<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:25286.wais]
S. Hrg. 109-253
NOMINATIONS OF: CHRISTOPHER COX
ROEL C. CAMPOS, ANNETTE L. NAZARETH
MARTIN J. GRUENBERG, JOHN C. DUGAN
AND JOHN M. REICH
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
ON
nominations of:
christopher cox, of california, to be chairman of the
u.s. securities and exchange commission
__________
roel c. campos, of texas, to be a member of the
u.s. securities and exchange commission
__________
annette l. nazareth, of the district of columbia,
to be a member of the
u.s. securities and commission
__________
martin j. gruenberg, of maryland, to be a member
and vice chairman of the
federal deposit insurance corporation
__________
john c. dugan, of maryland, to be comptroller of the
office of the comptroller of the currency
__________
john m. reich, of virginia, to be director of the
office of thrift supervision
__________
JULY 26, 2005
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina JON S. CORZINE, New Jersey
MEL MARTINEZ, Florida
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Bryan N. Corbett, Counsel
Mark F. Oesterle, Counsel
Peggy R. Kuhn, Senior Financial Economist
Dean V. Shahinian, Democratic Counsel
Patience R. Singleton, Democratic Counsel
Lynsey Graham Rea, Democratic Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
TUESDAY, JULY 26, 2005
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Sarbanes............................................. 2
Senator Dole................................................. 4
Senator Dodd................................................. 5
Senator Allard............................................... 5
Senator Carper............................................... 6
Senator Enzi................................................. 6
Senator Schumer.............................................. 9
Senator Bunning.............................................. 11
Prepared statement....................................... 50
Senator Stabenow............................................. 11
Prepared statement....................................... 50
Senator Crapo................................................ 39
WITNESSES
Ted Stevens, a U.S. Senator from the State of Alaska............. 6
Prepared statement........................................... 51
Dianne Feinstein, a U.S. Senator from the State of California.... 7
Barbara Boxer, a U.S. Senator from the State of California....... 8
NOMINEES
Christopher Cox, of California, a U.S. Representative in Congress
from the
State of California, to be Chairman of the U.S. Securities and
Exchange
Commission..................................................... 12
Biographical sketch of nominee............................... 52
Response to written questions of:
Senator Carper........................................... 105
Senator Bunning.......................................... 107
Senator Corzine.......................................... 109
Roel C. Campos, of Texas, to be a member of the U.S. Securities
and
Exchange Commission............................................ 14
Biographical sketch of nominee............................... 68
Response to a written question of Senator Carper............. 105
Annette L. Nazareth, of Texas, to be a Member of the U.S.
Securities and
Exchange Commission............................................ 16
Biographical sketch of nominee............................... 75
Response to written questions of:
Senator Carper........................................... 107
Senator Bunning.......................................... 108
Martin J. Gruenberg, to Maryland, to be a Member and Vice
Chairman of the Federal Deposit Insurance Corporation.......... 34
Biographical sketch of nominee............................... 83
John C. Dugan, to Maryland, to be Comptroller of the Office of
the
Comptroller of the Currency.................................... 35
Biographical sketch of nominee............................... 88
John M. Reich, of Virginia, to be Director of the Office of
Thrift Supervision 36
Biographical sketch of nominee............................... 95
Additional Material Supplied for the Record
Letter to Senator Richard C. Shelby from Norma Alexander Hart,
President, National Bankers Association........................ 112
NOMINATIONS OF:
CHRISTOPHER COX, OF CALIFORNIA
TO BE CHAIRMAN OF THE
ROEL C. CAMPOS, OF TEXAS
TO BE A MEMBER OF THE
ANNETTE L. NAZARETH, OF THE
DISTRICT OF COLUMBIA
TO BE A MEMBER OF THE
U.S. SECURITIES AND EXCHANGE COMMISSION;
MARTIN J. GRUENBERG, OF MARYLAND
TO BE MEMBER AND VICE CHAIRMAN OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION
JOHN C. DUGAN, OF MARYLAND
TO BE COMPTROLLER OF THE
OFFICE OF THE COMPTROLLER OF THE CURRENCY
JOHN M. REICH, OF VIRGINIA
TO BE DIRECTOR OF THE
OFFICE OF THRIFT SUPERVISION
----------
TUESDAY, JULY 26, 2005
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:03 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order.
This morning, we will hear from the President's nominees
for the Securities and Exchange Commission, Congressman
Christopher Cox, Commissioner Roel Campos, and Annette
Nazareth. I appreciate the willingness of the nominees to
appear before the Committee today.
Congressman Cox has been nominated to serve as the Chairman
of the Securities and Exchange Commission. Since being elected
to the House of Representatives in 1988, Congressman Cox has
established an impressive record as a legislator and leader on
securities regulation. He currently serves as Chairman of the
Committee on Homeland Security in the House of Representatives
and was also a Member of the Energy and Commerce Committee,
which at the time had jurisdiction over securities law, and the
Financial Services Committee for 7 years. Prior to his
election, Congressman Cox served as a senior counsel in the
Reagan administration and was an attorney in private practice
specializing in corporate finance and securities. Congressman
Cox graduated from the University of Southern California and
received his law degree and MBA from Harvard University.
Congressman Cox brings a wealth of experience to this position,
and I believe that the SEC and the securities markets will
benefit from his leadership. Congressman, I congratulate you on
your nomination and look forward to seeing you again many times
before this Committee and probably in the not too distant
future.
I would like to also welcome Commissioner Campos back to
the Committee for his second nomination hearing. He is no
stranger to this Committee. Commissioner Campos was first
confirmed as the SEC Commissioner in the summer of 2002. During
his tenure at the SEC, Commissioner Campos has led efforts to
promote convergence with respect to international securities
regulations and has worked to streamline the SEC's
administrative proceedings process. Prior to joining the
Commission, Commissioner Campos was one of the two principal
owners of El Dorado Communications and served as an executive
with the radio broadcasting company. Commissioner Campos began
his career as an officer in the U.S. Air Force and has also
spent significant time as a Federal prosecutor and as a lawyer
in private practice, focusing on corporate law and litigation.
Commissioner Campos graduated from the Air Force Academy and
earned his law degree from Harvard Law School and his MBA from
UCLA.
I also welcome Ms. Nazareth back to the Committee. She has
testified before this Committee on other occasions regarding
issues pending before the SEC. Since 1999, she has served as
the Director of the Division of Market Regulation at the
Securities and Exchange Commission. She has previously served
as Senior Counsel to Chairman Arthur Levitt and Interim
Director of the Division of Investment Management. Prior to
joining the SEC, she was a Managing Director of Salomon Smith
Barney and a Senior Vice President of Lehman Brothers, Inc. She
graduated from Brown University and earned her law degree from
Columbia University.
I thank each of the nominees for their willingness to
serve, and I look forward to your testimony here today.
Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Well, thank you, Mr. Chairman. I know we
are going to confront a difficult situation this morning. I
think there are votes scheduled.
Chairman Shelby. Five, five votes.
Senator Sarbanes. Five votes.
Chairman Shelby. Five back to back votes. We are going to
give them a break.
Senator Sarbanes. We will have to work around that.
I want to welcome the nominees before us, Congressman Cox,
Commissioner Campos and Ms. Nazareth, and I want to express my
appreciation to the Chairman for moving promptly to schedule
this hearing once all of the nominees had been sent here to the
Senate for us to consider for their confirmation.
Mr. Chairman, I am going to shorten my statement
considerably, but I do want to make some comments about the
work of the Commission and its importance to our capital
markets and the millions of Americans who rely on the integrity
of those markets. The Commission itself has defined its primary
mission in succinct and forthright terms: ``To protect
investors and maintain the integrity of the securities
markets.'' And the Commission has noted that, ``As more and
more first-time investors turn to the markets to help secure
their future, pay for homes, and send their children to
college, these goals are more compelling than ever.''
Now, more than one out of every two U.S. households is
invested directly or indirectly in the markets. The U.S.
markets play a critical role in the world capital markets. And
it is the integrity, the transparency and the efficiency of our
capital markets that have made them the envy of the world.
In order to carry out its mission, the SEC must provide
vigorous oversight of the markets, and vigorous enforcement of
our securities laws. The Chairman, of course, is in a sense
functions as the chief administrative officer of a rather large
organization. We are going to put that Harvard Business School
education of Congressman Cox's to the test here, and the
Commission has a strategic plan which adheres to the highest
standards of integrity, fairness, accountability, teamwork, and
excellence.
We have passed through a difficult period recently in the
securities markets. The Wall Street Journal said, ``The scope
and scale of the corporate transgressions of the late 1990's
exceeded anything the U.S. has witnessed since the years
preceding the Great Depression.'' These have involved problems
of accounting, disclosure, governance, Enron, WorldCom, and
other major public companies; the issuance by 10 major
financial institutions of misleading and fraudulent stock
analysts' reports, which led to the Global Settlement; systemic
problems of the functioning of the stock exchanges, which has
led to strong sanctions and reform of exchange regulation; and
mutual fund scandals involving late trading and market timing
which has also led to extensive regulatory reform and
enforcement actions.
I think the SEC has emerged stronger from this period with
a stronger regulatory framework, a reinvigorated enforcement
function, and with the expanded budget resources with which it
can carry out its responsibilities. In addition, the SEC has
introduced risk-assessment procedures, to anticipate problems
before they cause harm, and it has taken steps to raise the
morale of the staff and reduce the staff turnover that had
seriously undermined the Commission's ability to carry out its
responsibilities.
My own view is that at this time, we need effective
leadership at the Commission to maintain the momentum which
Chairman Donaldson and his fellow Commissioners established.
The challenges ahead are many. The effective implementation and
oversight Commission actions, registration of hedge fund
advisers, the administration of Regulation NMS and FASB is
moving on the expensing of stock options. There are other
initiatives pending at the Commission: Proposals to give
shareholders limited access to the proxy solicitation process,
the question of the credit rating agencies, completion of
mutual fund reform and evaluation of the self-regulatory
organizations.
Mr. Chairman, I look forward to this hearing. We have a
number of questions to put to the nominees. The Commission will
be facing a formidable agenda and the resolution of that agenda
in a positive, constructive, and satisfactory manner is
fundamental to the effective workings of our economy and the
protection of our investor citizens.
Thank you very much.
Chairman Shelby. Senator Dole.
STATEMENT OF SENATOR ELIZABETH DOLE
Senator Dole. Yes, thank you, Chairman Shelby.
Today, the Committee has the privilege of considering an
outstanding nominee to be the next Chairman of the Securities
and Exchange Commission. Congressman Chris Cox has a stellar
reputation as a leader on many important issues for consumers
and the securities industry, and he has a long and impressive
list of accomplishments from his nearly two decades in the
Congress. He is known for his intellect. He is known to be
innovative, diligent, and extremely hardworking--qualities that
will certainly serve him well as head of the SEC.
I am also certain that one of Congressman Cox's greatest
accomplishments was convincing Rebecca to marry him, and I want
to take this opportunity to recognize her. You see, Rebecca Cox
played an invaluable role, for which I am deeply appreciative,
at the Department of Transportation when I served as Secretary
there; whether it was the new National Airport or the
renovation of Union Station, the sale of Conrail or safety
belts and air bags, Rebecca was right there working so very
hard. Chris is indeed blessed with such an intelligent,
talented, and devoted wife. And welcome to Charles, Kathryn,
and Kevin. They have many reasons to be very proud of their
parents, and I continue to wish them all my very best.
We are all aware of the considerable challenges that await
the next Chairman of the SEC. In light of the single-vote
margins on a number of high profile, controversial decisions
recently made by the Commission, Congressman Cox is uniquely
qualified for this position. He has a strong reputation as a
consensus builder, even on the most sensitive of issues. The
responsibilities of the next SEC Chairman will be great, and I
am certain that Chris Cox is the right man for the job.
I also want to extend a warm welcome to Commissioner Campos
and Ms. Nazareth. It is my hope that this Committee will
consider these nominations with due speed and be ready to
approve them this week.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Dodd.
STATEMENT OF SENATOR CHRISTOPHER J. DODD
Senator Dodd. Well, Mr. Chairman, I will ask unanimous
consent that some opening comments be included in the record.
Chairman Shelby. Without objection, so ordered.
Senator Dodd. I would just like to underscore the comments
made by Senator Sarbanes. We have three of our colleagues here
to introduce these witnesses, and I know the clock is going to
be running, so I will move along and make sure they get an
opportunity to make their presentations before the votes start.
I just would note, there is a new SEC building going up,
Mr. Chairman, as you know, only a few blocks from here. In
fact, I gather the staff is moving in as we speak. And I guess
the symbolism here about getting closer to this epicenter of
politics is something that in my meeting with Chris Cox I
cautioned about.
I think it is so important that the Commissioners of the
SEC not become embroiled in the day-to-day machinations of
Washington politics. I suppose the symbolism of Union Station,
where literally millions of people every day transgress here
back and forth from the transit systems there, those average
investors that Senator Sarbanes talked about is the critical
issue.
And I also would not want to let pass the moment to say
thank you to Bill Donaldson and to Harvey Goldschmid for the
tremendous job they have done as Commissioners. We welcome all
three of you and look forward to working with you.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Allard.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Thank you, Mr. Chairman, and I want to
express my appreciation for your holding this hearing so that
we can hear from the three nominees to the Securities and
Exchange Commission, particularly Congressman Cox, Mr. Campos,
and Ms. Nazareth.
I am not that familiar with Mr. Campos and Ms. Nazareth,
but I have had the opportunity to serve with Congressman Cox in
the House and more than just served with him, I actually worked
with him on a number of issues. I would certainly second many
of the comments that were made by my colleague from North
Carolina and I am glad to see him before this Committee. I am
especially pleased that he has been selected to serve as
Chairman. I am very hopeful that things will go well under his
leadership at the SEC.
He brings capability and a lot of leadership qualities that
are needed during these trying times, and I think that his 17
years' experience in the House of Representatives will serve
him very well.
I feel that the prime role of the Commission is to help
facilitate a free market system that promotes security and
safety in our Nation's financial markets. Recent scandals and
possible future terrorist attacks on our financial industry are
attempts to break down America's faith and trust in investing
in our future. At a time when retirement security is a major
focus, the SEC should assist in instilling confidence in our
financial investment decisions as best it can.
So, I look forward to hearing your ideas, and thank you,
Mr. Chairman.
Chairman Shelby. Senator Carper, do you have an opening
statement?
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Not a statement, just to say to all of our
guests, welcome here this morning. I am withholding my opinion
on Mr. Cox until I have heard from Senator Boxer and Senator
Feinstein. We will see what they have to say. And I will decide
where to go with my old colleague, Mr. Cox.
Mr. Campos, we appreciate your service, and Ms. Nazareth,
if you are half as good as I have heard, you are a real
addition to the SEC.
Thank you very much.
Chairman Shelby. Senator Enzi.
STATEMENT OF SENATOR MICHAEL B. ENZI
Senator Enzi. Mr. Chairman, I want to thank you for holding
this hearing on these nominees and look to their speedy
confirmation.
I would particularly comment that I have been working with
Mr. Cox since I got to the Congress. He was the foremost expert
on export administration, and I got to work with him on that
for years, but my greatest adventures have been working on some
small business issues with him, and he has a fond heart for
small business, and I think that he is actually the right
person at the right time for the right job, and I look forward
to his confirmation. I ask for my full statement to be included
in the record.
Chairman Shelby. Thank you. Without objection, it will be
ordered.
Senator Stevens, we will call on you; then, Senator
Feinstein, Senator Boxer, and then Senator Schumer, our
colleague, for any introductions you want.
STATEMENT OF TED STEVENS
A U.S. SENATOR FROM THE STATE OF ALASKA
Senator Stevens. Mr. Chairman and Members of the Committee,
in view of the upcoming vote, I think I would just ask you to
put my statement in the record.
Chairman Shelby. Without objection, it is so ordered.
Senator Stevens. I will say that Senator Dole has preceded
me and made the comments I would have made about Rebecca
Gernhardt Cox and her children. I am sure that the Senators
here will remember that she was part of the Senate staff and
really was a very distinguished member of my office when I was
the Whip for many years.
But Senator Dodd, you will remember that you cosponsored
with Chris Cox the 1995 legislation to protect investors from
fraudulent lawsuits. I think that Congressman Cox, as a
graduate of Harvard Law School, a former Editor of the Harvard
Law Review, is, as many of you said, the right man for the
right job at the right time. I am delighted to have the
opportunity to be here to tell you that I urge you to bring out
his name as quickly as possible so we can confirm him and the
rest of these other members, and they can get about their
business.
Thank you very much.
Chairman Shelby. Thank you, Senator Stevens.
Senator Feinstein.
STATEMENT OF DIANNE FEINSTEIN
A U.S. SENATOR FROM THE STATE OF CALIFORNIA
Senator Feinstein. Thanks very much, Mr. Chairman, Ranking
Member Sarbanes, and Members of the Committee.
In response to Senator Carper's comment, I would like to
make this comment in return: I think the fact that both Senator
Boxer and I, two Democrats from Chris Cox's home State, are
here today is in itself testimony to the credentials that he
brings to this office.
I think I will not speak on behalf of my colleague. She
will speak for herself. But I think both of us believe that the
Securities and Exchange Commission is an extraordinary
Commission and that Representative Cox has the qualifications
and the experience necessary to manage regulation and
enforcement and to improve investor confidence in the Nation's
securities markets. One of the things that I did not know about
him was the fact that he is really academically very smart.
[Laughter.]
Yes, right. Not only, of course, does he come from
California, as was pointed out, but he also attended the
University of Southern California. What was not pointed out was
that he graduated magna cum laude in just 3 years with a
bachelor's degree in political science and English. He went on
to Harvard Business School and Harvard Law School and graduated
with honors in 1977.
At Harvard, as was said, he was Editor of the Harvard Law
Review, and he followed that by clerking for the Hon. Herbert
Choi, our Nation's first Asian-American Federal judge. He then
began his career as a private sector securities attorney at a
California-based international law firm, well-known, Latham and
Watkins. After 2 years, he was invited to become a lecturer at
Harvard Business School on business administration.
In 1986, he entered public service as a Senior Associate
Counsel to President Reagan. Against a whole host of
competitors, he then won the seat of California's 48th District
in Orange County, a district he has well represented for 17
years. And he recently became the first Chairman of the House
Committee on Homeland Security.
Now in the wake of corporate major accounting scandals, his
nomination comes at an important time for the Securities and
Exchange Commission. More recently, through the Sarbanes-Oxley
Act and other enforcement actions, the Securities and Exchange
Commission has strengthened investor protections and restored
faith in corporate America by tightening regulation and
increasing enforcement. The next Chairman will have the
difficult task of managing these recent changes in the industry
that will require even more scrutiny.
In closing, let me say that Representative Cox accomplished
a major background in academia, in business, in law as well as
his experience working in Government. This well equips him to
provide the leadership that is necessary for these new days in
the SEC. I want to just conclude by quoting Representative
Cox's statement during the Sarbanes-Oxley hearings. ``Fraud and
unfair dealing are the enemies of the free enterprise system.
We have tough laws on the books to deal with all matters of
crime, including corporate crime. But just as bacteria mutate
to avoid the latest antibiotics, those who cook the books are
constantly changing the recipes, and we have to keep our laws
and our remedies up-to-date.'' We look to him to do just that.
Thank you very much, Mr. Chairman
Chairman Shelby. Senator Boxer.
STATEMENT OF BARBARA BOXER
A U.S. SENATOR FROM THE STATE OF CALIFORNIA
Senator Boxer. Thank you, and it is a pleasure to be here
with my colleague, Senator Feinstein, and with my colleague,
Chris Cox and the other Members, and I see Chuck Schumer has
joined us.
Because of the press of the clock, I would ask unanimous
consent that my full statement be placed in the record.
Chairman Shelby. Without objection, so ordered.
Senator Boxer. And what I will try to do is just say what
has not been said before, so we can just get all the facts on
the table.
I agree that Chris Cox has represented his district with
great distinction, and I was fortunate enough to work with
Chris while I was in the House. I had the privilege of chairing
the Government Operations Subcommittee on Government Activities
and Transportation at the same time that Chris was Ranking
Member, and as you know, Senators Shelby and Sarbanes, the
importance of these relationships cannot be overstated.
And we did address very difficult problems. We held a lot
of oversight hearings, including one on the bombing of Pan Am
Flight 103. And throughout that particular session of Congress,
we maintained a very strong and collegial relationship. We
worked very well together, and we found the common ground. We
did not agree on everything, but we found the common ground,
and we moved forward.
And in the years since, I have gone on to the Senate, I
have continued to work with Chris on a number of issues. For
example, we fought for the interests of children when we co-
authored the Child Support Enforcement Act, and we have been
working together with Senator Feinstein and others to assure a
more equitable distribution of homeland security grants--an
issue that I am sure we all have different views depending on
the size of our States.
Now, I have found Congressman Cox easy to work with, a
pleasure to work with. And, you know, we do not agree on some
very basic issues, and we are very open about that. But we have
in the past definitely set aside those differences to make
progress for the people. And now, the rest of my statement will
be very brief, and I want to address it to you and my
Democratic colleagues.
As you review this important nomination to the post of
Chairman of the SEC, I ask that you keep in mind that this
position impacts the financial security and well-being of every
person in the country. Chris and I have talked about this. More
Americans invest in the stock market either directly or through
vehicles like their pension or retirement funds than ever
before.
In a former life, many years ago, I was a stock broker. And
I knew what happened when the stock market crashed after the
assassination of JFK all those many years ago. I will never
forget the looks on the faces of the clients that I was trying
to help at that time. They count on us. They will count on
Chris. So, I think what is very important in the wake of Enron,
WorldCom, and the Adelphia scandals is that we make sure that
Congressman Cox takes his considerable talents, and he puts
them to work on behalf of the people of this country--not the
special interests but the people of this country.
Now, he and I have talked about that, and he has told me
with great, I think, emotion that he will, in fact, do that.
And since Senator Feinstein had a really important quote, I
will also quote Chris when he spoke in favor of the Sarbanes-
Oxley Act: ``Fraud and unfair dealings are the enemies of the
free enterprise system. And as we see from the turmoil in our
markets, our country is paying a very high price because those
in power have broken faith with their employees and their
investors.''
So, I am looking forward to learning from today's hearings
how Congressman Cox, as head of the SEC, would achieve three
goals by using his considerable talents, and keeping that, I
think, strong statement right in the front of his mind that he
is, in this position along with our other good colleagues,
going to protect the interests of the people of this country.
Thank you very much.
Chairman Shelby. Thank you, Senator Boxer.
Senator Schumer.
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you, Mr. Chairman. It is a pleasure
to be here sitting before my colleagues on this side of the
table, and I want to welcome----
Chairman Shelby. We ask you questions now.
[Laughter.]
Senator Schumer. You know, when you sit down here, you see
how high up you guys are, and you are down here, and it is a
different experience altogether. I think I like it better on
that side.
But in any case, I want to thank you for holding this
hearing, and by the way, Mr. Chairman, the bipartisan group we
have here is an example of how you and Senator Sarbanes have
always attempted to run this Committee, and I think it is one
of the reasons we have had a great record of success as you
have been Chairman and as well when Senator Sarbanes was
Chairman.
I am here to introduce, of course, Annette Nazareth, but I
wanted to say a few words to welcome first Chris Cox to the
hearing. I used to joke that Chairman Donaldson visited us so
often that he became an honorary Member of the Committee. My
guess is you will be in the same position, and we look forward
to your many visits here. And let me say, frankly, that I am in
support of your nomination. And the reason is this. I have
always described myself as both pro-business and pro-
regulation, and I do not think the two conflict, as the
statements that Senator Feinstein and Senator Boxer mentioned.
Strong, good businesses and particularly financial
businesses have to be sure that there is good regulation so the
public trusts them. And I do not think there is a conflict.
Everyone knew when you were nominated that you were pro-
business, but I think an examination of your record and
certainly our discussions indicate that you are pro-regulation
as well, and I was heartened to see that you had stated
publicly what you had told me privately, that there is not
going to be a big rollback of all of the things that have been
done; the Sarbanes-Oxley bill, which has done so much good, and
many of the other things that Chairman Donaldson did. So, I
really look forward to your being Chairman of the Commission,
and I think we are going to have a very good time at that.
I want to thank Commissioner Campos for being here. Your
record speaks for yourself, sir. You have done a great job on
the Commission, and that is why I think your renomination is
going to go through without a hitch.
And it is my job here to introduce Annette Nazareth to my
colleagues here on the Senate Banking Committee. Before
introducing her, I would like to introduce and welcome her
husband, Roger Ferguson, who has also sat on this side of this
table. Roger Ferguson is a great public servant. He is now the
Vice Chairman of the Federal Reserve Board, and I know, Roger,
you are proud to be here to support your wife, another amazing
public servant in the financial world. Thank you for being
here, and I want to welcome your daughter, Caroline. The last
time I saw Caroline, we just bumped into each other in
Yellowstone Park, it was. We were on separate family vacations
and just happened to see each other, and I know your son is
away, but he wanted to be here today, too.
Mr. Chairman, I take great pride in submitting the name of
Annette Nazareth to be a nominee for the Securities and
Exchange Commission. I have had the pleasure of working closely
with Annette in her role as Director of Market Regulation for
the past several years, and if I was allowed only three words
to describe her today, I would say she is thoughtful,
pragmatic, and balanced. She understands the need for business
innovation with a strong regulatory framework to protect U.S.
investors.
In short, she is probably much like the description I gave
to Chris Cox. She is both pro-business and pro-regulation. They
might have different emphases, but the two will work well
together.
Annette Nazareth led the Market Regulation Division since
1999, supervising and regulating the U.S. securities market by
establishing priorities and guiding the resolution of a number
of securities market and broker-dealer issues, including equity
market structure issues, internalization and fragmentation
concerns, market data issues, intermarket links, and options
market issues.
And let me just say, as we know on this Committee, with new
technology, these were very, very difficult times. To keep our
markets preeminent--as a New Yorker, I obviously care about
that--bring in the new technology but keep the openness and
depth and liquidity of our markets that we have come to prize.
And the strong and yet subtle hand of Annette Nazareth was
behind all of this, and I think one of the reasons that our
markets can anticipate the 21st century with great success, and
I think no one doubts that they will continue to lead the
world, is because of the work that she did while working for
the Commission.
And now, as a Commissioner, I think she can do even more.
She is known on Wall Street and in Washington as being open-
minded and fair. She is always willing to discuss issues in an
in-depth manner, and frankly, we have had a few differences,
and she has done as well with those as with the ones where we
have agreed.
I think her diverse background will be invaluable to the
Commission, and I would ask unanimous consent my entire
statement be read into the record.
Chairman Shelby. Without objection, your statement will be
made part of the record
Senator Schumer. Oh, one other thing, Mr. Chairman. Our
colleague, Jack Reed, had wished to be here. Annette was raised
in Rhode Island, attended Brown, and then had her career in New
York, and he could not be here today but wanted to----
Chairman Shelby. Any statement he would have will be made
part of the record.
Senator Schumer. Thanks.
Chairman Shelby. Senator Bunning, do you have any comments?
STATEMENT OF SENATOR JIM BUNNING
Senator Bunning. I just have an opening statement, and I
will give it to the record.
Chairman Shelby. Without objection, so ordered.
Senator Stabenow.
STATEMENT OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you, Mr. Chairman. I would submit
an opening statement for the record and welcome the nominees.
Chairman Shelby. Without objection, it is so ordered.
Congressman Cox, do you have any family? They have been
introduced. Do you want to introduce them again before we call
on you? And then, I will call on you? And then, we will call on
the others, and then, we will start. I know Rebecca is here.
Representative Cox. Mr. Chairman, I am very pleased that I
am joined, and I appreciate the Committee's willingness to let
my family be here, by my wife, Rebecca. Seated immediately to
her right is my son, Kevin, who is 6 years old; my son,
Charles, who is 12; and my daughter Katie, who is 11. They are
a source of continuing support, inspiration, encouragement, and
advice.
[Laughter.]
Chairman Shelby. Mr. Campos, Commissioner Campos, do you
have any family or any comments you want to make about somebody
here?
Mr. Campos. Yes, I do, Senator. Thank you very much for
offering that. I would like to introduce my wife and life
partner, Minnie. She is a practicing physician and my son,
Daniel, who is a sophomore at a local school. And that is all I
have with me today.
[Laughter.]
There are a lot more in Texas and California, but they
could not be here.
Chairman Shelby. Ms. Nazareth, do you want to acknowledge
your husband again? Go ahead.
Ms. Nazareth. I certainly always like to acknowledge my
husband.
Chairman Shelby. He is no stranger to this Committee.
Ms. Nazareth. I know that, but I will take the opportunity
to acknowledge my husband, Roger Ferguson, who is also my life
partner and my inspiration as a public servant and my daughter,
Caroline Ferguson, who is 10, and like, I guess, the Cox
children, is a very honest and wise adviser. And our son, Roger
III, is unable to be here today. He is at camp, but he is 14
years old.
Chairman Shelby. Would all three of you stand and raise
your right hand and be sworn?
[Witnesses sworn.]
Chairman Shelby. All of your written testimony will be made
part of the record. Our votes have been delayed a few minutes,
so we will start with you, Congressman Cox, any comments you
want to make with regard to your nomination.
STATEMENT OF CHRISTOPHER COX
A U.S. REPRESENTATIVE IN CONGRESS
FROM THE STATE OF CALIFORNIA AND
CHAIRMAN-DESIGNATE
U.S. SECURITIES AND EXCHANGE COMMISSION
Representative Cox. Mr. Chairman, Senator Sarbanes, and
Members of the Committee, it is a pleasure to appear before you
today. I am deeply honored that President Bush has nominated me
for the very important task of ensuring the integrity and
efficiency of the Nation's capital markets. I want particularly
to thank Senator Boxer, Senator Feinstein, and Senator Stevens
for their very generous comments and introductions. It has been
a pleasure to have had the opportunity to work with them over a
period of very many years. And likewise, thank you, Mr.
Chairman, Senator Sarbanes, and each of the Members of this
Committee, for the time and the advice that you have given me
during the course of this confirmation process.
It is a special honor to be nominated to follow in the
footsteps of Bill Donaldson. His advice and guidance over the
past 2 months have been invaluable as well. He has served the
Securities and Exchange Commission, and our country, with honor
and distinction. Today, I am very pleased to be sharing this
hearing with Commissioner Roel Campos and Commissioner-
designate Annette Nazareth, both of whom have played such
important and distinguished roles at the Commission.
With your permission, Mr. Chairman, I would like to just
briefly describe some of the priorities that I would address as
Chairman if confirmed by this Committee.
I want to begin by noting that this Congress--and in
particular this Committee--plays the defining role in charting
the course and the overall mission of the Securities and
Exchange Commission. As you noted, Mr. Chairman, through my
years of service on the Energy and Commerce Committee and the
Financial Services Committee, I have had the privilege of
working with Members of this Committee and the staff of this
Committee to give the SEC the tools that it needs to ensure the
integrity of America's capital markets. Our most recent
accomplishment was the historic Sarbanes-Oxley Act, which was
absolutely necessary to bolster confidence in the integrity of
our markets. Sarbanes-Oxley is now a pillar of our securities
regulatory charter.
Mr. Chairman, this is only a brief statement. But I think
it is important, in these opening comments, to describe some of
the priorities that, if I am confirmed, would be the focus of
my service as Chairman of the Securities and Exchange
Commission.
First, my top priority will be the vigorous enforcement of
our securities laws. The Commission must be vigilant on behalf
of investors, and stalwart against fraud and unfair dealing.
This Committee and the Congress have given the Commission the
legal tools that it needs to protect investors and the health
of our financial markets. If confirmed, I will carry out that
mandate, through the aggressive use of the tools that Congress
has provided.
Second, I will cultivate respect for the rule of law in our
capital markets. There is no better means to this end than
continuity, clarity, and consistency in the Commission's
rulemaking and enforcement.
Third, I will strongly support the Commission's ongoing
work to ensure that the rules governing our financial markets
keep pace with advancing technology. The rapid globalization of
securities markets, and the amazing development of the Internet
as a medium for commerce and information have occurred at the
same time that the number of Americans who are directly
invested in securities has reached record levels. These
developments offer both investors and issuers extraordinary new
opportunities, but they also bring unprecedented risks. As a
result, the work of the SEC is now more important than ever.
Fourth and finally, I will work to ensure the continuity of
critical operations in the financial sector in the event of
another terrorist attack. As the Chairman of the Homeland
Security Committee, I know how much work has already been done
in this area, but as the tragic events of this July in London
have shown, the threat of terrorism has not abated, and the
September 11 attacks on Wall Street have put us on fair notice.
If I am confirmed as Chairman, the SEC will continue to
play a key role in the President's Working Group on Financial
Markets, and the SEC will continue to work closely with the
Department of the Treasury, the Justice Department, the
intelligence community, State and local law enforcement, and
our partners around the world to see to it that the American
men and women whose savings and jobs depend on the security of
our capital markets are as safe and as protected as they can
be.
Chairman Shelby, Senator Sarbanes, and Members, I am
grateful for the opportunity to serve as Chairman of what
Senator Sarbanes has rightly called the crown jewel of Federal
regulatory agencies. From my early days as a securities
practitioner to my most recent years in Congress, I have been
consistently impressed by the high caliber of professionals at
the Securities and Exchange Commission. For 70 years, the SEC
has set the standard of regulatory excellence for the Federal
Government and for governments around the world. It will be an
honor, if confirmed, to join this exceptional team.
In closing, may I say that it has been an equally profound
honor to work for nearly two decades with each of you as
colleagues in this Congress, and if you confirm me, it will, of
course, mark the end of that extraordinary experience. But I
welcome the opportunity to continue to work with each of you
for the protection of investors and the efficiency of our
financial markets.
Mr. Chairman, I would be happy to answer any questions you
may have.
Chairman Shelby. Thank you.
Mr. Campos.
STATEMENT OF ROEL C. CAMPOS
MEMBER-DESIGNATE
U.S. SECURITIES AND EXCHANGE COMMISSION
Mr. Campos. Thank you very much, Mr. Chairman.
I again am very appreciative of being here for the second
time, and I greatly value and appreciate the opportunity I have
had to work with this particular Committee and various Members
at various times regarding the issues with securities
regulation over the last 3 years.
Mr. Chairman, almost exactly 3 years ago, I had the
privilege of coming before this Committee for confirmation
hearings as today to be a member of the Securities and Exchange
Commission. At that time, I shared with this Committee that my
life's journey had begun in a humble household of Mexican-
American parents in the southernmost part of Texas. I explained
that my father served in World War II, was wounded in action in
Germany, and worked many jobs during his working life to
support my mother and five children.
Three years ago, my father, a retiree, and millions of
other Americans were dismayed and outraged as they learned of
one corporate fraud after another. These words have become
household names: Enron, Adelphia, Tyco, and WorldCom. In
response to the concerns of investors and retirees like my
father, who wondered whether their investments were safe and
whether they should have confidence in the American markets,
Congress guided by this Committee led by then-Chairman
Sarbanes, did the Nation a historic service by passing the
Sarbanes-Oxley Act of 2002.
In the 3 years of my service, the Commission has fulfilled
Congress' mandate, met the deadlines, and implemented, through
often complicated rulemakings, the requirements of Sarbanes-
Oxley. Unfortunately, in those 3 years, many other threats to
investor confidence and the stability of the markets have
erupted. Securities analysts were discovered to be recommending
companies that they believed were ``dogs,'' in their own words,
to promote banking business. A disturbing number of mutual fund
executives were found to be placing self interest above
fiduciary duties and were found to have allowed market timing
and late trading privileges to large customers at the expense
of fund investors. Significant trading violations were found to
have occurred on the floors of our major exchanges. Full and
accurate financial disclosures by listed companies continued to
be a problem, and many schemes were revealed that were
inflating financial numbers.
With these challenges, the SEC found itself in the busiest
and most crucial time since its creation, when Congress first
dealt with massive fraud and flight from the markets following
the Great Depression. In the 3 years of my service, the Agency
has conducted over 200 rulemakings, interpretations, proposals,
and the like. In that time frame, the Agency has brought nearly
2,000 enforcement proceedings. In fiscal year 2003, over $1.1
billion and in fiscal year 2004 over $1.21 billion in
disgorgement and penalties were assessed to help restore
investor losses from securities fraud.
I continue to believe that in America, the vast majority of
businesspersons, broker-dealers, investment advisers, and
professionals are honest and scrupulous. However, my days as a
Federal prosecutor and businessman teach me that a significant
few will succumb to temptation and thereby cheat. It is true
that no amount of regulation will ever totally prevent fraud.
However, wise regulation and proper sanctions will deter and
reduce the odds of success and reduce the damage that occurs
before the discovery of fraud in the marketplace. The challenge
of all regulation is to protect fully investors and their
capital without unduly burdening the conduct of business. The
sad fact is that a few cheaters can cause capital to stampede
to the sidelines, cause huge reputation damage to an industry,
and diminish the liquidity of our markets.
During the past 3 years, I believe that the SEC has
contributed mightily with Congress in helping restore much of
the lost confidence of investors in our markets. There is still
a long way to go. Most of the rules involving Sarbanes-Oxley
have been in effect less than 2 years, and their positive
impact is just beginning to be evident. While nothing in life
is perfect, I believe that the SEC has implemented Sarbanes-
Oxley and other rules in a very moderate and practical matter,
allowing honest business and the regulated financial community
to flourish and has protected investors. I believe that an
important key to the future is that the Agency continue to
listen to industry and, where appropriate, smooth out the
``rough edges'' of regulation. However, wise and fundamental
principles, such as those in Sarbanes-Oxley and those that seek
greater transparency and the elimination of conflicts must
never be compromised.
Recently, I have supported and been privileged to be active
in the Agency's effort to understand and apply industry
suggestions in the areas of hedge fund adviser registration,
the application of Section 404, involving the attestation of
internal controls of public companies, and the constant
improvement of our examination process. The SEC's enforcement
program must continue to be vigorous and act in real time to
protect investors' capital and minimize losses. Where egregious
violations of securities laws occur, strong sanctions must be
imposed to create deterrence and provide appropriate
punishment. On the other hand, where possible, the Agency must
continue to reduce and eliminate antiquated rules, such as with
the Securities Act Reform, which will simplify and greatly
reduce the cost of raising capital in America.
If the Senate grants me this huge honor of confirming me a
second time as a Member of this Commission, I vow to continue
to bring all of my energies to work diligently with my fellow
Commissioners and Chairman to continue to accomplish the noble
mission that Congress has given this Agency: to protect
investors, as Senator Sarbanes said, and to maintain the
integrity of the markets.
Thank you for your kind attention.
Chairman Shelby. Thank you.
Ms. Nazareth.
STATEMENT OF ANNETTE L. NAZARETH
MEMBER-DESIGNATE
U.S. SECURITIES AND EXCHANGE COMMISSION
Ms. Nazareth. Thank you, Chairman Shelby, Ranking Member
Sarbanes, and Members of the Committee.
I am deeply honored to appear before this Committee today,
and I am deeply grateful to President Bush for nominating me to
serve on the Securities and Exchange Commission.
I am a passionate believer in the United States capital
markets and the benefits to our Nation and its citizens that
come from a well functioning, appropriately regulated financial
system.
I have spent all of my professional life working in, for,
and with the financial services sector. My career has been
primarily based in the securities industry, where for 12 years,
I worked in various investment banks and commercial bank
affiliates. I have hands on experience helping businesses
navigate the legal and regulatory requirements that industry
faces. I have also gained an appreciation of the issues and
challenges facing the securities markets and those who
participate in them, whether they are brokerage firms,
professional traders, or retail investors. I believe that this
first-hand experience helps me identify sensible and pragmatic
selections to issues. I am keenly aware of the cost of
regulation and the importance of balancing these costs with the
benefits that regulation seeks to achieve. Most recently, I
have served as Director of the Division of Market Regulation at
the SEC, and I have had the opportunity to work closely with
Members of this Committee and the House Financial Services
Committee on a multitude of securities related issues. I have
also represented the Commission as a member of the Financial
Stability Forum, which is comprised of central banks, finance
ministry officials, and other regulatory authorities. The
Financial Stability Forum has the mandate to assess
vulnerabilities affecting the global financial system and
identify actions to address those vulnerabilities.
Finally, I must share with you the reverence that I have
for the Commission and its Chairman. As William O. Douglas so
aptly put it, we are the investors' advocate. In the United
States, we have the deepest and most liquid securities markets
in the world. We also have the highest level of retail investor
participation in the world. We are indeed an ownership society,
and this is due in no small part to the confidence that
investors rightly place in our markets. Integrity and
transparency are the hallmarks of our financial system. I
believe that working together in a thoughtful manner, we can
continue to maintain this preeminence and meet new challenges.
I look forward to working with Chairman Cox, and I would hope
to help forge consensus on many of the issues that the
Commission will face. I would be honored if you would permit me
to be a Commissioner of the Securities and Exchange Commission.
Thank you.
Chairman Shelby. Thank you.
I will ask each one of you this question, and I will ask
you to respond to this question. Some of us on the Committee
remain troubled by the recent trend of split votes at the SEC.
The SEC's quick reconsideration of the independent chairman
requirement for mutual funds following the recent DC Circuit
ruling adds additional hesitation. I think some Members of the
Committee are concerned that the lack of consensus on
fundamental policy changes to some extent perhaps undermines
the SEC's credibility and established an unfortunate precedent.
Are any of you troubled by the lack of consensus on major
regulation here, and what does this mean for the SEC going
forward. I know you cannot always agree on everything; that is
common sense, but Commissioner Cox?
Representative Cox. Thank you very much, Mr. Chairman.
Let me begin by noting that as a Chairman in the House of
Representatives--I have been given the gavel three times--and
in each case, all of the legislation and all of the official
reports produced by the Committees that I have chaired have
been unanimous and bipartisan.
I have been a Member of a number of Committees in Congress,
and I know that unanimity and bipartisanship is not always
possible, because people genuinely disagree. By statute, as you
know, no more than three Members of the Securities and Exchange
Commission can be of one political party. So by design,
Congress has ensured that there be different points of view
represented on the Commission.
I will undertake, Mr. Chairman, if you confirm me as
Chairman of the Securities and Exchange Commission, to do my
level best to seek the common ground, build bipartisanship and,
in fact, strip partisanship of any kind from all of the
deliberations and decisions of the Securities and Exchange
Commission, because I agree with the premise of your question
that wherever possible, unanimity of purpose, of rulemaking,
speaking with one voice strengthens the Commission and
strengthens its role in the capital markets.
Chairman Shelby. Commissioner Campos, of course, you have
been on the Commission.
Mr. Campos. I have been part of those split decisions.
Chairman Shelby. Sure.
Mr. Campos. I do believe, as Congressman Cox has indicated,
that it is desirable to try to reach consensus in all of the
work that is attendant to that, all of the background work and
discussions and understanding the views of the different
Commissioners and the staff should be taken into account.
However, in life, I think we all know, difficult decisions
and honest brokers and honest and reasonable minds will differ,
and I think that with the numbers of tough issues that the
Commission has had to deal with, it is not terribly surprising
that there have been split decisions.
And I, for one, do not believe it takes away from the
credibility of the Commission so long as the Commission has
done its utmost to reach consensus and to get there, and I
believe that our process must continue to be very open, in
which all of our deliberations are out there for the public;
the various considerations that went into each particular
Commissioner's decision when the final vote is out there and
available.
And when that happens, I believe that the public, the
professionals, and Congress can see that the process was
appropriate and was proper, and there was nothing illegitimate
about it. After all, the Supreme Court splits 5-4 very
regularly, and no one says that their particular decisions are
illegitimate because they have a split decision.
Chairman Shelby. Ms. Nazareth.
Ms. Nazareth. I agree with much of what has been said.
Obviously, consensus is highly preferable, and I think as in
many situations, there are a number of ways to skin a cat, a
number of means to achieve the desired goals, and it should
certainly be our strong preference to find a path that we can
all agree on for the maximum number of issues.
Chairman Shelby. Congressman Cox, several months ago, the
SEC issued guidance on stock option expensing and provided
issuers with additional time to comply with the new FASB rule.
I support FASB's rule and the SEC's efforts to provide issuers
with technical guidance on valuation. In light of your prior
position on this issue, what assurances can you give this
Committee that you will continue to support the SEC's efforts
in this area?
Representative Cox. Mr. Chairman, both the FASB
deliberations and the SEC guidance have essentially concluded
at this point. That process is going forward. Issuers are
expected in the next fiscal year to comply with this rule. In
my view, as a result, these questions have been asked,
answered, and deliberated upon. What is most important going
forward is that we have clarity.
This has been an issue of some discussion legislatively.
That is highly unusual. In my view, the independence of FASB is
of vital importance, as is the independence of the Securities
and Exchange Commission. The interests of Congress are
different than the interests of the FASB and of the SEC, and
Congress, of course, is concerned with big picture questions of
the economy and so on.
All of those issues, to my way of thinking, have been
addressed. The process has gone forward, and if you confirm me
as Chairman of the Securities and Exchange Commission, I will
ensure that the Securities and Exchange Commission builds upon
the record already established and that the rule is implemented
as the markets expect.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman.
First of all, let me say I strongly associate myself with
the Chairman's, the question he has just asked with respect to
the issue of expensing of stock options, and I appreciate your
response, which obviously reflects, I think, an appropriate
sensitivity to the necessity of having independence in the
standardsetters. That is how FASB was established, and that is
the precedent we have tried to stick to, although on occasion,
it is difficult.
I will just tell you this story, which underscores what you
said. When the Committee did Sarbanes-Oxley, there were Members
who wanted to include in it statutorily a provision that stock
options should be expensed. I opposed that amendment not on the
substance but because it was my view that FASB had been set up
to make this decision, and therefore, it should be left to FASB
to decide.
A number of my colleagues agreed with that in opposing that
amendment. They said no, we do not want to pass this amendment.
This is a decision for FASB. Subsequently, after considerable
study, hearings, proposed rules, modified rules, and so forth,
FASB put out that the options should be expensed, which, of
course, is the treatment that is taking place in Europe, for
example, in the EU and has been advocated by many observers for
many years.
Some of these colleagues who earlier had said well, no, no,
this should be left to FASB at that point decided no, no, now,
we have to interfere with FASB's independent judgment and try
to enact legislation. Fortunately, that did not take place, but
it does underscore the question of the role of FASB and how the
SEC relates to that role.
Now, the SEC has, as it were, a supervisory role, but it
seems to me it traditionally and in my view should continue to
recognize FASB's preeminent role as the standardsetter and the
necessity of taking those standards, those very complex
accounting issues out of the political context and putting them
more into a context in which careful analysis and expert
decisionmaking takes place.
Is it fair to say you perceive the relationship the same? I
ask that, actually, of all three of the nominees. Do you see
the relationship that way?
Representative Cox. Senator Sarbanes, the answer to that
question is ``yes.'' I know that this issue is of great
importance to you, and I have had the opportunity to discuss it
previously before this hearing. I do not think that there is
any question but that the Securities and Exchange Commission's
role in supervising the FASB is designed to ensure such general
and important, ``big picture'' things as the protection of
investors, ensure the integrity of the process, and ensure that
all of the issues are taken into account.
But in terms of accounting expertise and technical
questions, the judgment of the FASB is to be respected. That is
what it is there for. I also agree with your sense that
standardsetting on accounting matters in the Congress is
unwise. The very rare occasions where bills have been
introduced have been, in my view, legislative efforts to make
sure that issues are taken into account as much as there have
been very serious efforts to actually write the standards in
the Congress, which I think would be a mistake.
Chairman Shelby. Mr. Campos.
Mr. Campos. Senator, I strongly believe in the principle of
independent standardsetters, which the FASB situation
symbolizes. The SEC has a very specific statutory role to
oversee the FASB, and we have to handle that very carefully,
where we do not take away their autonomy and their independent
judgments.
But it is important for us at times to make sure that the
process seems open and that business interests are heard but
that the independence, above all, is protected. And I think
keeping politics and political bodies away from standardsetting
is a very wise course, and that is being followed all over the
world, I might add.
Senator Sarbanes. Ms. Nazareth.
Ms. Nazareth. I agree with you very much, Senator Sarbanes.
I support the independent role of FASB, and I think it is
vitally important that we defer to their expertise on
standardsetting.
Senator Sarbanes. The same issue arises, to some extent,
with respect to the Public Company Accounting Oversight Board,
and I have been struck by the ability of the SEC and Chairman
McDonough of the PCAOB to work out that relationship in a very,
I think, positive and constructive way. And once again, I would
ask how sensitive each one of you is to the necessity of
preserving the appropriate role for the PCAOB as it carries out
the functions it has been charged with under the recently
enacted legislation.
Why do we not just go right across again real quickly?
Representative Cox. Thank you, Senator Sarbanes. The
Sarbanes-Oxley Act vests the Securities and Exchange Commission
with responsibility for oversight of the PCAOB and creates this
very important body. Its Chairman, Bill McDonough, in my view,
has done an outstanding job. I have recently met with him and
look very much forward to working with him in a collaborative
and cooperative way. I think that is the appropriate way for
the SEC and the PCAOB to work going forward.
Mr. Campos. Senator Sarbanes, I agree as well, and we have
been learning as we go but being very respectful of, I think,
the PCAOB and its leadership, certainly, under Chairman
McDonough. And I foresee that continuing, and we will discharge
our oversight but in a way that obviously allows the PCAOB to
promote its autonomy and its standardsetting.
Ms. Nazareth. In my current role, I have not had too many
dealings with the PCAOB. But I certainly have a lot of
experience dealing with self regulatory organizations, which is
really what the PCAOB is akin to for the accounting industry,
and I strongly support the role that they provide.
Chairman Shelby. Senator Carper, do you have--do you want
to briefly----
Senator Carper. Yes, I will make it real short.
Mr. Campos, when we look back at this series of 3-2 votes
that we are talking about, we are going to have a new swing
vote here, I think, in all likelihood, and this is a question I
guess as much for Mr. Cox as it is for you, maybe more for Mr.
Cox than it is for you, but how would the SEC be different if
you had been sitting in the Chairman's seat, Congressman Cox,
for the last 2 years than where you have been sitting as these
3-2 votes came along on these key issues?
Representative Cox. Senator, I do not know. It is an
excellent question. It is one I have certainly given a lot of
thought to, but Mr. Campos and Ms. Nazareth have actually been
part of these deliberations.
I have no reason to think that Chairman Donaldson and each
of the Commissioners did not give their level best to try to
achieve consensus and tackled some very, very difficult issues
that, in my view, needed tackling because of the circumstances.
So, I cannot say that things would have turned out differently
had I been at the Commission. I do not know.
What I can say is going forward, I agree with the
statements made earlier by Ms. Nazareth and Mr. Campos in
response to earlier questions. I will give my level best to
working collegially with the other Commissioners and seeking
common ground and seeking consensus if it is possible to
achieve. If consensus means that each of the Commissioners must
compromise their important principles or do something that in
their view would injure investors and investor protections in
America, then, you cannot very well expect them to change their
votes.
Senator Carper. I am going to interrupt you. I do not mean
to be rude, but we have a vote underway, and you know how that
works.
Representative Cox. Yes, I hope you understand----
Senator Carper. You have had a chance to talk with Chairman
Donaldson, and I expect you have a good relationship with him.
What are some areas where--I know there are a lot of areas
where you agree with them. What might be some areas where you
think you might disagree?
Representative Cox. I have not known Chairman Donaldson
before President Bush nominated me for this position, but I
have gotten to know him over the past 2 months. I have found
his guidance to be extraordinarily helpful, and in my view, he
has been a very standup guy in some very tough times.
I think that jumping into the breach, as he did, when
markets were lacking in confidence, when investors were reeling
from all of the news and the financial dislocation of these
huge scandals reflects great credit upon him but most
importantly, he brought great credit to not only the SEC but
also to the enterprise of building confidence in our markets.
And so, I look at his record as one of great achievement,
and I would hope to build on that and extend it if I am
confirmed as Chairman of the SEC.
Senator Carper. A question I am going to ask each of the
witnesses to answer for the record, if you would, not at this
moment, but we have all heard assertions of problems with the
so-called Section 404 rules of Sarbanes-Oxley, and as you know,
that Section is designed to require the SEC to develop and
adopt rules that require companies to report to the management
of the companies' internal controls of their financial
reporting. And some of us have heard, I am sure we have all
heard from time-to-time, that these reporting requirements are
cumbersome and that the audits are expensive, at least the
initial ones are.
I would just like to ask each of our nominees to comment on
this issue and to give us a sense of whether you think there is
a problem or not and what the steps are you think should be
taken as we go forward so that we can have robust, vibrant
markets and also strong investor protections.
Chairman Shelby. For the record.
Senator Carper. On a lighter note, ask one last question of
the Chairman, because at Southern California University, were
you a member of a fraternity?
Representative Cox. Yes, I think it is the same well-known
organization of which you, Senator, are a member.
Senator Carper. Keeping in mind that Congressman Cox----
Chairman Shelby. Is that a----
Senator Carper. No, it is not. Congressman Cox's wife and
his children are sitting behind him, if your fraternity
brothers were sitting here right before us today to speak on
your behalf, maybe we could get them to answer for the record
what they, too, would say.
[Laughter.]
So that is a question for another day.
[Laughter.]
Chairman Shelby. Thank you, Senator.
We are having our first vote. Our time is up. We have four
more consecutive votes. We are going to recess, I will say, for
about 45 or 50 minutes, give you a chance for a long coffee
break. We will be back.
We are in recess.
Senator Sarbanes. Mr. Chairman.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Since we have to respond to the vote, and
that shows you how we lead our lives here, both in the Senate
and in the House, of course, I just am curious whether Charlie,
Kathryn, and Kevin, Congressman Cox's children, are aware that
if he is the Chairman of the Commission, he can set the times
the Commission meets.
[Laughter.]
And therefore, if there is a Little League game or
something of that sort, the Chairman should be able to make
provision for it. I just want to note that for the record.
[Laughter.]
Chairman Shelby. If any of you want to take a break for
your children for the rest of the day, we are in recess.
[Recess.]
Chairman Shelby. The hearing will finally come back to
order. We are sorry. One hour became two.
Congressman Cox, several press accounts have described your
involvement in a lawsuit arising from your time when you were
in the private practice of law. I think the outcome, if I
recall, of that lawsuit was in your favor. But would you just
for the record clarify your role in that litigation, how it was
resolved, and so forth?
Representative Cox. Thank you, Senator. I appreciate the
opportunity to discuss this matter.
Chairman Shelby. Sure.
Representative Cox. Ten years ago, when I had already been
a Member of Congress for 10 years, I was added to a class
action lawsuit in California State court. The purported basis
of including me as a defendant was work that I and my law firm
did for a man who 10 years thereafter was exposed as a
criminal.
I did preliminary work on a small SEC-registered public
offering. However, that public offering was not the basis for
the criminal indictment and ultimate guilty plea and conviction
of this individual.
Chairman Shelby. You had been in the Congress 10 years, had
you not?
Representative Cox. That is correct.
Chairman Shelby. Okay.
Representative Cox. But I also did not work at the law firm
at the time that the one small limited partnership offering,
which was not the subject of the fraud indictment, took place.
And for those reasons, the Court dismissed all of the counts
against me.
Chairman Shelby. Well, basically it was terminated in your
favor; is that the bottom line?
Representative Cox. Yes, I had the entirety of the
complaint dismissed against me. And there was no settlement of
the claim, either. I prevailed in court.
Chairman Shelby. Thank you.
Commissioner Campos, I have been particularly interested in
the ongoing convergence efforts by our international
counterparts with respect to financial reporting and corporate
governance. Senator Sarbanes and I have followed this. We have
traveled and met with a lot of the regulators, as you well
know.
During your tenure at the Commission, you have played a
significant role in promoting this process. Would you take a
few minutes and highlight some of the important accomplishments
and remaining challenges relating to the convergence process?
In other words, where are we and where do we need to go? What
are the impediments?
Mr. Campos. Senator, thank you for bringing that up. It is
a very important process in that several things are in play
here. We believe at the Agency that the U.S. markets should
welcome outside capital when it seeks to come into the U.S.
markets, and so, there is an ongoing dialogue about how,
consistent with protecting investors, we can also attract and
keep foreign companies coming to the United States, enlisting
in our markets.
The convergence process is very interesting in that what I
have seen in my representation of the Agency is that other
jurisdictions in Europe and in Asia are coming toward the
principles of Sarbanes-Oxley, the principles that we use in the
United States, and the convergence is occurring at a high
level.
What this means is that over time, there will not be the
ability for companies to essentially play one jurisdiction off
the other and seek the lowest denominator of regulation, which
is not a good thing. And so, in other words, there will not be
what we call a regulatory arbitrage, because the other
regulators in the world see the importance of having markets
that are safe, that protect capital, and that the rule of law
applies.
Those jurisdictions that do not protect capital are not
going to be attracting companies and investments over time, so
we have all of this working together in the world of
globalization to converge standards. One of those things that
is ongoing right now is the idea of the reporting standards
being IFRS, International Financial Reporting Standards, which
are based on international accounting standards.
Europe will require their companies to use IFRS this next
year. At some point in the near future, we at the Agency and
through our chief accountant are interested in reaching the
point where it will no longer be necessary for those companies
that use IFRS to reconcile to U.S. GAAP. That will promote
transatlantic commerce and industry.
But we want to make very sure that occurs when the
convergence is sufficient, and an investor here in the United
States, then, could look at a company that is based on U.S.
GAAP, whose financials are based on U.S. GAAP and look at a
company in Europe whose financials are based on IFRS and have
comparability and understand where they want to make their
investment. But those are the things that are going on in that
area.
Chairman Shelby. Thank you.
Ms. Nazareth, with the adoption of Regulation NMS and the
recently announced transactions involving the NYSE and Nasdaq,
our national equity markets are at a crossroads. After the
mergers are finalized, there will essentially be two dominant
players in the equities markets controlling most of the
liquidity.
How do you think the changing regulatory environments and
the announced transactions would impact investors and broader
markets? What does it mean for the self-regulatory function
here?
Ms. Nazareth. You raise an excellent question about the
self-regulatory function. As you know, our current self-
regulatory structure has been in place almost since the
inception of our markets.
Chairman Shelby. That is right.
Ms. Nazareth. Indeed, the structure precedes the Securities
and Exchange Commission itself, and it certainly is an
opportune time, an important time, to analyze, whether it is
the most effective structure, particularly in light of the
changes that are occurring today in our markets.
And we are at the relatively early stages at the Commission
of analyzing those issues, and I look forward to considering
those issues with my fellow Commissioners. The Commission today
has outstanding two different proposals. One is a proposal to
enhance the governance and transparency of our SRO operations,
and that is a pending rule proposal the Commission will need to
consider, and another is a concept release that raises broader
questions about self-regulatory structure, and again, it is a
very important issue for our markets. The integrity of the
markets is absolutely key, and I look forward to analyzing
those issues with others.
Chairman Shelby. Congressman Cox, in light of the Global
Settlement, mutual fund investigation, and recent
investigations into accounting and the insurance industry, many
people have questioned the appropriate role of our State
attorneys general in the area of securities regulations, in
other words, the State role.
It seems that State attorneys general often initially
discover financial wrongdoing. Would you comment on the
appropriate role, from your perspective, of the State and
Federal regulators in securities regulation and enforcement?
Representative Cox. Thank you, Senator.
Of course, the blue sky regimes of our 50 States antedate
the Securities and Exchange Commission. There is a substantial
and vital role played by the blue sky laws, the antifraud laws,
and the investor protection laws of the 50 States, our
territories, and jurisdictions.
The enforcement and the regulatory regimes of the State and
Federal jurisdictions should be complementary. One hopes that
the work is in no way jealous or competitive; that there are no
turf competitions, but rather, there is a constructive effort
to work together. In important respects, there are different
spheres and responsibilities, but in other respects, they are
overlapping, so it is also important to ensure that there is
not a waste of resources or doubling up or tripling up on the
same thing to the neglect of other priorities.
Chairman Shelby. Okay.
Senator Sarbanes, do you have any other questions?
Senator Sarbanes. Yes; thank you very much, Mr. Chairman.
The SEC has considerable power, both formal and informal,
over our corporate governance system, and investors depend on
that system to make sure that companies are run in the
interests of their investors and that the public is given full,
fair, accurate disclosure about their companies. I want to ask
each of you whether investors can count on you to maintain the
rights investors enjoy today, including the rights to
communicate with fellow investors, to bring proposals before
annual meetings, and to withhold votes from directors who are
not performing up to their expectations.
I see you all have rearranged yourself at the table.
[Laughter.]
It shows the imprint of----
Chairman Shelby. They are already working together.
Representative Cox. Senator Sarbanes, I will be pleased to
answer your question first, and of course, the considerable
expertise of Ms. Nazareth and Mr. Campos is something that I
can benefit from as well.
Shareholders are owners, and the rights of owners and the
rights of investors have to be protected in our system if our
markets are going to work.
Senator Sarbanes. I have heard Chairman Shelby say that
often, that it is the shareholders who own the company.
Chairman Shelby. I thought the shareholders did own the
company.
Senator Sarbanes. They do in fact.
Chairman Shelby. I think we may get Senator Sarbanes to
stipulate that.
[Laughter.]
Representative Cox. Protecting shareholder rights as owners
is, I think, a derivative way of protecting the liquidity of
the markets, enhancing the value of share ownership, and so, of
course, I would strongly support enforcement and protection of
all of the rights of shareholders that they presently have, and
I would also be more than willing to look at ways of using, for
example, new technology to expand the opportunities that
shareholders have to learn about and benefit from information
about and participate in using such information about the
company.
Chairman Shelby. Mr. Campos.
Mr. Campos. Senator, I certainly support protecting the
existing rights of shareholders, and the SEC, of course, has
the Federal mandate, the Federal laws, and we have been
studying, as you all know, the proxy system as to whether the
proxies should allow shareholders with certain percentages the
right to put a minority slate on their slates. And we studied
that issue very hard and unfortunately did not come to a
consensus on it or even a majority on it, and it was not
brought to a vote.
And I think it is an area that is going to need fresh
looking and is important to protect the rights of shareholders.
The value of stock does depend on it. And I think there are
other entities besides institutional investors, who do most of
the lobbying for this, who will be interested in this area as
well.
Capital is forming together in pools and funds, and they
are interested in making improvements to performance, also to
governance. So, I believe we will be looking at these issues
quite a bit over the next short period of time, and I support
maintaining those. We have to be careful with the States.
Delaware is a jealous regulator, as well they should be, but I
think we can do all that very well.
Senator Sarbanes. Ms. Nazareth.
Ms. Nazareth. I agree. I certainly support protecting the
rights of shareholders and welcome the opportunity to continue
to review these issues. We must ensure that we do achieve the
proper balance between shareholders rights--ensuring that the
corporate governance improvements that have been achieved
largely through Sarbanes-Oxley and other initiatives are
effective by virtue of shareholders being able to voice their--
--
Senator Sarbanes. Well, now, I realize it is a complicated
issue, and the Commission was not able to reach a consensus,
but it does seem to me the issue of how shareholders can impact
on the board of directors, particularly if there is a
substantial dissident group, is an important issue.
And Congressman Cox, do you think that is an issue worth
exploring and for the Commission to examine?
Representative Cox. Yes, indeed, Senator. I am well aware
that this issue has been under study by the professional staff
of the Securities and Exchange Commission and the subject of
deliberations by the Commission itself over a period of time
and that at least thusfar, the Commission has been unable to
forward a proposal that is acceptable to a majority.
Nonetheless, these issues are fundamental, and there is no
reason that we cannot constantly improve opportunities that
shareholders have to participate through better disclosure and
I believe by taking advantage of technologies which are making
the distribution of, in and communication among large numbers
of people much less expensive.
Senator Sarbanes. I am interested in, as the New York Stock
Exchange moves toward becoming a for-profit institution, what
are your respective views on separating the regulatory function
from the business of the stock market itself, along the lines
of the NASD and the Nasdaq split?
Representative Cox. Senator, again, I should begin by
deferring to the considerable expertise of the two individuals
seated at my right and left. Ms. Nazareth, in particular, has
spent a great deal of time and study on this in her current
capacity, and Mr. Campos, as a Commissioner, has worked very
carefully with the rest of the Commission to forward new rules
by which these issues are going to be addressed in the future.
In the event that we have for profit entities operating
markets, it is vitally important that the regulation of those
markets remain arms length. Assuring that that is so is going
to be one of the abiding interests of the Securities and
Exchange Commission if you approve me as Chairman.
Senator Sarbanes. Mr. Campos.
Mr. Campos. Senator, that is a very important issue, and
certainly, we have not had a great experience in terms of some
of the enforcement and some of the regulations in our
particular markets. The proposal right now, as you know, from
the NYSE, for one, would have a parent company, and they would
have some separation, but they would ultimately report to that
parent company.
And I have raised this issue with the NYSE and with our
staff as to whether we should not have a complete separation.
For one thing, it would certainly help the optics, and we have
a lot to be able to do to satisfy the public that regulation is
strong, and regulation will not be influenced by the profit
motive and the commercial motive.
And I am going to look at that issue as a very serious
issue and one in which, you know, we need to look at the input
from all the players to make sure that we get it right. But as
a fundamental matter, the separation is a question that needs
to be answered as to why not.
Ms. Nazareth. I know this is a topic of great interest to
you, Senator, and it is something that I have spent a lot of
time thinking about. Having said that, I am still not quite
sure that I have the silver bullet on this issue. I think that
it is absolutely an appropriate time to consider whether the
current model is the optimal model for self regulation,
particularly as the markets are moving more toward for-profit
exchanges and away from the mutual model that they previously
operated under.
As you know, in the concept release that the Commission
issued, there were a number of alternative models that were
discussed, each of which has benefits and costs associated with
them, and I do think that we will have to spend a good deal
more time analyzing the issue to determine what the optimal
model would be, and if as a Commission we determine that the
model should be changed, the Commission, may have to come to
Congress and ask for legislation to effect those changes.
Senator Sarbanes. Of course, the other model, NASD and
Nasdaq, is different, but that does raise right off the bat a
question as the stock exchange moves toward a for-profit
mentality, and I do think it is an issue that the Commission
needs to examine very carefully.
The Chairman is the one who comes to Congress or goes to
the Executive to try to get the budget for the Agency. And I am
interested in how you, Congressman Cox, perceive the adequacy
of the current funding for the SEC, what more you think is
needed and what, if, as yet, you have any views on this, what
needs to be done internally to improve recruiting, improve
retention, and boost the morale of the employees at the SEC, if
you have had any chance to form some views on that, and I guess
they would all be interested in hearing----
[Laughter.]
--how strong a champion you intend to be on budget
questions.
Representative Cox. Senator, I know that this issue is
important to you, because you and I have discussed it. I have a
good deal of familiarity with the overall budget picture at the
Securities and Exchange Commission as a Member of the Congress.
What I am not prepared, as you might imagine, to do today is to
present you with a budget request, since I appear before you as
a nominee, but if confirmed as Chairman, I assure you that I
will fight for all of the resources that the SEC needs in order
to discharge its mission, and you have heard me say here today
and on other occasions that I am enormously impressed with the
professional caliber of the men and women who work at the
Securities and Exchange Commission and that I would be very
honored to join that team.
Ensuring that such professionals can be recruited on a
continuing basis and want to stay at the SEC and make their
career there is one of the important jobs of the Chairman, and
obviously, issues such as pay parity play into that. That is
not the only reason, of course, that people are in public
service and work at the SEC. These are in the main people who
are public servants with public spirit animating them more than
anything else.
But at the same time, there are very strong competitive
pressures for the Federal Government, as we have recognized
when we created, in Sarbanes-Oxley, the PCAOB. And so, fighting
for both the people, the men and women who work at the SEC and
the overall needs of the Commission in order for it to
discharge its enforcement and regulatory responsibilities will
be a top priority for me as Chairman.
Senator Sarbanes. Let me just elaborate on the phrase you
used, pay parity. Pay and benefits parity; and what happened
is, of course, the SEC first in the pay area and then perhaps
even more importantly in the benefits area did not have parity
with the other regulatory agencies. We know they are not going
to have parity with the private sector given the way our system
works, but they did not even have it with the other agencies
and were losing people to the other financial regulatory
agencies, and they moved pretty well on that. I am not certain
yet whether all of the benefit package has been worked out on a
parity basis, and you would hope that the Commission would
address that in the near future.
But we received correspondence from a number of groups
raising the issue of executive compensation. What changes, if
any, do you believe are warranted to the current disclosure
rules for executive pay?
Representative Cox. Senator, the touchstone of disclosure
when it comes to executive compensation should be transparency,
clarity. This has to be understandable to investors. Executive
compensation is a moving target. There are compensation
experts, a lot of different ways to track and retain people,
just as we were discussing in the context of the SEC, and rules
have to keep up with that.
More importantly, once there is compliance with the
disclosure rules, it has to be presented in a format that
people can appreciate and understand so that if things are out
of line, they can do something about it. I do believe that
market pressures on compensation that is out of line can be
very effective and powerful, but only if that information is
there, clearly, understandably presented in the first place.
Senator Sarbanes. I gather that the Chairman asked you a
question on this subject before I was able to get back to
hearing, but it has gotten so much press coverage that I think
I should address it to you again, and that involves the lawsuit
when you were in private practice at Latham and Watkins that
accused you and the firm and two former colleagues of
misleading regulators and investors with respect to filings at
the California Department of Corporations. This involved the
First Pension Corporation back in the mid-1980's, who I think
was a client of your firm. Could you recount for us that
situation and how it was resolved?
Representative Cox. Indeed, Senator, and as I just
described a moment ago, it was 10 years ago when I had been a
Member of Congress already for 10 years that I was added as a
defendant in a large securities class action in State court in
California.
The basis for adding me as a defendant is work that I and
the law firm did on behalf of a client who, 10 years later, was
exposed as a criminal. The law firm's work on behalf of this
client and the work that I was involved with concerned a single
SEC registered public offering. That public offering was not
the basis for this individual's indictment, guilty plea, and
fraud conviction.
Furthermore, I did not work at the law firm at the time
that the one offering that they handled actually took place. I
had left a year and a half before that. And as a result, the
Court dismissed all of the claims against me in that lawsuit.
Senator Sarbanes. We have received a letter from the
Council of Institutional Investors, which I think each of you
have received, dated July 21, setting out a number of their
concerns, and given what has happened on us in terms of these
constant interruptions, I have touched on some of them. I am
not going to be able to touch on all of them.
I want to ask a process question, though, of each of you,
and that is what is your attitude in terms of engaging in a
continuous dialogue or interchange with such organizations as
the Council of Institutional Investors, which, after all,
represents well over 100 public, corporate, and union pension
funds and, you know, well over 100 money managers and
investment and securities professionals.
I want to get some sense of how open and accessible and
transparent you think the Chairman and the Members of the
Commission should be in listening to people and engaging in a
dialogue, and of course, they are not the only such group or
organization that exists.
I will take Mr. Cox and then go to the others.
Representative Cox. Senator, with respect to stakeholders
such as the Council of Institutional Investors and many others,
I look forward to the opportunity to hearing, formally and
informally, their views, suggestions, opinions, concerns, and
comments. It has been a little bit unnatural for me, as a
Member of Congress, simultaneously a nominee of the President
preparing to appear before your Committee, to essentially be
monklike and out of touch for well-known procedural reasons--
with people who otherwise I would be communicating with
routinely, including, I might add, the press.
I understand the reasons for these rules and these
constraints, but to the maximum extent possible, both the
Chairman and the other Commissioners, it seems to me, should
operate in the light of day as transparently as possible. The
Sunshine Act, which applies to the Commission, has this purpose
in mind.
At the same time, I want to add that I am well aware of
concerns that have been raised in the past about inappropriate
meetings, and as a result, I would take great care to follow,
at all times, the ethical guidance of the professional staff
and the General Counsel at the Securities and Exchange
Commission concerning with whom and under what circumstances it
is possible for the Chairman to meet.
Senator Sarbanes. Mr. Campos.
Mr. Campos. Senator, I agree with you that Commissioners
should make themselves available I believe to as wide a group
of interests as possible. With the CII in particular, I
recently met with Anne Yerger, and, you know, before her, Sara
Teslik, who used to lead that particular organization, and I
make it a point to, if they have not come to see me, I
generally call them: The SIA, the STA, and the various industry
groups. I want to know their issues and what it is they are
lobbying the Agency for, and I think that is appropriate.
Obviously, there are things ethically, investigations,
ongoing things that are verboten, but we have procedures to
make sure that we keep everybody out of trouble, and in those
areas, usually, our counsel attends. And in listening to the
issues, we learn what the industry is worried about, what
investors are worried about, and how our rules may be made
better, and that is important to do.
Ms. Nazareth. I think the Commissioners and the Commission
staff has had a long history of an open door policy with
interested groups, and I think that the input that we receive
is invaluable in being able to do our jobs effectively. So, I
would certainly be in favor of continuing that process.
Senator Sarbanes. Mr. Cox, I wanted to see how you square
your statement today about being an investor's advocate and the
importance of that in terms of the Chairman of the Commission
with all of these comments that greeted your nomination,
suggesting just the contrary, and I have, you know, pages of
them here. I mean, everyone knew what you thought, I guess, or
seemed to think they knew, seemed to think what you thought and
wasted no time in placing on your nomination a certain
interpretation that there was going to be a marked diminution
in regulation; the pendulum is swinging back, quotes the U.S.
Chamber of Commerce Chair. I will not state her name just for
the sake of gentleness here and similar quotes of that sort.
Now, were they all anticipating something we need to know?
Are they reading the tea leaves improperly? Or I go back to the
admonition, you know, that the Commission from the beginning
has had its charge to be the investors' advocate, so how do we
reconcile those two things?
Representative Cox. Senator, I appreciate the opportunity
not only to answer this question but actually to speak to some
of these things.
Senator Sarbanes. Even had some of your colleagues in the
House who figured out everything you were going to do. I
noticed that.
Representative Cox. I actually appreciate the support of so
many of my colleagues in the House, in particular the Ranking
Members on the Committees that I have chaired and chaired as
recently as yesterday and the support that they have offered to
this nomination. I think at least to that extent, there is not
much question that I will bring not only a bipartisan spirit
but I also hope a nonpartisan spirit to this enterprise.
I think that the reason that there has been so much surmise
is that, unlike Ms. Nazareth and unlike Mr. Campos, I have not
been on the Commission or working in the securities industry,
and so, there is a lot of inference and extrapolation and
interpolation on the basis of things that might or might not
even be relevant in my view.
There has been, I think, stated opposition by some groups
to legislation that I was a moving force behind in 1995, and I
view that legislation today, as I did then, and as Senator
Stevens described it in his introduction of me, as a vital part
of an overall regime of shareholder protection. It is just as
important to protect shareholders from shakedowns by
extortionate lawsuits as it is to protect them from other kinds
of fraud. But there are different views about that, as you
know.
At the same time, I think that some people's guesses of
what I might do as Chairman which I have read in the newspaper
are just wrong, particularly to the extent that they have a
view that somehow I would be in any way lax when it comes to
enforcement or that I would in any way not pursue appropriate
regulation, because I have a deregulatory mentality or that I
am for free enterprise to such a degree that I would want to
miss an opportunity to use the tools that Congress has provided
to the SEC to accomplish the mission of building integrity and
confidence in the markets.
Those will be my aims, and I look forward to that
opportunity should you grant it to me.
Senator Sarbanes. In comments on the House floor, when the
House dealt with the conference report on the Sarbanes-Oxley
Act, you stated, ``As we raise the legal standard here today,
we should bear in mind our obligations to do still more to
raise ethical standards so that the best and the brightest will
continue to want to join the accounting profession so that our
most experienced citizens possessed of good just are willing to
undertake the significant oversight responsibilities on
corporate boards of directors.''
Bill Donaldson, in his speech at the National Press Club,
spoke about the necessity for corporate management, as he put
it, to just do the right thing and that this message would then
be passed right down the line to all of the people who work for
the company. He says it needs to be put right into the DNA of
the company. And I was struck by your reference in that comment
about the obligation to raise ethical standards, because that,
of course, goes beyond legal standards. Legal standards do not
usually catch up to the ethical standards.
How important a part do you see that, if you were to be
confirmed as Chairman of the Commission in terms of carrying
out your responsibilities?
Representative Cox. A big part, Senator. I was impressed
with, and in strong agreement with, remarks made earlier by Mr.
Campos.
It is true that no amount of regulation will stop all
fraud. I mean, people that are intent on lying and cheating
their fellow citizens will presumably still find reason to
undertake it from time to time, but there is a great deal,
first, through the formal regulation of the SEC that the
Government can do to deter and certainly to punish this kind of
behavior and thus to increase investor confidence in the
markets.
But it is also possible for public figures to constantly
talk about the importance of ethics and solid values, treating
employees, customers, and all other stakeholders properly. That
is the American way. And so, the Securities and Exchange
Commission has that leadership role to play as well.
I think that business schools have found this to be the
case, and they are trying to put it into the early training now
of potential managers and companies and managers in the
financial services industry, and certainly, this is not
something that the Government should abjure; rather, this
should be our bread and butter. We constantly talk about this.
Both are necessary. Both the law, the regulation, the
enforcement, and the constant appeal to what is right and what
is good so that we do not have more Enrons.
And with regard to Enron, I saw in hearings in the
Financial Services Committee and in the Energy and Commerce
Committee, that there were constantly areas where people would
punctiliously follow a rule and claim to have gotten away with
something, but they were missing the big picture, which is that
it was wrong.
And so, Senator, I could not agree more strongly with the
premise behind your question.
Senator Sarbanes. Good. Thank you very much.
Thank you, Mr. Chairman.
Chairman Shelby. I want to thank all of you for your
appearance here today, and I apologize again for something we
could not stop, and that is the interruption of the hearing. We
will have a Committee hearing Thursday. I am sure we will have
a quorum then. We will try to move all three of you out, and
hopefully, we can get you to work as soon as possible. Thank
you for your appearance.
The hearing is in recess until 2:30.
[Whereupon, at 1:42 p.m., the hearing stood in recess until
2:31 p.m.]
Chairman Shelby. The hearing will come to order.
This afternoon, the Committee is considering the nominees
for three very important positions at the bank and thrift
regulatory agencies. The nominees are John Dugan, to be
Comptroller of the Currency; John Reich, to be Director of the
Office of Thrift Supervision; and Martin Gruenberg to be a
Member and Vice Chairman of the Federal Deposit Insurance
Corporation.
The Comptroller of the Currency, the Director of the Office
of Thrift Supervision and the Vice Chairman of the Federal
Deposit Insurance Corporation all play very important roles in
overseeing the safe and sound operation of our banking system
and ensuring that the institutions within their jurisdiction
maintain compliance with money laundering, consumer protection,
and a whole host of other important laws. Each of these
individuals will also have an important role to play in
protecting the integrity of the Bank Insurance Fund and the
Savings Association Insurance Fund.
Additionally, these positions are responsible for a diverse
group of institutions which have a broad range and size and all
of whom operate in a global marketplace where the pace of
change grows faster everyday.
In light of these considerable challenges, I commend the
President for nominating these three highly qualified
individuals for these positions. Each has a longstanding record
of distinguished service in the financial services sector.
Each, I might also add, served in staff positions in one form
or another right here in the Senate. Mr. Dugan and Mr.
Gruenberg worked directly for this Committee. Mr. Reich worked
for Senator Mack, a very important former Member of this
Committee.
I would also like to take a moment to specifically
recognize the contributions of Marty Gruenberg. Marty has
worked here for my colleague, Senator Sarbanes, for nearly 20
years. He has been part of the consideration of every major
piece of legislation that has come before the Committee during
my tenure in the Senate. His loyalty, dedication, and able
service are to be commended. And Marty, I offer you all my best
regards and hope to move your nomination along with the others
as soon as possible.
I look forward to hearing from the witnesses, and do any of
you have some family you would like to recognize at this time?
Do you want to start with you, Marty?
Mr. Gruenberg. Thank you, Mr. Chairman. My wife, Donna, is
here, and my son, Paul.
Chairman Shelby. Okay.
Mr. Gruenberg. And also, my cousin, Matthew Gruenberg, and
my cousin, Arnold Schwarzbard, and his wife, Marilinda.
Chairman Shelby. Mr. Dugan, do you have any members that
you want to recognize?
Mr. Dugan. I sure do. My wife, Beth, is here, and my son,
Jack, and my mother, Frances Dugan, who, by the way, is a 55-
year resident of the State of Maryland. I know Senator Sarbanes
is not here, but I wanted to make sure----
[Laughter.]
--I got that in. My brother, Chris, is here, and my cousin,
John Michael, is here as well.
Chairman Shelby. Great.
Mr. Reich.
Mr. Reich. My family is watching on the Internet from a
cabin in the Smoky Mountains.
Chairman Shelby. Pretty smart.
[Laughter.]
Mr. Reich. On vacation this week.
Chairman Shelby. When are you going to join them?
Mr. Reich. I will be rejoining them this evening.
Chairman Shelby. Rejoining them. That is good.
At this time, would all of you stand and raise your right
hand and be sworn?
[Witnesses sworn.]
Chairman Shelby. Marty, we will start with you. Your
written testimony, all of yours, will be made a part of the
hearing record, and if you will sum up briefly what you want to
say, we will try to move the Committee.
STATEMENT OF MARTIN J. GRUENBERG
MEMBER AND VICE CHAIRMAN-DESIGNATE
FEDERAL DEPOSIT INSURANCE CORPORATION
Mr. Gruenberg. Thank you, Mr. Chairman.
Chairman Shelby, Ranking Member Sarbanes, and Members of
the Committee, it is my great honor to appear before the
Committee today as the nominee to be a Member and Vice Chairman
of the Board of Directors of the Federal Deposit Insurance
Corporation.
I would like to begin by thanking President Bush for
nominating me and Senate Democratic Leader Harry Reid for
recommending me for this position. I would also like to thank
Chairman Shelby for scheduling this hearing so expeditiously,
and Senator Sarbanes for his guidance and unfailing support. I
would also like to thank the staff of the Banking Committee for
their friendship and for the very high professional standard
they set under the exceptional leadership of the Committee
Staff Director, Kathy Casey and the Democratic Staff Director,
Steve Harris.
I have been a member of the staff of the Senate Committee
on Banking, Housing, and Urban Affairs since 1987. I have
served as both Staff Director of the Subcommittee on
International Finance and Monetary Policy and Senior Democratic
Counsel. In those capacities, as Chairman Shelby pointed out, I
have had the opportunity to work on all of the major financial
services legislation enacted by the Banking Committee during
that period. In the course of working on those pieces of
legislation, I have had the chance to interact with the
leadership and staff of the Federal financial services
regulatory agencies, administrations of both political parties,
the financial services industry groups, and the consumer and
community advocacy organizations. That experience has given me
a valuable perspective on the safety and soundness, national
security, and consumer protection issues confronting the FDIC.
It has also given me a familiarity with the FDIC as an
institution, an appreciation of its relationship with the other
financial services regulators, and an understanding of the
industry and consumer groups with which it works. I believe I
would come well prepared to make a constructive contribution to
the work of the FDIC.
The FDIC was established by Congress in 1933 in response to
the banking crisis brought on by the Depression. The purpose
was to restore confidence in the banking system and provide
protection to depositors.
The FDIC has been remarkably effective in maintaining
public confidence in our banking system, even during difficult
economic times. As one who worked on the staff of the Banking
Committee during the savings and loan crisis in the 1980's, I
am acutely aware of the critical role the FDIC plays in
preserving the safety and soundness of our banking system, and
of the enormous costs that can be imposed on taxpayers and our
economy when unsafe and unsound practices take place.
Protection of depositors and the preservation of the safety and
soundness of our banking system is clearly the central mission
for which the FDIC was created.
I was also working on the staff of the Banking Committee on
September 11, 2001, and during the following weeks when this
Committee drafted and enacted the antimoney laundering title of
the USA PATRIOT Act. It is clear that Federal financial
regulators today have a responsibility not envisioned when our
Federal regulatory agencies were created--to prevent the use of
our financial system to finance acts of terror. It is a
responsibility equal to or even exceeding the responsibility to
preserve the safety and soundness of our financial system, and
one to which I will give my full attention if confirmed by the
Senate.
Finally, I come from an immigrant family. My parents came
to the United States in 1951 after having survived the
Holocaust in Europe. I keenly appreciate the economic
opportunities this country makes possible for its citizens, as
well as the challenge to taking advantage of those
opportunities for those who are outside of the financial
mainstream. Several studies have indicated that as many as 10
million American families do not have an account with a
federally insured financial institution. The FDIC, as well as
the other Federal bank regulatory agencies, have an important
role to play in expanding access to the financial mainstream to
all Americans, and ensuring that all Americans are treated
fairly in our increasingly complex financial system. That is
another area to which I would hope to devote attention if
confirmed by the Senate.
Mr. Chairman, let me conclude by thanking you and Senator
Sarbanes again for the privilege of working on the
extraordinary staff of this Committee, where I have spent most
of my professional life. It has been a remarkably satisfying
and rewarding experience. I believe that it has prepared me
well to carry out the responsibilities of FDIC Board Member and
Vice Chairman if confirmed by the Senate.
Thank you, and I look forward to answering any questions.
Chairman Shelby. Thank you. Mr. Dugan.
STATEMENT OF JOHN C. DUGAN
COMPTROLLER-DESIGNATE
OFFICE OF THE COMPTROLLER OF THE CURRENCY
Mr. Dugan. Mr. Chairman, Senator Sarbanes, Senator Crapo,
and Members of the Committee, thank you for the opportunity to
appear before you today. I am honored that President Bush has
nominated me to serve as Comptroller of the Currency, and I am
grateful to Treasury Secretary Snow for his confidence and
support. As a former staff member, I am especially proud to be
here before this Committee and in this room. I have spent many
hours here with able colleagues and good friends on some of the
most important issues confronting the banking industry over the
last 20 years.
I have already mentioned my family. I did want to add that
my daughter is out of town. She would be very unhappy if I did
not mention her today. She is at camp, but she is with me in
spirit.
Chairman Shelby. Maybe she is watching on TV.
Mr. Dugan. That is exactly right.
Chairman Shelby. You might want to call her name.
[Laughter.]
Mr. Dugan. Claire.
[Laughter.]
The Comptroller of the Currency supervises about 1,900
national banks and about 50 Federal branches and agencies of
foreign banks in the United States, comprising more than half
of the assets of the commercial banking system. The Comptroller
also serves as a Director of the Federal Deposit Insurance
Corporation, the Federal Financial Institutions Examination
Council, the Basel Committee on Banking Supervision, and the
Neighborhood Reinvestment Corporation. In these roles, the
Comptroller addresses a broad range of issues that are
fundamentally important to the banking system, and, if
confirmed for this post, I would look forward to working on
them with this Committee and with Congress as a whole.
For the last 20 years, my career in both the Government and
private practice has focused primarily on banking issues. As
Minority General Counsel for this Committee during the late
1980's, which was a very active period, as you remember, I
worked extensively on legislative and regulatory proposals
involving bank powers, bank failures, safety and soundness
supervision, and consumer protection, among many others. As
Assistant Secretary and Deputy Assistant Secretary of Treasury
during the Administration of the first President Bush, that
work expanded into financial modernization, interstate banking
and branching, deposit insurance reform, regulatory burden
relief, oversight of OCC regulations and legislative proposals,
and many other related issues. During my 12 years of private
law practice at Covington and Burling, I have continued to work
and advise on a wide range of banking matters, including the
Gramm-Leach-Bliley Act, financial privacy and amendments to the
Fair Credit Reporting Act, financial derivatives regulation,
enforcement matters, and national bank powers generally.
At many points in my career, I have worked closely with
many of the officials and staff of the OCC. I believe that I
have developed a strong understanding of the key challenges
that confront the Agency. I have also had frequent contact with
officials and staff at the Federal Reserve, the Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the
Securities and Exchange Commission, the Treasury Department,
the National Economic Council, and the Office of Management and
Budget. These are virtually all the Executive Branch agencies
that have a significant impact on regulatory and policy issues
affecting banks. Given our unique, some would say peculiar,
banking system with its many overlapping functions, I believe
the Comptroller must have a fundamental understanding of how
different regulators approach their jobs and work best
together, and I believe my experience has helped provide that
understanding.
In sum, I believe that my experience and education are a
strong foundation for this position. If confirmed by the
Senate, I would be honored to serve as the 29th Comptroller of
the Currency. I would be pleased to answer any questions you
may have.
Chairman Shelby. Thank you.
Mr. Reich.
STATEMENT OF JOHN M. REICH
DIRECTOR-DESIGNATE, OFFICE OF THRIFT SUPERVISION
Mr. Reich. Thank you very much, Mr. Chairman. I want to
thank you for scheduling this hearing. I know that time is
limited before the August recess. Chairman Shelby, Ranking
Member Sarbanes, Senator Crapo, I am honored by the President's
nomination and the support of the Secretary of the Treasury to
be the Director of the Office of Thrift Supervision. I am
privileged to be sitting at this table with these gentlemen.
In the almost four and a half years that I have served as a
member of the FDIC Board of Directors, we have witnessed
significant change in the economy and the banking industry. In
fact, Mr. Chairman and Senator Sarbanes, you may recall that I
was about to testify at this very table on September 11, 2001,
on the failure of Superior Bank when the events of that day
stopped the hearing and triggered a number of challenges and
changes to our country's financial system that no one could
have foreseen.
My nearly 25 years of experience as a community banker
before I came to Washington to work with my good friend, former
Senator Connie Mack, have given me a perspective that
recognizes the vital role banks and thrifts, and their
customers play in the economic success of their communities.
Before my life in Washington, I was active for many years in a
variety of community service organizations, and the effect of
all of these private, nonprofit and public service experiences
causes me to evaluate issues in a manner that balances the
issues of financial institutions, consumers, and our economy.
Under the leadership of Chairman Donald Powell, the FDIC
has been, and is, at the forefront of many of the issues facing
the financial industry today. We have brought together leading
thinkers on such key issues as corporate transparency,
financial institutions disclosure, and risk management and, of
course, our work on deposit insurance reform. We have launched
a major financial literacy effort called Money Smart, with the
stated goal of establishing partnerships with 1,000
organizations and institutions, in all 50 States, to distribute
100,000 copies of Money Smart in three languages and expose a
million consumers to our financial literacy program over the
next few years.
In addition, I have been privileged to lead a major
interagency effort to reduce unnecessary regulatory burden and
to tap the tremendous potential of technology to streamline
bank supervision, while not sacrificing our primary goals of
ensuring safety and soundness and consumer compliance with the
banking system.
While the FDIC has been aggressively moving forward on
these developing issues, we have not neglected our primary
mission of protecting depositors in the event of bank failures.
In fact, I believe that the lessons that I learned in the
failure of a large savings bank provide me with a unique
credential to serve as the Director of the Office of Thrift
Supervision.
Following the resignation of former FDIC Chairman Donna
Tanoue in July 2001, I was serving as the Acting Chairman of
the FDIC when Superior Bank, FSB, failed on July 27, 2001. It
was not just the size of the failure, more than $2 billion in
assets, that was instructive. As this Committee knows from its
oversight, this failure raised a number of issues, ranging from
subprime lending, residuals and accounting opinions, to
regulator cooperation and access, and management liability
which challenged the leadership and staff of the FDIC to modify
established methods of handling bank failures and to create
some innovative new approaches.
This experience, along with other experiences gained during
the nearly 4 and a half years that I have served on the board,
3 years as Vice Chairman, combined with my duties chairing all
of the standing committees of the FDIC Board should help to
enable me to effectively serve as the Director of the OTS.
Mr. Chairman, as the primary Federal regulator of all
savings associations and savings and loan holding companies,
the OTS oversees a vital segment of the American economy. As of
mid-May 2005, there were 886 savings associations with
approximately $1.4 trillion in assets. As of the end of 2004,
there were 492 savings and loan holding company structures with
consolidated assets of approximately $6.9 trillion. Savings
associations originated over $600 billion in single-family
mortgages last year, or approximately one out of every four
mortgages made in the United States. The industry serviced $1.3
trillion in loans for others. Savings associations operate over
9,000 branches throughout the United States and employed
217,000 people as of the end of 2004.
Mr. Chairman, if I am confirmed, my main goals as Director
of OTS would be to assure the continued safety and soundness of
the industry, faithful adherence to consumer protection laws
and the most efficient operation of OTS as an organization.
I am honored that the President nominated me to this
important position. I look forward to the challenges that lie
ahead. I look forward to working with this Committee, and I
wish to thank you again for holding the hearing.
I will be happy to address any questions.
Chairman Shelby. Thank you.
Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman.
I am pleased to welcome our three nominees before us this
afternoon. They are all well known to the Committee, either
having served on the Committee staff or on the staff of the
Committee. All are extremely well qualified for the positions
for which they are being considered.
John Dugan was, of course, the Republican Counsel and then
General Counsel of the Banking Committee and served with great
distinction, including the period when we were addressing,
among other issues, the savings and loan crisis. Subsequently,
he went to the Treasury, where he served first as Deputy
Assistant Secretary for Financial Institutions Policy and later
Assistant Secretary for Domestic Finance at the Treasury. And
since leaving Treasury, he has had a very distinguished career
at Covington & Burling, where he is currently a partner. He has
appeared here many times before the Committee in his public
capacity representing the Treasury and in his private capacity
representing a variety of clients.
John Reich worked in the Senate for over 10 years, from
1989 to 2000. Four of those years, he was Chief of Staff to
Senator Connie Mack, a very distinguished Member of this
Committee. He came to this work from 23 years in the banking
industry, including President and Chief Executive Officer of
the National Bank of Sarasota, and since January of 2001, Mr.
Reich has served as Vice Chairman of the Board of Directors of
the Federal Deposit Insurance Corporation.
Marty Gruenberg, who has been nominated to serve as a
member and Vice Chairman of the Federal Deposit Insurance
Corporation, has been a member of the Committee's staff since
1987, after working for several years on banking issues in the
House. I must say, Mr. Chairman, it is an odd feeling to see
him at the witness table there when we have worked so closely
together for nearly two decades. I am accustomed to turning
around and getting his counsel.
Marty has been involved in virtually every issue that the
Committee has dealt with in those years. Indeed, he has played
a major role in every banking bill that has been enacted into
law since 1987, and I could go through the list, but for the
sake of time, I will ask that they be included in the record,
but every major bill on banking that has come out of this
Committee, he has been part of that process.
His experience and expertise are hardly limited to matters
involving financial services. His work is equally impressive in
other areas of the Committee's jurisdiction, notably monetary
policy, export, and foreign trade promotion, export controls
and defense production.
It is not only his background and experience that make
Marty Gruenberg so well qualified to serve at the FDIC. On the
strength of having worked closely with him for nearly 20 years,
I personally know him to be superbly qualified by virtue of his
intellectual capacity, and his personal integrity and
character. Of course, we shall all miss him greatly, but I know
Marty to be a dedicated public servant who, in his new
position, will work to the same high standards that he has
always brought to his responsibilities at the Committee.
Mr. Chairman, I very much appreciate your holding this
hearing, and I hope we can move these nominees expeditiously.
Chairman Shelby. Senator Crapo, do you have an opening
statement?
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. No, I just have a question or two when we
have a chance.
Chairman Shelby. Senator Dodd, do you have an opening
statement?
Senator Dodd. Well, very briefly; I do not have a prepared
statement, Mr. Chairman, but let me first of all congratulate
our three nominees. John Dugan, of course, we have known for
many, many years here; worked together on this Committee a long
time, so we congratulate you, John, on your nomination.
Mr. Dugan. Thank you, Senator.
Senator Dodd. And Marty, this is a bittersweet moment for
those of us who have worked with you up here for so long. I was
teasing this morning and turning around to our friends right
behind Senator Sarbanes, and I said where is Marty this
morning? He should be here to help us with these questions. And
they said you are out preparing for your grueling grilling this
afternoon, not that I expect a grilling.
And on a personal note, I just got off the phone with my
wife on the phone, and Jackie worked with Marty for almost 20
years on this Committee and other matters as well and wanted me
to express----
Chairman Shelby. And she worked on this side of the aisle.
Senator Dodd. She did. She worked on that side of the
aisle.
[Laughter.]
Converts make the best Catholics.
[Laughter.]
Not that she has converted yet. We are working on it. But
Marty, she wishes you well, and I do, as well. We are going to
miss you terribly up here, and we wish you the same kind of
success that John has had, going off and doing good things. And
so, we thank you. Thank you for accepting this position. I have
great confidence you are going to bring great expertise,
stability, and dignity to the FDIC as well and John at the
Comptroller of the Currency. Mr. Reich, we wish you our best
wishes, too, in all of this.
So congratulations to you. We look forward to working with
you for many years to come as well, but we will miss you up
here. You have done a great job for this Committee. You have
served all of us tremendously well, and this Committee's
success over the years is a tribute not only to the Chairman
and the Ranking Member but also to the people who sit behind us
up here, who help us prepare every single day. You do not get
to make the statements; your names do not necessarily appear in
the press, but to the extent we are successful up here in
getting the job done, on most occasions, I think all of us
would say it is because of the quality of the people who sit
behind us.
And Marty, you have been behind us for years up here, and
to the extent that we have done good things, in no small
measure, it has been because of your contribution. So thank you
immensely for that.
Mr. Gruenberg. Thank you, Senator.
Chairman Shelby. I think we would all associate ourselves
with the remarks of Senator Dodd in that--regarding the staff
and what you contribute.
Mr. Dugan, the OCC's Quality Management Division has
finally released its long awaited review of the Office of the
Comptroller of the Currency's Bank Secrecy Act and the
antimoney laundering supervision that went with it. The review
is highly critical of OCC's performance, a conclusion that came
as no surprise to a lot of us here familiar with the Riggs and
the Arab Bank cases.
I know you are not over there yet, but outline for the
Committee briefly the concrete steps that you would intend to
make to rectify the shortcomings at OCC's supervision of the
Bank Secrecy Act. We think that is very important.
Mr. Dugan. That is very important, Mr. Chairman. I do not
think you can look at the history of what has happened here
without acknowledging, as the Agency has, that there have been
real lapses in the Bank Secrecy Act area. As you have said, I
have not had the benefit of access to the information that is
nonpublic. Of course, I have been dutifully reading up on all
the public information. And so, I think the first task is to
determine what the situation is.
I was both concerned and somewhat encouraged by the report
that came out last week. It was quite critical. But at the same
time, it did acknowledge that there had been improvements made
and that the Agency was at least moving in the right direction.
The report laid out a number of concrete steps to continue in
the right direction, particularly in the area of large bank
supervision, which seemed to require the most attention. Those
are the areas that I most certainly will focus on.
I want to emphasize that I think this is a quite difficult
area because like some of the other problems that this
Committee has dealt with, it is easy to go too far and to do
things that have counterproductive consequences. We have seen
some of those issues in the case of money transmitters and of
defensive suspicious activity report filings. It reminds me a
little bit of the credit crunch issue that we dealt with many
years ago where there were quite lax lending standards at one
point, and then standards were tightened to the point where
people were very much worried about whether banks were
performing their job. Striking that right balance of cleaning
up and improving Bank Secrecy Act supervision but doing it in a
way that calibrates the measures taken, I think, is quite
important. That will be my number one priority.
Chairman Shelby. Mr. Dugan, as troubling as the Riggs case
is to those of us on the Committee concerned about money
laundering and terror financing issues, the Arab Bank case
seems to be more troubling. At least with Riggs, there was a
history of admonishments with respect to that institution's
repeated failures to comply with the Bank Secrecy Act.
But in the case of the New York branch of the Arab Bank, we
do not even have that. We have an institution that had
repeatedly received the highest grades, only to precipitously
become the recipient of a consent order that effectively shut
it down. Equally troubling is the fact that most of what became
known about Arab Bank's New York branch was due to civil suits
against the bank and the publication on the Internet of
documents seized by the Israeli Army when it raided West Bank
branches of the bank, not by the supervisor's regulators.
I understand none of this happened on your watch, and I
would not expect it to happen on your watch, you know? But I
further understand that this remains a pending enforcement
matter that is also under criminal investigation by the Justice
Department. Could you provide the Committee, if you could, your
assessment of the severity of the Arab Bank case and assure us
that a meaningful review of that case will occur on your watch
if you are confirmed, which you will be? And what are the
implications of this case for one of the largest banks in the
Arab world? How important is this?
Mr. Dugan. Mr. Chairman, I would like to, but I am not sure
I can answer the first part of your question because----
Chairman Shelby. No, no, you cannot get into everything.
Mr. Dugan. There is quite a lot of confidential information
in this ongoing matter.
Chairman Shelby. We understand that.
Mr. Dugan. I only have what is in the public record.
I can commit, however, to the second part of your question,
to assess the situation to learn why it occurred, and to try to
figure out the best way possible to correct it so it does not
happen again.
Chairman Shelby. Mr. Dugan, there are a number of recent
stories in the press concerning the OCC's supervision of Wells
Fargo. And for the record, I want to state again, you have not
been in the OCC yet.
Mr. Dugan. Right.
Chairman Shelby. A number of disturbing accusations have
been levied against the OCC, including preferential treatment
of big bank CEO's, slow follow up on cited bank program
weaknesses, even the loss of the examiner's in charge computer.
Very rarely is the public privy to a national banking
regulator's recommendations on the selection of an enforcement
action against a bank with antimoney laundering and Bank
Secrecy Act deficiencies. Two sets of questions come to my
mind: What lessons can you take away or would you take away
from this disclosure of the Comptroller's regulatory review
process, and of that process itself, does anything need to be
changed, in your opinion, or would you wait until you get over
there and see what is really going on?
Mr. Dugan. Mr. Chairman, really, the latter. The
enforcement process is always one that invovles discretion. I
do not know the facts in this instance. There is an ongoing
investigation by the IG. I would like to be in a position to
tell you more. I certainly will follow up and assess this very
carefully.
Chairman Shelby. We believe you will.
Mr. Dugan. But, at this point, I just do not know enough to
comment on it.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman.
Mr. Reich, I wanted to ask a couple of questions. The total
assets in the thrift industry at the end of March of this year
stood at $1.3 trillion. It is my understanding that the largest
thrift has over $300 billion in assets. And the OTS is funded
by assessments on the thrifts it regulates. Some have raised
the question of the ability of the regulator that is so
dependent upon one institution's assessments to be completely
objective in carrying out its responsibilities. What is your
take on that?
Mr. Reich. For one, I have every intention of being
objective, Senator Sarbanes, but I am very concerned about the
point that you raise. I think there is every reason to be
concerned about the method of funding, in my opinion, for both
the OCC and the Office of Thrift Supervision. I think it is a
subject that needs attention, needs to be addressed, and a
resolution found for a different method of funding.
I have been willing, as a member of the Board of the FDIC,
to engage in conversation about creative funding possibilities,
and I look forward to the possibility of engaging in that
dialogue with my colleagues on the Board of the FDIC and the
other Federal regulators.
Senator Sarbanes. The prior Director of the OTS embarked on
a reduction in force to significantly reduce the number of
personnel in the field offices of the OTS. There is
considerable concern because a very large percentage of the OTS
examination staff is approaching retirement age in the next few
years. Furthermore, since its creation over 15 years ago, the
OTS has been consistently reducing the number of its employees
and has taken several internal administrative reorganizations.
This has placed significant stress on the OTS staff who have
remained, as each employee has taken on more areas of
responsibility and faces an uncertain future in the
organization.
Of course, many of these employees have a significant
amount of expertise and institutional history important to the
mission of the Agency. What is your view on these questions of
staff morale at the OTS, and how do we get more stability at
the Agency?
Mr. Reich. I think what the OTS has gone through over the
last few years is not unlike what the FDIC has also
experienced. Ten years ago, the FDIC was the primary supervisor
of almost 9,000 State-chartered banks. Today, the FDIC is the
primary supervisor of about 5,000 State-chartered banks. And,
over the years, as that reduction in the number of institutions
that they supervise has taken place, it has, I think, caused
the members of the Board of the FDIC to feel a fiduciary
responsibility to be financially responsible in managing our
resources, and as the industry has downsized, both the FDIC and
the Office of Thrift Supervision have downsized along with it.
I am concerned about staff morale in any organization, and I
will do the best I can to address the issues which staff is
concerned about.
Senator Sarbanes. I hope you well. I think you have a staff
problem over there, and I am encouraged by your indication of
your intention to address it.
Mr. Dugan, I want to ask you about preemption. We talked
about it when we met. The OCC's action in preempting the
application of State laws to national banks and their State-
chartered operating subsidiaries as well has drawn a tremendous
amount of criticism. The National Governors Association, all 50
State attorneys general, the National Conference of State Bank
Supervisors, and there is a perception that we are
fundamentally altering the Federal-State enforcement
relationship.
And it is a departure from where we were before. I mean,
there was some tension on occasion, but essentially, a
relationship had been worked out, and State governments were
able to, you know, seek to protect their citizens from abusive
lending practices and other areas of consumer protection. Many
of us here feel that it is really contrary to previous
governing practice.
In the Riegel-Neal Act, we stated that host State laws
regarding community reinvestment, consumer protection, and fair
lending apply to national banks unless those laws discriminate
against the national bank or are preempted, and we are quite
concerned about what appears to be a wholesale carve-out from
State law for national banks and for their operating
subsidiaries. What is your view on this question?
Mr. Dugan. Senator, as we discussed in your office, I do
not personally believe it is a wholesale departure. I know that
the OCC has received a great deal of criticism, in part because
many of the practices that had been going on were codified in a
very visible regulation.
But to me, the issue gets down to this: What did Congress
intend when it established a national banking system with a
Federal charter subject to a uniform set of laws? If you look
at the cases, and there have been over 50 cases over 100 years,
many of them in the Supreme Court and some of them decided
quite recently, the clear consensus rule is that if a State law
interferes with or significantly regulates a banking activity
of a national bank, it is preempted.
That is the general rule. There are exceptions, and
Congress can change that rule, but that is the premise that
national banks have been operating under for a very long time.
In the last 10 years or so since the Riegle-Neal Act, in
particular, with a great deal of consolidation in the industry
and much more in the way of interstate banking and branching,
nationally chartered institutions operating in many different
States have bumped into more and more State laws. Once that
situation started engendering more and more requests for
preemption opinions, the OCC codified their practice in their
regulation. It was not too dissimilar from what the OTS had
done a number of years back.
It prompted a great deal of criticism, and I understand
that. I think more can be done to share information with the
States on a timely basis, but I think the basic rule about
State laws being preempted if they interfere with a national
bank power is what the law is.
Senator Sarbanes. The Barnett Bank standard we think is a
higher threshold for preemption than the one that the OCC is
using now. That is the problem.
Mr. Dugan. Senator, I do not think that the OCC has tried
in any way to say that the Barnett standard is not the right
standard. I think there is a difference of opinion on what that
standard means in practice. There are various words in that
case. People have focused on the ``prevent or significantly
interfere'' language as one formulation, but there are
citations to a number of other cases and standards in that very
same paragraph where the Court talks about that particular
test. I think the question is, in the end, whether a State law
creates the Constitutional conflict where it obstructs the
basic purpose that Congress had in mind in setting up the
national banking system.
Senator Sarbanes. Are you prepared to meet with the State
banking and enforcement officials in order to enter into an
intense dialogue with them on this issue?
Mr. Dugan. I would be happy to meet with the State
officials to discuss this issue at great length.
Senator Sarbanes. All right; let me ask one final question.
I wanted to follow up on the Chairman's questions about the
Bank Secrecy Act. Assuming you are confirmed and take office in
the very near future, what do you think is a reasonable period
of time for you to have to address these problems at the OCC
that were identified by the study with respect to improvements
in how it does business? When would it be reasonable for the
Committee----
[Laughter.]
--to bring you back in for an oversight hearing in terms of
what has been done about enforcement of the Bank Secrecy Act at
the OCC?
Mr. Dugan. That, of course, is in the Committee's
discretion. It is a little bit hard for me to say without
actually having gotten over there. I will say a couple of
things. Regarding the part of the report that focused on the
lack of adequate policy guidance, I think a tremendous step was
made on June 30 when the agencies collectively released quite
detailed policy guidance on what is expected in this area. At
the other end of the spectrum, the report's focus on hiring and
maintaining the right staff, particularly for large bank
supervision, is going to take some time to address. But I would
be happy to come back to the Committee to give you an
assessment of where things stand before the end of the year, if
that makes sense.
Senator Sarbanes. It is my understanding that the four
largest dealers of the $37 trillion interest rate swaps market
account for over 40 percent of the supply in that market, and
the concentration of the dealers is even greater in the
interest rate options market. What priority do you think the
OCC should put on monitoring and supervising the national banks
that are the most significant dealers in the over-the-counter
derivatives market, and do you believe the agency has all the
resources it needs to adequately monitor and supervise the
derivative dealer community?
Mr. Dugan. Senator, I think the kinds of risks that you are
talking about in the derivatives market are not just interest
rate risk but credit risk, as well, which is why the market has
ended up in the larger banks. I think supervision in this area
has been a tremendous focus of the OCC and the other bank
regulators, but particularly for the OCC in the wake of the
derivatives issues that this Committee focused on, quite
rightly, in the 1990's and in the wake of a number of other
significant issues that arose at that time.
My sense is that the Agency does have the resources and
does focus quite a bit of effort in the derivatives area. I
think part of the whole Basel process is trying to reinforce
that and to capture some of the risks that have not been as
well captured in the past. But that will be an area of concern
when I get there, if and when confirmed.
Chairman Shelby. In the near future, the banking
regulators, as all of you know, are supposed to issue a final
rule that is intended to implement the changes contained in the
Basel II proposal. We intend to hold a hearing on the progress
of the Basel II proposal in September when we get back.
I recognize that more testing of these new standards is
scheduled and that there may still be changes made to the
rules. That said, I am not yet fully confident that the so-
called ``right standards'' have been proposed. What are you
going to do after you are confirmed to make sure that prior to
the finalization of the new rules we have developed the best
rules to make it work? Because there are still some outstanding
questions there.
Mr. Gruenberg, we will start with you.
Mr. Gruenberg. Mr. Chairman, I think there is good reason
to proceed cautiously with the implementation of the Basel
agreement. The most recent quantitative impact study that was
released indicated that on the banks that would participate,
half of them would have a 26 percent or more reduction of
capital. In fact, one of those institutions would have a 50
percent reduction of capital.
Chairman Shelby. Is that a concern for you?
Mr. Gruenberg. Yes, it is a serious concern, Senator. And I
think there was a great effort to bring this agreement about,
and there was a lot of investment of effort in it, but I think
until we are truly satisfied about is consequences for the
banking system, it is very important for the regulatory
agencies to move very cautiously and frankly be in no rush to
bring it to a conclusion until they are quite confident about
its impact.
Chairman Shelby. But as a new member, will be, of a very
important banking regulatory agency that is charged with safety
and soundness, this should, in your background here, be a
double concern for you.
Mr. Gruenberg. Very much so, Senator, and the FDIC, to its
credit, I think, under Chairman Powell has been very forceful--
--
Chairman Shelby. Outspoken right here at the Committee.
--among the regulatory agencies on this issue, both on the
overall reduction of capital and also preserving the minimum
capital requirement, and that would certainly be a very
significant priority for me if confirmed by the Senate.
Chairman Shelby. Senator Sarbanes, when he was Chairman,
even before he was Chairman of the Committee, he has always
voiced a strong feeling that the capitalization, the strong
banks, whether they are large or small, are the ones that stick
around and do not visit you and visit the taxpayers.
Mr. Dugan, do you have any comments on this? This will be
right in your lap, too. I want to comment that Comptroller
Hawke, right here at this table, he has some concerns, as you
probably know, about Basel II, the implementation, what it
would do and so forth.
Mr. Dugan. Yes, Mr. Chairman. I agree largely with
everything Marty just said. This is a situation where there has
yet to be a proposed rule, and I think it is very important to
have the full notice and comment process to take comments from
a lot of different sources about this before we move forward to
any kind of final rule. There has to be a better understanding
of the quantitative effects on capital, and I do not think
anybody who has read about the results from the QIS-4 study
would not be concerned about it. I think we have to proceed
with conservatism as we move forward for that very reason.
I will say I do think it is important to try to move away
from the existing Basel standard and try to move down a path to
something that is more risk-sensitive. I support the Basel
process, but for the reasons I have outlined, I think we have
to be very careful in what we do.
Chairman Shelby. Mr. Reich.
Mr. Reich. I am supportive of the Basel process, too, but I
think that it is too complicated. The results are disappointing
and of concern. I have listened to former Comptroller Hawke for
2 or 3 years talk about how complex it was and how complex it
was going to be to implement. I am concerned about its
implementation, and I think that it should be deferred until we
are confident that it is pretty accurate.
Further, I am concerned about any change that would have a
material reduction in bank capital.
Chairman Shelby. Thank you.
Mr. Reich, as you may be aware, this Committee was very
critical over the several years of the failure of the
regulatory agencies to properly examine for Bank Secrecy Act
deficiencies with the same zeal with which safety and soundness
exams have been conducted. Can you give the Committee your
assurance that under your directorship, after you are
confirmed, that the Office of Thrift Supervision would treat
BSA compliance with the level of diligence this Committee and
the Congress expects?
Mr. Reich. Yes, Mr. Chairman, I commit to do that. As Mr.
Dugan indicated, the Federal banking agencies joined together
on June 30 to issue joint guidance to all of our Federal
banking examiners. We should all be on the same page in our
examination processes. All examiners will each be receiving
identical information about the processes that they are to
follow. We have set a schedule of joint examiner training for
our agencies and joint banker education of the new guidelines
as of June 30, and I will do all that I can to see that OTS
implements these guidelines and places a high priority on the
BSA examination process.
Chairman Shelby. I want to direct this to all three of you.
Over the last year or so, there have been numerous incidents
involving the unauthorized disclosure of sensitive personal
financial information. In some but not all of these situations,
financial institutions have been involved. The Committee held a
hearing earlier this year to review the framework of GLB and
the new ID theft provision recently added to FCRA.
Could you comment on what additional measures you feel may
be necessary to complement the banking agencies' guidance on
breach of notification? Mr. Dugan, do you want to start, Marty?
Go ahead, Mr. Dugan.
Mr. Gruenberg. Sure.
Mr. Dugan. Mr. Chairman, I would say that financial
institutions already have a structure in place. I do think it
should be kept separate. I do not think this is an area where
they should be treated like other institutions. There are
different concerns; they hold information; they hold, in some
cases, quite sensitive information.
Chairman Shelby. But they should protect that information,
should they not?
Mr. Dugan. Sure, absolutely, and that is why, the Gramm-
Leach-Bliley Act--and you and Senator Sarbanes were both great
proponents of this--imposed standards for maintaining security
and imposing safeguards for customer information, and why the
bank regulators have issued guidance on security breaches.
Whether that needs to be tweaked somewhat to take account
of some more particular issues that have come up with some of
the types of information is, I think, worthy of consideration
by the Committee. It could be done either directly through
legislation or some combination of legislation and having the
regulators reexamine their existing authority and take measures
with the authority they already have.
Chairman Shelby. Marty. Excuse me; Mr. Gruenberg.
Mr. Gruenberg. Mr. Chairman, it is clear that there is a
very serious problem here that is not being fully addressed. We
established in the Gramm-Leach-Bliley Act the obligation on
financial institutions to protect non-public personally
identifiable information, and with the number of problems we
have had with a variety of institutions, it would appear that
either the guidance being provided is not sufficient, or the
compliance is not sufficient.
I would not presume at this point to say which, but I think
there is a very serious concern, and I also think there is a
very serious issue as relates to the nonbank institutions that
are trusted with a lot of personal information of people, and
that seems to me great attention needs to be paid to that area
as well, and it may require additional legislation to address
some of the concerns here.
Chairman Shelby. In light of the participation of
nonfinancial institutions in the payment system, what else
might be necessary to address the protection of financial
information as it moves through the entirety of the payment
system? Mr. Dugan, do you have any comments on that? In other
words, we have nonfinancial institutions involved in the
payment system.
Mr. Dugan. Mr. Chairman, the Gramm-Leach-Bliley Act,
applies technically to something called nonpublic personal
information, which is basically customer information of the
banks.
Chairman Shelby. Right.
Mr. Dugan. But in some cases, the institutions handle
personally identifiable information of noncustomers. I think
making sure that information is protected, because it has some
of the same kind of sensitivity issues as some of the other
information they handle, is something that would be worth the
Committee looking at.
Chairman Shelby. Mr. Reich, do you have any comment?
Mr. Reich. There is a joint working group of all of our
Federal banking agencies addressing identity security, and
hopefully, we will be coming out with substantive guidance that
will address these issues. At the FDIC, we have been working
with our IT examiners to help banks address the problem on two
fronts, dealing with it in the aftermath when breaches do take
place and then trying to help them set up systems and processes
to prevent it from happening to begin with, which is what the
joint working group is addressing.
Chairman Shelby. Mr. Dugan, what balance can we bring
between enforcement and latitude? For example, the recently
released internal review states that OCC's initial supervisory
actions have not always been severe enough to ensure timely
correction of BSA/MAML program deficiencies, and the subsequent
follow-up actions have not always been timely or effective.
Is it possible to have criteria that would provide
sufficient guidance for examiners and higher level
decisionmakers within the Office of the Comptroller of the
Currency to determine when stricter supervisory actions are
warranted that would not eliminate whatever level of discretion
is needed for the system to function properly? You know, there
is a balance there. Both Riggs and the Arab Bank involved high
risk accounts, and in the case of the latter, the Arab Bank, a
bank serving in a very high risk region through which funds
were flowing to the West Bank.
Should these types of banks be supervised differently from
banks with lower inherent levels of risk? In other words, is
that a judgment call, or what? How would you handle it?
Mr. Dugan. Mr. Chairman, I think the Agency has to be
committed to devoting more resources to institutions that are
perceived as riskier in particular areas, and I think that has
been at least the stated philosophy of the Agency for a long
period of time.
There are quite a number of tools that the bank regulators
have at their disposal from examiner criticism and informal
enforcement actions all the way through very formal enforcement
actions, even removal and prohibition, civil money penalties,
and the like. There is a spectrum of remedies and there are
well-articulated procedures that are supposed to be adhered to
to try to get balance into the process.
There will always be discretion in the enforcement process.
I think the important thing is to make sure that the process is
the right kind of process, so that different views are being
aired. I know what the processes are. Obviously, there have
been some lapses, and looking at that is one of the very areas
that I plan to devote a considerable amount of time to if and
when I get to the Agency.
Chairman Shelby. Senator Sarbanes, do you have anything
other questions?
Senator Sarbanes. Mr. Chairman, I would like to have
formally included in the record a letter that we received from
the National Bankers Association supporting the nomination of
John Reich to be the Director of the OTS.
Chairman Shelby. Without objection, so ordered.
Senator Sarbanes. In the course of which, they say that
they have worked with him in his current capacity at the FDIC.
During his tenure with that agency, Mr. Reich and the FDIC
Chairman, Donald Powell, have shown recognition for the unique
status of women and minority-owned banks, and they go on to say
that the NBA in the past has expressed some disappointment in
the inaction of the OTS in its regulatory oversight of such
matters but that they are optimistic that under the new
leadership of Mr. Reich, the OTS will administer meaningful
policies and regulations that strengthen the capacity and
foster the number of minority-owned banks, and they are looking
forward to working with Mr. Reich and the other nominees at
this hearing to develop a Government-wide, coordinated banking
policy that protects the diversity of the Nation's financial
system.
Chairman Shelby. It will be made part of the record without
objection.
Senator Sarbanes. And I commend that objective to our two
nominees as well.
Thank you very much.
Chairman Shelby. Anything else?
Senator Sarbanes. No.
Chairman Shelby. Gentlemen, I thank you for your appearance
here today. We believe that you are all well-qualified for your
positions, and we are going to try to move your nominations
Thursday.
Thank you. The hearing is adjourned.
[Whereupon, at 3:29 p.m., the hearing was adjourned.]
[Prepared statements, biographical sketches of the
nominees, response to written questions, and additional
material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR JIM BUNNING
Thank you, Mr. Chairman, for holding this hearing today, and I
would like to thank all of our nominees for coming before us today.
I would especially like to thank my good friend, Chris Cox, for
coming before us today and agreeing to be the President's nominee for
the Chairman ofthe Securities and Exchange Commission.
Its no secret that I have disagreed with some of the decisions the
SEC has made under the last Chairman. Though I appreciate his service
and think he should be commend for righting the SEC's ship, I believe
he made of number of policy mistakes. It seemed that he was ignoring
his commissioners on a number of major issues. Also I think he was not
open to advice from this Committee. I believe Chris Cox will listen to
all of his commissioners and take the advice of Congress.
There are many major issues facing the SEC. In particular, I am
concerned about the independent chairman rule that was overturned by a
Federal court, then rammed through again by the former Chairman and
Regulation B, whose implementation has been delayed until September. I
believe with Chris Cox's leadership, we can come up with a solution
that everyone can live with.
I have known Chris for a long time. He has served his country well
as a White House Counsel to President Reagan, as a U.S. Representative
and I believe he will serve his Nation well as Chairman of the SEC. I
urge all of my colleagues to support the nomination of Chris Cox as
Chairman of the Securities and Exchange Commission.
----------
PREPARED STATEMENT OF SENATOR DEBBIE STABENOW
Thank you, Chairman Shelby. Welcome Congressman Cox, Ms. Nazareth,
and Commissioner Campos.
These are busy times for the SEC and I want to commend the ongoing
efforts of the SEC and specifically Chairman Donaldson. Whether in
handling the melt down of Enron or the mutual fund industry scandals,
the SEC is restoring public trust in the markets--and I believe we
should vigorously continue down that road. The job that the Commission
performs is absolutely vital to maintaining a robust and vibrant
economy, and providing working men and women the piece of mind they
need to become investors in the American Dream. So, hearings such as
this are important.
I appreciated the time that Congressman Cox set aside to come by my
office last month. I left that meeting feeling that as Chairman he
would not seek wholesale change in the approach that the current
Commission is taking with regard to oversight of our financial markets.
Also, that he would work with the other commission as a whole to
generate a consensus on the difficult issues that the SEC will face in
the future. I look forward to hearing more about how he and the other
nominees will approach their roles as SEC Commissioners.
That being said, I would like to renew my concerns with the SEC's
proposed Regulation B, implementing Title II of the Gramm-Leach-Bliley
Act. As the witnesses testify today, I will listen especially close to
comments on Regulation B, the so-called ``Pushout'' rule.
I am worried that too little is being done to revise the rule in
order to have it comport with Congress' intent that certain traditional
bank activities--such as trust and custodial activities may continue to
be conducted in the bank rather than being ``pushed out'' into an SEC
registered broker/dealer affiliate.
The small and medium-sized banks in my home State of Michigan are
very concerned about the costs and consequences of having to implement
a regulation that they feel runs counter to the intentions of the
Gramm-Leach-Bliley Act.
Between now and the end of September, I look forward to working
with the Commission on providing a common sense approach to the issue
of securities activities inside our small and medium-sized commercial
banks.
Also, I am interested in hearing the witnesses comment on how we
can better secure our financial markets and make them fair for the
common investor. As we continue moving toward a future where more and
more households are invested in the market, we must do all we can to
ensure that the average investor--the investor who does not have access
to levers of power on Wall Street--can invest without fear that the
mutual fund they are investing in, or the brokerage house that they
hired, are covertly working against them by gaming the system.
We saw the vivid results of this type of malfeasance in 2003 and I
am glad to see that the SEC is making a concerted effort to address
many of these problems. If we are to help our constituents secure their
retirement future and encourage the American public to save, then we
must give them the piece of mind that the playing field is level and
they are not at a disadvantage when putting their money into the
market.
I look forward to the testimony.
Thank you, Mr. Chairman.
----------
PREPARED STATEMENT OF TED STEVENS
A U.S. Senator from the State of Alaska
July 26, 2005
I am pleased to join the Senators from California in recommending
Chris Cox as the next Chairman of the Securities and Exchange
Commission.
Chris graduated from Harvard Law School where he was editor of the
Law Review and also received an MBA. Chris has represented Orange
County in Congress for 17 years. A bipartisan consensus builder, every
bill and report from the three Congressional Committees he has chaired
during his House career was unanimous and bipartisan--No exceptions.
His 1995 legislation to protect investors from fraudulent lawsuits,
and from extortion by unethical lawyers, was approved in both the House
and the Senate with overwhelming support. Its principal co-author in
the Senate was Chris Dodd.
This landmark legislation, which passed with a bipartisan majority
in both the House and the Senate, imposed new responsibilities on
accountants to discover fraud, and put an end to the ethical abuse of
professional plaintiffs in class actions. Now, court-appointed
representatives in securities class actions are seeing to it that more
of the recoveries go to shareholders, who were harmed instead of their
lawyers.
Through a long and distinguished public career over two decades in
the White House and in Congress, Chris Cox has shown that he is
independent, tough-minded, fair, and bipartisan. He is committed to
enforcing the rules of the marketplace for the benefit of every
investor, and to upholding the integrity of our capital markets.
While this Committee will review Chris' qualifications carefully,
he has already gone through an even tougher confirmation process. He
had to convince his wife, my good friend and one of the smartest
lawyers I know, Becky Gernhardt, to marry him. Many of you know Becky
from her public service in the Assistant Majority Leader's Office, the
Reagan White House, and of course, the Base Closure Commission.
I urge this Committee to act quickly on this nomination and to
report it to the full Senate for consideration.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
RESPONSE TO A WRITTEN QUESTION OF SENATOR CARPER
FROM CHRISTOPHER COX
Q.1. We have all heard assertions about the problems with the
rules under Section 404 of Sarbanes-Oxley. As you know, that
Section requires the SEC to develop and adopt rules that
require companies to report on the management of companies'
internal controls over their financial reporting. As some of us
have heard, these reporting requirements are cumbersome and the
audits are expensive, at least the initial ones. I would just
like to ask each of our nominees to comment on this issue, to
give us a sense of whether you think there is a problem or not,
and what steps should be taken as we go forward so that we can
have robust, vibrant markets and also strong investor
protections.
A.1. I strongly believe it is possible to have both robust,
vibrant markets free of unduly cumbersome and expensive
regulatory requirements, and strong investor protections. I
continue to strongly support the Sarbanes-Oxley Act, and was
proud to serve on the House-Senate Conference Committee that
wrote the law. I believe it was then, and remains now, an
important and necessary response to the high-profile scandals
that shook corporate America and to the subsequent crisis in
investor confidence. In particular, the internal control
reporting provisions of the Sarbanes-Oxley Act have the
potential to provide significant long-term improvements in
financial reporting. But it is important to both investors and
public companies that the Commission ``get it right.'' As we go
forward, the Commission and the PCAOB must offer increasingly
clear, refined, and useable guidance in order to achieve the
twin objectives of robust markets and strong investor
protections.
RESPONSE TO A WRITTEN QUESTION OF SENATOR CARPER
FROM ROEL C. CAMPOS
Q.1. We have all heard assertions of the problems with the so-
called Section 404 rules of Sarbanes-Oxley, and as you know,
that Section is designed to require the SEC to develop and
adopt rules that require companies to report to the management
of the companies' internal controls of their financial
reporting. And some of us have heard, I am sure we have all
heard from time-to-time, that these reporting requirements are
cumbersome and that the audits are expensive, at least the
initial ones are.
I would just like to ask each of our nominees to comment on
this issue and to give us a sense of whether you think there is
a problem or not and what the steps are you think should be
taken as we go forward so that we can have robust, vibrant
market and also strong investor protections.
A.1. Given the need for U.S. investors to have confidence in
the internal controls of companies in which they invest and to
see that an independent auditor has attested to those internal
controls, Section 404 may be compromised if an important
segment of issuers is not subject to the same disclosure
standards as apply to the majority of issuers. This was a
fundamental piece of the Sarbanes-Oxley Act and to give the
foreign issuers or small issuers an out may not be in the best
interest of investors. Yet, both of these classes of issuers
must be analyzed separately. Section 404 of Sarbanes-Oxley
specifically focuses on mitigating the risk of improper conduct
in the areas of accounting and financial reporting by ensuring
that companies' internal controls over accounting and financial
reporting are strong enough to create a safety net. Section
404's mechanism for doing this is to require an audit of
internal controls in conjunction with the audit of financials
and an attestation by corporate management and independent
auditors on the effectiveness of internal controls.
The first season of the internal control audits is coming
to a close and we are seeing that 404 was an important tool in
mitigating risk. While many have complained about the costs of
compliance with 404, I believe that, in time, renewed investor
confidence in companies' reports will pay off. One must also
remember that many of the most significant costs are one-time
costs that likely will not be repeated in subsequent years. As
former Chairman Donaldson stated in a Congressional Hearing
before the House Finance Services Committee, ``the time,
energy, and expense that companies are now investing in their
internal controls, will earn a handsome return in the years to
come.''
With respect to foreign issuers, I believe it is unlikely
that we will see an exodus of foreign issuers from the U.S.
markets. There are many reasons why we expect a continuing and
strong presence of foreign issuers in the United States.
Nowhere in the world can foreign issuers raise as much capital
as quickly as they can in the United States. In addition, the
Commission historically has lightened the foreign issuers'
disclosure burdens. Foreign issuers' financial statements can
be prepared in accordance with home country accounting
standards, provided the registration statement discusses and
any material variations from U.S. GAAP. Foreign issuers also
have certain options not to disclose certain categories of
information that are mandatory for all U.S. issuers, such as
breaking down revenues and earnings by lines of business and
pension obligations. Foreign issuers have much lower burdens of
disclosure regarding management compensation and related party
transactions than customarily apply to U.S. issuers by virtue
of Items 402-404 of Reg. S-K. Plus, further accommodations to
foreign issuers were made when the SEC amended Form 20-F so
that it more closely mirrors the disclosure standards
established by IOSCO.
With respect to small issuers, the need for confidence,
comfort, and comparability is no less but the analysis differs
because of the particular barriers faced by new and small
issuers. I am eagerly awaiting any recommendations of the
Smaller Public Company Advisory Committee tasked with examining
this issue. I also understand the Commission on Fraudulent
Financial Reporting, at the staff 's suggestion, is working to
provide additional guidance for smaller companies. Any changes
to Section 404, whether for small or foreign issuers, must
follow a careful risk analysis before the Commission can
conclude that such accommodations will still afford investors
the necessary protections and maintain their confidence in the
markets.
RESPONSE TO A WRITTEN QUESTION OF SENATOR CARPER
FROM ANNETTE L. NAZARETH
Q.1. We have all heard assertions of the problems with the so-
called Section 404 rules of Sarbanes-Oxley, and as you know,
that Section is designed to require the SEC to develop and
adopt rules that require companies to report to the management
of the companies' internal controls of their financial
reporting. And some of us have heard, I am sure we have all
heard from time-to-time, that these reporting requirements are
cumbersome and that the audits are expensive, at least the
initial ones are.
I would just like to ask each of our nominees to comment on
this issue and to give us a sense of whether you think there is
a problem or not and what the steps are you think should be
taken as we go forward so that we can have robust, vibrant
market and also strong investor protections.
A.1. I believe Section 404 of the Sarbanes-Oxley Act is
fundamentally sound and an important tool for improving the
accountability of issuers. That having been said, I am also
sensitive to the costs issuers have incurred in the first year
of implementation. Earlier this year, the Commission and PCAOB
board members hosted a roundtable on implementation of the
internal control reporting provisions under Section 404. During
this dialogue, the Commission learned about the benefits
issuers experienced, including improved focus on internal
controls and the prospect of improvements in investor
confidence, transparency, and financial statement quality. The
Commission also explored the reasons for the significant costs
to issuers of implementation, some of which were one-time, and
others of which were based on interpretive concerns, such as
auditors undertaking a very conservative scope of testing or
duplicative testing by management and auditors. The staff has
since issued interpretive guidance to focus management and
auditors on implementing a risk-based approach to the rules. It
is our hope such an approach will reduce the time and expense
of compliance with Section 404. I also understand the Smaller
Public Company Advisory Committee is studying possible
improvements regarding implementation for small businesses and
may make recommendations. I will encourage the Commission staff
to continue to request feedback on progress, monitor costs, and
consider further opportunities for improved implementation. I
will also support identifying and developing best practices in
this area.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING
FROM CHRISTOPHER COX
Q.1. As you know, the SEC has proposed a new Regulation B to
Section II of the Gramm-Leach-Bliley Act. The Fed, along with
the FDIC, the OTS, and the OCC wrote a very strong letter to
the SEC opposing their proposed regulation. The SEC has delayed
the implementation of the rule, but it is due for review in
September. Will you consider the opinions of the banking
regulators while reviewing Regulation B?
A.1. Yes. As you might imagine, given our service together in
1999 as Members of the House-Senate Conference Committee that
wrote the Gramm-Leach-Bliley Act, I well appreciate your
abiding interest in the question of how best to ensure
functional regulation of securities activities conducted by
banks. I will work diligently to gain a full understanding of
the issues surrounding the Commission's proposed Regulation B,
including listening carefully to the opinions of banking
regulators, those in the banking industry, investors, and other
stakeholders.
Q.2. As you know, the Independent Chairman rule proposed by the
SEC was overturned by a Federal court. It was then revoted out
by the SEC. This proposed rule was very controversial and was
fought by Commissioners Glassman and Atkins as well as many
Members of this Committee. Will you be reviewing the
Independent Chairman rule if confirmed?
A.2. Because the Commission's mutual fund governance rule is
again before the court, it is likely that the Commission will
receive additional, and legally binding, guidance. I will
review the issues surrounding the rule in detail, and in
particular will abide by the decision of the court in both
letter and spirit.
Q.3. As you may know, the TVA has agreed to voluntarily
register with the SEC. The TVA has over $25 billion in publicly
traded bonds, many of which are held by seniors in the
Tennessee Valley. I would ask you to watch over this process
carefully and make sure these bondholders have the safety and
security that other investors have enjoyed for a long time.
Would you do that as Chairman?
A.3. Yes. I will ensure that the Commission carefully reviews
the TVA's filings to ensure its disclosure to the public and to
bondholders is full and transparent.
Since its creation in 1933, the Tennessee Valley Authority
has been considered an agency and instrumentality of the United
States, but the debt TVA issues is only an obligation of TVA
and is not guaranteed by the United States. Last year, the
Congress enacted a law requiring TVA to file with the SEC
annual, quarterly, and current reports with the Commission
beginning with its fiscal 2006 annual report.
While the law does not require TVA to register its
securities with the SEC, the SEC's Division of Corporate
Finance will be responsible for reviewing TVA's filings for
compliance with the disclosure requirements of the securities
laws and regulations. I can assure you that I will indeed watch
over this process with great care to ensure full and fair
disclosure as required by the securities laws.
RESPONSE TO A WRITTEN QUESTION OF SENATOR BUNNING
FROM ANNETTE L. NAZARETH
Q.1. You have testified before this Committee before on the
Nasdaq exchange application. As you know, this application has
yet to be approved or rejected. Can you tell me why it has
taken so long to come to a decision?
Do you think 4 1/2 years is too long to wait?
A.1. The Commission should always endeavor to respond to
matters, including exchange applications, as expeditiously as
possible. Nasdaq's application to register as a national
securities exchange has been pending with the Commission for
several years. A number of difficult policy issues were raised
by the application, many of which required significant effort
by Nasdaq to resolve. For example, Nasdaq currently lacks price
priority rules that all of the other exchanges have. The lack
of price priority rules raises profound market structure issues
that could have implications for all of our registered
exchanges and, ultimately, investors. In an effort to move its
application forward, Nasdaq and NASD recently agreed upon a new
structure, which would separate Nasdaq's internalization
business into an entity under the regulatory control of NASD.
Also, Nasdaq has proposed to modify its rules so trades
executed on its proposed exchange would be pursuant to price/
time priority rules. The Commission has published both of these
proposals for public comment. Nasdaq will amend its Form 1
application for registration as a national securities exchange
to reflect this new structure. I expect the amended Form 1 to
be published for public comment shortly after its filing by
Nasdaq with the Commission.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORZINE
FROM CHRISTOPHER COX
Q.1. The recent attacks in London are a horrible reminder that
the threat of terrorism is still with us nearly 4 years after
the attacks of September 11, 2001, and is likely to remain for
some time. As you know, given your background as Chairman of
the House Homeland Security Committee, ensuring the stability
of our economy and the continuity of markets and business
operations is an essential component of our homeland security
strategy. The SEC, along with other financial regulators, plays
a vital role in this mission. In the wake of September 11, one
of the lessons we learned was the importance of reinforcing the
telecommunications infrastructure that supports our financial
markets. But the cost building in redun-dancies and backup
capabilities can be high. Nearly everyone agrees that the
Federal Government must play some role in bearing a share of
the cost. Do you think we have done enough relative to ensuring
continuity in the event of a terrorist attack, and what further
actions would you recommend? For example, would you recommend
that the President exercise his authority under the Defense
Production Act, which allows him to order economic activity for
national security purposes, such as the manufacture of more
bullets during a time of shortage, now that it includes
critical infrastructure?
A.1. Since September 11, 2001, much has been done to ensure
continuity in the event of a terrorist attack, but much more
remains to be done. Ensuring the continuity of critical
operations in the financial sector in the event of another
terrorist attack will remain a top priority for the Securities
and Exchange Commission. The threat of terrorism, including
terrorism directed against the financial sector, has not
abated. I will work closely with the other Commissioners,
Commission staff, other Federal and State agencies, law
enforcement, self-regulatory organizations, and private sector
stakeholders to see to it that market resiliency safeguards are
implemented effectively and completely. With respect to the
Defense Production Act, I would concur with the premise of your
question that, despite its enactment over a half century ago in
very different circumstances, this Act is highly relevant to
the war on terrorism in the 21st century. Already, the law has
enabled the Homeland Security Department to expedite the
production of communications systems for airports. To the
extent that the President and Congress wish to extend the use
of this authority to the Nation's financial markets and
associated infrastructure, the SEC will energetically cooperate
and offer its expertise.
Q.2. In light of the New York Stock Exchange's proposed merger
with Archipelago--which will necessitate a number of structural
changes to the NYSE's regulatory structure--do you agree that
this would be an opportune time to go a step further and adopt
a new approach to the regulation of broker-dealers through
consolidation? It is my understanding that the securities
industry supports combining the functional regulation of
broker-dealers, which is currently duplicated by both the NASD
and the New York Stock
Exchange, into a ``hybrid'' SRO, while allowing each
marketplace to regulate its own trading activities and set its
own listing standards? In a related area, SRO's impose market
data fees to fund self-regulation. Do you think it is
appropriate public policy for market data to generate revenues
for SRO's to subsidize their regulatory obligations or to fund
competitive business activities?
A.2. The suggestion that broker-dealer regulation currently
conducted by both the NASD and the NYSE be combined in a
``hybrid'' SRO is one that should be evaluated in the context
of an ongoing appraisal of the role that self-regulatory
organizations play in our securities markets as standard-
setters for listed companies, operators of trading markets, and
front-line regulators of securities firms. An abiding goal of
the SEC must be to see to it that SRO's, which can face
conflicts of interest when they operate a market, remain
unbiased when at the same time they fulfill their
responsibility to regulate their members who trade in that
market.
The Commission's proposed minimum governance standards and
greater transparency of SRO regulatory programs are intended as
a first step to address such competitive and regulatory
concerns. I will carefully evaluate the Commission's proposals
on these matters, together with the comments received by the
Commission, before reaching conclusions on how the Commission
should proceed.
With regard to your further question, market data fees have
played an important role in funding the regulatory obligations
of the SRO's. In Regulation NMS, the Commission amended the
formulas in the Market Data Plans that allocate revenues from
consolidated data to the various SRO's. The amendments were
designed to promote the wide availability of market data and to
allocate revenues to SRO's that produce the most useful data to
investors. I agree with the implication in your question that
the use of market data fees to subsidize competitive business
activities may raise serious public policy concerns that merit
the continuing attention of the Commission.
Q.3. In a recent GAO report entitled ``Environmental
Disclosure: SEC Should Explore Ways to Improve Tracking and
Transparency of Information'' that I, along with other
Senators, commissioned, one of the GAO's recommendations was
that the Chairman of the SEC work with the Administrator of the
EPA ``to explore opportunities to take better advantage of EPA
data that may be relevant to environmental disclosure and
examine ways to improve its usefulness.'' Knowing your interest
in ensuring the transparency of
financial reports, what steps will you take as SEC Chairman to
implement this and other GAO recommendations to ensure and even
improve proper enforcement of environmental reporting
requirements, such as those under SEC Regulation S-K, requiring
companies to report all material financial and nonfinancial
information related to their environmental activities,
liabilities, trends, and uncertainties?
A.3. I will follow the GAO recommendations with a view to
ensuring and improving the full and fair disclosure of material
information. Specifically, with regard to environmental
disclosure, I will work to improve compliance with current
requirements mandating that public companies disclose material
information relating to environmental litigation, remediation,
regulatory compliance, and other environmental issues. In
addition to enforcing compliance with these disclosure rules
through its disclosure review program, the Commission will,
under my leadership, build upon the open and cordial
relationship that has existed between the SEC and the
Environmental Protection Agency for some time. It is my
understanding that, in response to this GAO recommendation, the
staff of the SEC and the EPA has already met to discuss how
they can more effectively share information.
The GAO included two other recommendations in its report; I
understand that each of these recommendations has already been
implemented.
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