namely the incremental cost of authorizing, clearing and settling of a transaction, as well as other costs that the board may consider because they're incured in the course of affecting an electronic debit transaction. of these other transaction costs, we recommend that in addition to the costs allowed under the original proposal allowable costs of network processing fees and other transaction processing costs such as the cost of network connectivity and the cost of processing equipment and software, in addition, we recommend that costs of transaction monitoring be included as an allowable cost because these activities are integral to the authorization decision. we further recommend that a portion of fraud losses be incorporated as an allowable cost because issuers they incur losses for fraud they cannot prevent. allowing a portion of fraud losses recovered is not eliminate the incentive to monitor and prevent fraud. because the cost of fraud losses

varies with the amount of the transaction, we believe that fraud losses are best incorporated through a component in the interchange fee standards. turning to the implementation approaches, numerous issuers, trade groups, networks and individuals objected to the fee limits embodied in the cap under both alternatives and the safe harbor. however, many of these commenters recognized the app l appealed and acknowledged a pure specific standard would be difficult to implement and enforce. although many issuers argued against both alternatives, a significant number preferred alternative two, the standalone over alternative one, the framework with the safe harbor in a cap due to the second alternative's ease of come ploins. however, many of these commenters suggested raising the cap value for expanded definition and to cover the costs of a larger percentage of covered issuers.

merchants uniformly supported alternative 1 as being the most consistent with the statute. merchant commenters generally preferred a more issuer specific approach because issuers would receive interchange fees tied to actual respective costs, aulg though some of these commenters acknowledged that a cap or a safe harbor would make the interchange fee structure simpler for merchants to understand which could increase transparency. however, they advocated a lower safe harbor value arguing that a higher safe harbor would allow a large fraction of issuers to receive interchange fees above their actual allowable costs. similarly, merchants generally supported a lower cap to discourage issuers from incuring and compensated for excessively high costs. we believe that the best reading of the statute's reference to an issuer and a transaction is to interpret those terms to refer to a representative issuer and a representative transaction

rather than a specific issuer and a specific transaction. a approach based on a more specific reading of those terms would be virtually impossible as an issuer costs for each specific transaction which may vary cannot be ascertained at or time the issuer received the interchange fee. therefore, with respect to the implementation approach, we recommend that the final rule adopt a modified version of the proposed rule, that is, apliblgible to all covered issuers. under the final rule, the maximum permissible interchange fee would be the sum of a base component. we recommend that the base component set at 21 cents, which corresponds to the 80th percentile issuers average transaction allowable costs as reported in the board survey of covered issuers. we further recommend that the component set at five basis points of the transaction value,

ri flekting the median issuer's fraud losses as reported in the same sur vafr. each covered issuer permitted to receive an interchange fee that did not exceed the sum of two components without demonstrating the actual per transaction allowable costs. with respect to the statute's requirement that an interchange fee be reasonable and to portional to the cost of the issuer, we believe that the cap delineates a separation of a fee that's reasonable and not reasonable. moreover, because it's based on certain costs for affecting particular electronic debit transactions, the standard ensures that sfees are proportional to those costs as required by the statute. these interchange fee standards would be effective on october 1st, 2011. the final rule also contains provisions that prohibit sir couple vengs or avags of the standards. the statute authorizes the board

to allow for adjustment to an interchange fee to account for an issuer's costs in preventing fraud from vided complying with standards established by the board related to fraud prevention activities. the proposed rule did not include a specific adjustment to the amount of interchange fees for an issuer's fraud prevention costs. instead, the proposal requested about comment of two broad approaches to designing standards. the first focused on general fraud prevention activities and costs. the second focused on recouping costs of new or substantial improved fraud prevention technologies. although commenters did not uniformly favor either proposal, they generally agreed that the board should not mandate use of specific technologies, merchant commenters favored a requirement that an issuer adopt technologies that would decrease fraud to be eligible for the adjustment. in contrast, issuers and payment

card networks preferred a nonprescriptive approach to allow issuers the flexibility necessary to tailor their fraud prevention activities to address most effectively the risk faced by the issuer associated with changing fraud patterns. we believe that the dynamic nature of the debit card fraud environment requires standards that permit issuers to determine the best methods to mitigate fraud losses for the size and scope of their program and in response to frequent changes in fraud patterns. as a result, we recommend that the board issue an interim final rule with a request for comment that basis eligibility for the fraud prevention adjustment on general standards for an effective fraud prevention program rather than prescribing specific measures or technologies. the general standards require an issuer to establish policies and procedures, reasonably designed to maintain an effective fraud

prevention program. as in the case of the interchange fee standards we considered a variety of approaches for implementing the fraud prevention adjustment. we recognized that both issuers and merchants make substantial investments in fraud prevention and the statute does not require the board to set an adjustment so that each issuer fully recovers the costs. as a result, we recommend that the fraud prevention adjustment be implemented through an addition through the cap applicable to all covered issuers. based on information about fraud prevention costs gathered through the board's survey of covered debit card issuers we recommend that the board permit a fraud prevention adjustment of no more than one cent per transaction which is based on the median issuer's fraud preconvenience costs as reported in the survey, less the cost of transaction monitoring included as an allowable cost in determining the interchange fee standard. when combined to the maximum interchange fee under the

standard, a covered issuer eligible for the fraud prevention adjustment could receive an interchange fee up to approximately 24 cents for the average transaction. a suggested by virtually all commenter it is fraud prevention adjustment effective on october 1st, 2011. we may recommend that the board make revisions to the adjustment as appropriate at a later date after we consider the comments received. in addition to rules related to interchange fees the statute requires the board to prescribe rules related to the routing of transactions. first, the board must adopt rule that is prohibit issue herbs and payment card networks from restricting the number of networks on which a debit card transaction may be processed to fewer than two unaffiliated networks. second, the board must adopt rule that is prohibit issuers and networks from restricting the ability of merchants to route debit card transactions over any network that may

process such transactions. these provisions apply to all issuers including small issuers and certain prepaid card programs that are exempt from the interchange fee restrictions. the proposed rule included two alternatives for implementing the prohibition on network exclusively arrangements. alternative "a" requires a debit card transaction routed over at least two unaffiliated networks irrespective of the authentication of the authentication methods on the card. alternative "b" would require two affiliated networks for each authentication available to the card holder. under either alternative, issuers would be prohibited from restricting merchant routi inin choice among the networks enabled on a card. issuers in payment card networks universally preferred alternative "a." it would impose less severe operational burdens and would

not have as large a negative effect on the development of new authentication methods. merchants preferred alternative "b", which they believed would provide the broadest routing choice. such as many online transactions. merchants also believed this alternative would not require substantial operational changes for issuers and networks. we recommend the final rule adopt alternative "a." the recommended final rule requires two unaffiliated networks to be enabled on each debit card without regard to authentication method. under the final rule, an issuer could comply by having one signature network and one affiliated pin network, or alternatively two unaffiliated pin networks or two unaffiliated signature networks enabled on a card. we believe this approach is consistent the statute, which

prohibits issuers of payment card networks from restricting the number of payment card networks on which a debit card transaction may be processed to fewer than two unaffiliated network. moreover, the statute does not require two payment card networks available to the merchant for each method of authentication. we further believe this approach would minimize the compliance burden on institutions, particularly small issuers, would present less authentication methods. the statute does not establish an effective date for the exclusivity and routing provisions. under the final rule t prohibition would be effective april 1st, 2012 with respect to issuers and october 1st, 2011 with respect to payment card networks. the final rule includes a delayed effective date for certain prepaid cards that may

face technological or operational difficulties with complying by april 1st, 2012. the effective date on routing restrictions would be october 1st, 2011. the earlier effective date will enable merchants to take advantage of enhance erouting flexibility. my colleagues and i would be happy to answer any questions you have. >> thank you very much. thanks to the staff again for a tremendous amount of work on this very challenging rule. we've been talking about issuers and merchants and networks. the ultimate beneficiary, we hope, is the consumer. how do you think this rule will affect consumers? >> i'll answer that question. it's very hard to predict the effect that the rule will have on consumers because the effect

is going to depend on the actions taken by various participants in the payment -- in the debit card system. on the one hand, card issuers are likely to implement changes in response to introduction interchange fee. although the staff thinks it's unlikely that issuers would actually impose fees on debit card transactions, per se, or engage in other activities that are designed to steer their customers away from using debit cards, we would expect that at least some cards issuers would change some terms facing their account customers, such as reducing or eliminating rewards

associated with debit cards, perhaps imposing certain fees on deposit customers more generally or reducing benefits on deposit customers more generally. at the same time, it's likely to reach consumers in the form of lower prices. the extent to which the savings do get passed on will depend on the competitiveness of the markets in which the merchants operate. merchants who operate in highly competitive markets with low margins are likely to pass on substantially all the savings to their customers. merchants in less competitive markets may keep a larger portion for themselves. if they continue their current practice of not varying prices with payment method, any savings that do get passed on will be shared by all consumers, regardless if they pay with

debit cards or other forms of payment. see the effect on any individual consumer will depend on their p behavior. do they use debit cards or not? on the competitiveness of the merchants with whom they do business, on any changes in merchant acceptance of various payment card methods and on the bank's reactions in terms of how they adjust any account terms. so it's hard to predict how any individual consumer will be affected and in aggregate, how all consumers will be affected. we can't say in advance how those are going to play out. >> thanks. >> one of the differences -- one of the most important differences between this rule and the preliminary rule is the expanded set of costs that you are allowing in calculating interchange fees. can you talk about how you decided which costs would be included? maybe what the legal reading is

that supports that. >> let me fry to answer that one. we first focused on a statute that prohibits the board from considering. those were costs not specific to a particular debit transa. as mark alluded to in his presentation, that would include corporate overhead, audit, billing department, hr department, those kinds of costs. what the board is allowed to consider are the costs that are specific to particular debit card transactions. those would include the costs the board proposed to permit as allowable costs. the authorization clearance and settlement, which the statute in fact requires the board to consider. but then a range of other costs that are also specific to particular transactions. and we considered those, and we looked at the data we had on

those. some are included in the final rule and some are not. for example, fixed costs of software, hardware, that goes towards affecting a particular transaction. those are included in the proposed fee standard. other costs such as rewards, customer inquiries, arguably they are particular to specific transactions, but for the reasons we laid out in the federal registry notice, those were not included in the interchange fee standard. >> okay. thank you. >> thank you, mr. chairman. mark noted in his presentation that the proposed interchange fees standard has to meet the statutory requirement that the interchange fee be reasonable and proportional to an issuer's kogs. i noted in looking through the

public comments that a number of commenters indicated that in rankings for public utilitieuti the interpretation that would typically be given to the term reasonable would include some markup to allow for a fair rate of return. >> so getting back to the costs that the board is prohinted the from considering those would be costs not specific to a particular transaction. a rate of return overall on your debit card program is difficult to attribute to a particular transaction. i would also say many of the rate making cases use a term

just in reasonable rates. we have a different term here. reasonable and proportional to cost. congress wanted us to rely on this. they could have used that term. they did not. we were interpreting it differently. >> thank you very much. >> one other question is i wonder if you talk a little bit about what impact you think this rule is likely to have on innovation in the payment system more broadly. i noted some commenters were concerned that this is a rule that could inhibit innovation. i wonder what your perspectives are. >> so we did receive a lot of comments to express concern about the potential effect of the rule on innovation. the commenters would note the

effect and development of authentication methods. like new form factors, like mobile payments. or new fraud prevention technologies. there were commenters that expressed concern of inhibiting the development of new technologies. there were also commenters, however, who wanted the rule to be applied evenly across new as well as existing technologies in order to create a level playing field, so as not to advantage one type of technology over another. we also recognize the importance of establishing basic ground rules that create a level playing field across different types of technologies. so the final role does not generally exempt innovative technologies for the provisions of the rule. we think that this does establish the level playing field that some of the commenters were looking for. and also creates regulatory

certainty for potential innovators going forward. at the same time we recognize that certain aspects of the rule could have an effect on innovation. that is going to impact the way in which they develop those technologies. but there are certain features of the recommended final rule that should have a mitigating effect on the negative effects of innovation. in the exclusivity portion of the rule, we are fot requiring multiple networks associated with each authentication method. this should help an innovator not have to open the technology to other parties. we are not using a technology specific standards. there will not be dictates about technologies are or are not acceptable. the market can develop the

technologies that are most effective. ultimately there will be an effect on innovations as the innovators have to meet the restrictions associated with the rule. certain aspects of the rule should mitigate some of the effects. >> thank you. governor duke? >> thank you, mr. chairman. following up on the chairman's questions about impact on consumers. other countries have implemented restrictions on interchange fees. could you talk about the experience they've seen respective to account holder fees, savings passed on by retailers, changes in discounts for different methods of payment? >> sure. there are two types of scenarios one could look at when looking at other counteds. one would be places where there's a government intervention to lower interchange fees. the second would be countries with a payment card system with

low ore zero interchange fees. it can be hard to draw conclusions about the affect of interchange fees on the outcome for consumers, banks and payment card networks. there are a lot of moving parts. there are a couple of general conclusions one can draw by looking at case studies in other countries. in response to change and interchange fees due to government intervention, there are often changes in account terms for card holders. for example, in australia when the reserve bank of australia lowered credit card interchange fees in their particular case, rewards for many cards went away. certain account fees were less attractive to the consumers. so a first lesson would be that there is generally some adjustment in terms of the account terms for card holders. but at the same time, the evidence doesn't suggest that having a high interchange fee is

necessary for the debit card or payment card system to function effectively. in australia when they cut the credit card interchange fees, banks continued to offer the kr credit cards and consumers continued to use them. in canada where there is no interchange fee on pin debit transactions, pin debit remains an important part of the deposit relationship between banks and consumers. we will expect some adjustment in terms of the fees, but we wouldn't expect to see a cig capital contraction in the supply of or demand for debit card services based on evidence in other countries. in terms of the effect of the interchange fee regulation and other countries on prices, that can manifest itself in two ways. first is in terms of the merchant discounts that merchants receive or pay. i'm sorry. and i think there is evidence that many of the decreases in interchange fees are passed

through in merchant prices. in merchant discounts. the evidence for consumer prices is much weaker. there are so many factors buffeting consumers prices that there's not been strong evidence documenting that any decreases in interchange fees and subsequent decreases in merchant discounts are passed through in terms of lower consumer prices at the point of sale. if you were trying to determine what the impact would be on the consumer here, are there any authorities you would need to collect data that you don't have today? >> well, we currently under the statute have authority to require payment card networks and issuers to provide us information, particularly information helpful for us in establishing the interchange fee standards. it doesn't explicitly give us the authority to require that merchants, for example, give us

information or other parties, but we can have surveys that they can voluntarily comply with in terms of providing us that information. >> thank you, mr. chairman. >> governor? >> no questions, thank you. >> governor? >> yes, thank you, mr. chairman. looking at how issuers cost accounting systems capture cost data i'm wondering if there's any external sources of cost estimates that were used in craft i crafting the regulation to serve as a way to cross check what the staff saw that came from the surveys put out by the fed. >> we didn't explicitly use the e ternl cost data. we used the data we gathered through our survey.

having said that, we did look at various external cost studies associated with issuer costs. there are various problems, including the cost accounting systems can differ allot across firms. and in addition, whether or not a firm outsources things to a third party may affect their ability to identify certain types of cost components. and finally we recognized as we were performing the incentive effects associated with reporting for respondants enganged in the exercise we were looking at. but when we did look at the external studies, performed by consultants and processors and payment card networks, the numbers they got were largely comparable to what we received from our su va. there are caveats associated with that in they didn't survey the same issuers we surveyed.

the level of granularity, we don't know how well that compares. at least it's sort of an aggregate level. their estimates are largely comparable to what we got. which makes us think our numbers are not radically off or the surveys are not radically misreported in our formulation. >> thank you. >> okay. thank you. at this point i would like to hear positions. let me start with you, vice chair. >> thank you, mr. chairman. i supported the option of the proposed final rule on debit card interchange fees and routing. i want to commend and thank the staff for the pain staking effort they've invested in preparing this final rule. importantly staff carefully analyzed over 11,000 comments that were received, and these

comments raised appropriate issues relative to the implementation of the durbin amendment. they were extremely helpful in guiding the revision process and in particular, as mark mentioned, significant changes have been incorporate d in the final rule in response to the comments we received. in crafting the final rule, staff assessed the legal requirements governing rule making under section 1075 of dot frank. and to the extent possible also considered the likely economic impact to result from alternative implementation choices. the final rule carefully adheres to congress' mandates relating to network exclusivity and routing, and to its direction, to establish standards for assessing whether the amount of any interchange transaction fee that an issuer may receive or

charge with respect to an electronic debit card transaction is reasonable and proportional to the cost incured by the issuer with respect to the transaction. the final rule strives to ensure that issuers retain incentives to reduce operating and fraud costs over time. and it aims to avoid consequences that could be dilitarious. a long-term goal of the federal reserve is to facilitate a transition from a payment system reline on paper check and cash to more efficient and convenient electronics based technologies. debit cards have helped speed that transition. staff have recognized the importance of establishing an environment that will be conducive to continued innovation in the payment system in the years ahead, one

receptive to the adoption of promising new technologies. they further sought to establish a standard that will be transparent and reduce the burden on supervision. the legislation directing this rule making was motivated in part by the fact that interchange fees in the united states have increased substantially over time. where as in those countries where interchange fees have historically been low or have been limited by government intervention, the use of debit cards has remained robust this escalation may well reflect a market failure. economic theorys suggest, however that the determination of prices in two sided markets like the debit card network are complex, regarding important network and usage extern

externalalities. the literature recognizes that networks will valuable because they can serve to reduce transactions cost, and the pricing and strategy on such two-sided platforms will be influenced by the network effects. our notice provides economic analysis pertaining to the cost and benefits of the proposed rule for the key affected groups. merchants, large and small financial institutions, and banked and unbanked consumers. the ultimate welfare effects are impossible to ascertain in advance. the impact of the rule will depend on the behaifrl responses of all parties. how they respond to the reduction in revenue from lost interchange fees and their pricing and product offerings.

how consumers respond in their choice of payment methods. whether merchants pass through to consumers any interchange fee cost reductions and how market participants more generally respond to the interchange fee network exclusivity and routing provisions, which could affect pricing and competition throughout the broader retail payments market. these responses cannot be easily predicted based on existing information. because this will affect the livelihood on consumers, businesses and financial institutions large and small, as well as the evolution of the payment system, it will be important for all of those interested in sound public policy to study and carefully assess the impact of this rule on the well being of the affected groups and the fishtdsy

and dynamics of the payment system in the years ahead. >> thank you. governor duke? >> thank you, mr. chairman. i want to start by acknowledging the quality and quantity of work that's gone into this proposal. in the initial proposal and the final the staff demonstrated the comprehensive understanding of the structure and economics of debit interchange. the individual members of the team brought their own experience, knowledge, insight, creativity and perhaps most importantly patience. this has not been an easy law to implement. i believe every effort has been made to choose carefully from among the schemes possible under this statute. issuers, networks, merchants consumers and other members of congress comments forcefully and passionately. the comments received were often

in opposition to one another. as i read through each section, i concluded the final decisions reflect thoughtful attention to the positioned argued by all sides. i would like to comment on the sections on standards, network exclusivity, exemptions and the anticipated effects of the rules on various parties. with respect to standards, we first had to address which costs should be included or excluded in determining whether the interchange fee was reasonable and proportionate to costs. within the costs determined to be relevant many establishing the cap we had to determine where to draw the line. i believe the cost included is reasonable. further i believe the decision to follow alternative the establishment of a cap is the best approach. i think that it is permtded by the statute and that the advantage of simplicity in

transparency will lead to more effective implementation. this creates an incentive to reduce costs as the amount is recalibrated with updated information. i believe the choice of alternative "a", the requirement that cards be enabled with two unaffiliated networks without regard to authentication method is the correct option. it meets the requirements of the statute in a way less complicated and costly to implement than vk two networks. it also accomplishes changing the dynamic network for payment networks by allowing merchants to choose the lowest cost routing available. and it would not require pioneers to wait for a second competing network to become available.

when i think about except issuers that i run into problems. the statute stops three administrato administrators. reloaded general purpose prepaid cards not marketed as zbift cards. we received numerous comments expressing concern that the kemgs would not be effective in practice. i agree with this concern. indeed when i ask about the exemption at the previous board meeting, the staff acknowledged there was no way to no for it would be effective. the staff pointed out then and in the final rule that the statute will permit but not do require the networks to establish higher interchange fees for exempt issuers than for covered issuers. we have way way to know if or how this will work. we have no authority to enforce such a structure. i applaud the decision to provide networks with lists of

exempt small issuers in an effort to save them the administrative costs. the other method seems just as likely to work to reduce the incentives as to create such an incentive. we plan to survey issuers and networks and publish a list of fees. this could enable exempt issuers to find the network with the most favorable rates. it could just as easily leave merchants and acquirers to route away from the networks. if you define it as the cost or loss of revenue resulting from regulatory action. small issuers may be held to an interchange fee targeted to be reasonable and proportional to costs incured by larger

institutions, but because they were exempt, the cost incured by smaller institutions were not shown. i believe it was a desire not to impose the burden on them. the exception may not work for government administered program or prepaid cards. i do recognize that small institutions can offstet the costs by charging higher customer fees for debit cards checking accounts or other services. debit cards are not a stand alone service but rather one of many methods of accessing a checking account. prepaid cards are stand alone services. the reduction in revenue can only be offset. and profit required in the first place can only come through fees

charged by government entities or the card holders using them. in a time of austerity at every government level, a time when governments including the federal government are issuing benefits electronically to save the cost of issuing paper checks it seems unlikely that governments who contract will be in a position to absorb the additional costs so the fees will fall to the beneficiaries who use the cards. if the exception cannot be realized anyway, the incentive not to charge overdraft fees and to allow a single fee withdraw in order to qualify would be negated. i read with great interest the section concerning anticipated effects of the rule on various parties. i could not find any study of another country's experience that offered convincing evidence as to the ultimate impact on con suners. we are unsure what the ultimate effects may be. i would hope in the future we

would undertake a study to quantify the overall effect of this rule on consumers and to this the extent we don't have the authority to gather the data required to conduct such a study, i hope we'll request such authority from congress. finally, i would like to comment on the unavoidable impact, higher fees on checking accounts. one of my first projects was the study of banking account charges. i was working for a community bank contemplating service charges on checking accounts to offset the likely interest expense associated with now accounts, which were expected to be authorized in coming legislation. they were very expensive to process. we saw a ruk in the number of the smaller accounts and a corresponding reduction in expense significant enough to improve profitability. years later as more and more banks brought back free checking it took me a while to figure out what had changed.

until i discovered they changed the dynamic and made the low balance high transaction account profitable. now i have every confidence in the industry and in small credit unions to find new product models to restore profitability and checking account products significant to their business. it's likely to come at the expense of less accountability. the experience of other countries would suggest overall usage of debit cards for payments would not decline significantly as a result of the regulation but as fees for checking accounts rise, i would expected more consumers to turn to prepaid debit cards. i am concerned about the level of consumer protection covering prepaid reloadable cards. the work required to implement other parts of the act, we

couldn't get to it before the time came to transfer regulatory responsibility to the consumer financial protection bureau. i'm proud of all the rules we did propose, but i wish we would have done more on this front. i can only call on you to watch developments in the market and place a high priority on revisiting consume eer protection issue with prepaid cards. mr. chairman, i'm appreciative of all the work that's gone into this role. but given my conviction that the exemptions will not work in practice, cannot support the burden on small issuers and the highest cost on issuers and recipients of government benefits that will result if we can't find a way to make the exemptions effective. for that reason i oppose the final rule. >> thank you, mr. chairman. let me explain the standard i

imposed on myself by judging the recommendation from the staff. it's a two-part standard. first, as would be applicable in any action that we take the question is whether the proposal is consistent with the intent of congress as manifested in the language of the statute. but second, i think we have to toe focus on the the fact that we are required to act here. this is not a question of discretion on our part whether to act. so the second part was whether i have a concrete alternative proposal that would better realize my own policy preferences while also remaining consistent with the statutory language. with respect to the consistency of the propose d regulation, i believe the staff proposal is consistent with the regulation of the statute.

as discussioned in the register notice circulated by the staff. and as mark alluded to in his presentation a few moments ago. there are some possible readings, such as one to craft standards to make an exception to entail enormous levels of uncertainty in the part of issuers, networks and merchants alike as to what fees were acceptable. here and in other areas the staff has rightly opted instead for permissible readings of the am biggous provisions with sound economic incentives and greater certainty for all relevant actors. still there are provisions whose language does not admit interpretations that some may have preferred. for which there may be good

policy arguments. not on economic grounds, but on the grounds of statutory language would not admit that interpretation. i have a concrete alternative to sound policy positions while remaining consistent with congressional intent. while i share those concerns, i don't have an alternative consistent with the language of the statute that would better achieve the statutory aims. focusing on what the staff proposal was. so i do support the proposed regulation as presented by the

staff. they have done a heroic job of simulating the 11,000 comment water levels. and modifying the proposal on the basis of all these comments and questions. so as to improve it substantially. i'm sure, i'm positive there are many mer chabts issuers, consumers and networks which would want to change much of what has been proposed. it's on those grounds i agree with the staff recommendation. now, there is one matter on which congressional intent was quite clear. and that was the desire to

exempt small issuers for the limits on interchanged transaction fees imposed by the statute. unfortunately, though, the statute does not give us the authority necessary to assure achievement of that aim. there is reason to hope the aim will be realized as explained in the federal registry notice, but it's by no means certain. for everyone's convenience, i did write up this proposal i don't know if you can get it circulated. i won't spend a lot of time on it. i thought it was useful for people to see the language. it basically asks that by the end of six months following the effective date of the rule that the board staff should establish

separate interchange fees and secondly, with respect to networks that have established such separate schedules, how the interchange fees received by exempt issuers compare with those prevailing before the rule became effective. and i think that's a relatively straight forward thing to do based on the kinds of information that we contemplated them this will require some expenditures, time and resources beyond the kind of monitoring that was contemplated. that would be by the end of 18 months following the effective date of the rule, the staff determined and report to board on three matters. first changes in exempt issuers, changes over this period. second, whether there's evidence that merchants have rejected debit cards of customers of exempt issuers and third, how the network exclusivity

provisions from which these issuers reserve course not exempt have affected small issuer costs. i recognize ad second and third in particular will not be susceptible to comprehensive study but in an effort to gather relevant information will be useful for us for the affected parties and for the congress in assessing whether the intended exception was effective. i don't know how you want to proceed with this. kbl r. >> i agree. it shouldn't be a formal amendment. we should make it a sensible board. and instruct the staff to carry it out subject to any feasibility issues that arise in the process. is that acceptable? >> that's fine. >> let's finish with you and then before we vote on the full

rule i would like to hear views on her suggestion. >> needless to say, it's been enormously controversial. speeches were crafted lawsuits were filed. millions of lobbying dollars were spent and meetings have occurred. debates on the statutory provision and the proposed rule have been robust and acrimonious. i want to start by acknowledging the work of the exemplary staff here who handled the work neither as a crawl nor as a sprint, but handled it as the marathon that it was. they worked diligently and effectively and diligently to make sure we fulfilled the requirement set out in the law.

the law states the board shall prescribe regulations. and that mandate is what brings us here today. we are fot at liberty to say no. the staff proveeded with the utmost of good faith and consider ad number of alternative formulations it has attempted to craft a regulation as close in approximation to this congress' intent as possible to create a standard capable of being complied with and capable of being examined for and that minimizes as much as the language provided by congress allows the possible of adverse or perverse economic incentives. i also want to thank all the entity who is have informed this rule making through their submission of public comments. comments prepared by groups and

institutions for whom the cost is a large part of their budgets. one issue consistently trazed is the importance of ensuring they are reimbursed for legitimate debit card costs. this was a theme in comments from consumers as well as comments for banks and credit unions. this final rule, while not inclusive of all costs is inclusive of a broader swath of costs than originally proposed. this supports an interchange fee higher than the initially proposed fee and permits a recovery of costs by the vast majority of issuers of debit cards. because this leans towards the

inclusion of all permissible costs, there's little information for this rule alone to be the basis for making those banks and credit unions that operate officially less accessible the federal reserve needs to continue to pay close attention to this result as well as how the regulation affects small banks and credit unions which often provide safe, lower cost financial products to millions of americans. one virtue of the board's final rule is it provides the ability to watch whether a two-tiered price structure is maintained or erode

eroded we need to focus on the the future of payment methods exempt from the law. in particular, what will this rule mean in terms of the development and use saj of prepaid, reloadable nongift cards and from the perspective of the consumer will different types of payment methods provide americans with the ability to have their poor financial needs met in our economy. i want to underscore my colleague's unease. when a regulator has to intervene to better align pricing with costs, what market must be working less than competitively. we're only doing what congress said. it's no secret they had significant concerns about escalating debit and interchange fees. by some estimates those fees amounted to $16 billion in 2001 and stood at $48 billion in

2009. these have a disproportionately harmful effect on the 25% of the unbanked population and other consumers that pay by cash and checks since the consumers never receive the benefits of any card reward programs funded by interchange fees. the bottom 50% of income earners pays $66 # million more in higher prices to subsidize $554 million in payment card rewards. whether we ultimately disgreat on the functions, it appears that we have no choice in this matter but to adhere to congress's directive, even when the guide posts for achieving requirements are far from clear. the proposed rule is a worthy attempt, and i recommend it move forward. >> thank you, governor.

this was a difficult rule. i'm appreciative of the staff's effort. i think the final rule shows a lot of responsiveness to the many comments that we received, and i do think it's a good faith and carefully executed attempt to implement the will of congress in setting these parameters. the concerns that i have had have been making the exemption for smaller issuers effective. they are not exempt from the network if exclusivity rule, subject to the same forces that others will be subject to and the federal reserve does not have the power to require networks to maintain a two-tier pricing system.

they l give us the best shot at making that effective. it's described in more detail in the rule we intend to set up a transparent system in which we will regularly publish the interchange fees that networks collect for exempt and nonexempt issuers. we will monitor the effects going forward. if it doesn't work we'll know and think about what else can be done. it's encouraging many networks have maintained a two-tier system. i hope they will follow through with their commitments and those network who is have not yet committed will consider doing so. given that i think this is is best available solution that implements the will of congress and also makes economic decisions. for example, the use of a cap both simplifies supervision and

is also best for inducing cost min mization by issuers, i will support the rule. let me ask my colleagues if they have any questions or comments on the informal instruction to staff and see what the response is to that. >> i'm supportive of the proposal. >> as am i. i am algs. >> as we vote on this as we vote on this rule, then. we'll do that with the understanding that we will continue to monitor various aspects of the interchange market. and we will use the information, including updates and costs in thinking of appropriate measures

in the future. i need a motion. >> moved. >> second? >> second. >> let's go around. >> i support. >> i'm in favor. >> i support. >> i do as well. the motion carries. i thank the staff. thank the audience. the meeting is adjourned. [inaudible conversations] [inaudible conversations] [inaudible conversations]

>> the federal reserve board is just a voted four to 121 saint catherine credit card transaction fees that banks charge retailers. that was higher than it had previously proposed. you can watch this meeting began at her website, c-span.org. for more details on the debit card fee changes, go to federal reserve to.coast. democratic senators criticize court rulings that they say favor corporations over consumers, employees and investors.

>> earlier, his senate panel examined the numbers prima court ruling some other corporations. we'll hear from a former wal-mart employee who helped bring a class-action sex discrimination lawsuit that the court brought last week with the five to four vote.

senator patrick leahy during your screen chairs the senate judiciary committee. the republican ranking member senator chuck grassley. this hearing is just under 90 minutes. >> this morning, we're going to highlight several recent supreme court decisions. one, to examine the impact the lives of hard-working americans. in my view, each of these decisions give corporations additional power to act in their own self-interest and each limit the ability of americans as a day in court. in the tough economic times are facing around the country, it has a particular interest because american can immerse, employees will have a lot to protect them from fraud and discrimination. they rely on course to force those laws to protect them.

these protections are rooted for most business family supreme court in the last 75 years. last week in wal-mart d. dukes, five men claimed 1.5 billion would spend nearly a taking justice or sex discrimination by the employer wal-mart. they did not share enough in common to support action. perhaps richer than they told the women that wal-mart could not have had a discriminatory policy against all of them because they left its payment at the stores. near majority justices made it harder to one corporations accountable under historic civil rights laws. earlier this month in janus capital versus first derivative

traders, the same day just to save give corporations another victory by assuring them from accountability, even when they knowingly lied to investors. someone said janet decision provides wall street companies with a license to lie. others have said is a roadmap for pride. if you commit lives, you lie to investors as long as you follow the guidelines the supreme court decision, apparently you can get away with it. whatever phrase you use, the decision allows wall street companies to design new ways with accountability. highly inflected american 15 life savings ravaged over the past two years by investment and corporate misconduct. two months ago on at&t versus

conception young, how companies can take care of it fineprint and telephone bills and other contracts. of lassies. binding arbitration pervading mandatory arbitration meets american constitutional right to a jury trial and the due process our constitution cares what the arbitration they had no trains here in the coming of jury and of course no appellate review. so these cases were discussing a few examples of how the court's recent decisions will hurt individual americans. the benefit of those who invest in misconduct. the american people have grown frustrated with the notion regardless of their conduct, some corporations are considered too big to fail. the supreme court's recent decisions may make some wonder whether the court decided that

some corporations are too big to be held accountable. we have a situation where they are too big to fail, too big to be held accountable will have a real concern in this country. in fact, the chance to save the plane is missing a nuisance corporation. i believe the ability of americans being together to hold corporations accountable has been seriously undermined by the supreme court. decisions have been praised on wall street that they are hurting hard-working americans on main street. i think witnesses for being here today and before we stay with the witness, of course i yelled to my friend, the distinguished ranking member, senator grassley of iowa. >> thank you drainage. everyone should agree that all americans, whether individual or business entity must have confidence when they appear before a judge they will receive

a fair and unbiased adjudication of their claims and defenses. everyone knows how strongly i believe congress has constitutional duty to conduct oversight of other branches of the government, even including reviewing the federal judiciary. that review must be fair and active. so i can think of in the last and object if title of this hearing and i know the hearing -- the title does make the testimony, but i might ask whether certain conclusions have been reached before this hearing is even start, what business is like a litigant's desire from the judiciary and from congress a fair hearing, protect the mayor a in a measure predictability of the law. the united states is founded on the principle that all persons should receive equal justice under the law. americans believe that the most fundamental requirement for a

legitimate legal system is that it be staffed by judges and justices who are fully committed to impartially adjudicate in the cases that come before them, regardless of the identity or the status. this belief should be of no surprise. a small implant is an air out the by federal judges and justices. unless we forget the phrase comes equal justice under law is engraved about the united states from court building. those are more than just pleasant sounding words. the fundamental principle of equal justice under the law has origins in the foundations of western civilization and the birth of the concept of representative government. today, the concept of equal justice under the law and a truly impartial judiciary are at the heart of our legal system

and our democratic system of government. contrary to this fundamental beliefs and those in pro-business launches this is a poignant who will decide cases based on the empathy that they have for certain groups of litigants are certain cases. the appointment of individuals a federal judge a supreme court justice because he or she possesses empathy or sympathy for certain categories of litigant over others is miss guided, unwise and is very contrary to the fundamental principles upon which our governmental and judicial systems are based. under the ethical rules, judges are required to consider controversies before them impartially and must disqualify themselves as impartiality can be reasonably questioned. a judge is doing fine for

violating his or her oath and the ethical canons governing the contact of judges. when it comes to judging, empathy is only good if your the person or the group that the judge has sympathy for her. in most cases, it's the judge not the law that determines the outcome and that's a dangerous road to go down if you truly believe in the rule of law. individuals with legitimate claim should have a chance to make them, but not all individuals have legitimate claims. it appears those who attacked the supreme court in favor of business watches changer system. under the review, it would seem that legal dispute are nothing more than political popularity contest, where the site with the loudest voice of the lightest advocacy groups when notwithstanding what the law actually provides. our founders predicted this.

they knew the judges and justices he subjected to these kinds of attacks. that's why our founders created a system they did and provided for federal judges and justices in article iii of come to to shame. under our constitution statute, judges and justices misapplied the law impartially and color cases as they see them without regard to this status or political views that the litigants. the thyrsus done. it works and it's the best that mankind has ever known. thank you. >> thank you. our first witness this finding is that a dukes. as many of us know, she's the lead plaintiffs class-action alleging discrimination pay promotions, dukes versus wal-mart or the company up in the home were a part telephoning at students anticipated many

opportunities higher and very happy about working for the company. she learned about the walton family and the vast as this empire in a community college class in the mid-80s. as soon as the donald community college was placed on the dean's list, obviously meets duke center family quite proud. but wal-mart hater, she nearly 25 years of retail experience, including work is ahead catchier than a department manager. this may 25th mix or 17th year of working at pittsburg wal-mart store. still believes in the strength of our case. she wants to go to trial and have her voice heard. i was struck by some until meat is your favorite quote, which i think you may hear me using mitterrand. it's don't let fear get under

your feet. it will carry you where you don't want to go. that was a great quote. so we'll put sure post them in the record of course, the please go ahead. >> good morning, mr. chairman. i am betty dukes. i am i to speak to this morning. this print courts ruling has brought me before this committee today. i would like to share that love may his jury is a wal-mart employee. i grew up in the city of pittsburg, california and have worked the wal-mart store there for 17 years. i had worked in the retail industry for nearly 25 years before coming to wal-mart. most of my working career has been in the retail business. from the start of my career with wal-mart, i've sat opportunities for advancement.

but during my 17 years at wal-mart, only one promotion while working in wal-mart buyers leave numerous awards for outstanding customer service and other duties performed well. prior to filing this class did in 2001, there was never any post them for management positions in my story. for the first nine years of newark to wal-mart, i never saw nor heard of any system were trying to get into management. after the lawsuit was filed, i learned my experience was typical of other women's experience at other stores. once the lawsuits began, i also learned the wal-mart workforce database that women were paid less than men for doing the same work in wal-mart stores. rather than bringing a claim on my behalf, i brought the suit on

behalf of the women who worked to wal-mart stores in this country. we have evidence that countless numbers have been such a to the same working conditions and the impact they've, which favored man. i would hope this it would remain for treating women unfairly. i was disappointed last week when the supreme court was bringing these claims together in one remote case. we collected a lot of evidence that they received unequal pay supporting our efforts to try to claims together. supreme court decisions did not allow this case to go forward. women will now have two pursue

smaller class cases. we will continue to proceed on behalf of many women as possible many women give up because it is too hard to sue wal-mart on their own. it is not easy to take on your own employer. it is even more difficult when the players biggest company in the world. and this country, or in any equal pay a court equal promotion. i am afraid that the court would leave them without having to do date in court. thank you. >> thank you very much. i'm sure i'm one of those women

watching in your test the money. andrew pincus is well known to this committee. he frequently are goes before the supreme court and is well known to the supreme court. previously he served as the property justice assistant attorney general. of course its general counsel of the commerce department. >> thank you very much, mr. chairman current ranking member grassley and members of the committee. it's an honor to appear before the committee today. to discuss corporate behavior of the court's recent decisions, selected outcomes in all the court cases involving private plaintiff seeking damages from businesses. this year there is a tie. his assist parties last, nine wins for business parties, nine

wins for plaintiff suing businesses. involving substantive interpretation, business parties last every case decided by the court. i know some will say business when the most important cases. i wonder if their perception of the cases isn't colored by the outcome. if for example the case had said in retaliation claims under the federal antidiscrimination mosque complained must always be in writing. i think the reaction would've been quite quite justifiably an outrage is a process requirement that will chill retaliation and open the door for companies to intimidate workers. the court has said as long as the actual decision-maker than a playmate case didn't act with intense, even if the supervisor had exhibited discrimination, then discrimination can't be brought. i think there would be great concern about that.

so i do think in looking at the cases come it's important to look at the whole range. turning to the subject of discussion, i think it's important to distinguish between microanalysis and policy decisions. all the cases were talking about today present questions of statutory interpretation of laws passed by congress or the federal rules governing corporate seizures. the supreme court of the mask of budget policy is ask a rather to ascertain that tends as they know very someone at how deemphasize they get to some of those principles. of course it's possible to have a bigger debate with the best way to dissolve these issues. i believe that separation is

important. they departed substantially from existing and i don't think it sets a price in the court refused to embark on the radical forces being urged by the plaintiff and acidity or two principles that have been recognized in those three areas. in wal-mart, the court confronted an unprecedented class-action that they found to be a failure of proof there was a common legal question in the case and very much rested on the particular fax produced in support of the commonality issue. the court did previously twice rejected 89 abetting claims under section 10 b. of the securities exchange act and in this case seems to be a clear attempt to avoid rulings by seeking to impose aiding and abetting liability with a different label.

again, someone alleged to have helped another should be liable if the argument and reached a decision. finally in at&t against concepcion, california and that was an outlier decision. the arbitration clause and the enforcement of an arbitration cause in compliance that will effectively turn arbitration into litigation. just as the state couldn't they were happy to enforce causes as fun as arbitrators are picked up off the street the contrary, that would turn arbitration. the court said insisting on procedures that do exactly the same thing. the scope of the court's rulings will be debated to death in a

book come out. one thing is certain the predictions made now is likely to be incorrect. two years ago many asserted ashcroft against the oil above the standard for determining whether a complaint is sufficient to go forward with access to the courts and action needed. judicial sumner released a decision that in those two years there hasn't been an increase in general and solar right and employment discrimination cases, which were particular focus. we don't really know what these decisions are going to mean. thank you.

>> thank you very much. the next witness is professor melissa hart at the university of colorado school of law. she specializes in employment discrimination and supreme court decision-making after graduating from harvard law school, justice jon paul stevens on the united states supreme court. and professor hart, good to have you here. >> chairman leahy, thank you. i appreciate the opportunity to talk today. i've been asked to focus on two cases, wal-mart against dukes in at&t against transfix and impacts on both access to justice and consequently on corporate accountability and corporate behavior. these cases are different in the context in which they arrived.

transfix as a consumer case with a cell phone agreement, wal-mart against dukes is a case involving systemwide allegations that i am promotion in the work place. the substantive law is very different. they have important similarities that are relevant to the con conversation here today. first and most significantly, both cases and decisions reflect tremendous skepticism. i think it's fair to call a hostility to class-action resolution of disputes by the current supreme court. the erosion of the effectiveness of the class-action devices at this very fire from the intense and 18 thanks, current version of the rule here because the class-action is the only way to reach many kinds of systemic misconduct, erosion of the tool insulates companies and many serious risk of litigation for

many kinds of potentially illegally behavior. this change, this reinterpretation of rule 23 and wal-mart has very serious as as well as within the employment area. they both involve what is part of the trend supreme court cases that have an interpreting procedural rules in ways that limit the likelihood that the sensitive america lover beard a decision-maker. one of the things that's important to keep in mind is these cases. nobody aside that he do come across that wal-mart. nobody of february. the question was, can they put claims before a decision-maker. the procedural devices are being put ahead of the substantive law

and interpreted in ways that make it hard to get to the questions. looking up all wal-mart it's easy to see how rule 20 3a that governs class-action some federal reports house from 1,966,000,000,000 to last week been understood by lower courts by grim courts can search them by rules and drafters of the threshold inquiry that was not supposed to be a high barrier to pursuing a class-action. it was supposed to consider not the merits of the claims, or whether the group of people could put merits and claims before the court. the wal-mart decision, rule 20 3a no rebates that the standard at higher, more difficult than standards the court had erred established in earlier cases for substantive underlying claims. a class can't be certified. if the recertified, it would

meet the standards that are winning on the marriott. that's a very troubling turning on its head of the relationship between procedural and substantive rules. i think that's a policy judgment. these judgments about how procedural rules should be used to affect how much and what kind of litigation before decision-makers and in the arbitration context as well but it's much better made in state legislatures or ms body thin backcourt khmer reinterpreting roles that are not themselves been rewritten. if for no similarity that's important to note and thinking about cases is what they are very different from each other, they are similar in the modern world in every single person in this room has signed dozens of contracts at the contracts that transfixing. we all agree every day to replication agreements and will

be bound by peace agreement and litigation. hubble corp. were interpret agreements and something that will affect us all. similarly, wal-mart, wal-mart isn't that the type of work is a learn more workers are in the multi-facility, multinational corporation with decisions made in subjective ways that involve assessment by one supervisor of the workers working for him or buy one region manager without a check to standard to that evaluation. in light of the ways these decisions might affect people live in the country, it may well be time for this congress to start taking about changing the loud, responding to judicial reinterpretation with new standards that returned the original intent of rule 23 of

federal arbitration act. thank you drainage. >> thank you very much. next witness is the senior legal fellow deputy director at the center for legal and judicial studies at the heritage foundation. he specializes in constitutional law. mr. alt received his law degree at the university of chicago law school. mr. alt, please go ahead. as with all witnesses, please go ahead. >> thank you, chairman leahy for inviting me to testify before your committee once again. i share with senator graham the title of this hearing suggests conclusion that the recent decisions will somehow create barriers to justice and accountability and adverse incentives for corporate behavior. i do not believe the facts support the conclusion.

reviewing business cases for terms of the court leads to several conclusions. a frequently speaks on in the fractured voice carried to raise her critics, that unanimous or see their majoritarian voice too far from creating new barriers to justice or accountability, the courts decisions in today's hearing reject new, novel infrequently as worded advancer trailers for existing requirements which were designed to present frivolous legislation in the church you process to all parties. three, the designer any requirements was none other than congress. a couple cases highlighted so far? largely ignored so far is the unanimity of the determination could not be brought under rule

23 b2, but was more appropriate, if the appropriate under b3. it's obvious why it is the claim was brought. the certification for monetary damages is harder and more costly than under the injunctive relief section and lawyers attempting to shoehorn predominately claims for monetary relief into the 70. with the use of b2 is at best a b3 claim as tedious as the repetition may be creates very real due process concerns for members who are not required to get adequate notice or to have the option to opt-out of litigation. it also creates serious to process concerns for wal-mart, which would have been forced

supreme court recognized trial by finance. while this might have been convenient for the plaintiff, it creates unfairness for the defendant to a statutory defense is to individual claims. perhaps most importantly in the wake of this decision, there's ample opportunities for justice and good corporate behavior. smaller and better defined class actions can be filed, perhaps once in which absurdities are not also members accused of discrimination and a number of supervisors would've been plaintiffs as the class defined no women would be a good place to start. additionally, action supported by title vii for attorneys fees would also be available. those who believe they have been injured that wal-mart will have their day in court. the only party who may claim substantial injury is the trial.

then we move to digest k street this case this case is another attempt to expand the implied private right of action, but the court is dirty answer to question repeatedly and central bank payments down that he was not appropriate to expand action under 10 b. equally important, court does not operate, but i statutory machine by the litigation reform act. central bank decided prior to congress this consideration of the psl aire and congress assertion at the time to extend a private right of action to eaters than abettors. you refers to do so. under section 104, the sec in what is now ample -- once again within the context, ample

incentives and subjective. civil enforcement and send security permits state authority to seek restitution. these mechanisms are hardly toothless paper tools to enforce include obtaining injunctive relief, issuing orders, imposing our civil penalties by many companies. contrary to the chairman's statement early on, the conclusion is not if you commit fraud as a corporation to get away with it. as evidence that you sec enforcement actions between 2002 and two dozen eight in which it collected in excess of $10 billion discourage, much to investors. >> these are actions prior to us?

>> there's 3815 -- >> they were prior to the roadmap and janice? >> the authority of bses reinforce after janet. >> mr. alt if i make because your time is expired, and appreciate your sarcasm and continuing sarcasm in your testimony, but the determination as to who should be enforcing action. >> her whole testimony will be placed in the record. a thank you for being here. i mean that sincerely. the sarcasm notwithstanding. professor cox joined the faculty at duke law school in 1879, where he specializes in the areas of corporate securities by anesthetize the new york stock exchange from the national assist each net security dealers online degree from hastings and

harvard university. these go ahead, sir. and i'd also like each of you with your full steam and placed the record. i should know, we may start a series of roll calls and work around the time that each will have a chance to answer questions and ask and on the testimony of the way they want. i would also note each of you the record will be kept open so if there are things that should occur disagree committee of a chance to respond in the record. >> thank you very much. [inaudible] >> is your -- >> no principle in western

civilization does more than the principle that individuals who cause harm to another approximately should you responsibility for that. a quick perusal of the case law securities laws for sure this is not the print to pull the flies and security areas. under review quickly a few cases here. the supreme court decision held the following. corporations whose executives laid knowingly prepared false documents can steal from customers auditors for $17 million in customer's revenues for fraudulent round-trip train action and did so to retain the customers the client are not responsible to investors who purchased the customer shares at inflated prices due to round-trip transactions for the seventh circuit decision applies stoneridge and central bank decision. the president of the subsidiary who inflates numbers of

subscribers and revenues of its subsidiary is not liable for those who purchased shares at prices inflated as a consequence of the president reporting chicanery having been incorporated into the financial statements issued by the parent. and my favorite is a district court case from the state of the federal courts in utah in which the ceo false represented to prevent the auditor from pursuing confirmation that would've uncovered a change of implications carried out by the ceo and reliance on the letter issued an unqualified statement only to find out the massive fraud and investors out of money. the ceo was not respond well because of central banks and because of stoneridge. and the above cases are hardly aberration is we have to look at what happened janus capital.

they usually janus capital is whether an adviser who prepared a dish you by investment funds is responsible for statements contained in the decided type for court held that the adviser did not make any statement in the janus investment fund and therefore got past. the court's reasoning for the majority with the following. it is the speaker who takes credit for blame for what is ultimately sad. the speeches delivered by a human being, it is one them to identify who the speaker is. a corporation is not such a beating. the corporation, my act for individuals not only through symbiosis of entity structuring structures in which the corporation operates. financial courts passing

multiple individuals, each provides a voice to the inanimate entity. the reasoning of the capital is that none of these factors makes a statement because in the eyes of the courts majority, the statement can only be made by the entity. of course entities don't speak. individuals do. so we point out something else here that was not part of my prepared statement. now published 10 papers of security class-action fraud. one thing we do is take a look at how many times we follow any evidence of the sec prosecution. on the 17% of cases which are now 900 settlements do we find any evidence of an sec involvement, not a person action, but a report they are carrying out an investigation. we also took a luck at what gets recovered in the $10 billion. let me tell you, that's one worse. that is the planets and even

even the fcc admits they are seriously constrain on what they can recover by way of discouragement and refined recovery versus what happens. this is not a fair comparison. let me tell you something else. the janus capital case was not in aiding and abetting case. that would've been a classic primary purchase paint case. what is happening with the court as they are interpreting what is 18 and abetting as to exclude individuals should respond ability. we can have an interesting argument under the entity have to pay any sum it you there's no argument that the factories to kingery as investors should be responsible and the results of what we see and central bank, stoneridge and now janus capital is weak at the front straight past. i see my time is up, but this is all kinds of perverse results with the result that we are not

holding individuals response will allow to be held responsible. i believe everybody would agree to the fact that those who engineered carryout fraud and by even the most basic formulation of primary should be responsible in the case law does not lead to that result. thank you. >> thank you very much. previous careers as a prosecutor i always tell people who did the wrongdoing should be held responsible. these two, we can speak about the legal. these things, but you are the person who is actually involved. can you tell us what you made a few another women employees at wal-mart quite excited to come

together? what was it that have been? to think about what justice ginsburg referred to are justice scalia's decision this attention attention -- what distinguishes class members rather than what you make them. what was it thinks they can make a deal? >> as senile, wal-mart is a bass corporation. we are virtually spread apart. it's not that we can come together socially. we come together under the premise that we work in an environment that is very unfair in the treatment of its employees. we have many complaints, but this is just too that have come forth. we are trying to unite without having to be under the intimidation of losing your jobs

just to speak out. we are in a very intimidating environment. so this avenue is one that would allow us without the fear of retribution to come forth and have our complaint address. >> are you going to get up now? >> absolutely not. the best is yet to come. >> thank you. >> has their heart,,, discussion we just discuss going to make it more difficult for victims to improve cases of the above disparate impact of policy or is this a one-of-a-kind case? >> one of the interesting happened both in kuwait and in the majority opinion and also in the press filing the case is

people have emphasized based upon merit is different from other companies in particular it's so big. it's been suggested this case is somehow unique. in fact commit these kinds of cases, cases challenging the excessively subjective decision-making, and guided discretion to managers has been in the lower courts for decades. the idea of a claim of success in the subject of decision-making leading to discrimination is endorsed by the supreme court in 1888 and the watson case. these cases have been around for a long time. it is true by their nature. what you look at is because he got a systematic policy being challenged, not an individual decision, but systematic policy of an range of decisions and consequences of decisions can be made to class-action device to be able to pursue these claims for a couple reasons.

not to get too much into the weeds, but the way these cases -- the important thing these cases does this opens up to have a better understanding of how the come to me as structuring decisions and what awareness that has put the quite equate deal of consequences of these decisions and discrimination going on in an individual case, the kind of discovery would be available to an individual plaintiff in the threat of individual litigation also doesn't lead to self-monitoring by a company. one of the most important things about the wal-mart case is after the service tab in 2001, wal-mart started changing policies. it recognized as making batch resize, choices hurting women in a changing policies itself. that is one of the good consequences of litigation uses when you make it impossible to bring suits to the procedural

technique. >> we also hear that -- and someone say it's not a trend here in this court, but we've held hearings here on lilly ledbetter's my discrimination case, jack rice's age discrimination case. and each of these has seen that five justices made it more difficult for victims of discrimination hold their corporate employers accountable. if they are a threat going through this or am i reading too much into them? >> i feel you're not reading too much into it. it is true if you look at employment discrimination cases businesses have won some and lost time the general trend is bound to interpret the law to make it more difficult to bring

the underlying claims. again, nobody has ever reached the merit of these claims, but i think there is a fair cause for concern that because i procedural threshold the court that seems at odds with the substantive legal standards that it existed this case. the court may in the future may similarly tightly and so this may very well be another case in which the attendant do not to title vii of the civil rights act of 1991 has been in our enemies interpretations of the law. >> have a lot more questions, but never in the blackness of, so i yield to senator grassley. >> thank you, mr. chaiman into each of you for your testimony. i'm going to just ask two of the panel for answers to a couple questions.

i like to have mr. pincus first amendment stroke respond to professor hart's testimony. >> is seen as a key part of professor hart's testimony about the wal-mart case and encoding at three to tell precisely what the contours of the decision will turn out to be interpreted in other cases. to me that the key question in my opening statement with all of these cases we just don't know how they'll be interpreted. womack is perceived by many as an extreme case because of the size of the class and the nature relative to the large number of decision-makers involved. there's a real question about how it's going to play out as the lower courts get a hold of it.

>> i would build on mr. pincus statement and simply say i think part of the difficulty with determining what impact it will have is recognizing it does not propose class actions. they simply foreclose this ominous class-action lawsuit and you continue to have class actions, perhaps better defined and which you can raise claims come at reading the sort of evidence that professor hart was talking about the might be necessarily the plaintiffs were seeking to make. in this particular case is a is spread appropriately for instance under b3 permits will make the opportunity to raise the source of defenses for your regard to the particular damages. i'm not sure i would endorse doom and gloom.

meritorious claims will still appeal to go forward. >> the same order for the panel is. unlike your reaction to professor cox's testimony. >> legal and all it says and professor cox and i have about the impact of the storage essential decisions on particular issue before the court they are. but i do think whatever will in most cases the cause of action and that was true as mr. alt mentioned after predicating ability ndv sec rudy and again in the dog frank rejected

arguments that expanded liability and further expanded from what it is done in 1994, the sec's power to both bring enforcement actions and also to obtain money to deposit into fair funds account for the benefit who can prove injury to. whether the law says there is a private right of action for ever around. it's likely the law doesn't say there's a private right of action for every wrong in this session the context of aiding and abetting, dave and mary and the statutory context and the conemaugh context to create those things because they recognize once you move away anyone who helps something do something wrong even though conduct is legal, they have intent to help the wrongdoer.

her out again the issue about whether the class-action lawsuit is a sensible thing to do, rather than make sure you have cops in terms the sec's enforcement. i think it goes in part to the understanding of the proper function. i think the court was attempting to a day or two but it is that congress had told them to do. they believe that congress considered the question of expanding liability, especially chose not to do it, the best impersonation of the. the litigation actually causes as much harm as good and constitutes large measure wealth

transfer from one set of shareholders to another with the true beneficiaries being encrypted transaction cause. with regard to evidence that only 17% of settlement studied but then inserted icc involvement. you go back all the way that talk about the problem and class-action litigation costs associated art so i is more good to settle. that doesn't necessarily mean those cases have particular wrongdoing. >> i'm going to be pretty quick. professor hart because you speak in a layman's language, which i

like. i'm in a lawyer. what exactly does wal-mart say unto things, when a max and size of class should be an number two, what does it do to individual super warrior with respect to promotion. >> the wal-mart decision to speech with a maximum size of a case of me, but there's much more in the decision about they disapproved. some areas for concern and could just tiscali refers to the idea perhaps it would be limited to a single supervisor. that ignores the fact that many of the policies being challenged in a case like wal-mart or systematic companywide policies, not decisions of the single supervisor.

>> stab, stab, stab for a second. so what you're saying is in the assistance or am unclear, a supervisor exercise is policy with respect to promotion. how much freedom under this case does supervisor have and what level of right with respect to seniority is there any rights does an employee has? >> again, you will depend on the company is policy is structured. in the context of the case, and may not be like this, but certainly one of the evidence of discrimination with significant. there really is startling interns to the very large number of hourly employees and they absolutely flip a very small number of owner managers who are

women. in the way the decision-making system is structured to both give individual managers discretion to pick their friend and at the same time create a series of corporate standards in the corporate culture that discourage the advancement of women through a variety of policy decisions that are highlighted in the complaint. when the complaint was filed, for example, one of the things wal-mart used to have is a policy is a requirement to be a store manager you have to be willing to relocate. it's obvious to a layperson wide-eyed in our society discriminates quite significantly can women as compared to men. like a review so, which wal-mart is fixed in the wake of this litigation, the refusal to oppose the absence of any posting of management opportunities, which meant as a tap on the shoulder system, which lots of evidence tends to

favor the people who look like the people in charge. if you have been in charge which is passed for promotion. this evidence with how to structure its employment policies or choices they were making even at the time they thought the results they're having. there's lots of evidence wal-mart had the information about the kinds of gender disparities happening all over the country and all for doing regions the wal-mart operated and this is not a random thing. and yeah, didn't respond in any way. and the benefit of being able to challenge this kind of employment track days to class-action litigation is that it does force accountability. even at the litigation to supersede the will have to change its foreign mit change despite being brought in at that's so important not to lose. >> thank you.

thank you, mr. chairman. that was really helpful. .. gave sort of like a flying change at a hockey game. change while the puck is collective. i am glad to have all of you here and reading the recent

series of supreme court opinions actually going back a few years our minds me of my multiple days when i was studying for a ucc exam and those of you who have had the misfortune of either going to law school or study in vienna for shall commercial calm -- code knows it is the most -- ordeal so i'm plowing my way through this immense book and somebody who was a year ahead of me and immensely more knowledgeable said you don't need to worry too much about that. it is actually a lot simpler than it appears. indeed the entire ucc can be summarized in two words. i badly wanted to know what that was so i asked, what are the two words? the fellow looks down at me and my study and said bank owens. [laughter] and it is starting to seem a little bit as if a similar two

word prophecy could be applied to the united states supreme united states supreme court's decision and that would be corporation wins, and i have two questions that i would like to ask across the panel. the one is you know at some point in human behavior, when actions result in a certain thing time after time after time after time, it becomes reasonable to presume there is no longer a random effect happening and that there is indeed some intentionality to what is going on, and so my first question would be to each of you, do you think we have reached that point at this stage? let me start with ms. dukes.

>> the let me get a little clarity of your question. >> could you turn your microphone up? >> let me get a little clarity as to the question you asked. if you could make a little more clear for me if you don't mind. >> i was just trying to determine if you think that if you were to plot the supreme court decisions on the corporation wins graph, are there enough of them that come down there that you think it has independent significance beyond just a random variation. they are going to be times when there will be three or four decisions in a row that come down in favor of corporate versus individual interest just an ordinary nature of things, just an ordinary variation of life and sort of random nature of things, but after a while it becomes increasingly statistically improbable that what is happening is random as the events pile up and pile up

and in pileup and that is true whether you are talking about any area of human endeavor. is even true if you are talking about nonhuman events. you start with or a cause once thinks no longer fit a pattern and i'm wondering if it is your authorization and if you don't care to comment on it i can happily go to another witness. are we at the point where you think it is reasonable for people to conclude there is more going on than a random selection and that in fact there is a purpose or an intention in the supreme court's actions in these repeated decisions that favor the interests of corporations? >> thank you for the clarity of that. i'm beginning to get the impression and i believe it many other americans feel the same way that the supreme court as the makeup is now, that it is quite conservative in its opinion. i feel the supreme court

concerning those five votes that we had that dismantled the walmart versus dukes case, that they are definitely leaning on the side of the corporation. it is beginning to be obvious that if you can get your case before the sitting court, the chances of the more liberal aspect will not survive. >> professor pincus, is that your view? >> i don't think so senator. i think it a look at at the terms decision i think it is really a draw. i think if you look at last term's decisions there were some very significant cases. i think actually if you look specifically at cases where individuals are seeking damages from corporations, the individuals actually won more than a lost, so i don't think so. justice breyer was interviewed at the beginning of his term in the fall and he was asked this

very question. he said i really don't think so and he said he had gone back and looked at the cases from recent terms and compared them to prior terms end really didn't see a difference in the percentage of cases decided either way. >> professor hart? >> i think is a little more public hated them corporation wins all the time. obviously there are lots of examples where corporations lose cases. i do think if you look at the trend over the past few years it is very clear that the majority of the court and it is consistently the same majority is taking it very restrictive view about what it's -- what kind of cases of thing should be permitted to go to the court and i think that is the most concerning thing is that procedural barriers are being set up that weren't set up at the rules, weren't set up by statute that are being created as a policy judgment by the majority on the court that limit the ability of people to bring their claims into court and that really changes our legal system in ways that whether the corporation wins or loses in any given case people are being allowed to bring their cases

forward and that is a troubling trend. >> professor alt? >> i don't think the facts support that particular trend and in fact if you take a look there are a number of key losses for businesses in the last several terms. if you take a look i think the court is all over the map on preemption cases and all over the map this term and preemption cases. and if you take a look as well, to make that sort of claim you have to ignore the fact that a number of these pro-corporation cases involve supermajorities and involve decisions written by the most liberal justices on the court. spew my time expires. let me jump to professor cox and give him a chance. very brief if you could, i'm sorry. >> and securities law i agree with your statement senator and i will tell you the shrill rhetoric where they used to be limited to the amicus brief they filed over and over again, the chamber of commerce filed is now very well found in cases like

bank of australia case and also in stoneridge where the message is aggregate litigation is destroying america and the destroying america's competitiveness. i think they don't like these is. >> my time has expired. senator franken is here and i yield to my good friend for minnesota. >> thank you mr. chairman. i ran back to boat and ran back as fast as i could so excuse me if i'm out of breath. first of all as far as mr. alt's testimony that may say i have always been a big fan of sarcasm. i use it a lot myself. [laughter] >> and i've appreciated your sarcasm in the past. >> it does have it's place, and i'm learning bit by bit exactly what that is as i go. so i have some sympathy for you. i think you have been wise to tamp it down and i don't mean

that sarcastically. [laughter] mr. pincus however in a recent letter to "the new york times" you disparaged, sarcastically, the class-action lawyers who represent consumers like the concepcion's and i was really wondering why you did that given the average salary for partners at mayor brown is over $1 million, i don't think you are in the most credible position to make that kind of sarcastic critique. professor hart i have introduced the arbitration fairness act which would bar the use of mandatory upper trace and causes and consumer and employment contracts. mr. pincus has testified that the course decision and at&t was correctly decided because it is in line with prior decisions for other justices may disagree.

while it is true that the case is in line with decisions dating back to the early '90s legislative history the legislative history of the federal arbitration act, enacted in 1925 i think tells another story. as the dissent in the 2001 circuit city case points out the decisions expanding the reach of the faa ignored clear legislative intent which is that this was meant to be business-to-business. so in fact the arbitration fairness act would merely restores the original legislative intent of the faa. these are all technical arguments about legislative history and precedent and court rulings and whatnot but let's put that all aside for a minute. let's set this up for anyone listening today so they can get a handle on what at&t really did in this case. first it is something that is just wrong. they advertise something as furry, a free phone. and it wasn't.

california law says you can't advertise something that is free and make people pay a sales tax on it unless you say so. so they bought their cell phone, advertised as free. then they get a $30 charge on it in their bill. they weren't asked to pay the sales tax when they got the phone for free that they thought they were getting for free. so, yet now they have devised a scheme to prevent people from suing. no one is going to spend time getting 30 bucks back. the only way to do this is to do it through a class-action suit. and what this does, what this decision does is incentivize

corporations like at&t to rip people off $30 at a time, hundreds of thousands of people so they get their 100,000 people at $3 million maybe four people will try to get their money back, 120 bucks. aren't they just incentivized and ripping off customers? isn't that what is going on here? >> is that a question to make? >> yes, that is a question to you. >> i think, i think that decisions like at&t definitely, they make it easier for businesses to set up deals like this and know that they want as you said only four out of how many customers is going to actually try to get their money back so they're not going to be responsible for their conduct and i think it is particularly disturbing in this case, just want to comment on something he said which is the intent of the congress enacting the faa. the decision in at&t that the court focused on this

interpretation was necessary because of what what congressman to 1925. in 1925 these kinds of contracts, these adhesion contracts in which millions of people are buying a free phone didn't exist. this is a different world than similarly that kind of employment discrimination claims that were at issue in circuit city didn't exist in 1925. the world is changed changing the i.d. of the 1925 legislature meant to be finding employees and consumers is nonsense. so i think this is one of the areas where we are really seeing a misuse of this idea of congressional intent in order to insulate from liability companies that engage in wrongdoing which is why legislative response really is needed to address this problem. >> thank you. i had that legislative response. i have run out of time. mr. chairman. >> we will have one of the round. i guess just the two of us if

you would like because i do have another question i would like to ask which has to do with the fact that in a number of these cases, the interest or the institution that is on the other side from the corporate interest is the jury and the access of americans to the jury to redress their grievances. over and over again as professor hart bachus pointed out are procedural obstacles. a little bit here, little bit there but eyes making it more difficult for americans to get in front of a jury where, particularly where i should say a big corporation is the defendant. and, i worry about that exist my view is that the founders put the jury and the constitution and in the bill of rights in three separate places for a

reason. it was part of the structure of government that they were erecting. i believe they understood that, as william blackstone had explained, the most powerful individual in the state will be cautious of committing edney flagrant invasion of another's rights when he knows that the fact of his oppression must be examined and decided by 12 indifferent men. now determine different has achieved an entirely different meaning now but the point is clear that the jury and the fact that the powerful may have to face a jury is an important part of our constitutional structure. it is a particularly important part where money has such sway in the executive branch of government, where money has such sway in the legislative branch of government, try bribing a juror. tampering with a jury is a

crime. is protected in the american system of government as our last chance for a reason. de tocqueville observed the jury is before everything apolitical institution. one on two considered as a mode of the sovereignty of the people, and in that context i think there is an additional constitutional and structural worry in a country that prides itself on its operation of government when it is the jury that is being drawn further and further away from the ordinary american in favor more of the most powerful individuals in the state. and i wonder if any of you have thoughts on the role of the jury. do you believe that the jury was part of the plan of the founders that they set up our institutions of government, that it wasn't just judicial executive and legislative branches but actually having a jury and there was part of the

plan as blackstone and de tocqueville had suggested? professor cox. >> i think there is a lot of history that one of the benefits of a jury can be quite the opposite of what many here would think of that is kind of a temporizing effect on overreaching wife both aggressive plaintiffs but also by the government so that there is a rich history of bad and the literature about the temporizing effect of a jury. another thing is the idea of community standards. which are implicit in so much of the law whether it be civil law or criminal law. what is a reasonable person? again in my own sort of narrow part of the world the securities law, we find that the roles of juries historically have been taken over by the trial judge so we don't have the jury being involved in a lot of crucial factual determinations, not just questions about whether something is material but

whether it has been truthful on the market whether it has been a cautionary statement whether the complaint alleged a strong inference. fees are now no longer viewed while there are questions of fact, they are entirely appropriate for a question for the judge and that gets into something in the opening statement by the chairman, and that is the question about are we a country ruled by law or are we ruled by individual biases? the jury is designed to make it more towards the lopsided less by the individual standard site. >> echoing what you said if i remember my de tocqueville correctly, the chapter in which the quote about the jury being a apolitical -- political institution occurs is the chapter headed something like on tempering the tyranny of the majority. so i think it really is built into that. my time is expiring so i will yield back to senator franken.

>> thank you. thank you and mr. pincus' testimony, he states that businesses that engage in wrongdoing will remain fully accountable for their actions because government enforcement, not private litigation, deters corporate wrongdoing. professor cox, i want to ask you about this. the walmart litigants are now filing with the eeoc in less time i checked, the eeoc had a backlog of 86,000 private sector charges, and the eeoc has dated that quote the private right of access judicial forum to adjudicate claims is an essential part of the statutory enforcement scheme.

relevant to the at&t case a gal report found the fcc doesn't regulate carriers contract terms. it has few rules that address services consumers receive from wireless phone carriers and conducts little monitoring of consumer complaints and does not enforce its billing rules for wireless carriers. professor cox, what is your understanding of the role that suits american citizens play in our civil justice system? are they redundant because there are are the government enforcement mechanisms? >> fare hardly redundant. they are necessary. this has been something that has been recognized repeatedly by the courts, particularly the supreme court, that we have found that congress has tightened up the ability of type that litigants and so whatever judge friendly might have said five decades ago no longer

applies after the tsl are. the idea of the sperry is strike suit think died more than a decade ago. so we do need private litigation. we don't fund our government regulators at the level they need to be. and there's a lot of institutional creep and again our own studies in the studies of others have shown the importance of credit litigation that, if i may go into this just one moment. what is the -- of the case brought by the fcc and these are all public studies. we find the fcc systematically goes after smaller capital for smaller losses experiencing financial distress then we find with private litigants. the studies are published and they are out there. they pick on the weaklings, not on the strong so we need to private litigants protect it in the securities area and i've no reason to believe it would be any different in employment

areas, consumer areas etc.. private litigation is a hallmark for providing access to justice in america and that is a wonderful expression and we should all get behind it. >> thank you. i don't have much time so mr. pincus just a quick question. i know that you said that this was -- at&t is a very consumer friendly and fair arbitration system that has been said today. how long would it have taken the concepcion's to go through the process and get their 30 bucks that? >> could take a matter of months. >> a matter of months. >> much quicker than the judicial system. >> so, okay. so this would be a couple that would, for $30, go through a couple of months. >> all it takes senator is there is a form on the web site. you make a complaint. the record, because the economic

disincentive for at&t, because it has to pay a very large bonus if the cases litigated and loses $10,000 minimum plus attorneys fees. >> no, no, no. if they say we will give you 30 bucks back they don't have to pay the 10,000. >> no, but if they refuse to do it. >> but if they refuse it and pay $10,000 they will get their $30 back. see exactly senator and that is why this is a perfect system the lower courts found in this very case. >> so they would get their 30. >> for compensating anybody who complains. 10,000 people would get their $30 back. >> so you would get your 30 bucks back, so what you are saying? after a month or two or three? >> could file a form and it could take as quickly as a week. you would get just $30 back in the record shows he would also get reasonable fees for a

lawyer. >> the concepcion's would have given -- gotten their 30 bucks back within a number of weeks? i don't understand that because you said in your letter that they were within their rights to charge 30 bucks. >> well. >> you just testified to the senate that they would get their 30 bucks that. why would they get their 30 bucks back if he wrote to "the new york times" that at&t had the right to charge 30 bucks? i don't understand that. it seems to contradict what you say in your letter and what you testify in the senate contradicts exactly what you wrote in would in the u.s. times. you wrote it is my understanding that if this charge was indeed a sales tax california law allows merchants to pass across the sales tax on to consumers only -- okay. what i am saying is that you are contradicting yourself. you are saying that this was a

sales tax. they had the right to do this but you are saying that they would have paid the $30 back? white? >> well. >> i've run out of time. >> can i answer senator? >> yeah. >> i apologize for using the example of the way the arbitration system works. >> you said they would get their 30 bucks that. >> the reason for that is at&t settles most claims that are brought in the arbitration -- most complains that consumers bring at&t tries to work out a settlement because its goal is to have happy customers. >> i am sorry but i have to go vote. i apologize. i have to vote as well so i will give you 30 seconds. >> at&t settles a lot of cases that it leaves is litigated would not have merit because a and want to have good customer relations and b it wants to save its own cost of litigating a

settlement so most cases are settled. i don't know exactly what would have happened if i misspoke i say in the concepcion's's would with that bike up their money back to the way the system works is its at&t a huge incentive to settle claims in order to avoid the risk it will have to pay a lot of on a later and that is why the lower courts in this case found both the district court in the court of appeals, that injured parties were much more likely to get compensated under at&t's arbitration system than they would in a class-action. >> if you would like to supplement that answer the record of the hearing will stay open see you may add more. i am sorry to cut you off but we are up against a relatively hard deadline here. i want to close by saying that i think it is regrettable that there appears to be the steady addition of troubles, toils and snares by the supreme court on

americans road to a jury, which is to me a baseline constitution of government. it is clearly something that is consistent with the interests of big corporations who wields disproportionate influence in other branches of government to stay away from juries which is the one institution of government which they may not tamper. so there is clearly a strong institutional and said that there and do you have seen strong institutional behavior from the big mall to national corporations and others trying to deprecate as much as they can it make americans believe that the jury system is not part of their constitutional legacy but instead a drag on economy and a nuisance in a place where runaway juries and to tame frivolous lawsuits. indeed, every american who hears the word jury and has the phrase runaway juries jump into their

mind, every american who hears the word lawsuit and has the phrase frivolous lawsuit jump into their mind has been a successful subject of a long campaign of indoctrination about this and of public communication so it is happening out there and i think when the supreme court is making decisions that are consistent with that long-standing practice and pattern, it is worth our attention and i applaud chairman leahy for holding this hearing. as i i said anybody who wishes to add any further information to the hearing has a week before we close it. without anything further, we will be adjourned. thank you all very much. i appreciate it.

the federal trade commission said this week it will push for stricter privacy and security protections for internet users and users of mobile phone apps. the head of the ftc testifies next on c-span2.

now the senate commerce committee looks at consumer

privacy and data security and the internet. the committee is working on measures that will require companies to notify consumers quickly after any security breach. you'll hear from the head of the federal trade commission, julie brill and officials from the commerce department and federal communications commission. west virginia democrat jay rockefeller chairs a committee and will gavel the hearing to order in just a moment. this is an hour, 20 minutes. >> we are going to begin. this hearing will come to order.

this is the third hearing on consumer privacy that we have had in this committee and a in the 112 congress. as i have repeatedly emphasized americans are often unaware of the vast amounts of information that are being collected on them and then used often to their -- usually to their detriment. i focus on the need for companies to provide everyday consumers with a clear understanding of what information they are collect inning, where the information is going and how it is being used. i have also asked companies to give consumers an easy way for them to stop those collection processes. i don't think this is too much to ask of companies that are making a lot of money, and a lot of money that comes off of consumers personal information. that should not be happening in america. this is the new cost of doing business in america and people have to understand that. government doesn't subsidize what companies need to be doing

to perfect privacy. poll after poll shows americans are increasingly concerned about the loss of privacy in the same polls show americans don't know what to do about it. endless meetings and in my state as i am sure senator kerry ancestors jimmy have also. my intent is chairman of this committee of jurisdiction and i say that very clearly, for many to hear, to change all of this. i want ordinary consumers to know what is being done with their personal information and i want to give them the power to do something about that. that is why i've introduced s. 17, the do not track on line attitude to the -- 2011. this bill is based on a simple concept. with an easy click of of the mouse consumers can tell all on my companies they do not want their information collected period. one click, no information

collected. under my bill companies would feel obliged to honor that request. it is that simple. senator kerry has also introduced a bill, it is 799 the commercial bill of rights active 2011 which is a very comprehensive piece of legislation that governs many facets of all of this and that the economy and d.. it is a very good piece of legislation. other members of the committee have similarly voiced strong interest in privacy matters. i believe these hearings perform the basis for building bipartisan consensus about doing something about this. today's hearing is also about data security which directly implicates consumer privacy. we are reminded of this i'm afraid every day in the headlines. the recent security breaches of citibank, sony and epsilon show that companies are increasingly vulnerable to cyberattacks that compromise the safety and privacy of americans. i am not concerned about the breaches. i am concerned about the -- what

happens to the american people as a result of that. i am concerned about the breaches too. when criminals break into a database and steal credit card numbers, social security numbers and even e-mail address is they can use this information to commit identity theft which can have devastating consequences for the victims. that is why senator pryor and i have introduced once again this year as 1207 the data security and breach notification act the same bill we introduced to the last congress. the bill will impose an obligation on companies to adopt basic security protocols to protect sensitive consumer data and would be further -- would further require these companies to notify affected customers in the wake of a security breach. again, cost of doing business in the new world. the bill would also require greater transparency for something called data broker industry's.

not one of my favorite subject to talk or think about. these are companies that amass vast amounts of data, sell both information and other companies often for marketing purposes. they make a lot of money and most people don't even know they exist. they have never heard of them and they have no idea their privacy is being invaded, useused, sold and marketed. so, there is a broad consensus that federal data security legislation is necessary. vid administration included a a breach edification provisions provision similar to the provision of s. 1207 and cybersecurity proposal. in order for this bill to be ready for floor consideration as part of the larger cybersecurity effort i will work with senator pryor and all of my colleagues to make sure all of this works out. i now call on senator kerry. i warn you we have some boats at 11:00 so we will be hurrying just a bit. >> indeed and mr. chairman and that spirit i will try to be very quick because we have about five votes i think coming out.

first of all thank you for holding this hearing and i want to thank you for the meeting we had the other day to discuss not just our pill but the whole approach of the committee and i pledge to work with you as closely as possible as we try to find a broad-based and hopefully consensus approach to the challenges of this issue. what we are discussing today is really the ability of people to sort of control or have some impact on the way profiles about them, the digital profile for multiple digital profiles are compiled on almost all of us, and then sliced and diced and traded in a marketplace where many people are not as you have just remarked, appropriately in control of what happens to them. we also are here to discuss the need to establish uniform standards for the security of the private networks that hold

our information. and when i talk about privacy i am talking about the ability of people to exercise choice and control over how their information, i repeat, their information is collected, used and distributed. data security is a subset of that issue and about how companies can secure the information that they collect on people and what they need to do in the case of a security lapse. both are serious matters. when a company is hacked in the information, hundreds of thousands of their consumers is taken the individual's information is revealed or obviously exposed to the risk of the hackers who stole it using that information in any number of ways but particularly to harm them. the company that is hacked is hurt by being exposed to reputational damage and harm to relations with its customers.

in establishing uniform procedures for how to react in the case of the security lapse and increasing sentences for having strong security procedures is i think a necessary role and well addressed in the date of breach legislation that to deal mr. chairman and senator pryor have introduced. data security requirements alone are not going to give people authority over how their information is collected or its use and distribution. data security is just one piece of the overall privacy puzzle. after working with senator mccain and others for some months on this issue, you mentioned the legislation mr. chairman a moment ago that we introduced and i appreciate her comments about it. we need to find a way to meld the various approaches that are out there and to build consensus within this committee. i agree with you we have jurisdiction in order to be able to protect people.

beyond accountability security, think that the legislation we have contemplated is going to give people meaningful and specific explanations and control on how their information is being collected, used and distributed as well as importantly the power to opt out of those practices. i think senator rockefeller's approach is a good one, a strong one and an important one. do not track is one component of it but i do think beyond that we still have to deal with this question of choice over how your information is managed even if you do consent to it. and so, i think that what we have put forward is a comprehensive bipartisan proposal as a starting point and mr. chairman i think it is critical to work with you, senator kay bailey hutchison and senator snowe and others on the committee in order to bring more people to the table and i certainly look forward to doing

that. i do want to point out that at the moment and sort of in the center of this debate there are a couple of polls but in the center you have major companies like intel, microsoft, ebay and hewlett-packard as well as consumer advocates represented by the consumers union and others who are helping us to try to focus this in the right direction. finally, we have expert agencies represented here today. the federal trade commission and the department of commerce and the federal communications commission, they have all been doing what they can to protect americans using the legal tools available to them and using their ability to convene the stakeholders and the experts and educate themselves and the consumers on the changing practices of this rapidly moving and ever evolving world we live in. but, the fact is that they don't

have all the tools necessarily and that is why this discussion is so important. i look forward to working with you mr. chairman making sure we have the complete nature of what is going on in the market today from which we can draw the best conclusions about how to proceed, had the smart a slime commercial privacy protection put into law and i thank you for focusing intently on this important issue. >> thank you senator kerry. >> thank you very much mr. chairman for holding another hearing on this very important topic and i appreciate that and i agree with senator kerry's nurtures a shin the data security is one subset of consumer privacy which is itself though a very broad topic. on data security there seems to be broad support among industry stakeholders, consumer advocates and many members of congress for a national standard and it is certainly an issue that congress is likely to address legislatively in the near

future. there've been a number of high-profile data breaches affecting consumers nationwide. establishing a single standard for notifying victims of data breaches in protecting sensitive information is something i do think we should consider seriously. i look forward to working with the chairman of the members of the committee in hopefully adjusting this in a constructive and bipartisan manner. on the broader issue of privacy in what frame not sure there is yet a consensus on how to best protect consumers or whether a legislative solution is indeed the best method for doing so. before congress considers comprehensive privacy legislation that would have a significant impact on businesses large and small and on consumers, but i think we need to thoroughly examine this issue and make sure that we don't apply for this solution in search of a problem. i'm very interested to hear from our witnesses today on what specifically is most concerning to consumers when it comes to privacy, what consumers

expectations are regarding their privacy and what if any real harm has occurred on line data collection and how to best address any such harms. in a world where millions of people voluntarily share very personal information on web sites like facebook and twitter on a daily basis, i am not sure exact way with consumer expectations are when it comes to privacy but i am pretty sure different consumers have different expectations about privacy. i'm also not sure who is best suited are qualified to make the determination. should it be congress? should be the federal trade commission or neither? perhaps industry and consumers should set the standard by mutual consent in their interactions. these are the issues that i hope we will carefully examine and i'm hopeful we can make some progress on them today. now my colleagues who have introduced legislation in this field certainly well-intentioned and thoughtful legislation but i'm not sure we fully consider the unintended consequences that could attach to these proposals.

the internet and the communications marketplace have flourished and fuel tremendous economic growth in part because excessive government regulation has not yet occurred terkel in fact american innovation far outstrips the innovation that is occurring in other places including europe are much more extensive regulation currently exists. so the internet clearly has changed the way we communicate and do business very much for the better and we should be careful about imposing new rules and regulations that might unnecessarily harm future innovations. i'm sure no one on this committee wants to break the internet or limit many of the popular on line services consumers can access in order to avoid fundamentally altering the current on line experience in creating these unintended consequences. i just urge that we all proceed with caution. one very brief example for instance overly restrictive regulations for on line advertising would likely result in consumers having access to

fewer free on line services and applications. i'm not sure that we are qualified at this point to make a judgment of what the that trade-off ought to be. i want to protect privacy on line and i want consumers to feel comfortable when using the internet but until we have a clear picture of the harm we are trying to address and have looked at a cost benefit analysis of any new privacy legislation, i have reservations about moving forward with a legislative mandate. that said there a number of ideas that have been put on the table that i do find appealing. one example is the idea that maybe we ought to consider consolidating privacy enforcement and oversight into a single federal agency rather than multiple agencies. so on this and this entire range of topics i look forward to working with you mr. chairman of the other members of the committee. again i thank you for holding this hearing and i would like to ask consent to have a statement prepared by the national retail

federation. >> so ordered. we thank the senator and now turn to -- we have julie brill the commissioner of the federal trade commission one of the commissioners and austin schlick and cameron kerry department of commerce, three pretty good witnesses. ms. brill if you wish to proceed. >> thank you chairman rockefeller and ranking member hutchison and members of the committee. i am julie brill a commissioner of his federal trade commission. appreciate the opportunity present the commission's testimony today. vast amount of personal permission about consumers are collected and used by many different types of businesses are going players, retailers, advertisers, data brokers, lenders, insurance companies and many more. imagine a cash-strapped mother working as a substitute teacher

and waiting for a permanent opening. she and her husband have mounting bills so to tide them over between paychecks she gets a payday loan. she then goes to the drugstore and buys diapers and children's tylenol with her loyalty card. soon after in the mail, she gets coupons for diapers and children's and she receives an offer to refinance her mortgage on terms that seemed too good to be true. in the evening the mom goes on line to spend time on a social network site. while on line she notices she is receiving ads for toys and children's cough medicines as well as more loan offers. could the drugstore and social networking sites have loaned information about her consumers purchases and interest qwest could the payday lender have sold information about her need for money to other lenders and lead generators both on line and off-line. bring her late loan? could the fact that she is a new mom be sold to potential employers? the answer to all of these

questions is yes. some of the things i've described can offer real benefits. the mom probably wants coupons for diapers but the vast majority of consumers are completely unaware that they are purchasing history, their particular financial situation, information about their health and other personal information is sold to data brokers, lead generators, lenders, insurance companies, potential employers and others. most consumers are simply unaware of the data they lose about them being collected, sold and used both on line and off-line. i am concerned about how consumers privacy is impacted by these practices. at the federal trade commission we are focused on solutions that provide consumers with more information and more choices about these practices while allowing industry to continue to innovate and drive. the ftc enforces laws protecting consumer privacy and security,

educates consumers and businesses and engages in policy initiative. our written testimony highlights our many recent significant enforcement efforts related to privacy and data security. including our latest action announced just this week against teletrack, company that sold lists about financially distressed consumers to marketers. to settle our allegations teletrack agreed to comply with the fair credit reporting act and pay a $1.8 million civil penalty. privacy and security continue to be front and center on the commission's policy agenda as well. the commission is not taken a position on whether general privacy or do not track legislation is needed but a majority of commissioners, myself included, support widespread implementation of do not track mechanisms. more generally, the commission supports strong privacy

protection. are preliminary privacy report recommended industry build privacy protections into their products and services at the outset, simplify choices presented to consumers about privacy and improve transparency related to data collection and use. on data security the commission supports the enactment of federal security and breach notification legislation per client please legislation proposed in this committee aims to accomplish all of these schools. thank you for your leadership on consumer privacy and data security. we look forward to continue to work closely with you on these critical issues. >> thank you ms. brill. welcome mr. kerry. >> thank you chairman rockefeller and members of the commit a. i welcome the opportunity to be here today and to discuss with you the issue of how we can best

protect consumer data privacy in a digital age. this is an issue that affects everyone. at this committee's hearing on march 16, the obama administration urged legislation to establish basic commercial data privacy protection for all u.s. consumers. what we recommended and had three elements. the first is baseline privacy protection in the form of a consumer privacy bill of rights. adapted from widely accepted fair information practice principles. the second is for government to convene multi-stakeholder processes to encourage the private sector to develop legally enforceable contacts specific codes of conduct that implement the bill of rights and

specific context. and the third is to bolster the federal trade commission's leadership in this field by granting its explicit authority to enforce the privacy bill of rights and to grant safe harbors for revolving codes of conduct. we are encouraged to have members of this committee and others in congress who have introduced several bills to address the significant of data privacy issues. the administration looks forward to working closely with members of this committee and congress to pass legislation that will protect consumer interests and provide businesses and consumers with a clear and consistent set of rules of the road, both within the united states and internationally. our conclusion that the time is come for comprehensive data privacy protection is a product

of the work of the department of commerce internet policy task force and the national science and technology council subcommittee that i cochair. it reflects two tenets. the first is very simply that to harness the full power of the internet, we need clear rules that allow for innovation and economic growth while protecting trust and respecting consumers of legitimate privacy expectations. consumer groups, industry, leading privacy scholars agree that a large percentage of americans do not know what information is being collected about them or how they can control collection and use. second, as we established guidelines we need to avoid a regulatory environment that restricts the innovation and the free flow of information and the

hallmarks of the internet and drivers of economic growth and an expansion of information that stretches the boundaries of human knowledge and creates social and political change. legislation should add duplicative or overly burdensome regulatory requirements to businesses that already adhere to strong privacy principles or that are subject to existing sectorial regimes. legislation should be technology neutral so that consistent with baseline principles, firms have flexibility to adapt to elegy to comply and to adopt business models that use data in ways not contemplated today. our work continues as the

administration finishes a commercial privacy. at the department of commerce we will engage the stakeholders on the development of codes of conduct. we will work on data security and work with other agencies to ensure global interoperability. this is an area where congressional action can have significant impact. two weeks ago i was in budapest to speak with european data privacy commissioners and i can report to you that comprehensive legislation will send a strong message of u.s. leadership that will conform a model for our partners, help prevent fragmentation of the world's privacy laws and undue restrictions on businesses that conduct international trade. so mr. chairman we look forward to working with you, the committee, stakeholders, the ftc

and with other federal agencies toward enactment of legislation in the field. i ask that my written comments may included in the record and welcome any questions. thank you again for this opportunity. >> your statement will be included in the record and i thank you for your testimony. mr. schlick. >> good morning chairman rockefeller and members of the committee. thank you. i'm particularly pleased to be here this morning with two strong partners the department of commerce and the federal trade commission. the ftc has decades of experience implementing privacy protection statutes. these include revisions in the committee seasons at that safeguard their customers personally identifiable information as well as provisions protect consumers against unwanted telephone and

solicitation. at the same time increased use of personal data in connection with new on line and wireless applications is raising serious privacy and security concerns. is the ftc recognized in the national broadband plan to successful successful bidder is these answers will be critical to increasing adoption and deployment of elegy to benefit consumers, government and economy. the commission historically focused on pre-privacy related goals, ensuring the personal information is protected from misuse and mishandling, requiring providers to be transparent about their practices and enabling consumers to make informed decisions. the schools remain our primary focus as we implement the various sections of the communications act that directly impact privacy. for example, section 222 to two of the committee stations act require telecommunications carriers and interconnected voice-over internet protocol providers to secure customer proprietary network information which is known as cp and i. cpn includes consumers call records and call information.

under section 222 the fcc is about the rules addressing the handling, use and sharing of cpn i. we have the doctor rose to prevent a practice under which unauthorized third parties attempt to gain access to telephone subscriber's personal information. through a row making and enforcement we have resolved difficult issues such as opt in and opt out verification or appropriate minimum notice standard status sharing rules and notification to law enforcement and consumers in the event of data breaches. in just the last six months the commission issued 28 warnings and notices of apparent liability in violation. because of our active enforcement and education efforts in section 222 protections are well-known and well understood and the number of consumer complaints the ftc receives a on these issues has declined steadily. section 338 and 631 of the communications act also protect personal information. these provisions established firms for satellite and cable