent may have been to be more permissive than that.
    Mr. Alexander. Okay. And your agency has been very vocal 
about the need for additional regulatory reform to money market 
funds. It has only been 2 years when you implemented changes to 
the money market fund regulation by enhancing the credit 
quality of the underlying assets, shortening the weighted 
average maturity and the portfolio, and increasing transparency 
for each fund. These were substantial changes that made the 
funds stronger and more able to withstand redemption pressure. 
Have you done any analysis to show that those changes, to see 
if they have been effective?
    Ms. Schapiro. Congressman, I recognize that this is a very 
controversial issue, and I will say, I am very proud of the 
changes that we made to money market funds 2 years ago to do 
all the things that you stated. I did say at the time, as did 
our senior Republican commissioner, that more needs to be done 
because money market funds are still susceptible, due to 
structural weaknesses, to a run that could be very 
    When the Reserve Fund broke the buck in 2008, a massive run 
started on money market funds; $310 billion was withdrawn by 
investors very quickly after Reserve broke the buck. And the 
run was only stopped because the Treasury stepped in with a 
guarantee program and the Fed stepped in with a liquidity 
    That experience, I think, is very sobering, from my 
perspective and that of other regulators. We will be very 
thoughtful and have been very thoughtful as we approach this 
issue. The President's Working Group issued a report in October 
of 2010 that laid out all of the concerns of the collective 
regulators with respect to money market funds' potential for 
runs and laid out six different options for how we might deal 
with that. We are focusing on several options now, a capital 
requirement or a floating net asset value, but if there are 
three votes to do so, we will put those ideas out for public 
comment, debate and discussion.
    We will hear what people have to say. We will refine those 
ideas and go from there, but we appreciate that money market 
funds, which have $2.5 trillion of assets, are important to 
investors, to corporations, to the fund industry, but we also 
never want the taxpayer to be on the hook again for a potential 
    Mr. Alexander. Thank you.
    Mrs. Emerson. Thank you.
    Mr. Womack.
    Mr. Womack. Thank you, Madam Chairman.

                            SEC ENFORCEMENT

    And I totally understand the tremendous pressure that your 
organization is under, given the last several years of issues 
that have already been articulated in this hearing and in other 
hearings. But I want to go back to some of your numbers for 
just a minute. To be clear, you say you had a record number of 
enforcement actions, and as I am looking at the testimony, the 
number was 735 and an impressive list of different actions, 
involving CEO, CFOs and senior corporate officers, broker 
dealers, et cetera. But of those 735, it is my understanding 
that a significant percentage of these actions are really 
follow-on administrative actions.
    I realize they count in the numbers, but if I am looking at 
the numbers correctly, between 2009 and 2011, the number of 
original cases is actually down. Now am I reading these numbers 
    Ms. Schapiro. Well, a couple things, first of all, these 
are apples-to-apples comparisons. We count administrative and 
follow-on administrative proceedings, both in 2009 and in 2011 
numbers. But I think the point that has been perhaps lost in 
some of the commentary that I have read, at least about this, 
is that administrative proceedings that are follow-on are 
absolutely critical to our ability to enforce the Federal 
securities laws. It is only through that vehicle that we are 
able to bar people from continuing activity in the securities 
industry. So if we want to bar somebody from acting as an 
investment advisor, as a broker dealer or really in any other 
capacity, we have to use a follow-on administrative proceeding. 
Some of those are hotly contested; some of them aren't. Some of 
them follow naturally from the civil proceeding, but they are 
an absolutely critical tool for us to utilize in ensuring that 
people who violated the securities laws don't keep coming back 
over and over and over again.
    Mr. Womack. I don't argue that point at all. But I am going 
back to the numbers. On one hand, we are talking about 735 
enforcement actions, but less than 500 of those are original 
actions, and there were more than 500 original actions in 2009. 
Now, the reason I make this point is because we are sitting 
here today looking at the better part of a quarter of a billion 
dollar increase for an agency. And we are making the argument 
that this enforcement restructuring or this enforcement action 
by the SEC is demonstrating its enormous success, if you will, 
in what it is doing.
    Now either the numbers are misleading or the actions that 
we are talking about are just much more complicated actions, 
and so I am giving you an opportunity to help me through these.
    Ms. Schapiro. Sure. I appreciate that, thank you.
    And I don't believe the numbers are misleading at all. I do 
believe that the actions are far more complex than they ever 
have been historically. If you look at the many financial 
crisis cases involved incredibly complex structured products 
and sales practices. Our disgorgement and penalty number is 
also very significant for this year, $2.8 billion, that 
represents the complexity of the kinds of cases we are 
    We have brought cases against firms for improper selling to 
school districts. We have brought cases for misleading 
investors in the sales of CDOs. We have brought cases for bid 
rigging in the municipal securities markets, extremely complex 
types of matters. Obviously, the entire web of insider trading 
cases has involved an enormous amount of investigative 
resources to connect all of the people who were in a conspiracy 
to insider trade.
    We brought very complex Foreign Corrupt Practices Act 
    So I think the numbers don't give the full story, and we 
always try to say the numbers don't give the full story. The 
complexity of the cases that we are bringing and the number of 
senior people that we are naming in cases are also important 
factors in showing the efficacy of the enforcement program.
    Mr. Womack. The additional funding that you had last year, 
how do you break down that funding in so far as how much of it 
went into enforcement-related activities?
    Ms. Schapiro. In last year's numbers, we had an increase of 
400 positions; 63 of which went to enforcement to focus on risk 
assessment, litigation, and building up our trial capabilities, 
as we are, litigating more cases than we have historically. The 
largest number in this current fiscal year went to trading and 
markets division, which is responsible for all of the 
regulation and oversight of the securities markets, much of the 
Dodd-Frank implementation, the creation of the OTC derivative 
regulatory regime and issues of market structure, like high-
frequency trading and co-location, dark pools, the response to 
the May 6th flash crash and all of those efforts.
    Mr. Womack. Can I assume that one of your roles there or 
one of your functions is to continually evaluate the structure 
and the investment that the Federal Government is making in the 
organization to ensure that the proper resources for the proper 
emerging issues are being effectively and appropriately 
    Ms. Schapiro. Absolutely. I view that as one of the most 
important parts of what I am there to do, is to make sure we 
are good stewards of the resources that we have, and that we 
are acting smarter and faster than we ever have before.
    The last 3 years have required significant rebuilding of 
the infrastructure of the agency to support these major 
initiatives to reorganize our enforcement and our examination 
program and to build the technology to support them, but we are 
headed in the right direction.

                         INFORMATION TECHNOLOGY

    Mr. Womack. I have one more question, Madam Chairwoman, if 
I may, and that is the relationship between the--and I call it 
an information technology platform, whatever you call it in 
your agency, can you just briefly describe what your request, 
what you are attempting to do in so far as your automated 
platforms are designed to do and how that may be able to save 
the agency money and at the same time reduce our continued 
dependence on more and more additional personnel?
    Ms. Schapiro. Sure. We believe we can dramatically cut our 
O&M costs for a number of systems just by modernizing them and 
getting them off 10- and 15-year old infrastructure. The 
savings for EDGAR and for sec.gov could be as much as 45 
percent, so those are two very quick things.
    But I believe also by eliminating the siloed structure of 
our technology and our data and allowing our staff to access, a 
data warehouse without having to go in and out of multiple 
systems to do their job could save tremendously on staff 
efforts and increase productivity. Those are just a couple of 
    Mr. Womack. Thank you for your answers.
    I yield back.
    Mrs. Emerson. Thank you, Mr. Womack.
    I would like to ask for us to have a separate meeting with 
your IT director, please, because I want to know how fast we 
could work together to get that IT system unsiloed because I 
think if the Commission had been able to put in the name 
``Bernie Madoff'', just for example, and had found any kind of 
filings that he and his company did in several different 
places, maybe we could have found something faster. But I would 
like to have a separate meeting, so that we can discuss how 
much it would cost to get this up and running and to totally 
modernize your system in the shortest amount of time possible.
    Ms. Schapiro. If I could just add to that, we would be 
happy to actually demonstrate for you the new examination 
system called Trends. It allows examiners to have access to all 
information about a particular registrant at their fingertips, 
instead of having to search multiple, different databases. We 
could also talk about the Tips. Complaints and Referral System 
that we talked about a lot in this hearing last year, that the 
agency deployed last year. And we intend to spend some of our 
technology dollars to enhance and refine that system, so that, 
again, tips that come in to the agency from disparate places 
come into one place and can be linked together so that Bernie 
Madoff's name would show all of the tips that might have come 
in about his conduct.
    Mrs. Emerson. Well, I will look forward to doing that 
because I think it is absolutely critical. We have been able, 
by doing something similar at the Internal Revenue Service, 
just for example, to make life a lot easier. And it has become 
more efficient, and quite frankly, they need fewer people to 
perform a lot of those tasks.
    Ms. Schapiro. We would be happy to do that.
    Mrs. Emerson. Thank you.
    Mr. Diaz-Balart.
    Mr. Diaz-Balart. Thank you very much, Madam Chairwoman.
    And good to see you again and thanks for your service.
    Ms. Schapiro. Thank you.

                              VOLCKER RULE

    Mr. Diaz-Balart. I would like to go back to the proposed 
298-page Volcker rule. It is my understanding that the SEC and 
other agencies received more than 17,000 public comments. That 
was already spoken about a while ago. Commissioner Gallagher 
from the SEC said in a speech yesterday, and I am going to 
quote him, that even a quick review of the many substantial 
comment letters the commission received revealed widespread 
fears regarding the fact that the proposed rule on the proper 
functioning of global markets and the competitiveness of the 
U.S. financial industry. He goes on to say, these are fears 
that I share.
    So, with some concerns surrounding the proposed rule and so 
much at stake, wouldn't you agree that it would be a good idea 
to just take a step back and pretty much go back to the drawing 
board and start over again? We are dealing with a very 
substantial rule here, obviously.
    Ms. Schapiro. Congressman, we did get 15,000 or 17,000 
comment letters, which is alot. But, I will say what is 
actually more striking to me on Volcker is the length, depth 
and quality of the comment letters we did receive, although a 
smaller number, but ones that offered some very real concern 
and issues for the agencies to collectively think about.
    So whether we start right from the beginning again or not, 
I can tell you that we will very carefully and are very 
carefully reviewing the comment letters--and I certainly have 
not read them all--and rethinking how we should approach the 
statutory requirement. Our goal at the SEC, and I believe I can 
speak for all regulators in this, is to try to fulfill the 
obligations of the statute but not to the detriment of our 
markets and particularly not to detriment of market making, 
which we, as a capital markets regulator, in particular, fully 
appreciate and understand is absolutely critical to capital 
formation and the successful operation of markets.
    Mr. Diaz-Balart. And there are obviously fears that that 
could happen.
    Ms. Schapiro. We absolutely have heard those. And as you 
know, we have had hundreds of meetings with industry, and we 
have alot of issues to work through. And I think Chairman 
Bernanke said last week it would be very unlikely, if not 
impossible for to us to get this done by the statutory deadline 
of July. And I think our goal would be to take the time to get 
it right, not to get it fast.
    Mr. Diaz-Balart. Great.

                              SWAP MARKET

    Now a separate question, Dodd-Frank requires the SEC and 
CFTC, right, to issue joint rules regarding swap entities and 
products. Are the agencies working together to make sure that 
the definitions are consistent?
    Ms. Schapiro. Yes, we are, and one reason it is taking so 
long is that it is a challenge. We have one Dodd-Frank Act, but 
we have different statutory regimes upon which each of us are 
building. And frankly, there are some differences between the 
security-based swap market for which we have a responsibility 
and the swap market for which the CFTC has responsibility. So, 
it has created a lot of challenges in the joint rulemaking, but 
we are working together to try to make those definitions as 
consistent as we possibly can. I don't want to tell you we will 
be identical on every single thing, but we appreciate the goal 
of consistency here, and we are working through some final 
issues between the two agencies.

                               MF GLOBAL

    Mr. Diaz-Balart. Lastly, and as my time is running out, 
regarding the MF Global issue, what actions has the SEC taken 
to recover those missing funds?
    Ms. Schapiro. It is tremendous tragedy what has happened 
with respect to MF Global. And I will say that the SEC has been 
deeply involved, although there were only about 318 active 
securities accounts at the firm, while there were close to 
40,000 futures accounts. So our role has necessarily been 
somewhat more secondary.
    We worked very closely with the SIPC trustee, who is 
marshalling assets and trying to determine exactly what has 
happened, what the final days of the firm were like and where 
the money has gone and will seek to claw back money where 
    Under SIPC, which applies again on the security side but 
not to futures accounts, the trustee's expectation is that 85 
percent of customers will get 100 percent of their funds back 
when the firm is finally resolved.
    But we are working very closely with both the CFTC and the 
trustee, and of course, we will have an enforcement view into 
this as well.
    Mr. Diaz-Balart. Thank you.
    Thank you for that.
    You are right, it is a huge tragedy for so many people.
    Lastly, Section 953 of Dodd-Frank Act requires that the SEC 
promulgate regulations for the so-called pay ratio disclosure 
provision. Have you heard and what have you heard from 
stakeholders in terms of the compliance issues and the 
corresponding costs related to the implementation of the pay 
ratio provisions?
    Ms. Schapiro. Well, we have heard a lot from stakeholders. 
As you can imagine, we have had many meetings. The statute is 
fairly prescriptive with respect to pay ratio disclosure. I 
should say it is quite prescriptive, and it creates some 
challenges for us as we write the rule. It did not have a 
deadline, so we haven't missed a deadline yet, although there 
is obviously interest in our getting this done.
    Some of the challenges relate to the fact that many 
companies have hundreds, thousands or tens of thousands of 
employees overseas, how to count them, how to arrive at an 
average compensation number, whether to count employees who are 
part time or employees of joint ventures, for example. There 
are a lot of technical issues, but there are a lot of burdens 
to making the calculation because it is an average of all 
employees that firms are really struggling with and we are 
trying to work through.
    Mr. Diaz-Balart. Thank you. This obviously highlights the 
complexity of these issues.
    Mrs. Emerson. Yes, as a matter fact, I have heard some 
nightmares in trying to accumulate some of the data that takes 
much longer to accumulate in the private sector. And if you are 
a multinational corporation, it is very hard to accumulate the 
data because you have to go to different governments.
    Ms. Schapiro. There are many operational issues. We----
    Mrs. Emerson. It always sounds easier, you know, on the 
surface, but when you kind of dig into it, sometimes I think we 
ask for more than we can expect to get.
    Ms. Schapiro. Well, in this case particularly because it is 
quite a prescriptive provision; it is not just take the W-2 
forms and come up with an average and then compare it to the 
CEO's compensation. It is much more complex than that.
    Mrs. Emerson. It is. Thank you.
    Mr. Yoder.
    Mr. Yoder. Thank you, Madam Chair.

                               DODD FRANK

    And Chairman Schapiro, thanks for being here today.
    And I want to kind of pick up where the chair was leaving 
off there regarding some of the heavy burdens that Congress has 
ultimately placed in your lap. I mean, we send a lot of 
direction your way, certainly with Dodd-Frank and with other 
legislation that probably has you spinning a lot of plates in 
the air. Similarly, we spend a lot of time as Members of 
Congress out in our districts talking with small business 
owners, entrepreneurs, folks who create the jobs that make the 
country go and ultimately create the type of prosperity that 
everyone in this room and this country wants to see for their 
kids and grand kids.
    So, with that sort of mutually stated goal in mind, there 
is a twin set of challenges that really can be affected by 
agencies like yours. First of all, many business owners, many 
folks throughout the country, and many investors express 
concern with the regulatory uncertainty and its impact on the 
    Certainly, when the rules of engagement through Dodd-Frank, 
the Volcker rule, or whatever we are working on remain up in 
the air, many folks express a concern on how that impacts 
investment and risk-taking, when the rules of engagement aren't 
fully known by the folks who we are expecting to take risks, 
invest, and make the economy go.
    And then our second challenge is we have a huge budget 
crisis in Washington that is pertinent to this conversation. As 
we try to find ways to cut spending, we are asking your agency 
essentially to quickly resolve and make clear information to 
the free market system that we want to promote in this country, 
while at the same time finding ways to do it in a cheaper 
fashion. In a sense, what we are asking you to do is what 
entrepreneurs have to do every day in this country, which is 
produce a better product with less resources and less time.
    And so my question for you is, how do we work together with 
Congress and with the SEC to find ways to produce better 
results in a more predictable fashion and one that doesn't 
require additional Federal resources? Is it that we are 
creating too many demands upon the commission at once? Is it 
that we need to work together to reprioritize so that we are 
making sure those very important critical things that affect 
the economy and affect job creation, that we are emphasizing 
those and not other items. Is it duplication? Are we asking too 
many agencies to do too many things.
    But I will tell you, when I am out in my district, I hear, 
it is not just of the SEC but agency after agency, we are just 
under a mountain of new uncertainty. I hear it from banks. I 
hear it from small business owners. I hear it from whoever. And 
we are expecting these people to create jobs.
    So putting all that together, how do we work together to 
resolve this in a way that can reduce expenditures in agencies 
like yours and promote certainty in the economy?
    Ms. Schapiro. I guess I have a couple of thoughts. One is 
on your point about regulatory uncertainty, I absolutely agree 
it impacts the willingness of businesses to take risks and to 
invest, because it is uncertain what the reward might be or 
whether they might not even be able to follow through on 
something that they have started. And that is in conflict with 
our desire to get these rules right.
    So when Congress passes a statute and asks us to implement 
something like the Volcker rule, once we get that done, there 
will be some more certainty. But it is taking a long time to 
get it done because we want to do it the right way. So there 
is, I think, always going to be a certain amount of uncertainty 
coming from Washington that makes it harder for businesses to 
plan. Perhaps there is more uncertainty now, just because of 
the volume of work that has come to all of the banking and 
financial regulatory agencies as a result of Dodd-Frank.
    On the small business aspect, we are very focused, and one 
of the non-Dodd-Frank things that we are working on today, are 
areas where we think we can relieve some of the burden on small 
businesses in capital formation while at the same time not 
reducing really critical investor protection, so that people 
are comfortable allocating their money in the market and that 
small businesses have the opportunity to get their feet on the 
ground before they are subject to the full panoply of Federal 
securities regulations, through ideas like on-ramping and 
scaled disclosure. For example, we are looking at whether the 
500 shareholder trigger for public reporting is the right 
number, or it should be higher and even higher for community 
banks, and we are looking at restrictions on communications in 
the offering process. So we have a full plate of small business 
capital formation initiatives that we are examining.
    We are also looking in areas within the SEC where we can 
cut spending and where we can save money. We have two things in 
that regard. We have a continuous improvement program. One of 
the recommendations out of a large study that was done of the 
SEC by a Boston Consulting Group was to create a continuous 
improvement program. And through that initiative as well as 
others, we have identified $8.3 million in savings just over 
the next 2 years, with a relatively small lift in terms of 
other savings that we think that we can find.
    And we have in our technology group a very conscious effort 
to spend money to save money. So if I can give you an example, 
we spent $7.6 million to replace 500 servers with virtual 
servers. We will recoup that $7.6 million in 15 months, and 
over the next 5 years, we will save close to $19 million. We 
can take that money and redeploy it toward better and more 
useful purposes within the agency. And we are doing that on a 
consistent basis throughout our technology program, by 
tightening up contracts, putting in higher service level 
agreements and performance metrics that will allow us to catch 
problems earlier, so we can have much less utilization under 
our contract support agreements, and therefore lower our costs 
of delivering technology.
    So that is a long-winded way of answering multiple parts of 
your question. But the last thing I would say is that of 
course, while we must be good stewards of the appropriation 
that we receive, our funding is fully offset by fees that are 
paid on securities transactions, about $0.02 per $1,000 of 
    Mr. Yoder. I noted that in your testimony, and certainly, I 
appreciate it. I also appreciate your acknowledgment that many 
of these investors and these businesses and folks that we hope 
will create jobs are dependent upon the--or affected by the 
regulations coming out of the SEC and other agencies and so our 
ability to work with private industry and to come up with 
regulations that make sense, that are acceptable, that create 
certainty, I think is just really critical towards getting our 
economy back on track. Not all the folks on this panel were 
supporters of many of those things that are thrown your way. 
And so we know certainly some of these are politically divisive 
    But in general, I think we could agree, across the aisle 
and across the executive and legislative branch that anything 
we can do to create a certain environment will help capital 
flow and help put people back to work, and so we ought to be 
partners on that.
    Ms. Schapiro. I agree with that. And wherever we can, we 
think about whether we can scale disclosure, we can delay 
implementation dates, or we can do other things that put less 
burden on small businesses, while of course being conscious of 
the fact that we want to protect investors because fraud in 
this area will not help anybody.

                           CONFLICT MINERALS

    Mr. Yoder. Certainly. And so I appreciate that.
    I have one other question related to some of your proposed 
rules related to conflict minerals. I don't know if you recall 
last year when you appeared before the committee, I asked you a 
little bit about this as well. There is a concern among some 
companies in the country related to really minimal amounts of 
materials that are very increasingly difficult for a small 
device manufacturer to be able to track.
    Just a few questions, and I will just buzz through them, 
and you can answer. What is the anticipated date for the 
adoption of the final rule regarding conflict minerals? Has 
there been any consideration given to setting clear guidelines 
for the amount of a conflict mineral that would trigger the 
proposed reporting requirements? I think last year, we 
discussed the concept of, if it is possible to create some sort 
of de minimis level and whether there had been enough latitude 
given to the SEC in Federal statute that allows you to do that. 
Certainly there is some broad discretion in terms of 
implementation of these amounts. Also would the SEC consider 
moving to a category for indeterminate origin for situations 
where metals are purchased and no origin can be determined for 
these minimal amounts? Is there a way we can resolve that so 
some of these companies that make small devices--for example, I 
have Garmin in my district who is affected by this. Are there 
situations where companies like that could work with the SEC to 
come up with a rule that was actually feasible to be 
    Ms. Schapiro. Congressman, as you point out, this is a 
particularly complex rule, and again a fairly prescriptive 
statutory provision requiring companies to disclose whether 
they use conflict minerals originated in the Democratic 
Republic of the Congo. The Commission has been working--and we 
missed the deadline on this one quite some time ago because it 
is so complex and so out of the ordinary for the SEC. The 
Commission is working to finalize the adoption, and I am 
hopeful that in the next couple of months, we will be done. We 
have met with many industry participants as well as many NGOs, 
the Jesuit Conference, the Conference of Catholic Bishops, the 
Enough Project, and people who have on-the-ground experience in 
the Congo and understand, as I think we all do, the good and 
important intention behind this provision. And so we are 
working to finalize it. We held a roundtable where we also 
heard from industry about the particular issues that they were 
concerned about.
    I don't believe a de minimis exception is possible under 
the statute, but the rule will try to give latitude and 
flexibility in some areas that I think will be helpful to 
different kinds of businesses in order to comply. We will have 
a phase-in period--I don't know how long that will be--to give 
sufficient time for some supply chain due diligence mechanisms 
to be developed and put in place. We are looking closely at 
what the OECD has done in terms of guidelines. So it is still a 
bit of a work in progress.
    Mr. Yoder. Well, I appreciate your efforts to work with 
industry to try to find a rule that can be workable and 
feasible. And certainly, you know, the conversation we were 
having previously related to just that regulatory uncertainty. 
This is another thing that affects private industry's ability 
to create jobs and grow in this country. These rules frustrate 
and affect, sometimes very negatively, some of our folks we are 
asking to grow and be great companies. So anything you can do 
to resolve these in a way that is actually possible. Sometimes, 
these companies look at these rules and just say, I can't 
implement this; this is just not feasible.
    Your response may be, Congress needs to give us new 
direction, because, as you said, the law was written very 
prescriptively, and maybe Congress does need to take another 
look at that. But in some cases, it is just an impossibility 
for some of these companies way down the chain with a very 
minimal amount to try to track all this way back to the point 
of origin. You can imagine the amount of expense and effort, 
and not understating the impact to the region that we are 
trying to protect and make sure there is not this happening, 
but the effort to sort of pinpoint every single mineral that is 
coming into a small device multiple steps down the chain can be 
very, very cumbersome and difficult.
    Thank for your efforts there.
    Thank you, Madam Chair.
    Mrs. Emerson. I might add, Mr. Yoder, that often these 
things come about because the people who are writing the laws 
don't have a clue what it is like to work in the private 

                             SEC ECONOMISTS

    And that begs a question, Chairman Schapiro, with regard to 
your division or department in the SEC that actually houses 
your economists. I am curious because I don't know how often 
you utilize your economists in determining the economic impact 
of a certain type of regulation. Certainly with regard to what 
Mr. Yoder is saying, it seems to me that regardless of the 
intent of Congress, that in fact the economic impact on a 
company, such as Garmin, who needs to use some of those 
minerals because you can't get them anywhere else or they would 
become anticompetitive, should be subject to some kind of 
economic analysis. Do you actually ask those folks within your 
organization to help on this?
    Ms. Schapiro. Absolutely. We have significantly expanded 
the size of our economics group in the last 2 years. They are 
involved right from the beginning in the cost-benefit analysis 
of the regulations that we might propose, helping to us analyze 
the cost of different alternatives, if those are possible. They 
help us craft a request for comment on both the cost-benefit 
analysis but also in asking industry and others for data that 
would help inform the public policy choices that we are making.
    We have hired a superb new chief economist in the last year 
and have built up that function significantly, and they are 
deeply involved in rulemaking. They are also deeply involved in 
enforcement, in studies and in helping us do things like 
reconstruct trading after the flash crash. So they are well 
integrated into the organization.
    Mrs. Emerson. So would you also use them also, for example, 
to evaluate money market regulations?
    Ms. Schapiro. Absolutely.
    Mrs. Emerson. Do they get involved in trying to fully 
consider, if you will, the economic impact of those proposed 
solutions to the broader capital markets or the like?
    Ms. Schapiro. Yes, they are very involved in the money 
market fund work that we are doing right now.
    Mrs. Emerson. Okay.
    Ms. Schapiro. And when we did the rules 2 years ago to 
implement the increased credit quality and other standards, 
they were also very involved.
    Mrs. Emerson. So how many economists do you have versus how 
many lawyers?
    Ms. Schapiro. Well, we have many more lawyers, and I can 
get you the exact numbers. But we have a lot of Ph.D. 
Economists. We actually have 16 offers outstanding to new Ph.D. 
Economists to join the SEC when the school year is over, and we 
use them throughout the agency.
    [The information follows:]

                        Economists and Attorneys

    The SEC currently has approximately 1,658 individuals classified as 
attorneys and 45 as economists. In FY12 there are 39 economist new 
hires approved for recruitment, and that hiring process is underway. In 
our FY13 request, we are requesting 20 more economists.

    Mrs. Emerson. How do you find these folks, for example? 
They are all just trying to finish up their Ph.D.'s?
    Ms. Schapiro. We attend--and I think, many Federal agencies 
do this--a big conference in January of every year where lots 
of Ph.D. Candidates come, and we can interview many of them at 
once. The staff will have gone to that conference having read 
anything those people have written, learned as much about them 
as they can, select the ones we want to interview and then make 
offers to them.
    Mrs. Emerson. Interesting.
    Ms. Schapiro. And we also bring in economists from the 
industry when we have the opportunity to do that.
    Mrs. Emerson. I would think the competition would be pretty 
fierce for them these days, but----
    Ms. Schapiro. You know, the competition is fierce, but 
again, the SEC, because of our market regulation function, is 
really a very interesting place for economists, because it is 
not singular focused. You can be involved in something like 
money market funds and mutual fund regulation, but you can also 
be involved in market structure questions the impact of high 
frequency trading on our markets and then be looking at issues 
around how broker dealers compete. There are so many different 
facets to SEC regulation that make it interesting for 
    Mrs. Emerson. Do they also get involved in reviewing what 
might be obsolete or outdated regulations for you? I know the 
administration is trying to push agencies as well as the 
Congress, I might add, toward trying to get rid of outmoded 
regulations that are on the books that cost the private sector 
money but don't do anything because markets have changed so 
much or other circumstances have changed. How do you do that 
review process, or do you?
    Ms. Schapiro. We do do it, we do it now, but we also will 
be doing it pursuant to the executive order that was signed in 
July that applies to the independent agencies asking them to 
develop a plan for retrospective rule review. That plan is 
currently with our commissioners, awaiting their comments and 
their input.
    The economists will be involved in that, as well. One 
reason for a big increase for our economics group in this 2013 
proposed budget is that the 10-year review of the Sarbanes-
Oxley rules will fall about that time, and so there will be an 
enormous amount of economic work that needs to be done in 
connection with that.
    Mrs. Emerson. And can you divvy up some of that rulemaking 
or regulatory review among the commissioners?
    Ms. Schapiro. I hadn't thought about it. It is an 
interesting idea to have people take the lead on different 
parts of that. We will certainly talk about that.
    Mrs. Emerson. I am just trying to help figure out; that 
way, you have more hands in in trying to get it all done.
    On the regional offices, I was pleased that you mentioned 
the review of the 11 regional offices. How do you suspect you 
will go through the process of trying to figure out whether or 
not some of those could be closed but not lose the 
functionality of what those people do?
    Ms. Schapiro. Well, one of the recommendations, as you 
know, that came out of the broad Dodd-Frank required study of 
agency operations was that we look at our regional office 
strategy. As you can imagine, regional offices grow up over 
many, many years for all sorts of different reasons. And our 
regional offices do a tremendous amount of the agency's work. 
That is where most of our examiners and our enforcement staff 
are located. So we want to go about this in a very 
constructive, thoughtful and careful way. We will analyze 
issues around productivity, proximity to industry, proximity to 
investors, coverage for the country, because this is a big 
country, and we are a pretty small agency. When you think about 
it, we are about the size of the D.C. police department, but we 
have responsibility for policing financial markets across the 
entire country. We will look at a whole range of different 
    It is being led by our enforcement director and our head of 
examinations group. It is one of those areas where we need 
contractor support in order to be able to do the really 
detailed and in-depth analysis that, at the end of the day, may 
say we have it right. It may say we are not in all the right 
places. We just don't have any preconceived notion about that 
at all right now, but we will need contractor support. And 
while I would like to focus on just three or four of the BCG 
initiatives for the coming year, that is one we will keep our 
eye on.
    Mrs. Emerson. Okay. I can understand why you would have to 
have the examiners in certain locations. Although, quite 
frankly, with technology as it is and if, in fact, everything 
works on the IT front, I suspect that you can get an awful lot 
tended to through technology, in addition to having your 
examiners actually show up to look into a company.
    Ms. Schapiro. Well, I went through this in the private 
sector, and I can say we ended up closing one office and 
actually opening two satellite offices in the New York area to 
get better coverage in New York, where the industry was more 
heavily located. But there is also sometimes great stability 
and depth of knowledge and expertise in some regional offices 
that also has to be considered. We don't want to lose that.
    Also some offices are in very inexpensive parts of the 
country, and so from a cost-benefit perspective, it might make 
sense to keep an office open; it might even make sense to grow 
it, so long as air fares and other considerations to get them 
to other areas are not exorbitant. So there are a lot of 
factors we need to look at. I appreciate that.
    Mr. Serrano. Thank you so much.

                          SEC LEASING POLICIES

    Last year, the SEC faced some very serious problems in its 
leasing policies, leading to a violation of the Antideficiency 
Act. Please describe to us the steps that you have taken to 
remedy this concern and ensure that this problem never faces 
you again.
    Ms. Schapiro. Well, thank you. Let me start by saying that 
I take responsibility for the agency's missteps with respect to 
leasing at Constitution Center. The Inspector General's report 
explains a number of the flaws in the process that the staff 
utilized in determining what our space needs would be. But 
based on an expectation that the agency would be given the 
resources to do the new responsibilities under Dodd-Frank and a 
doubling of our budget authorization, which I understand is not 
the same as an appropriation, we did go ahead and lease space.
    We moved very quickly to mitigate this situation. Two-
thirds of that space have been sublet or released now to other 
Federal agencies that are non-appropriated agencies, the OCC 
and the Federal Housing Finance Agency. The FHFA has in fact 
already moved into the space. So two-thirds of the space is 
gone. One-third of the space is left. We are excessing that to 
the GSA. They have informed us that they have tenants for that 
space, and they are working through that process. We expect to 
excess it in the next 30 days or so. I revoked all delegations 
to staff to sign real property leases, and on August 1st of 
this past year, I signed an MOU to turn over all of our leasing 
responsibilities to the General Services Administration, which 
has deep and long experience. And we will leverage them, and 
they will enter into all real property leases on behalf of the 
SEC on a going-forward basis.
    Mr. Serrano. I am tempted to say that should make the 
Chairwoman very happy, but I am being sarcastic.
    Mrs. Emerson. I actually am pleased that you all are giving 
that responsibility over to the GSA. We will deal with them on 
another day, but they are more suited to do it than you all, 
and we all know that.
    Ms. Schapiro. We are little, and it is really the same 
motivation behind our transferring our financial management 
systems to a Federal shared service provider at DOT. We can use 
our resources much more critically for our mission, protecting 
investors and ensuring the markets operate with integrity, and 
to build up infrastructure where there are other agencies that 
can do it better than we will ever do it is the appropriate 
thing for us to do.
    Mr. Serrano. For anybody scratching their head, the 
chairwoman is very clear in and very good at her oversight over 
the General Services Administration.
    Mrs. Emerson. Thank you.
    Mr. Serrano. But she is right.
    Mrs. Emerson. You are being sarcastic, I know.
    Mr. Serrano. Yes, but profoundly sarcastic, which is a 
whole different thing. But I do agree with Ms. Emerson that 
this is probably where it best belongs, and hopefully this will 
never happen again.
    Let me ask you because I think the SEC has been more 
vigorous than ever in pursuing wrongdoing. However I am 
concerned about the various reports regarding the SEC 
settlement policies with those accused of unlawful activities. 
In some cases, the SEC has obtained settlements with 
individuals in which they neither had to admit or deny guilt, 
even though those same individuals have pled guilty to criminal 
charges elsewhere. Do you think the SEC is doing enough to 
obtain admissions of guilt in settlement agreements? Do you 
think the SEC can obtain enough deterrence value from a verdict 
in which an entity that doesn't admit any wrongdoing?
    Now we have also seen press reports that say that if they 
had to admit guilt, you could get into some legal proceedings, 
and it would eat up resources, but it just, on the face of it, 
seems strange to many of us that somebody would do something 
wrong and would simply go, oops and that is the end of it. And 
I would like you to tell us why you think that is a good 
    Ms. Schapiro. Sure. Well, our policy with respect to cases 
where there has been a parallel criminal proceeding and there 
has been a finding or a plea or a guilty verdict is we do not 
allow people to ``neither admit nor deny'' in the parallel 
civil proceeding. That policy changed a number of months ago.
    I will say with respect to just our purely civil 
proceedings, this is how we approach the issue of allowing 
people to ``neither admit nor deny'': If we can get in a 
settlement back to investors about the same amount of money in 
penalty that we would get if we litigated the case, without the 
uncertainty of litigation, the possibility of losing litigation 
or the tremendous delay, sometimes of years, we think that is a 
good deal for investors for us to get that money back to them 
much more quickly.
    I realize that leaves people feeling a bit unsatisfied. 
They would like an admission of guilt. People won't settle if 
they have to admit guilt; they might as well just litigate with 
us and delay for as long as they can. So we will litigate. We 
do litigate many cases, but where we can get in settlement what 
we would get after years of a trial, if we were to win the 
trial, we think it is a good deal for investors.
    Mr. Serrano. But if part of your mission is to try to make 
sure that what happened that put us into this hole we are in 
right now doesn't happen again--and people tend to have short 
memories, so we are all now during an election cycle trying to 
figure out how we got into this mess and claiming certain 
residents at the White House having caused it all. But I 
remember, unless I am totally incorrect, that we got into this 
mess when a lot of things happened in the financial industry 
that had ramifications and a domino effect throughout the 
    Now if no one is going to be found guilty of anything, then 
what is to stop people from doing it again and again and again, 
knowing that all that is going to happen is they are going have 
to repay what they took, if you will. There is something 
missing there. That doesn't happen to a person down the street 
from me in the Bronx. They usually have to pay more than that 
for stealing a car or whatever. I don't know if there are any 
lawyers on the panel. I am not a lawyer, but is this a common 
practice for our society?
    Ms. Schapiro. I will tell you that virtually every other 
Federal agency and virtually every other financial regulatory 
agency allows the settlement of cases on a ``neither admit nor 
deny basis''. And in fact, DOJ and a number of others, 
including the Federal Trade Commission, actually allow the 
person that has been sued to deny all of the allegations, 
except for the jurisdiction of the agency. We don't ever allow 
anyone to deny the allegations; we just don't require them to 
admit them. So we actually have a stronger settlement posture 
than most other agencies.
    I will say that the other thing we do is that if you look 
at a complaint that we file in a case, we lay out the facts 
pretty clearly. We quote the emails. We talk about the conduct, 
so it shouldn't lead anybody to doubt what it is we believe the 
wrongdoing was. And it gives a pretty full picture and 
description of what went wrong. And again, we do litigate a lot 
of cases, and we name a lot of individuals in the cases we 

                       OVERSIGHT AND ENFORCEMENT

    Mr. Serrano. Well, let me just close with this, there were 
some folks in the past, including folks in your agency, that 
didn't want any oversight to take place. There are some people 
in government and there are people in this society, in our 
country, who may not want you to be vigorous in your oversight. 
So please make sure in doing what you feel is right that you 
are not opening the door for people to think that they can get 
away with things, because there are plenty of folks out there 
who want it just that way under the heading of, we shouldn't 
have too many regulations. And they don't seem to understand 
that some regulations are in place to stop bad things from 
    Ms. Schapiro. I understand, and I just want to reassure 
you, we are a law enforcement agency. We are many things. We 
are a regulator, but we are also a law enforcement agency. We 
take it very seriously. We have brought on board a lot of top 
notch prosecutors into the SEC's enforcement program so that we 
can go up against the biggest, strongest and best funded 
defendants that exist and we will continue to do that.
    Mr. Serrano. All right. Thank you.
    Mrs. Emerson. I am glad you brought this issue up because 
it is really important. And you did say earlier in a question 
that wasn't specific to this exact issue, regarding the big 
bank settlements, for example, that you wanted more litigators. 
I am assuming, but I should never assume anything, so let me 
ask, this is so that you could possibly have more opportunities 
to pursue cases and not have to settle without consequences.
    Ms. Schapiro. I would say now, we wouldn't settle a case if 
we don't believe we are getting the appropriate remedies. And 
we won't bring a case we don't think we could win if we had to 
litigate it, because that would be irresponsible. The 
expectation is that as we bring more and more cases, we will 
have to litigate more of them, and we need experienced trial 
counsel and paralegals and investigators to support them to do 
    Mrs. Emerson. Do you ever contract out for those services? 
Some agencies actually do.
    Ms. Schapiro. I believe we have a paralegal contract. I 
don't think we contract out--we obviously have expert witnesses 
from time to time under contract, and that is another expense 
of going to trial needing expert witnesses. But I don't believe 
we contract out any of our core enforcement functions.
    Mrs. Emerson. I was just curious, there are other agencies, 
for example, who will contract out for a certain specific 
trial. I was just curious.
    Mr. Womack.
    Mr. Womack. I associate myself with the remarks by the 
ranking member on settlement because we need to strike a very 
careful balance between settlement and litigation because of 
the impact it has on what I term some measure of risk, and we 
have to be careful, as they do in criminal proceedings, that if 
you don't do something from time to time that elevates that 
risk by prospective perpetrators, then if you are just settling 
for what you would normally get, to me it doesn't do anything 
about the risk factor. So I just make that kind of as an 


    You said in passing a minute ago when you were talking 
about capital formation, it caught my attention, because last 
year, I worked with Jim Himes on a bill that, as you know, 
Madam Chairwoman, increases the shareholder threshold for 
registration for community banks from 500 to 2,000. That same 
language is coming back in a bill this week, as you know. The 
SEC has, I guess, the authority, it is within its purview, to 
do that on its own. We had 420 votes?
    Ms. Schapiro. It was overwhelming.
    Mr. Womack. It was pretty decisive. Help me with that.
    Ms. Schapiro. Sure. Let me add to it that we have a new 
advisory committee at the SEC on small and emerging business, 
which has been a tremendous resource to us over the last 6 or 8 
months in looking at a lot of these issues. They recently 
recommended to us that we raise that 500 shareholder trigger to 
2,000 for community banks and 1,000 for other public companies, 
and they just transmitted that recommendation to us recently. 
So this is something we are looking at very carefully. And we 
would have to engage in rulemaking, which may take longer than 
actually passing legislation would take, but the staff is 
working very hard on this, and there is a lot of interest at 
the commission in moving forward.
    Mr. Womack. Well, my experience in a short period of time 
as a Member of Congress, I am not so sure that legislative 
activity is any faster or slower than rulemaking. I just 
haven't been convinced yet, but we will see going forward.
    I was also pleased that you mentioned in discussing cost-
benefit analysis, there was a mention in passing of high-cost, 
low-cost areas. You know, when you add 670 some people in a 
given year, if all of those personnel additions--and I know you 
have already indicated they are going to be spread out around a 
lot of offices, but if they were all located in, say, the 
District of Columbia or my friend Mr. Serrano's beloved Bronx, 
we are talking about a sizable amount of cost associated with 
people living in some of those locations, whereas if they were 
to be in Cape Girardeau, Missouri----
    Mrs. Emerson. Northwest Arkansas.
    Mr. Womack. Fort Smith, Arkansas.
    Mr. Serrano. Now, now, stop it.
    Mr. Womack. The cost associated with people located in 
those areas that have nice qualities of life, cities, 
communities run by some of America's best mayors, having been 
one of those, there is some merit to having people in these 
areas and help reduce that cost. I know it is not a lot in the 
overall scheme of things, but every little bit helps.
    Ms. Schapiro. I agree completely. The largest number of 
slots in this budget proposal would go for examiners, who are 
not in Washington, D.C., because there is very little 
securities industry in Washington, D.C., to be examining. And 
it would be spread around the country in places from Salt Lake 
to Fort Worth to Boston, Philadelphia; we have 11 regional 
offices. So part of this regional office strategy that the 
Chairwoman and I were discussing really needs to look at things 
like where we can most affordably house and hire people and 
give them a quality of life, as you point out, and hopefully 
have them stay with the agency for a long time.
    Mr. Womack. Thank you, I yield back.
    Mrs. Emerson. Mr. Diaz-Balart.
    Mr. Yoder.
    Mr. Yoder. I am good.
    Mrs. Emerson. Mr. Serrano.
    Well, everybody seems to be good, and we will let you off 
the hook early today.
    Anybody have questions you want to submit for the record? 
If so, we will submit them to you, Chairman Schapiro. If we 
could please get a response within 30 days, that would be 
    Ms. Schapiro. Very quickly.
    Mrs. Emerson. You don't have to do it by tomorrow.
    Chairman Schapiro, we really thank you very, very much. You 
have a tough job, and it is a responsibility that few others in 
this government have. I know it can't always be easy to sleep 
at night. So thank you for the good job you do. Our job is to 
make it easier for you to do your job, but please understand 
that we also want to be as efficient as we possibly can.
    Ms. Schapiro. We understand. We want to be as efficient as 
we can, too, because then we can spend the money on things that 
really matter.
    Mrs. Emerson. Thank you so much.
    Ms. Schapiro. Thank you.
    [The information follows:]

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                                             Monday, March 5, 2012.

                        FEDERAL TRADE COMMISSION


    Mrs. Emerson. The hearing will come to order.
    This is the first hearing for the Financial Services and 
General Government Subcommittee this year, and thank you all 
for being our first witnesses.
    Last year, the Committee faced many challenges but achieved 
significant accomplishments. We enacted appropriations bills to 
fund the Federal Government for both fiscal years 2011 and 
2012; and I think while no one was happy, including me, with 
all of the outcomes in the 2011 and 2012 bills, we did 
accomplish our constitutional duty. We reduced spending and, 
more importantly, we enacted bipartisan bills.
    Between fiscal years 2010 and 2012, our Subcommittee 
allocation has been reduced by 11 percent. However, all of our 
financial problems are not resolved and, in fact, in many ways, 
some appear to be getting worse. Secretary Geithner is 
projecting the Federal Government will reach its $16.4 trillion 
debt limit before the end of the calendar year, so we really 
have to scrutinize every single dollar that is appropriated.
    I would like to welcome back our Subcommittee Members, 
particularly my good friend Joe Serrano and Rodney Alexander. I 
am interested in your input, and I hope we are going to have 
good attendance at all of our hearings.
    We will follow the 5-minute rule for questions, except of 
course for Ranking Member Serrano, who can take as much time as 
he likes. I imagine we will be getting into more discussions 
about the Cardinals and the Yankees as the baseball season 
progresses. But that always coincides with the beginning of our 
    For everyone else, I do want to keep questions and comments 
to about 5 minutes; but I want you all to know, I won't cut 
anybody off in the middle of a sentence.
    We will recognize members in the order of seniority based 
on who is present at the beginning of the hearing, going back 
and forth between the parties; and for latecomers we will 
recognize them in the order they arrive. While I am sure we 
will not always agree on the issues coming before the 
committee, all members and witnesses will be heard and 
    I would like to welcome our witnesses for the first hearing 
of the year, Chairman Leibowitz and Commissioner Rosch from the 
Federal Trade Commission. The FTC is responsible for protecting 
consumers from unfair and deceptive practices as well as 
regulating anti-competitive business behavior. The FTC's 
jurisdiction affects American consumers and touches wide-
ranging sectors of our economy.
    I am interested to hear how the FTC is reining in its costs 
in this time of fiscal belt-tightening. I am also interested in 
learning more about how the FTC will coordinate with the new 
Consumer Financial Protection Bureau to make sure that 
resources aren't being spent on duplicative efforts and that 
consumers and businesses have a very clear understanding of 
which agency has jurisdiction over their activities.
    I am looking forward to hearing from both of you. Welcome 
again and thank you for being here today.
    Let me recognize my good friend and colleague, the ranking 
member, Jose Serrano, for any opening comments he would like to 
    Mr. Serrano. Thank you, and let me, of course, keep up with 
tradition by congratulating you on the Cardinals' World Series 
    Mrs. Emerson. Thank you very much. I am hoping that we will 
do it 2 years in a row.
    Mr. Serrano. Don't get carried away. But the Yankees have 
pitching this year. So we are in good shape.
    Thank you, Madam Chair; and I would like to join you in 
welcoming Chairman Jon Leibowitz and Commissioner Thomas Rosch 
from the Federal Trade Commission to this hearing.
    Your agency plays an important role in our daily lives and 
those of our constituents by maintaining a competitive 
marketplace for goods and services and by ensuring that 
businesses do not engage in unfair practices towards consumers. 
During this hearing, I am particularly interested in learning 
more about how you set your priorities in many areas of 
responsibility, since your portfolio covers such a broad 
spectrum of issues ranging from get-rich-quick schemes to 
consumer privacy, among many others.
    The budget request for the coming fiscal year is $300 
million, which is a decrease from the current year, so I look 
forward to hearing about whether this funding level allows for 
adequate staffing to cover your many responsibilities.
    I would also like to hear about how your priorities will 
change as we emerge from this economic downturn. As the economy 
and technology continue to improve, we can expect that even 
more people will have regular access to the Internet through 
computers and mobile devices. As a result, more people are 
likely to confront issues of online privacy, and I am 
interested in hearing about your efforts in this area and how 
they interact with the efforts of other government agencies.
    Finally, one of my particular interests has always been 
making sure that all people in the United States or, as I say, 
all people who live under the American flag are treated 
equally. I am pleased to see that you are working towards this 
goal by providing your materials in a variety of languages, 
when appropriate.
    However, I am also interested in making sure that where 
people live does not affect how they are treated. Therefore, I 
will be interested to hear about what steps you take to ensure 
that the people of the territories have a fair market in goods 
and services, just like those who live in the 50 States.
    I look forward to discussing your plans for the coming year 
in more detail, and I want to thank you both for your hard work 
and your service. Thank you.
    Thank you, Madam Chairman.
    Mrs. Emerson. Thank you, Joe.
    I would now like to recognize Chairman Leibowitz for your 
opening statement and would appreciate it if both you and 
Commissioner Rosch keep your statements to 5 minutes. Thanks.
    Mr. Leibowitz. I might be in the ``here or there'' 
category, but not much more, I promise you.
    Chairman Emerson, Ranking Member Serrano, Mr. Alexander, 
Mr. Womack, it is a pleasure to be here with my friend and 
colleague Tom Rosch today; and thank you for inviting us to 
testify and for the kind words.
    The mission of the Federal Trade Commission is as broad as 
it is critical: to protect the Nation's consumers as they 
navigate the marketplace and to ensure competition as it shapes 
the economy. We try to be practical, bipartisan, and we believe 
we punch above our weight.
    Our appropriation this year is $312 million, and for fiscal 
year 2013 the Commission is seeking $300 million. While we 
require less money overall, last year's appropriation, as you 
know, addressed an expiring lease. We are seeking modest 
additional operating funds for increased costs due to 
inflation, needed technology, and staff. Of course, we would 
need considerably more funding if Chairman Mica's bill to move 
us out of our long-time headquarters were to be enacted.
    Let me just make one more point about our budget. Last 
year, in fiscal year 2011, we returned $258 million to 
consumers in redress and to the Federal Government from fines 
and from fees. That seems to be a pretty effective return on 
investment for taxpayers, and that doesn't include our 
antitrust mission, which saved consumers money by stopping 
anti-competitive behavior that might very well raise prices. So 
the agency is going to continue to tighten its belt, but 
Congress has tasked us with a responsibility to enforce an 
ever-growing number of laws, including CAN-SPAM, the Children's 
Online Privacy Protection Act, and the Telemarketing Act, which 
gave us the authority to create the Do Not Call registry. And 
we are concerned that the quality of our work may become 
strained by the quantity of demands placed upon us, especially 
if we undergo sequestration.
    Our priorities include addressing fraud, protecting 
privacy, and ensuring competition in the health care, energy, 
and technology markets. All of these issues are discussed in 
our written testimony, so I will just touch on a few of them 
    First, on the consumer protection front, the Commission has 
continued its focus on protecting Americans from frauds that 
proliferate during hard times. Since 2009, the FTC has brought 
more than 90 cases against scammers making false promises of 
mortgage modification, debt relief, credit repair, government 
grants, and work-at-home opportunities. In coordination with 
other Federal and State partners, including, by the way, Chris 
Koster, the Missouri Attorney General, we have participated in 
sweeps resulting in another 400 law enforcement actions.
    And, of course, we don't just take on small bottom feeders. 
In 2010, Countrywide--now Bank of America--settled with the FTC 
to resolve allegations that the company overcharged consumers 
who were behind on their mortgages or in bankruptcy. We mailed 
out checks worth nearly $108 million to 450,000 homeowners. 
That is actually more than 1 percent of all mortgage holders in 
the United States. A few weeks ago, Bank of America agreed to 
reverse or refund another $36 million in overcharges.
    Second, the FTC remains at the forefront of policy and 
enforcement efforts with regards to protecting consumers' 
privacy, especially children's privacy. To date, we have 
brought more than 100 spam and spyware cases, more than 30 data 
security cases, and there are now more than 200 million phone 
numbers on the Do Not Call Registry, which Dave Barry has 
called the most effective government program since the Elvis 
    At a basic level, our enforcement actions emphasize that if 
you promise to protect consumers' privacy, you have to honor 
that commitment. The FTC recently announced a proposed 
settlement with Facebook to resolve charges that the company 
told consumers that they could keep their information private 
but then repeatedly allowed the information to be shared more 
broadly. The Facebook settlement will help protect the privacy 
of the approximately 150 million Facebook users in the United 
States and the almost 850 million users worldwide; and it 
follows similar actions against Google and Twitter. And these 
settlements, by the way, also allow companies to move on and 
keep developing innovative products and services for consumers.
    Third, health care competition will remain very high on the 
FTC's agenda. We push back against rising health care costs, 
which are nearly 18 percent of the GDP and increasing faster 
than the rate of inflation, in a variety of ways, including 
challenging proposed hospital mergers likely to increase 
concentration and raise prices and fighting various anti-
competitive restrictions on health care goods and services.
    And, as you know, Chairman Emerson, an especially egregious 
practice we have targeted is the pay-for-delay pharmaceutical 
agreement. These deals between brand name and generic drug 
makers delay entry of lower-priced medicines into the market 
and cost Americans dearly in higher prescription drug prices.
    Fourth, the FTC continues to monitor petroleum markets 
closely. We are keenly aware of the impact of gasoline prices 
on American families. We closely scrutinize energy mergers and 
acquisitions to ensure that these deals don't lead to higher 
prices. And we opened an investigation into price anomalies 
among gas refineries last year, and it continues to this day.
    Finally, we have long believed that, while regulations can 
be important for protecting consumers, they need to be 
regularly reviewed to ensure that they are up to date, 
effective, and not overly burdensome on businesses. In 2011, we 
accelerated the pace of our regulatory review program so that 
by the end of the year more than a third of the Commission's 65 
rules and guides were under review or had been recently 
reviewed. One example is the Children's Online Privacy 
Protection Act, COPPA, which we are reviewing five years ahead 
of schedule to ensure that the rule keeps up as online 
technology and, of course, our kids' ability to manipulate it, 
speeds ahead.
    In 2009, thanks principally to the efforts of Commissioner 
Rosch, we revised the rules that govern administrative 
litigation within the agency, setting timelines that ensure the 
cases move expeditiously through our process. You can now get 
an antitrust trial in five to eight months at the FTC, which is 
virtually unheard of in Federal courts.
    But I have been heard enough, so I am going to turn it over 
to Commissioner Rosch.
    [The prepared statement follows:]

    Mrs. Emerson. Thank you very much, Chairman Leibowitz.
    Commissioner Rosch.
    Mr. Rosch. Thank you very much, Madam Chairman and Ranking 
Member Serrano, Congressman Womack, Congressman Diaz-Balart, 
and Congressman Alexander.
    You know Chairman Leibowitz because he has appeared before 
you before, but let me introduce myself so that you will know 
where I am coming from.
    I was born in Council Bluffs, Iowa, back in 1939; and we 
moved across the river to Omaha when I was 10. I married 
Carolyn Jane Rosch of Broken Bow, Nebraska, in 1961. We 
celebrated our 50th wedding anniversary last August. We have a 
daughter and son and four granddaughters, three of whom are 17, 
which presents its own problems.
    I was an antitrust lawyer for 40 years. I was appointed an 
FTC commissioner by President Bush and was confirmed by the 
Senate for a 7-year term in 2005. I am currently the only 
Republican FTC commissioner. I would describe myself as a 
fiscal conservative.
    This is not my first stint at the FTC. I served as director 
of the Bureau of Consumer Protection from 1973 to 1975, so I 
have an abiding interest in the agency's welfare and 
    That said, I have been free to disagree with my Democratic 
colleagues, and I have disagreed with them--hopefully without 
being disagreeable--on a number of matters over the last 7 
years. These have included the agency's 2013 budget submitted 
to this Committee and the President's policy decisions which 
are reflected in that budget. The areas of disagreement with my 
colleagues have included authorized generics--which I know that 
you have an abiding interest in as well, Chairman Emerson, 
since you have legislation pending on that subject--financial 
services enforcement needs and case selection, particularly 
since we now share jurisdiction with the new CFPB--over my dead 
body, I might add--oil and gas prices, the staff's preliminary 
privacy report.
    I will answer your questions about my views on these or any 
other topics, but I want to emphasize that, despite these areas 
of disagreement, collegiality means to me that I have never 
felt bullied by the chairman or my colleagues to support or not 
support a position that I disagreed with, and I consider the 
FTC to be the epitome of a collegial agency.
    Thank you.
    Mrs. Emerson. Thank you very much, Mr. Rosch. I appreciate 
your comments.
    And in spite of what the national news media would lead you 
to believe, the Congress also has much more collegiality than 
the public thinks, and while we sometimes disagree, we can be 
friends on the side and respect one another. I am pleased to 
hear that is the way it happens at the FTC as well.


    I am going to ask my first question about the Consumer 
Financial Protection Bureau and the memorandum of understanding 
that the FTC has with the CFPB. I am just going to ask some 
process questions first; and then, if you want, we can get into 
the substantive discussion.
    Chairman Leibowitz, I read the MOU. Explain to us your 
interpretation of what part of the FTC's jurisdiction is 
transferred to CFPB, how you all are working together. I also 
want to know about how some of your jurisdiction was 
transferred, because it seems to me that you wouldn't need as 
many resources as you have requested.
    Mr. Leibowitz. That is a very fair question, and I think 
that is part of Commissioner Rosch's concern as well about the 
creation of the CFPB.
    As you know, we have a memorandum of understanding. We do 
that because we want to make sure that we are efficient in 
going after malefactors. Now as we know from the complaints we 
get and from the cases we've brought--we've brought more than 
90 cases involving debt consolidation, fraudulent debt 
consolidation, bogus credit repair, a variety of other cases 
like that--it is a target-rich environment. So, from my 
perspective, as long as we are not double-teaming companies and 
we are letting each other know which investigations we are 
doing, that is a good thing for consumers.
    We have also set up six working groups with the CFPB, and 
we meet with them fairly regularly to make sure that we are not 
tripping over each other or stepping on each other's toes.
    Mrs. Emerson. How do you define ``fairly regularly''?
    Mr. Leibowitz. I would say we are talking to them at the 
staff level every week at least once, and I talk to Richard 
Cordray or email him every couple of weeks.
    Now, on the resource issue, I would say this: Over time, it 
might make sense to defer to the CFPB more. But, remember, it 
is a new agency. It has not brought a single case yet. We have 
jurisdiction over nonbank financial institutions. They have 
jurisdiction over that plus banks, and so I think they have 
their hands full. And, as we know, there is a fair amount of 
uncertainty over the agency itself and over the recess 
    So while I think over time it may be that we don't need the 
resources to bring as many of these types of cases, this year 
and for now it is critically important that we do. Because, 
again, what we are trying to do is shut down a lot of scammers 
who are preying on the most vulnerable consumers.
    Mrs. Emerson. Mr. Rosch.
    Mr. Rosch. Well, Madam Chairman, frankly, this feeds into 
one of my principal concerns about the budget that has been 
submitted to you.
    First, in addition to 38 retirements which we had this last 
year, we lost no fewer than 21 FTEs to the new CFPB. So there 
are supposed to be 59 FTE vacancies at the Commission.
    Second, however, each and every one of those vacancies left 
by the 59 FTEs has either been filled or it will be filled 
under the Commission's 2013 budget.
    Third, those 59 slots will be augmented by another 10 FTEs 
under the budget request you are considering. So the result, 
assuming the 59 slots had remained unfilled, is an addition of 
69 FTEs.
    Fourth, many of those FTEs will be used to combat the so-
called financial fraud cases, despite the fact that we now 
share jurisdiction with the new CFPB.
    Fifth, insofar as the testimony implies that there are 
other substantial savings that will be made, I would suggest to 
you most respectfully that this is penny-wise and pound 
    I think that the big-ticket items are threefold. The first 
is the 69 additional FTEs. The second is the creation of a new 
Miami office. That would stand in stark contrast to the 
antitrust division's proposal to close a number--I think it is 
four--of its offices at the present time.
    Beyond that, it would require taxpayer funds not only now 
but in the future indefinitely. Because I can guarantee you, 
based upon our experience from 1973 to 1975, that we will play 
havoc trying to close that office down the line.
    Third is the unprecedented proposal to give away--and the 
Chairman has mentioned this--to give away our headquarters 
building, which is Federal Government property built 
exclusively for us, to the largely privately endowed National 
Gallery of Art. That will cost the taxpayers from $80 million 
to $300 million, depending on where we move and whether it is a 
new building like the SEC's.
    You know, Madam Chairman, at least for a fiscal 
conservative like myself, I think that this Congress--or a 
large majority of the House, at least--was enacted on the 
promise of frugality; and, to my way of thinking, it is time to 
walk the walk as well as talk the talk. I say that most 
    Mrs. Emerson. Thank you very much, Mr. Rosch; and I don't 
disagree with you.
    Let me just say briefly, and then I am going to leave it, 
with regard to the headquarters building, that is a discussion 
to have with the authorizers. We don't have the ability to make 
those types of decisions in an Appropriations Subcommittee.
    I want to pursue with you the filling of these 59 positions 
and then adding 10 additional FTEs, particularly after having 
sent 21 over to CFPB.
    I also want to discuss with you all why you have so many 
satellite offices, because it is not just you all. It is the 
Securities and Exchange Commission and everybody else. And with 
technology changing as it is I just believe we can be much more 
efficient with our funds, as opposed to having people be 
physically placed in other places, with some exception.
    I do appreciate both of your comments very, very much.


    I am curious, though--particularly with you, Mr. Rosch, 
knowing that you aren't crazy about the notion of the CFPB--do 
you believe that your jurisdiction over nonbank financial 
institutions should have been transferred over to the CFPB?
    Mr. Rosch. Good lord, no.
    Mrs. Emerson. Chairman Leibowitz?
    Mr. Leibowitz. I absolutely agree with Commissioner Rosch. 
And I also think that if we are not transferring our 
jurisdiction we ought to stay active in the field, at the very 
least until the CFPB has proven that it can do the job. I think 
it can over time.
    Mrs. Emerson. I just believe duplication of efforts is a 
waste of taxpayer dollars, and we will pursue that. But, in the 
meantime, let me pass my questioning to Mr. Serrano.
    Mr. Serrano. Thank you, Madam Chair.


    First of all, Commissioner, I would like to congratulate 
you and your staff on putting forth a budget request that is 
nearly $12 million less than your appropriation for fiscal year 
2012. And that is probably the last time anyone will hear me 
say congratulations about another cut. We are all having to do 
more with less, and I appreciate that you have taken that to 
heart. Can you describe, however, the steps the FTC is taking 
to increase efficiency and streamline your operations?
    Mr. Leibowitz. Well, we try to do a lot of things because 
we all understand that we are living in an era of austerity 
    So, for example, one thing we are trying to do is to use IT 
or computers to do things like document reviews that are 
sometimes done (and still have been done up until recent years) 
in part by manual labor.
    Another involves human capital. Commissioner Rosch 
mentioned the buyouts that we have done for some of our 
retirement-eligible employees. One way in which you save 
money--and it is sometimes painful because we have a group of 
people who have institutional memories--is to offer buyouts 
among very senior attorneys and then to bring in younger 
attorneys who are at a lower pay level.
    And then probably as much as almost anything else--because, 
again, we are a lawyer-driven agency; probably 65 percent of 
our budget is staff salaries--is creating a culture of savings. 
Our executive director asked the entire staff of the FTC for 
ways in which we could save money, and we had 150 responses, 
and some of them we institutionalized.
    We also put restrictions on travel. We send fewer people to 
meetings, as we should. And we got rid of our sedan that we had 
at the agency. We both came over in minivans.
    So we are working on this, and it is important.
    Mr. Serrano. Mr. Rosch, would you like to comment on that?
    Mr. Rosch. Thank you, ranking member.
    I am a reformed sinner in this regard as well. And you 
should understand that. In the past, I have supported an 
increase in the budget for the FTC as well as the FTEs. But I 
would suggest that now is not the time to do some of these 
things for three reasons:
    First, we are now in the midst of an austere time and the 
Fed says that we are going to be until at least 2014. 
Prosperity is not around the corner.
    Secondly, we need every last dime that we can get ahold of 
in order to get us out of the building at 601 New Jersey when 
the lease runs out, which it is going to do at the end of the 
fiscal year 2012, no matter what.
    And, third, we now share jurisdiction, as I have indicated 
to Madam Chairman, with the new CFPB. That is a fact of the 
matter. No additional spending by this agency is justified in 
these hard times and under these hard circumstances, in my 
    Mr. Leibowitz. If I could just respond.
    As you pointed out, our request is actually less for fiscal 
year 2013 than we are using in fiscal year 2012, but we do have 
a slight increase in the operating budget. Of that amount, the 
smallest part--I think it is $1.5 million--is for FTEs. The 
majority of it is for technology upgrades, which are very much 
    And, again, you determine our appropriation. We understand 
that. Wherever we end up, we will do our best. And we are a 
pretty efficient agency in terms of the taxpayers getting bang 
for your buck.
    But I do think that if we end up under sequestration or 
with a reduction, we are just not going to be able to do the 
things you want us to do, and that means it is going to be 
slower bringing of cases or reviewing of documents.
    When we are doing a merger review, it is the businesses who 
can put us on the clock. And we have to review tremendous 
numbers of documents in the second request, which is where we 
closely scrutinize a deal. Most mergers actually do not go to a 
second request. But, when they do we have to look at 1.5 
million documents on average; when I first came to the 
Commission in 2005, the average was 200,000 documents.
    So, again, we will work within the budget that this 
Congress and this Subcommittee gives us. But we are a pretty 
productive agency.
    So I understand Commissioner Rosch. I have the greatest 
respect for him. He makes us a much better agency, and he is an 
absolutely brilliant litigator. But if you want us to be as 
effective as we have been--and I think there is bipartisan 
consensus that we have been pretty effective--it would be tough 
to do that with a smaller budget.
    Mr. Serrano. And we are concerned. I think it is clear on 
both sides of the aisle that, while there are cuts in place and 
there is a desire to continue to cut, we do want you to be 
effective, and we want you to take on new areas.


    And with that in mind, the last question that I had added 
to my binder--see, it is not even in the binder, even though it 
has got holes in it--is one that this Committee knows I care a 
lot about and I will tell you what it is. It is the equal 
treatment or the lack thereof by a lot of folks who sell their 
goods in the territories.
    So, for instance, in Puerto Rico recently, the commissioner 
for consumer affairs just sued or fined, if you will, Amazon 
because they won't ship or they won't give the special shipping 
rates to the territories--in this case, Puerto Rico and the 
Virgin Islands--that they do to the 50 States. And my argument, 
very briefly, for those who may forget it, is that if you live 
under the American flag, you should be treated equally.
    What can you do? What can happen, now that everybody seems 
to be aware that this is happening more and more?
    I will give you an example. There was a journalist in 
Puerto Rico interviewing the commissioner, the secretary, and 
found out that she had a problem with her car and she needed a 
part. And she went online to buy that part. She was told it 
couldn't be delivered to Puerto Rico. The suggestion by the 
person on the phone was: ``Do you have a relative in one of the 
50 States we can ship it to and then that relative ships it to 
you?'' Well, that is not an answer for people who are American 
citizens who live under the American flag.
    In closing, before you respond, whenever I ask these 
questions on the Committee, I look at Congressman Womack, 
because I know that he had a long military career. And when it 
comes to veterans, we treat everybody equally. And yet when 
they go back home, they don't get the same services or the same 
treatment simply because they live in a territory and not in a 
    So what is under your jurisdiction that you could do about 
these kinds of problems?
    Mr. Leibowitz. We will take a look at this issue. I know a 
little bit about it. We can go after companies that engage in 
unfair, deceptive acts or practices or unfair methods of 
    Mr. Serrano. But it might not be deceptive. It is just 
    Mr. Leibowitz. Right. As I understand Amazon's practice, 
you can get free shipping in the 48 contiguous States but maybe 
not Hawaii and Alaska and not Puerto Rico. It is not deceptive, 
because they are saying, ``we will not give you free 
    Then the question is, is it unfair or an unfair method of 
competition? I don't want to prejudge this, because we will 
take a look at it, but unfairness might be determined on 
whether there is an increased cost to Amazon.
    But I will say this: We have brought antitrust cases and 
done antitrust investigations in Puerto Rico. It is actually 
done sometimes out of our headquarters. It is sometimes done 
out of our New York office. And I believe we have had a couple 
of health care matters where there were entrenched companies 
with very high market shares trying to prevent competitors from 
coming into the marketplace.
    I will get back to you on both of those things.
    [The information follows:]

    Mr. Serrano. All right. Thank you.
    Thank you, Madam Chair.
    Mrs. Emerson. Thank you, Mr. Serrano.
    Mr. Alexander.
    Before you talk, for those of you who didn't hear this 
earlier, I said that we would take people in order of seniority 
as to who was here at the start of the hearing. It is first 
come, first served. Okay?
    So, Mr. Graves, I am sorry. You are going to be last. 
    Mr. Alexander. Madam Chair, if I promise not to go over 5 
minutes, I can make a statement and ask questions, too?
    Mrs. Emerson. Sure.

                       PHARMACY BENEFIT MANAGERS

    Mr. Alexander. Mr. Chairman, in your opening comments, you 
said that you felt like in all of your dealings you continue to 
hit above your waist. But it is hitting below the waist of the 
other guy that hurts, and they are the ones that we have to 
stand up for.
    As you know and have heard, there is much concern among the 
community pharmacists and the seniors about the effects of the 
possible merger of two of the Nation's largest Pharmacy Benefit 
Managers (PBMs). The concerns include the effects that the 
merger would have on rural pharmacists and the patient access 
to the pharmacies of their choice. As a Member representing a 
very rural district, I share these concerns. So Commissioner, I 
know that you can't comment perhaps at this time on this, but 
we certainly hope that the views of the rural pharmacists are 
being adequately considered as you move forward with this 

                            PRIVACY REPORTS

    And the question is: We are hearing some reports that the 
FTC will recommend in its forthcoming privacy report a 
government-imposed regime for data collection and news that 
could effectively starve our Nation's information economy on 
the information that it needs. It appears that such a proposal 
would have an enormous impact on the economy. Have you done any 
sort of economic analysis before making such a dramatic 
    Mr. Leibowitz. Well, let me take the second question first. 
We haven't finished up our final privacy report, so I do not 
want to comment on what we are going to do. But it is 
circulating around the Commission, as Commissioner Rosch knows.
    But it is largely about best practices. In other words, 
more privacy by design, more choice for consumers, and more 
transparency. Very few people read privacy notices online, 
particularly in the mobile space.
    So the privacy report is not about enforcement efforts. It 
is certainly not about regulation. We see ourselves largely as 
an enforcement agency in the privacy area. We have brought more 
than 100 spam and spyware cases, more than 30 data security 
cases, and a couple of the major cases involving social 
    So I hear your concerns. I do not want to say exactly what 
we are going to do, but we are not a regulatory agency in that 

                       EXPRESS SCRIPTS INC--MEDCO

    On ESI-Medco, obviously, I can't say much more than we are 
looking at this. We are asking questions. We are collecting 
information. But we are very aware of the concerns of rural 
independent pharmacists. My mother-in-law was a pharmacist, my 
father-in-law was a professor of pharmacology, and I have met 
with a number of groups on both sides of the issue.
    Mr. Rosch. I can't say anything more about it than that 
except to state that my grandfather was a pharmacist as well. 
So there.

                            PRIVACY REPORTS

    Mr. Alexander. Okay. On the privacy issue, do you have 
evidence to show or to demonstrate that the public is being 
harmed now if we don't do anything?
    Mr. Leibowitz. In the cases we have brought when a company 
puts spyware in your computer or spam in your computer, that is 
a clear harm to the public, even if it is very hard to quantify 
that harm.
    When you talk about some of our other cases involving 
Facebook or Google, where they said, ``we will protect people's 
information and keep it private,'' and then they made the 
default public, it is hard to quantify, but there are real 
    As I view our privacy report or our policy work--and we 
have had a policy function going back to when the agency was 
created almost 100 years ago, in 1914--it is about best 
practices. A lot of companies want to be engaged in best 
practices, and we work with all the stakeholders.
    So, for example, one company that participated in all of 
our workshops was Wal-Mart, because they believe it is really 
important to have good privacy practices. It encourages more 
trust in the Internet and more commerce.
    But I hear your point. We do not want to be a regulatory 
agency here.
    Mr. Rosch. Well, I am comforted to hear the Chairman say 
that. But that doesn't allay my concern about the staff's 
privacy report that was issued back in December of 2010. 
Because as I read the report--and, again, it was a draft at 
that point--it appeared that the emphasis was on unfairness. 
And we told the Congress back in 1980, and we reiterated in 
1982, that we were going to rein in unfairness, as opposed to 
the deception prong. We were going to vigorously protect 
consumers under the deception prong, and that is what I think 
we ought to do.
    And, beyond that, as I read the report, I thought the staff 
had championed a ``do not track'' recommendation; and I thought 
we were in no position to advise anybody--let alone the 
Congress, of all people--about what we ought to do about the 
new ``do not track proposal.'' Both the browser solutions and 
the self-regulatory solutions are not ready for prime time, in 
my judgment. For that reason, I disagreed with the privacy 
report as it was written at that time.
    Mr. Leibowitz. I am actually supportive of the notion of 
``do not track.'' If a consumer wants to opt out of tracking--
not advertisements but behavioral marketing--I believe he or 
she ought to be able to do that.
    When I first started and when Tom first got to the agency, 
we had a Republican Chairman, and she used to always say, your 
computer is your property. People should not put things in it 
without your permission. So we have proposed a self-regulatory 
do not track option. It has been supported by Microsoft, 
Mozilla, and a number of other companies.
    There is something called the Digital Advertising Alliance 
that is coming up with its own sort of ``do not track'' 
approach that we are very supportive of. There are 100 
companies, major marketers that are responsible for 90 percent 
of online behavioral advertising, that have come up with a 
little icon you can click on to opt out of targeted 
advertising. It is beginning to work.
    But, having said that, it is not a regulatory idea. It is 
an idea that, again, is about best practices.
    Mr. Alexander. Thank you.
    Mrs. Emerson. Mr. Womack.
    Mr. Womack. Thank you, Mr. Commissioner, for your time 
    I just have a couple of questions, and I will have some to 
submit for the record.
    Kind of a follow-up to the line of questioning of Mr. 
Alexander, what similarities or differences between the CVS 
Caremark deliberations and the current concerns surrounding the 
Express Scripts-Medco pending merger can you identify for the 
    Mr. Leibowitz. Sure. Well, we approved the CVS Caremark 
merger in 2006. That was one pharmacy and one PBM. Express 
Scripts and Medco, two PBMs. After we had some complaints about 
whether CVS was violating some of the terms of the consent, we 
went back, looked at their practices, did an investigation, and 
found that they were in violation--they had put some consumers 
into the donut hole earlier than they should by miscalculating 
the amounts they owed. So we got complete redress for all of 
the consumers who were affected.

                       EXPRESS SCRIPTS INC--MEDCO

    But coming back to your question, one was a merger of a PBM 
and a retailer, essentially; and this is a proposed merger of 
two PBMs. Horizontal competitors, in other words.
    Mr. Womack. I get it.
    As has already been mentioned, because I have a military 
background, obviously, the TRICARE program is very important to 
me. And this is for you, Mr. Chairman.
    Should the FTC approve the Express Scripts-Medco merger, do 
you believe that the new company's control over 30 percent of 
the retail drug market and nearly 60 percent of the total mail 
order market will benefit the next round of TRICARE contract 
bidding? Or will it detract from the program's ability to 
provide affordable prescription access to American military 
    Mr. Leibowitz. I do not want to prejudge where we are going 
with this investigation. But I will say this: Our staff is 
working very assiduously on it.
    On the military aspects, I honestly had not thought about 
this until now. Commissioner Rosch might have. We will get back 
to you consistent with what we can say at this time in the 
    The only other thing I would say is that, under the Clayton 
Act, if an agreement may substantially lessen competition in a 
line of commerce, we have to challenge it. And that is the 
standard we apply. So, if it does, we will challenge a deal. 
And if after reviewing it we find that it does not raise prices 
or reduce choice, then we will not. But we will get back to you 
with what we can tell you about that.
    [The information follows:]

           Express Scripts INC--MEDCO Health Solutions Merger

    Prior to closing its investigation of the merger of pharmacy 
benefit managers Express Scripts Inc. and Medco Health Solutions, FTC 
staff spoke to senior Tricare officials while assessing the effects of 
the proposed merger on Tricare.

    Mr. Womack. Commissioner, any thoughts?
    Mr. Rosch. Well, the only thought I have, Congressman 
Womack, is that the last thing we want to do is to mandate, 
require an open network. Because that would be, again, the 
Federal Government reducing consumer choice and mandating what 
the consumer should do in terms of the prices or terms of sale 
of these products.
    That is the only thing I would add to what the Chairman has 

                        GASOLINE AND FUEL COSTS

    Mr. Womack. My final question is, there is not a person up 
here on this panel who is not getting questions at home about 
what can be done about the ever-increasing price of gasoline 
and transportation fuel. I was reading through your testimony 
that said, in November of 2009, the market manipulation rule 
became final. What thoughts do you have or what direction are 
you taking regarding anti-competitive or manipulative practices 
going on in that trade?
    Because back at home people say to me all the time--and it 
is very believable--and I think the consensus of opinion is 
that there is manipulation. So where are we?
    Mr. Leibowitz. Look, we are obviously aware of how the 
increasing price of gasoline hurts the middle class, 
particularly. It means that people have less money to buy 
    And we have an open investigation. We have found some 
anomalies among refineries. Their utilization rates were going 
down. Their profits were going up. So we opened an 
investigation--it is actually a little broader than that--into 
whether there is any market manipulation going on or any 
antitrust violation.
    Now, having said that, time and time again when we have 
looked at this, we know that the largest factor in the price of 
gasoline is OPEC or the prices that we pay for wholesale. OPEC 
would be a criminal price-fixing violation, because they set 
output, if it was done by companies rather than by nations. We 
have brought cases to block oil company mergers. We brought one 
where we insisted on divestiture when Exxon was selling some 
refineries in Maine just last year to Irving Petroleum.
    But it is a very difficult problem. I know you hear about 
it when you go back home. I hear about it from my neighbors and 
every time I go fill up at the pump.
    So we are working on it. We will do what we can. And if we 
find violations, of course we will go after them.
    Mr. Rosch. Well, I do have a view about this, and I 
disagree with the Chairman about this particular matter. Our 
Bureau of Economics has opined, as he has said, that it is a 
worldwide market and that there are very few things that we can 
do about it as the FTC with respect to supply and demand.
    That said, the question is--for me, at least--whether the 
President can do something about it besides simply appoint a 
task force, of which the FTC is a member, to investigate price 
manipulators. And I would say yes, for three reasons:
    First of all, I think that if the forces of supply and 
demand do control this market, and it is a worldwide market, 
then anything that can be done with respect to domestic 
exploration, including the President's determination that there 
should be more of it, will immediately be reflected in the 
behavior of price traders throughout the world.
    Secondly, I think that the idea of postponing a decision on 
the Keystone pipeline, which would import Canadian oil and gas, 
is not justified on any other grounds than its political 
potential. And I say that as somebody who has a small farm, 
along with my wife, in the Ogallala Aquifer in Nebraska.
    Third, this task force that the President has appointed so 
far as I know has done nothing except sit on its hands. It has 
been nothing but a charade designed to let the public know, or 
at least think, that we are doing something about it. I don't 
think we are doing anything about it. At least, as a member of 
the Commission, I must say I have no information that we have 
done anything.
    Mr. Leibowitz. So let me just make a couple of points.
    On is that, obviously, Commissioner Rosch has the right to 
have his opinion. But, the pipeline is out of our jurisdiction 
at the FTC. And, of course, there are other factors going into 
it, and we will see what happens. I do agree with you generally 
that when you have more supply you tend to reduce prices.
    I would also say this about the task force: I think what 
Commissioner Rosch is referring to is a task force set up by 
the Attorney General that has a number of agencies on it. We 
are actually doing an investigation into refinery pricing. That 
is a different matter.
    So that was the clarification I wanted to make.
    Mr. Womack. Thank you.
    Madam Chairwoman, that completes my questions. I will have 
others submitted for the record.
    Mrs. Emerson. Thank you, Mr. Womack; and we will accept the 
questions you have for the record.
    Mrs. Emerson. Mr. Diaz-Balart.
    Mr. Diaz-Balart. Thank you very much, Madam Chairwoman.
    Mr. Ranking Member, it is a pleasure to be with you again.
    Chairman, Commissioner, it is a privilege to have you here.
    I have really three questions on two separate issues; and I 
don't know, Madam Chairwoman, if we are going to have an 
opportunity for a second round.
    Mrs. Emerson. Absolutely, if you would like one.
    Mr. Diaz-Balart. Okay. Well, in that case, let me see if I 
can get all three of them in or not.

                             MORTGAGE SCAMS

    One of them is--and I don't have to tell you all how the 
economy is hurting, particularly small- and mid-sized 
businesses. And in the State that I represent obviously not 
only do we have the usual pressures but, like in other parts of 
the country, we have mortgage scams, et cetera, which is making 
a tough situation worse.
    If I could use an example, if you have a Chinese 
manufacturer that steals software or other IT, information 
technology, it obviously gives them an unfair advantage price-
wise because you know the other companies have to buy the 
product at a real price. Another company buys it at a less 
price. And, obviously, it puts that American company then at a 
    I guess it was the National Association of Attorneys 
General. They sent a letter to the Commission in late November 
urging the FTC to take action on this issue. Among those 39 
attorneys general who signed was Pam Bondi from the State of 
    So here are two questions: What can the FTC do to combat 
these unfair trade practices, number one? Number two is, are 
you willing to work with attorneys general, including Attorney 
General Bondi in the State of Florida, on that issue if in fact 
you are planning to do anything on that?

                           ALCOHOL PRACTICES

    That is one issue, if I may; and, in the interest of 
brevity, let me get to the other issue which is, as you know, 
the 21st Amendment grants States the right to regulate their 
own alcohol practices, including how it is distributed to 
consumers, et cetera. And does the FTC intend to use its 
resources to weigh in on State laws and regulations regarding 
alcohol sales and distribution? And, if so, in what capacity 
would you be doing that?
    So those are the two separate issues.

                             MORTGAGE SCAMS

    Mr. Leibowitz. Okay. Let me take the first one first, and I 
will take the second one after that. If you want to add 
something, Tom, you are welcome to.
    We got a letter from 36 State attorneys general, plus three 
territorial Attorneys General, including the Attorney General 
of Puerto Rico. They raised a very serious problem that you 
just documented, which is what happens when there is all sorts 
of pirated software out there that gives foreign competitors an 
unfair advantage over American companies? Because American 
companies pay for licensing and buy computers. It is a really 
interesting issue, and it is a complicated one, too.
    Because when the Congress created our agency, they gave us 
limited remedies. We do not put people in jail. We do not fine 
malefactors on the antitrust side. But we have broader 
jurisdiction for unfair methods of competition, and 
Commissioner Rosch has been a leader in using this broader 
jurisdiction. So it is a penumbra around the antitrust laws.
    This is an important issue and there have been some in the 
business community who have pushed back very vigorously about 
our use of Section 5. They will not make us stop using it, but 
we listen to all stakeholders and we have taken some time to 
finish up a response. We should have it out very, very soon.
    The Attorneys General Association is meeting in Washington. 
One of the leaders was Pam Bondi who we work with a lot on 
scams and on a variety of other matters.
    Mr. Diaz-Balart. We have got lots of scams in Florida.
    Mr. Leibowitz. We can talk about that in the context of our 
possible Miami office a little bit later.
    And another is Rob McKenna, the AG of Washington. So I am 
hoping to talk to them in the next couple of days a little bit 
more, and we should have a response out fairly soon.
    Mr. Rosch. I don't have anything to add.


    Mr. Leibowitz. On the second question of alcohol practices 
in the States, we have occasionally, when asked by a State 
lawmaker, weighed in about these issues, going back to when Tim 
Muris, the first Chairman under Bush 43, wrote a report on 
competition in wine sales. We have been involved from time to 
time in this issue. If there is a particular matter, I will 
circle back with your office and try to give you a sense of 
whether we are thinking about doing----
    Mr. Diaz-Balart. That is great.
    Mr. Leibowitz. But we would like to see more competition. 
Of course, we also recognize that States are the ones who 
regulate alcohol from a health and safety perspective.
    Mr. Diaz-Balart. Thank you, Mr. Chairman.
    Thank you, Commissioner.
    Thank you, Madam Chairwoman.
    Mrs. Emerson. Mr. Yoder.

                             BUDGET SAVINGS

    Mr. Yoder. Thank you, Madam Chair. Mr. Chairman, and 
commissioner, I appreciate you both being here today. We have a 
very difficult task in front of us in Congress, and one that is 
not lost by both of you gentlemen or anyone on the panel, and 
that is how we find a way to balance the Federal budget, find a 
way to cut spending and get our Federal spending back in line 
with our resources.
    I was really intrigued by the conversation we were having 
towards the early part of the hearing regarding the 59 
additional FTEs, the Miami office, and the selling of the 
building. And I guess as we are looking for additional savings, 
one of the standards that we have to use here as we are looking 
at these things relates to, could we justify borrowing from our 
grandchildren to fund the expense of the agency and is the 
expense or the increase--you know your budget is going down, 
which Mr. Serrano pointed out, and that is notable--but as we 
try to find 10 percent, 20 percent more from agencies, what are 
the types of changes that we could make at the FTC to make 
those reductions?
    I can tell you that when I am home, there are not a lot of 
people who come up at town hall meetings saying you really need 
to boost the FTC's budget and cut more spending from other 
areas. I know that is heartbreaking.
    Mr. Leibowitz. We didn't salt those questions, by the way.
    Mr. Yoder. Truly when we are looking at places to cut, 
there are places that are heart breaking to cut, and there are 
regulatory agencies that function mostly out of Washington, 
D.C. that don't have a lot of champions across the country in 
the hearts of the American citizens.
    So I guess as we are making tough cuts, how would we 
justify not making deeper cuts in the FTC and how do we justify 
some of the FTE expenses and where could we make additional 
    Mr. Leibowitz. Sir, there are a lot of good questions 
embedded in that longer question. Let me see if I can take a 
crack at some of them and maybe Commissioner Rosch will follow 
up. One thing that your question seems to acknowledge is that 
not all agencies are the same. There are a number of members 
here who are newer to Congress and newer to the Appropriations 
Committee, and I think that is important to recognize as you go 
through looking at different agencies.
    In our case, in fiscal year 2011, we had an operating 
budget of about $276 million and we returned $258 million to 
consumers in redress to the Federal Government in fines and in 
fees. So I think you get a tremendous return on your 
investment, the taxpayers do, from the FTC.
    Now, let me take a few of the other issues, and one is the 
Miami office. We will not do this--and I don't think we could 
do it--without a preprogramming from this Subcommittee. And we 
will not do it with additional resources. But as Mr. Diaz-
Balart pointed out, among metropolitan statistical areas, South 
Florida has the highest incidence of identity theft of any MSA 
in the country. South Florida has also quadrupled in size in 
the last 50 years.
    So a majority of the Commission, Commissioner Rosch 
disagrees with me, thinks that if we put a small office, again, 
from reworking current resources into south Florida, we can 
really help the people of south Florida. And there are terrific 
Spanish-language attorneys there and it would be mostly 
dedicated to our Spanish-language work. Not exclusively.
    With the number of FTEs, I can understand why it is 
confusing. It is not 59 additional FTEs; it is 10 additional 
FTEs. You are going to see some big agencies as you go through 
agencies. We are a tiny agency by Washington standards. We like 
to think that we are a small but mighty agency. The number of 
FTEs authorized is about 1,175. We are operating at 1,155. So 
we are only asking for 10 additional FTEs. And believe me, if 
there was one thing that had to go first, although I would hate 
to see it happen from our slight request for a slight increase, 
it would be the FTEs because technology is critically important 
to us. It is how we keep up with the bad guys and how we do our 
merger reviews and antitrust work.
    So I think it is either 49 or 59 is backfilling and then 
the request adds 10 additional FTEs. We have already backfilled 
most of those. I think we are operating at 1155 or 1156 FTEs 
out of 1176 right now.
    Mr. Rosch. Well, you know, frankly, I think each of these 
projects is probably worthwhile, but not now. That is the 
problem. The problem is one of austerity. We are operating in a 
period of real austerity at the present time. That said, can we 
hand some of this stuff off to the States?
    The chairman has, for example, talked about identity theft 
being a real problem in south Florida, and I agree with that. 
But that is quintessential theft. It is best handled by State 
and local authorities with, to be sure, a very large consumer 
education component from us.
    But we are not in the position to handle this. What we are 
in position to do is to handle security breaches which feeds 
identity theft and we do that. There is no question about that.
    The CFPB. It is here. I lost that fight. And so it is here. 
But we share jurisdiction now with the CFPB. I do not 
understand why we don't have a reduction in our FTEs as a 
result of sharing jurisdiction with the sister agency which has 
taken 21 of our FTEs away from us as it now stands.
    Now, the chairman also mentioned during his remarks that we 
had contributed fees and fines which exceeded our budget 
    Mr. Leibowitz. Slightly less, but yes, consistent with it.
    Mr. Rosch. The budget submission that is before this 
committee assumes total offsetting collections of 136.5 million 
from HSR filing fees and do-not-call fees. But I am concerned 
that the agency will never be able to collect those fees. The 
fact of the matter is that the actual collection of fees over 
the years has varied widely. And the FTC has only met its 
estimate of HSR fees once during the last 10 years. 
Accordingly, I question the utility of providing an estimate of 
offsetting fees to this committee.
    Mr. Leibowitz. If I could just respond. Let me just make a 
couple of points. First of all, I have the gravest respect for 
Rich Cordray, I think he is a terrific first head of the CFPB, 
and I think they are going to do very good work. And down the 
road in a few years I could agree with Commissioner Rosch 
wholeheartedly; I don't disagree entirely with him now. But it 
is an untested agency and the actions it is taking, while there 
are concerns raised about it, and people who would like to undo 
it, the CFPB should not be used as a justification for us to 
cede the field.
    Again, we have brought 90 cases involving debt 
consolidation and foreclosure rescue scams and work-at-home 
scams and we do really good work. And by the way, from time to 
time, we have had to send people down to south Florida and have 
them deputized as assistant U.S. Attorneys to prosecute cases. 
That is an expense to the agency.
    And so I think over time, you may want to, and we may want 
to move people out of predatory or financial fraud. But I think 
at this point, when as you have pointed out, people are still 
suffering, it is not precisely the time to do that.
    Now, having said that, again, we understand the need for 
austerity. We understand the need for agencies to tighten their 
belts and we also understand that it is this committee that is 
going to determine our budget. And so if you end up not giving 
us all of our requests--and by the way, when we started on the 
Commission--I started 2004 and Commissioner Rosch started a 
little more than a year later--in a time where the economy was 
growing, we were both for growing our agency, which is 
considerably smaller than it was in, say, 1979, when the 
population of the United States was 200 million, not 300 
    So I have a great respect for his principled position, but 
I also think that, given our effectiveness as an agency, and 
given the number of obligations that Congress has placed on us, 
especially if we undergo sequestration, the quality of our work 
is going to be very constrained by the quantity of demands 
placed upon us, and we are not going to be able to do things 
for all of your consumers and for the consumers that we are 
trying to help that we are trying to.
    Mr. Yoder. If I might, Madam Chair, as a quick follow-up, 
Mr. Chairman, as we try to make reductions we have to 
prioritize things. Has the agency gone through and prioritized 
those regulatory functions that it feels are of a critical 
nature versus those that may be more of a want as opposed to a 
need? And I just note the FTC's engagement in the interagency 
working group on the regulation of advertising on cereal and 
peanut butter. I don't know to what extent the FTC is actually 
engaged in that endeavor, but things like that may not be of 
the critical nature that maybe some of the other functions that 
you are discussing. So has the agency gone through and said 
some of these things we would do in a moment of flush 
resources, but the Committee on Financial Services is telling 
us to find the lowest 10 percent, can you identify what those 
    Mr. Leibowitz. That is a really great question, and by the 
way, I am hoping not to have to talk about food marketing too 
much, but the food marketing interagency working group report 
was mandated by the Senate Appropriations Committee. It was Sam 
Brownback and Tom Harkin. Obviously we are keenly aware of the 
new language the Appropriations Committee has given us in our 
fiscal year 2012 appropriation. I think from the perspective of 
the Commission, it is probably time to move on to other areas. 
The interagency working group report would not be a priority.
    Food marketing to kids is a priority and childhood obesity 
is a priority. But with that particular initiative, I think it 
is probably time to move on.
    Now, under Bill Kovacic, who was the Chairman before me, 
and then served as Commissioner with Commissioner Rosch and 
myself, he started an initiative called FTC at 100 in which we 
went out to all of our stakeholders, looked internally, and ask 
what our priorities should be in the coming 5 or 10 years. And 
I will get you a copy of that, Congressman. It was a really 
good study that I go back and look at from time to time. It 
talks about what our priorities ought to be. And what our 
priorities ought to be, depending on different types of growth 
or levels of growth.
    And we know now we are going to have little or no growth 
and hopefully not a decline in our workforce going forward. We 
try to do that.
    I will say this: I don't want to throw another agency under 
a bus, but I was on a panel with a Commissioner from another 
agency, and someone asked me that question. It was at a 
luncheon, and someone in the audience asked me the question, 
``Do you ever take a look at your agency to see what you need 
to do going forward if 5 or 10 years?'' And I basically gave 
him an answer about FTC at 100 and the other Commissioner 
whispered to me: I wish we would do that.
    So I think we are pretty good at that. We are not perfect, 
but self-examination and examination by your outside 
stakeholder, businesses, consumer groups, and others who follow 
your agency is a good thing to do.
    Mr. Rosch. I don't think so. And this is another area where 
I disagree with the Chairman. You know, he has mentioned to you 
that we used to have close to 1,800 FTEs back in the 1970s. And 
today we have 1,200. You know, frankly, Mr. Yoder, I think that 
every law firm in the United States has seen a similar 
contraction of its support staff, and the answer can be summed 
up in one word: computers. That is exactly what has happened. 
And yet we have not contracted accordingly. I think there is 
more belt tightening that we can do in terms of support staff 
because of computers. It is as simple as that.
    Mr. Leibowitz. Clearly computerization is a reason as to 
why government generally has downsized and can downsize to some 
extent. I do not think going from almost 1800 FTEs in 1979 down 
to about 900 in 1989--and Congress, by the way, has been very 
good about growing our agency when you can do it--is entirely 
about computerization, but I certainly understand the 
Commissioner's position.
    Mr. Yoder. I appreciate your comments. I might just close 
my thoughts by saying certainly, Commission has large scope, 
but has the ability to make the determination as to what is 
going to be on its plate. Certainly you get directives from 
Congress and from other directions, but you make those 
decisions. So it might be helpful for, myself at least, to see 
as budgets were to shrink, where you would choose to 
    And sometimes agencies choose to prioritize those--
eliminate those things that would get the most attention. That 
is not obviously the type of list I am looking for, the ones 
that would cause us the most strain. But the ones that you 
would see as the lowest priority versus the highest priority in 
terms of, if we had to do only one thing, this would be it, and 
if we got to do two things, this would be it. That might be 
useful as we go through and try to determine where to best 
spend our money.
    Mr. Leibowitz. It is a fair point. Let me come back to you 
with some of those ideas. And I would also say that as an 
agency, generally, we try to come up with a bipartisan 
consensus about what we want to do. And we try to look at 
things that are the greatest good for the greatest number of 
people because we do have finite resources.
    Mr. Yoder. Thank you. Mr. Chairman. Thank you, Madam Chair.
    Mrs. Emerson. Mrs. Lee. Thank you for being patient.
    Ms. Lee. Good to be back. Good to see you. Thank you for 
this hearing. Thank both of you for being here and for your 
service. And I would just say how important this day is because 
we are marking Consumer Protection Week. And I believe 
consumers need more protection now than ever. And you are FTC 
your mission is so important in terms of consumer protection.


    I want to ask a couple of questions in terms of deceptive 
and unfair practices as we see it in the predatory lending, and 
discrimination in lending or deceptive or fraudulent loan 
servicing. I know you don't have jurisdiction over banks and 
thrifts, but you do have jurisdiction over nonbank mortgage 
companies, mortgage brokers, and other non banking finance 
    Now it was this sector of the industry that really had some 
of the worst actors in the subprime mortgage crisis, and many 
of them were guilty of discrimination and illegal steering of 
minority borrowers into predatory subprime loans. Most of those 
fly-by-night companies have collapsed, thank goodness, but they 
were quickly replaced by companies who offered to rescue 
homeowners from the very predatory or fraudulent mortgages that 
really brought down our economy.
    Communities like--and I will give you an example--like mine 
in my district in East Oakland, they were targeted, entire 
communities, by misleading advertising, unfair and predatory 
loans, and discriminatory lending. And these were targeted 
based on race and ethnicity. Now, unfortunately, they are 
falling prey to scams that promise to save their homes and 
lower their mortgage payments.
    And so your agency, I know, is as busy as ever. But you 
have some help along the way, but you mentioned, and we all 
recognize it is going to take a couple of years for the 
Consumer Financial Protection Bureau to really be fully 
operational. And so in the meantime, let me find out what you 
all are doing on the mortgage rescue scams. Do you have your 
materials that are bilingual and can they effectively help the 
hardest-hit minority communities?
    And I would like to know a little bit about your outreach 
campaigns into these neighborhoods and just exactly what you 
are doing. And your budget, given the lack of consumer 
protection and these scams that are taking place, I think you 
need more resources, because--the middle class has now fallen 
into the ranks of the poor, and in large part, it is these 
subprime mortgages that have forced them, you know, out of 
their homes and put them out on the streets. And so we need to 
get it together real quick, and your agency is very critical in 
this. So, if you ask me, you need more resources to do this.
    Mr. Leibowitz. I appreciate that. Let me start and I will 
turn it over to Commissioner Rosch. All of our consumer 
protection materials are in Spanish now, and it is critically 
important that we do that. Some are in other languages. We have 
some in Korean, some in Chinese, and some in Vietnamese. If we 
see a particular scam targeting a particular demographic, we 
will spend the time and the money to make sure we have 
translations for the population that can use this information 
the best. And then we have a terrific Web site. Some of you, I 
know, link to it from the Committee. Consumers use it all the 
time. We have millions of hits on our Web site every year.
    In terms of the cases we are bringing--foreclosure rescue 
scams and credit reduction scams--we have brought more than 40 
in the last three years, and with the cooperation of different 
AGs, over 200 in just those two categories alone, and people 
who are in arrears on mortgages are targets. Willie Sutton 
said: Why do you rob banks? It is where the money is. And we 
have seen the malefactors going into the foreclosure rescue 
business. You used to hear the ads on TV or on radio saying, 
``Give us $3,000 and we will take care of your problem.'' They 
took the money and didn't do anything because 97 percent of the 
people at these companies were in sales, and 1 percent, at 
most, were trying to renegotiate mortgages on behalf of 
    With the help of Congress, we also passed a bipartisan 
mortgage rule that banned advance fees for mortgage relief 
services. It was supported unanimously by the Commission. And 
we modified our telemarketing sales rule to ban advance fees 
for debt reduction. And so you see far fewer of those scams 
with advance fees right now.
    And in the particular discriminatory lending context we 
have brought at least a handful of cases. There was a case 
involving Spanish-language borrowers in California who were 
being charged, on average, a quarter point (maybe a little more 
than that) more for their mortgages. It was the Golden Empire 
Mortgage (GEM) case. And we have had other cases in that area. 
And we reach out to legal services, to community groups, to 
honest businesses who do not want to be at a competitive 
disadvantage to the crooked ones, to try to come up with more 
cases in that area.
    Mr. Rosch. Well, two things. Three things, first of, all, 
Congresswoman Lee. First of all, I happened to live in your 
district for a long time, so I know what problems you are 
facing. That said, several things.
    First of all, we are not doing minorities any favors by 
getting them out of their houses into houses that they can't 
afford. We discovered that in the CompuCredit case. And that 
was partially owned by the Southern Christian Leadership 
Conference, as a matter of fact.
    So we told them that if people were moving because of 
fraud, we were going to clamp down on that. And we did. We 
returned a lot of money to consumers as a result of that fraud.
    That said, I think that probably the biggest problem that 
we have at the Commission today is probably cheap consents. 
What do I mean by cheap consents? First of all, I don't think 
that it is in the public interest if it is a consent settlement 
agreement that doesn't return any money to consumers. And these 
are brought into me all the time. People spend their money as 
soon as they make it. So a lot of these scammers who are 
terrible people are consenting out, and it is cheap. It is 
cheap for them to settle out.
    Second, we have the same problem that the SEC has, except 
in spades, because we do not, by and large, require people to 
admit liability. We just took a consent, for example, in which 
we agreed, to let the people deny liability, and I don't think 
that that is a good use of public funds at all.
    Ms. Lee. Why is it that we do not require the admittance of 
    Mr. Rosch. I don't know.
    Ms. Lee. Is that a legal issue that the law prohibits that 
    Mr. Rosch. Well, a judge in New York has just brought--
Rakoff is his name, and he has just questioned the SEC as to 
whether or not they can legally have a consent that neither 
admits nor denies liability. Now we have been taking consent 
agreements like that for years, so I do not really have any 
problem with those. But I do have a problem with a consent that 
just simply denies that there is any liability at all. That is, 
to me, a cheap consent. And I will not go along with it. And I 
have told people that I will not go along with it.
    Mr. Leibowitz. Let me just say I absolutely agree that 
Commissioner Rosch that we need to have more cases in which we 
get disgorgement or restitution for victims. But I would also 
say this: as I understand it, we are a little different than 
the SEC in the sense that we litigate lots of cases. We are 
primarily, not exclusively, but primarily an enforcement 
agency, and a policy agency as well. In 2011, we brought 
something like a little over 100 cases and we currently have 
about half that number in litigation, roughly half. And so we 
litigate a lot of cases; we also settle a lot of cases.
    Now, I would also say that usually when we have 
settlements, the companies will say that they do not want to 
admit liability. They do not deny liability but they do not 
want to admit liability. I will look at this particular case in 
which they denied liability. That is very unusual. But it is 
important to shut down ongoing fraud, and sometimes--not 
always, and hindsight is always 20/20--you can get better 
relief or relief that is just as good if you take a consent and 
then you move on to the next malefactor. And I am not saying 
that we do triage against fraudsters or bad guys, but there are 
a lot of people out there, so if we can get a pretty good 
consent that is a good as what we think we will get in court, 
we will sometimes take it.
    But I agree with Commissioner Rosch. It is important that 
we do more disgorgement and that we do more restitution.

                           PREDATORY LENDERS

    Ms. Lee. Could I ask one more? Have you looked at civil 
rights statute and say, for example, the targeting of Spanish 
speaking homeowners? That to me, and we are looking at other 
areas on this too, could be a civil rights statute violation.
    Mr. Leibowitz. One of the cases we have brought was under 
the Equal Credit Opportunity Act. So yes, we sometimes can use 
the Civil Rights Acts as well. That is in our bailiwick.
    Ms. Lee. Thank you.
    Mrs. Emerson. Mr. Graves.
    Mr. Graves. Thank you, Madam Chair. Mr. Chairman, 
Commissioner, thanks for being here. I am intrigued. It is sort 
of nice to go last every now and then, because you hear all the 
questions and there is a lot of questions and Mr. Yoder really 
gets to the heart of it all, and that is, as we sit here on 
this panel and we look the at request that is put before us, we 
realize the dire condition our Nation is in from a fiscal 
perspective, I have to say it troubles me a little bit that 
what is put before us is really not going to save our Nation in 
any way. It is almost--to me appears to be a deference to other 
agencies, other departments, other areas that must take 
responsibility for all of this crazy spending that is going on 
in Washington, when I think it needs to be addressed in 
totality by all agencies and departments.
    And so if you could help me a little bit with the history 
of the CFPB and where that departure occurs, where that funding 
goes. And I know it was discussed a little bit when I was 
coming in, but help me understand that, where the time line, 
and how that tracks and where is that being picked up in your 
request here.
    And then I was really appreciative of the Commissioner's 
comments about some things going back to the States. I think if 
there is ever an opportunity for this Congress to devolve some 
parts of the Federal Government back to the States where they 
rightfully belong, this is a good opportunity. With the deficit 
as high as it is, four consecutive years, a trillion dollars 
and every agency that comes before us just asks for more money. 
We just heard on this panel that you could do better if you had 
more. There is no more. We have reached that point where there 
is no more.
    So from your comments a minute ago, Commissioner, what 
would be some ideas that could go back to the States? That is 
sort of my second question. And then thirdly, the GAO produced 
the report about duplicative programs. Are there any of those 
that you can see that identified with your Commission or are 
there some on another report later that may come out that maybe 
you could help us with earlier and we do not have wait for the 
report to come out, but we could say hey this is being covered 
somewhere else. There are sort of three questions there.


    Mr. Rosch. Let me try. Okay? The CFPB was Elizabeth 
Warren's idea initially, with the White House's blessing, I 
might add. And frankly, I listened to Elizabeth Warren up in 
New York once upon a time, and my wife was sitting in the 
audience and I said what do you think of what I said to her? 
And my wife said: Never cross that woman's path again, ever.
    That said, I did write a letter to your counterparts on the 
Financial Services Committee and I will not say that I got the 
cold shoulder. But I basically said the same thing that you 
have said, Madam Chairman, which is we are layering another 
unnecessary layer of bureaucracy on top of the FTC, which is 
doing the job quite nicely now, thank you. But I lost that 
round. So the question is now what do we do about it? And the 
answer to me is we cut back.
    Now, how we cut back, since we now share jurisdiction with 
a new CFPB. I happen to disagree with the Chairman that we need 
to do as much as we always did, because I think there are now 
two agencies involved in doing that same thing.


    The second thing, though, is what do we do about the 
States? I have talked about one thing. As far as I am 
concerned, Congressman Diaz-Balart, my view is that identity 
theft is a quintessential theft which is handled best by State 
or local authorities because we do not have criminal authority 
as they do, and we have not, by and large, been involved in 
doing that sort of thing except on a consumer-education basis. 
And we are doing quite a bit in that regard.
    That said, let me identify another area where I think we 
can hand off more to the States, and it is in mergers. There is 
no question that we are getting discovery that is more 
voluminous than we used to get, and that happened in private 
practice to me as well, particularly when on-line discovery was 
de rigueur and unchecked. But that said, what we ought to be 
doing in my judgment is handing off some of these cases to the 
States. They have States attorneys general who are perfectly 
well able to handle this task for the time being. I don't agree 
forever. I agree with Congresswoman Lee in that regard. But now 
is not the time.


    Mr. Graves. Thank you and I could ask one more follow on 
that, and Mr. Chairman, you wanted to respond to, you used the 
term ``layer'' when referring to CFPB. So you are saying to us 
that it is not carving out a segment of your appropriations and 
calling it a new name. It is, the FTC remains whole and then 
there is a new layer, or new dollars proposed in the future or 
shortly, I imagine. That is what I am trying to get at, because 
I heard you a minute ago say back in the 1970s we had 1,800 
FTEs, but we only have 1,200 today. But I can't imagine your 
budget was 150--it is more than it was. And so over time, did 
they take portions away, create a new agency? This one kept the 
same amount, then there was new funding for the other one, and 
it just multiplies over time.
    Mr. Leibowitz. That is a good question. I think when the 
agency started shrinking there was no creation of a new agency 
to draw people away. The CFPB, as Tom alluded to, is on a 
banking agency pay scale. So they pay considerably more for 
people who will, over time, certainly be doing some of the same 
work that we do. But I would make this point: they are out from 
under appropriations, which I know is an issue for this 
Committee going forward. It is a bipartisan issue for this 
    But again--and I don't disagree with Commissioner Rosch, 
and you certainly--we all understand that we have to do belt 
tightening. But let us say you are one of the 450,000 consumers 
who got a check in the mail from the Federal Trade Commission 
because of loan servicing violations by Countrywide, which was 
bought by Bank of America. It is hard to say to them we are 
going to reduce the funding of the Federal Trade Commission, 
and as a result, it is going to take longer to do that 
investigation. The Federal Trade Commission might not bring 
this other case. The agency might not effectuate the return of 
the money from what we believe was a pretty clear rip-off, 
charging up $300 for mowing the lawn, putting it on someone's 
servicing bill and then adding late fees and a variety of other 
fees. It is hard to tell those consumers that we cannot help 
you or we cannot help you as soon as we would if we had more 
    So over time, if the CFPB survives and does the things I 
believe it will on behalf of consumers, then I think that is a 
real debate to have, then I would probably be agreeing with 
Commissioner Rosch that we should move our resources around. 
But I don't think you want to leave a gap year or two years.
    Again, the CFPB has terrific people and a really good head 
of the agency. But their future is, I think we all understand, 
somewhat uncertain, at least in the next year or two, and they 
have not brought a case yet because they are a new agency.
    I will say one more thing and I will stop. I do not envy 
you. You have tough choices to make, and whatever the choices 
you make, Congressman, we are going to work within those 
parameters. But what I do know, and what I think Commissioner 
Rosch agrees with me on is that we are a really good agency. 
And so I respect his position that we should just stay flat, 
and if that is where you end up, that is what we are going to 
do and we will do the best that we can.
    Mr. Graves. Thank you. And I hear what you are saying. And 
every agency that comes before us says the same thing. We are 
so important. We are so important. We are so important. And I 
know why, certainly there are some very important tasks that 
you take care of.
    But I left north Georgia earlier today, three children, 
kissed them all this morning. They went off to elementary 
school, middle school, and innocently not aware of you sitting 
before us today. And what you would say to them? They are the 
ones that are going to have to pay for this. Your children or 
grandchildren, if you have them, are the ones that are going to 
have to pay for this.
    You say the decisions are difficult for us. They really are 
not. They are not that difficult. They just get delayed because 
we do not get assistance that we are asking for from various 
agencies and department heads.
    I will leave it at that because we, as the Congress, have 
to come to grips with this, and I think each of us have to do 
it together. We hear the call for bipartisanship. This is the 
opportunity for us all to do it together. But going on the 
fifth year of trillion dollar deficits, this is not the path 
that we need to be on.
    Mr. Leibowitz. I understand.
    Mr. Graves. Thank you, Madam Chair.

                       AGENCY DUPLICATION OF WORK

    Mrs. Emerson. Thank you Mr. Graves. We are not finished yet 
with the CFPB because I have a couple more questions. Really 
less to do with the CFPB and more to do with you all but I am 
curious about this whole process. I don't like duplication at 
all. It is, I think, a waste of resources. So let me ask this: 
Number one, the 21 folks that went over to CFPB, what do they 
do? What were their jobs at the FTC?
    Mr. Leibowitz. They were economists. They were attorneys. 
Some but not all of them did financial fraud issues for non 
    Mrs. Emerson. Right, non bank financial institutions.
    Mr. Leibowitz. Where we have jurisdiction.
    Mrs. Emerson. Right.
    Mr. Leibowitz. And, you know, they were, on whole, as is 
typical of our agency, very good, competent attorneys and 
    Mrs. Emerson. Were they asked specifically by the CFPB 
folks or did you say to them if you want to go over and keep 
working on these issues you can go? How did that whole thing 
    Mr. Leibowitz. So I think we sent over a couple of 
detailees early on just to make sure folks knew what they were 
doing in areas that they didn't inherit. Remember they took the 
consumer protection functions from the banking agencies and put 
them together in a different way, but they had not done a lot 
of what we had done. So we sent over a few detailees and for 
the most part, they have been hired away.
    Mrs. Emerson. I am still confused why that function is 
leaving the FTC. What is it that they are going to do that is 
it different from what you-all are currently doing. And I 
realize there is a bit of bitterness here.
    Mr. Leibowitz. I wouldn't say bitterness. I would say 
healthy competition.
    Mrs. Emerson. It seems to me you are doing something well, 
and CFPB is spreading your resources thinner when you all have 
expertise in this area. I mean, it is just silly.
    Mr. Leibowitz. I would say, it is a really fair question to 
ask, and I think one that have been thinking about more since 
Commissioner Rosch and I started preparing for this hearing 
together. I guess I would say this: We have, if you include our 
regional offices, about, 100 people working financial fraud 
issues right now and we have back-filled most, if not all, of 
those positions already. But having said that, I think over 
time the CFPB might be a very competent and a better agency in 
the financial fraud area. But two things. One is in the next 
couple of years, I think you want to make sure that we are 
stopping financial fraud, and we do have an MOU so we don't 
trip over each other. So we don't double-team----
    Mrs. Emerson. I read the MOU and I still can't figure out 
what you are doing versus what they are doing.
    Mr. Leibowitz. Right, what it does is most basic level it 
says, ``let's let each other know who we are investigating;'' 
right? It does not say, ``you take the payday lenders and we 
will take the non bank----
    Mrs. Emerson. So you are basically duplicating? You have a 
whole list of characters and they are taking one and you are 
taking one; why aren't we just leaving that at FTC period?
    Mr. Leibowitz. Why don't we leave it in the FTC period?
    Mrs. Emerson. Yes.
    Mr. Leibowitz. Again, none of us has a magic wand and if we 
did, we might do things differently. I know because I look at 
our complaint database as does Commissioner Rosch, that this is 
a very target-rich environment. There are more people doing bad 
things to consumers than we can go after. So it is good from my 
perspective to have a second cop on the beat.
    But the other question is why don't we leave it to the 
Federal Trade Commission? Well, Congress made the 
determination, and it was not a unanimous determination, but 
that they would create this new agency, and so we work with it. 
And I hear what you are saying. I understand your concerns. 
There was obviously some debate, as you know, early on about 
whether to just make those functions a part of the Federal 
Trade Commission.
    Mrs. Emerson. So the opposite question is then why don't we 
just send that whole piece of what the FTC does to CFPB and 
you-all will focus on all of the other things that you do well.
    Mr. Leibowitz. Well, I don't want to speak for Commissioner 
Rosch, some people think that might be happening over time but 
we had a bipartisan view. It was Joe Barton, it was Henry 
Waxman, it was Barney Frank who was your college classmate and 
Congressman Bachus, everyone agreed that we should keep our 
jurisdiction because we did a really good job and because there 
was uncertainty over the CFPB, particularly very, very early 
    Mrs. Emerson. You were very diplomatic and I understand 
where you are coming from.
    Mr. Rosch. And I have very little to add to what the 
Chairman has said except the following. First of all, with 
respect to the people who have gone over there, Peggy Twohig 
who brought our principal pre-2008 case that yielded consumers 
millions and millions of dollars, went over to head up the 
CFPB's new non bank financial protection program.
    Second, I would point out that the CFPB has exclusive 
jurisdiction over rulemaking, over fair debt collection 
practices. And it may make a rule which is broader than the one 
that we enforce under the Fair Debt Collection Practices Act. 
We don't know at the present time. The Chairman is correct 
about that.
    But from my standpoint, it is folly in this limbo state 
that the CFPB is in, except we know that it has got a lot of 
our people doing non-bank work. It is folly for us to try and 
duplicate their efforts today and particularly in a time of 
austerity. It does not make any sense to me.
    Mrs. Emerson. I appreciate that. The whole thing is 
frustrating, and it is kind of like when you have the SEC and 
the CFTC having to jointly do rulemaking, which it hard enough 
among five commissioners, let alone when you have to do five 
commissioners within each agency all of whom then have to 
agree, which is why it is taking so long to get other types of 
Dodd-Frank regs done. But I appreciate what you all said.

                          FTC REGIONAL OFFICES

    Let me ask you, Chairman Leibowitz, just because I am 
trying to find where could we easily save money. The FTC has 
seven regional offices. You would like to add a couple people 
to start an office in Miami. Is there an Atlanta office?
    Mr. Leibowitz. Yes.
    Mrs. Emerson. Could the Atlanta office close and become the 
Miami office?
    Mr. Leibowitz. That would not be my preference or the 
preference of most of the members of the Commission, although I 
will talk to them about it. What we would probably do is we 
would post, if we go forward with the Miami office, we would 
probably start it with about six people, and we would post from 
within our existing agency. My guess is we would have a lot of 
interest in doing that. And we would backfill someone who is 
doing financial fraud with a vacancy we have in financial 
fraud, and refill it in Miami. But you know, I want to think 
about it.
    Mrs. Emerson. Where are the six other offices? New York?
    Mr. Leibowitz. New York, Chicago, San Francisco, Dallas-
Fort Worth, Cleveland and Atlanta. And Seattle, of course, 
which does both competition and consumer protection work.
    Mrs. Emerson. With technology, as it is today, do you 
really need to have all of those regional offices? Because I 
would contend that having an office in Miami that is 
particularly focused on Spanish-speaking consumers would make 
sense, but I don't see why you need to have seven other 
offices. Perhaps New York, I don't know.
    Mr. Leibowitz. Well, you might talk to Chairman Durbin 
about the Chicago office. Look, when Commissioner Rosch----
    Mrs. Emerson. Let me interrupt you and say that we don't 
earmark anymore, and therefore we all need to be cognizant. I 
mean, I have several post offices closing in my district and 
the Post Office Distribution Center, and it makes me sad and it 
makes me angry because the agencies aren't doing what they 
ought to be doing. I am just saying do we really need them in 
this technological era in which we live.
    Mr. Rosch. I championed closing the Atlanta office. And the 
chairman has suggested that he would be, at least in some 
future incarnation, amenable to that as well. But that is 
something that I do think we ought to consider.
    Mr. Leibowitz. If I could just add that if we had to start 
from scratch, and by the way, when Commissioner Rosch was the 
head of our Bureau of Consumer Protection during the Ford 
administration, how many offices did we have? We had 17 
regional offices?
    Mr. Rosch. Believe me, we do not want to play havoc trying 
to close any of those.
    Mr. Leibowitz. I would say this. First of all, I think 
there are some things that regional offices can do including 
consumer education and being a liaison with State attorneys 
general where they are located and near where they are located. 
But it is a little harder to do from Washington. And I would 
also say this: If we could start from scratch and the 
Appropriations Committee said to us, ``We want you to have 
seven regional offices, you pick the cities.'' I cannot imagine 
that Miami wouldn't be a city, because it is a hub for Latin 
American business activity. It has grown exponentially over the 
last ten years--57 percent of households are now in Spanish-
speaking. And so I cannot imagine we wouldn't put it there.
    But at the same time, our regional offices have been 
engines of antifraud activity, and a few of them do antitrust 
work as well. The New York office does terrific antitrust work. 
So I would hate to say we would close this office in order to 
open another office, because there are really good people. I do 
not want to move them. I do not think the Commission wants to 
move them around and force them to pick and choose. You can 
either stay there and lose your job or you can move to Miami. 
But we would do it, if you would let us do it. Again, it is up 
to you because we would need a reprogramming. We would do it 
from existing resources.
    Mrs. Emerson. Yes.
    Mr. Diaz-Balart. If you make the announcement about opening 
an office particularly generally in February, you make that 
announcement, you will have a lot of people wanting to go down.
    Mr. Leibowitz. And I know we will have the support of your 
very good Attorney General.
    Mrs. Emerson. I was not choosing Atlanta, because Mr. 
Graves is from Georgia, after all. But I am trying to figure 
out, if you need this, what can you do without? Because the 
fact of the matter is that we just do not have the money to 
fund everything.
    Mr. Leibowitz. Well, I would say, between Commissioner 
Rosch's testimony and what we heard from some of the Members of 
your Subcommittee, we might be able to figure out a way to do 
it from existing resources and try to take under consideration 
some of the points that we have heard today at this hearing.


    Mrs. Emerson. Will you indulge me? I have one more really 
quick question. It has to do with your leased space. Bring us 
up to date on the New Jersey Avenue location.
    Mr. Leibowitz. Right.
    Mrs. Emerson. I think, originally, you had asked for more 
square footage than you all needed. But tell me what you are 
doing with this move. Because I, obviously, am looking for 
another way to consolidate some space and save some money. Can 
you give us an update?
    Mr. Leibowitz. Well, thanks to this Subcommittee, we 
probably have enough money, or close to it, to do our move. I 
just had a discussion with our executive director today who is 
sitting behind me about how we are going to, in new space, as 
part of our belt tightening, reduce the space per employee and 
per attorney to some extent.
    Mrs. Emerson. Let me ask you, do each of your attorneys 
have to have private offices?
    Mr. Leibowitz. It is preferred because of the 
confidentiality of some of the things we do, but it is not 
essential and we have doubled up at times in the past, and we 
might have some doubling up going on now and we might have some 
doubling up going on in the future. People want to work at the 
FTC, there is no doubt about it. It is a really good agency. If 
you say to a young attorney you have to sit with somebody else 
just like they do in a House office or a Senate office, we will 
make that work.
    Mrs. Emerson. Well, our staff sit in pits.
    Mr. Leibowitz. At the risk of--I'm sorry, what?
    Mrs. Emerson. Our staff sit in big pits.
    Mr. Leibowitz. Like a bullpen, going back to the baseball 
analogies that you started the hearing with. At this point, 
there is a little bit of uncertainty because a certain member 
who chairs another committee, I believe, is holding up some 
prospectuses. So we are hoping to get that through a committee 
on the House side soon. Otherwise, actually, we will have to 
stay in our space and we will have to pay a lot more for it and 
we will have to come back to you and----
    Mrs. Emerson. All right. I will follow up on that. And I 
appreciate it. But we need to start moving on this because it 
is ridiculous, and I want to try and save money. Joe?
    Mr. Serrano. Thank you, what I think we have established is 
that Miami is in pretty good shape for getting an office.
    Mrs. Emerson. If certain things happen. Another office 
would have to close.
    Mr. Serrano. Exactly. And then Mr. Diaz-Balart will have a 
problem because he believes in cuts, will he attend a ribbon 
cutting? That is a different issue all together. It is good. We 
have made some comments here about duplicating services and so 
on. But I think what we need just to remember, every so often, 
as we talk about this new agency, is that it didn't happen in a 
vacuum. Homeland Security was not created in a vacuum. That 
whole conglomeration was created as a reaction to something. 
Well, something went terribly wrong in this country in the 
financial markets and so a lot of people agreed something had 
to happen.
    And I am not sure that every one was willing to say the FTC 
with your limited resources, and so on, should handle all of 
that that was going on. And I think that is what we tend to 
forget. Am I correct?
    Mr. Leibowitz. That is right.
    Mr. Serrano. That is the shortest answer you have given all 
day. But I understand.

                          TIPS AND COMPLAINTS

    Let me ask you a question. I assume that the FTC gets a 
large number of tips and complaints every day. Are you able to 
follow up on all of them or just a fraction of them? And how do 
you choose which complaints to go after?
    Mr. Leibowitz. Sir, that is a great question, and I know 
that you spent some time as the chairman of the Consumer 
Protection Subcommittee of the New York State Assembly.
    Mr. Serrano. Oh, my God. You remember that far back?
    Mr. Leibowitz. We just read up on our appropriators. We get 
something like--my staff will correct me if I am wrong--
something like 2 million complaints a year. And of course, what 
we do is we put it in a database, and it becomes a critically 
important way in which we determine which scams to go after.
    Now we also allow State attorneys general, because I think 
it is really critical that we all work together, to access that 
database and to input data into it. And so we can all work 
together on figuring out which scams we should be trying to 
stop, which ones will give the greatest benefit to the greatest 
number of people, and our complaint database is one way we do 
    We also talk to consumer groups and we also talk to honest 
businesses because they do not want to be unfairly competed 
against. One of the interesting things is when we did our 
mortgage modification rule, we actually ended up having one of 
the trade associations for the companies that do this 
supporting our rulemaking in the end, because one, as we 
listened to them they had some suggestions, and two, is they 
felt like they were at a competitive disadvantage.
    So it is a hard thing to do. We try to do our best to 
really figure out where we can do the most good. And we work 
with our State AGs and other folks. And with HUD, and with the 
Department of Justice and Treasury when we can.
    Mr. Serrano. Mr. Rosch.
    Mr. Rosch. No comment. That sounds fine to me.
    Mr. Serrano. That is even a shorter comment than the one 
that he made. I must be doing a good job here.

                        STATES ATTORNEY GENERALS

    You mentioned a lot your working relationship with the 
States AGs. Do you ask them for information or do they always 
come to you with an issue that they want you to cover?
    Mr. Leibowitz. It is a combination. Sometimes on mergers 
and issues, we generally take the lead. And on antitrust 
investigations, sometimes they join us and occasionally they 
will do--and maybe we should ask them to do more--some of the 
depositions when we are doing an investigation and some of the 
document reviews.
    We have a lot of cross pollination with them. I did a youth 
privacy panel with Eric Schneiderman two weeks ago in New York, 
and that was great because we hadn't met each other, although I 
had worked with some of his predecessors. And tomorrow, the 
National Association of Attorneys General is in town, and I am 
going to talk to them and then they are coming back to our 
agency and we are doing a workshop for them.
    So there are a lot of ways that we cross-pollinate, and we 
need to do more of that because obviously when we leverage our 
resources, we all do more for the consumers we try to 

                            ON-LINE SHOPPING

    Mr. Serrano. Let me ask you a quick question on online 
shopping. The last couple of years, around the holidays, 
Christmastime, we hear about how much more people are buying 
online. So obviously, just by that mere percentage growth, you 
would say that there are more problems online. Is it that it is 
just a mere percentage growth, more buying, more shopping that 
way, therefore more problems? Or is it that that medium lends 
itself more to schemes and bad information?
    Mr. Leibowitz. That is a great question and I don't know 
the answer to that. I do think when you don't have a person, 
and there is no one that you are necessarily speaking with, it 
probably make its easier in some ways to start a phishing site.
    And one of the issues where we have been very bipartisan is 
the Internet Corporation for Assigned Names and Numbers (ICANN) 
recently developed a plan to have all of these new top level 
domain names, and we thought it would be a hotbed for fraud. 
Because you have all of these new domain names. Think about the 
ways you could misspell Marriott; right?
    Now with only 20 top-level domains, we are always chasing 
the bad guys. Sometimes they are operating out of Orange 
County, California, but they have registered their domain name 
in Berlin. We were worried and we sent ICANN a 15-page letter 
from the Commission urging them to go much slower and to try to 
put in requirements where we know who is registering and making 
sure that the registration information is accurate.
    So I would say, I don't have an answer for you. It is a 
really good question. I will follow up with our staff and see 
if they can try to quantify some of this. But I will say this: 
the Internet gives all consumers great gifts in enormous ways, 
and online commerce is a terrific thing, but it also has led to 
a variety of fraud, and of course, that is what we are supposed 
to be watching at our agency.
    Mr. Serrano. It also has killed that great Jack Benny 
routine, shopping at Christmas at the counter because there is 
no Mel Blanc or Frank Nelson to exchange with. I just gave away 
my age. But anyway.
    Mr. Leibowitz. I thought you were younger than that.

                         IMPACT OF BUDGET CUTS

    Mr. Serrano. It is not that funny to buy online. You can't 
make it. I have just one more question, Madam Chair, and it is 
a question that has to be asked, which is, how would the FTC 
handle 1.5 percent cut for 2013 if sequestration was to occur?
    Mr. Leibowitz. Speaking for myself--I am hoping we don't 
see sequestration because again, we would have to make a lot of 
tough choices, and it would involve personnel and it would 
involve IT, where we are desperately trying to catch up with 
the marketplace. And so it would be very, very difficult for us 
to do the things you want us to do. I think it would mean fewer 
cases, and I think it would mean slower development of cases. 
Again, having said that, wherever we end up (with our 
appropriation), we will do the best we can.
    Mr. Rosch. Well, from my standpoint we do away with cheap 
settlements. That is the number one thing. Number two, I think 
we would probably hand off more to the CFPB, which, after all, 
was expected to handle these matters. Number three, I think we 
would probably hand off more to the States. I don't think, 
frankly, sequestration would be that bad a thing for us under 
these circumstances given the austerity that we are living in 
right now.
    Having said that, probably because of my background as a 
trial lawyer an antitrust trial lawyer I don't think that 
matters are ever over until the Supreme Court has said they are 
really over. And so for that reason, probably I am more eager 
than my colleagues to follow on an administrative proceedings 
with Supreme Court review.
    But having said that, in the Whole Foods case, I was able 
to persuade my colleagues that we ought to soldier on. But 
generally speaking, I have not been able to do that. And I 
would be remiss if I didn't say and emphasize that in all 
cases, however, I think I got a full and fair hearing from my 
colleagues and from the chairman. As I said, for me, that is 
the kind of collegiality that really counts.

                              MERGER FEES

    Mr. Leibowitz. Can I just have one more thought, and 
Chairman Emerson and I have talked about this a little bit. 
Last year, the Hart-Scott-Rodino fees that companies pay when 
they are seeking a merger have not been adjusted for inflation 
since 1999 or maybe 2000. The Senate appropriations proposed an 
increase I think, last year, and it was blue-slipped by the 
Ways and Means Committee, because it didn't originate in the 
House--if you want to modestly update the Hart-Scott-Rodino 
fees for inflation, and then put a tier in of over $1 billion, 
you could probably raise something like $800 million to $1 
billion over ten years. That would be divided between the 
antitrust division and the Federal Trade Commission, but it 
might be a fairly painless way that you might want to think 
about for raising a little more money.
    Mrs. Emerson. Let me just weigh in here for a second. This 
is an Energy and Commerce and Judiciary Committee authorizers' 
    Mr. Leibowitz. Right. We would be happy to help you out and 
talk to our authorizers.
    Mrs. Emerson. It is never a bad idea to talk to 
    Mr. Rosch. But I want to emphasize that we can have been 
off target with respect to our fee estimates throughout. So I 
am not sure that we ought to be making any promises and 
increasing fees is the end of the game for us.
    Mr. Serrano. Well, I have no further questions. I want to 
thank you, and I want to thank you especially for repeating and 
reminding us that you work hard at getting along and doing 
things in a joint way. And your comment that when people don't 
agree they still accept your comments fairly, that is very 
refreshing to us because we get different kinds of situations 
when we get folks from different parties who are in adversarial 
positions in front of us. It can get a little heated at times. 
So we thank you and thank you for your service. And you will 
get back to us on territories, online shopping, and the Jack 
Benny program.
    Mr. Leibowitz. Absolutely.
    Mrs. Emerson. We may be doing a lot of online shopping 
around the holidays this year. I have a sneaking suspicion. Mr. 
    Mr. Diaz-Balart. Very briefly, because I didn't get answers 
to my questions, again, about--I guess you are preparing a 
letter to the attorneys general and that will deal with that 
first question, and the second one, you will get back to me if 
there is anything on the alcohol issue.
    Mr. Leibowitz. Absolutely.


    Mr. Diaz-Balart. What resource do people have if they 
suspect that a domain name has been taken, either fraudulently 
or, frankly, maliciously? Can I right now get a domain name of 
JoseSerrano.com and start putting stuff on there that he did 
not like? Not that I would ever do that, Joe, I am just saying 
could things like that----
    Mr. Serrano. Move me to the right a little bit?
    Mr. Diaz-Balart. What recourses are there and what 
abilities do you have to deal with that? How limited are you?
    Mr. Leibowitz. It is interesting that you raised that. I 
was testifying a couple of years ago when I was a nonchair 
Commissioner before the Senate Commerce Committee and 
apparently someone who had been associated with the late Ted 
Stevens campaign had set up a humorous site involving Maria 
Cantwell, another Member, at that time they were both members 
of the Commerce Committee. And this was not humorous to Maria 
Cantwell, or to Ted Stevens by the way.
    I would say there is probably some recourse. Let me get 
back to you on that. The biggest problem is that most of the 
people who do this, they either cannot be reached because they 
are in an area in Romania or Southeast Asia, and they are 
registering a domain name for $3, or even if they are an 
American, they are registering a domain name for $3 with 
inaccurate information, and it is going to be hard for us to 
track them down. Or they have registered it before a more 
legitimate person and then they just want some money for it.
    I was not involved in this when they started the Internet 
Corporation for Assigned Names and Numbers and in retrospect, 
there are things that we should have done differently. And one 
of the areas where we have been involved, just because we saw 
so many problems, is trying to encourage reforms within the 
ICANN process. But I will get back to you on your specific 
    Mr. Diaz-Balart. Thank you.
    Mrs. Emerson. Mr. Yoder. No more? Mr. Graves.

                         PRIVACY BILL OF RIGHTS

    Mr. Graves. Let me just follow up on, I guess there was the 
Privacy Bill of Rights that has been floated out there. And I 
know you spoke a little bit about earlier about a component of 
it maybe. Does that--just to help our Committee understand, is 
that something you see moving forward as a regulation or 
something coming out of the Commission or is that something you 
mentioned earlier, industry-regulated or is that how you see 
    Mr. Leibowitz. So, it is a good question. It is not subject 
to a straight black-and-white answer. The Privacy Bill of 
Rights and the privacy proposal surrounding that have been 
driven by or initiated by the Department of Commerce. And what 
they want to have is codes of conduct. We are actually very 
supportive of this, certainly in theory. Codes of conduct for 
industries that they would agree to about protecting privacy, 
and then the FTC would do the enforcement role. We are an 
enforcement agency. That is much of what we do.
    We have supported, although not unanimously, the notion of 
do-not-track options so consumers can opt out of being tracked 
if they don't want to be tracked. The Commerce Department's 
initiative has legislation around it. I think we all understand 
this is not going to be a major legislative year. Our 
initiative for do-not-track is purely voluntary. It involves 
industry really stepping up to the plate and trying to give 
consumers an option. And then it involves some standard-setting 
organizations that want to set up standards for it. We are not 
regulating, to get to your bottom-line question.
    Mr. Graves. So if someone chooses not to participate in the 
standard, what would be the recourse? And if somebody does 
choose to participate but they do not abide by the conduct that 
you just described, what would----
    Mr. Leibowitz. That goes to the heart of exactly what we 
are doing. If someone says, ``I don't want to participate in 
the standard, I do not want to give consumers an option not to 
track when they come on, I am going to say if you come on my 
site, we are going to track you,'' they are allowed to do that. 
We do not think it is the best practice. I don't think it 
encourages trust in the Internet or more Internet commerce. But 
we are not saying it is an enforcement violation in any way, 
shape, or form.
    If on the other hand--and I think this is what makes the 
industry-driven do-not-track proposal so powerful--if a company 
says I am not going to track consumers if they opt out, and 
then they engage in tracking, one, because there is an 
enforcement mechanism set up by the Better Business Bureau, it 
could be enforced there; right? And they can be penalized. It 
is an enforcement mechanism with teeth. And two is, if any 
company makes a commitment, ``I will honor your privacy,'' and 
they don't, it is enforceable by the Federal Trade Commission.
    Again, look, I, myself, probably wouldn't opt out of 
tracking, because I sort of like getting targeted ads. And no 
one wants to, in any way, undermine the free content and 
services on the Internet that we get from advertising. But from 
my perspective, consumers ought to have a choice. And what is 
really heartening to me is that most companies want to give 
them a choice.
    Mr. Graves. So is it a common practice for a private group 
of businesses to come together and come up with their own rules 
of the road or codes of conduct and then FTC would regulate 
that and enforce that?
    Mr. Leibowitz. We would not regulate it. We would enforce 
it. We might encourage them to do it, but we don't have 
authority. During Dodd-Frank, Commissioner Rosch and I were 
both very big advocates for getting out from under the 
Magnuson-Moss Act, which is the medieval form of rulemaking 
that we are under that makes it very, very difficult to do 
rulemaking, and Congress did not give us that easier rulemaking 
authority. But again, it is up to industry, but I think there 
are a lot of reasons why industry wants to do this. One, they 
do not think a lot of people would be opting out of the 
tracking. And two is, they recognize that the more trust you 
give consumers, the more Internet activity, including commerce, 
there might be.
    And it is the right thing to do. Even executives in 
technology companies are aware of tracking and they wonder 
where their information is going sometimes.
    Mr. Graves. Could I follow up on that? So is there another 
example of where industry has come together and developed rules 
of engagement and the FTC has enforced those rules that were 
developed outside of the regulatory?
    Mr. Leibowitz. Let me get back to you on that. Early on in 
the days of the Commission, in the 1950s and 1960s, there were 
lots of codes of conduct. I think we got away from them for the 
most part, with a few exceptions, because we thought our unfair 
and deceptive practice authority works, and we weren't in the 
business of regulating for the most part. Here we don't feel 
like we are in the business of regulating, but we are 
encouraged by what companies voluntarily want to do.
    Mr. Graves. This is a unique model that I have not heard of 
before, where you have a private sector do it and the 
enforcement by the government.
    Mr. Rosch. Frankly, Congressman, that is because it is a 
tautology. If it is truly voluntary, then it is not enforceable 
at the Federal level by the FTC or by an Act of Congress. On 
the other hand, if there is Federal legislation that makes it 
enforceable, it is not truly voluntary.
    Now why are these people interested in doing it? The 
Chairman has offered you one explanation; I will offer you two 
other ones. Number one, the Carnegie Mellon study that I 
referenced earlier has determined that most consumers cannot 
even access these do-not-track mechanisms. So that is one 
reason. And the second reason is because big entrenched 
companies I am concerned about will use self-regulation privacy 
as a tool, as a weapon, if you will, to preserve their 
positions, and against entry by smaller rivals. I am concerned 
about that.
    Mr. Graves. Thank you, and I share similar concerns that 
whenever we allow the strong force of government to enforce, as 
was the term that was used here, that has not been ratified nor 
approved by Members of this body, but only rules of engagement 
by the private sector I think we should all be cautious of 
    Mrs. Emerson. Thanks, Mr. Graves, given the fact that most 
of the time, voluntary turns into mandated at some point down 
the road. It does make me nervous.
    One thing I would like to ask you all to do, we all have 
questions for the record, we would like to have those answered. 
Sooner rather than later. Sometimes it is 6 months; if you 
could do it in the next 30 days it would be great.
    Secondly, on the fee structure, because I am concerned 
about what Commissioner Rosch has said, that I would like to 
have a list of how much in fees you have, in fact, received.
    Mr. Leibowitz. I can give you that right now actually for 
the last 10 years.
    Mrs. Emerson. Are you just going to hand me a piece of 
    Mr. Leibowitz. I will hand you a piece of paper and follow 
up with writing.
    Mrs. Emerson. With that, thank you all so much for being 
here. It is fun having you too, Commissioner Rosch. I like 
having opposite party Commissioners testify at our hearings 
because I think that it is important to show that while perhaps 
you don't agree on everything, you do work together. I don't 
know if that is true across the board in all agencies, but I am 
thrilled that it is with you all, and we want to thank you so 
much, both of you, for being here and for the great job that 
you are doing and for the help that I know you are going to 
give us in trying to save money.
    [The information follows:]


                           W I T N E S S E S

Genachowski, Julius..............................................     1
Leibowitz, Jon...................................................   247
McDowell, R. M...................................................     1
Rosch, J. T......................................................   247
Rymer, J. T......................................................   335
Schapiro, M. L...................................................   163