frank of massachusetts. [inaudible conversations] [inaudible]

>> thank you. witnesses on the first panel are the of ma willry sh -- honorable mary shapiro who was not there during madoff. and mr. saumya. partner and managing director of boston consulting group. i welcome our witnesses. do we have two others/ ? we will have two other -- we

will have michael shanahan, a senior partner managing for the questions and answers, but not for opening statement. and to assist you with the -- and then shanderarshka hura, whatever. managing director of the boston consulting group. at this time, chairman shapiro, you are recognized for your opening statement which you don't have to limit to five minutes if you wish. get yourself in as much trouble as you need. i am kidding. [laughter] >> that is very good advice, mr. chairman. thank you chairman, ranking member, members of the committee. >> we are having trouble with our mics. pull that closer to you.

>> thank you for the opportunity to discuss the organizational assessment of the securities and exchange commission performed by the boston consulting group and other issues regarding the sec. when i arrived two years ago, the agency was reeling from a variety of economic events and emission failures that severely harmed the ability of the agency. >> i know it may sound and natural to you, there will be a new sound system installed during the christmas break. if you could pull the whole microphone closer. >> will perform the way the commission operates. we brought in new leadership and including the first chief operating officer and chief compliance officer. we've revitalized and restructured our operations. we took steps to break down in

journal silos and create a collaboration. we recruited more staff with specialized expertise in real world experience and expanded our training program. and enhanced safeguards to investor assets by new rules and leveraging public accounting firms. our goal throughout the many changes has been to create a more vigilant and agile organization to perform the critical mission of the agency. i believe our efforts are paying dividends. last year, the sec returned $2.2 billion to harmed investors, twice the budget for that year. last fiscal year, $2.8 billion in penalties ordered by enforcement actions. 176% increase over the amount than fiscal year 2008. we range and scope from complex cases against parties that played significant roles in the economic crisis to a lesser

known cases involving harm to individual investors. our examiners and investigators collaborate effectively resulting in a number of recent enforcement actions generated from the exam referrals. we continue to seek ways to improve our operations. last fall, as required by the bought-franc -- dodd-frank act, a consulting firm conducted a broad and independent assessment of the sec organization. they confirmed what we believed over the past few years, the sec has improved the effectiveness of its operation. nevertheless, we agree that the sec still has significant opportunities to further optimize its available resources. even assuming further optimization, bcg concludes that we will not have the personnel

or resources to perform all of the activities within the agency's responsibility. they also conclude that sufficient resources have contributed to a gap in the ability to develop information technology systems. beyond the resource issue, they provided useful insights into how the sec might continue efforts to ensure that it remains a vigilant, agile, and responsive organization. given the determining and executing the appropriate course of action, it will require internal coordination and a significant commitment of signif staff. that has already begun. we organized around the four principal goals, optimizing the structure, strengthening capability, improving controls, and enhancing our workforce. we have already implemented or are in the process of employment

in an number of bcg recommendations including clarifying the role of the officer and his ability to make changes, building staff skills, and establishing an improvement program, improving the office, optimizing the office of information technology, redesigning the office a human- resources, and prioritizing the responsibilities. it is important to note that bcg believes the upfront investments will be required was some can be paid for through the efficiency gains outlined in the report, the savings will not be sufficient to cover the investment needed to achieve our goals. the committee has requested my views on two pieces of legislation, the sec modernization act and the

regulatory accountability act. although i appreciate it, this describe some concerns on the structure and ability to deal with the change in market conditions. the regulatory accountability act requirement for cost-benefit analysis could undermine the ability to issue orders against wrongdoers until late exempted orders. and delay orders to companies. i would welcome the opportunity to work with the committee on both pieces of legislation to ensure any chilly improves the ability to achieve the mission. we recognize that implementation and many of the ideas in the

report or require a long-term commitment and sustained effort over several years to successfully implement. while we're still in the early stages, we're committed to an open and transparent process. thank you for the opportunity to testify. i'm happy to answer any questions he might have. >> thank you. >> perfect timing. i am a partner and managing director at the boston consulting group.

a civic and under tinging involving many professionals, i am accompanied by my colleagues who will be able to assist in responding. they were responsible for the organizational review. andrea villa extensive documentation, undertook analysis and conducted more than 25 discussion with current and former sec officials. and industry groups. we focused on these subjects that the sec identified.

first, organizational structure. second, personnel and resources. to carry out the mission, they have clear organizations. they fill the mandate. our study focused on the ladder. we found that what the sec has initiated steps to better fulfil its mission as well as its expanded mandate, they can do more to shape a better organizational structure and address gaps. we have a portfolio of initiatives. we recommended that they implement these initially on a no regret bases.

they are foundational to the future. the senate to his fallen to four major categories and are as follows. -- these fall into four major categories and are as follows. the sec should engage in a rigorous assessment of the highest needs and reallocate resources accordingly. reshape the organization. did the sec should reshape the structure, rolls, and governance to maximize efficiency, effectiveness, and collaboration. invests in enabling infrastructure. including technology, human resources, risk management, and high priority staff skills. and enhance the model. the sec should implement roles as both the regulator one.

they have a plan for these initiatives that carefully sequences them in a way as to create significant efficiencies that would help fund the investments. as an initial matter, will recommend they create an office to coordinate the immediate implementation of the initiatives. we also recommended that after the sec has implemented them, congress should reflect on whether or not it is resulting organization adequately meet the expectations for the efficiency and effectiveness. if they determine that it still does not meet the expectations, we recommend that it have increasing funding to allow them to better fill the current roll or change it to fit available funding. the proposed organization act

of 2011 contains a number of provisions which appear to be consistent with this spirit there are several ones of the modernization act which appear be honest those reports. in addition, several provisions appear to go beyond the scope of our steady. they address regulatory mandates that are beyond the scope of our study. thank you for your time and attention. we're happy to answer any questions you may have. >> thank you. what would you think would be the number one church road change that ought to be made at the sec? should it be made before additional funding or staff hires? what should that sequined be?

-- sequence b? >be? >> there are a number that we made. we consider this issue. the markets dynamics are made broken dealers. separately -- >> would we need to know he was

going to be the primary regulator? >> we did note that there was a lot of dialogue on that topic. in the set of options, one option was presuming that you have it. >> i think they could be combined irregardless. i think the sec would continue to have oversight and accountability even if he had an sro or something. >> there have to oversee a pair.

>> right now it is a separate division here. they have had several pluses by raising the standard of the exam. there is potentially an added advantage of independent from enforcement. this separates exam. if you lose the information flow between the two. it can go back to rose.

it is loss if you separate them. >> thank you. >> you have had the report since march. i am sure you have reviewed it. has the agency undertaken any of the recommendations today? >> we have. understandably, a lot of these are longer-term process. some are quite massive. it should take as some time. we have consolidated the office of the director. we have eliminated a director. we have established a the improvement program. sore looking for cost-saving we can redeploy the savings and

other activities. we are and the process of training all of our employees for a full rollout of our new performance management system which was highlighted by a bcg. we have reorganize the office of information technology. we have new information. it is yielding dividends. we have gone the full review of the other parts. the word should be done in november. then we will be able to go forward with that. we have offloaded some responsibilities we think can be done more efficiently by outsourced agencies. our financial management program is being outsourced to a federal service provider. of releasing information has been outsourced.

we have reorganized enforcement to great results. the other works streams. >> thank you. >> thank you. you have been very reasonable. i am prepared to reconsider the extent to where we borrow last year. we can find ways to convey our sense of particular activities without having is separate entity. it has been badly treated by this. with regard to the rating agency, they are extraordinary.

they have systematically overrated securities. i'm not talking about the u.s.. i'm talking about operation bonds. i asked them why. they said they are not going to depart. we're saying they are more likely to default. it is like saying if you live in iowa you have more chance of being eaten by a sharp than if you live in montana. that might be statistically the case. we set up. we have the problem of municipalities. we did in hants the advisers.

it may have gone too far. i am prepared to work with the agency. we can make sure it is the importance. on raising the bar for adopting regulations, and he makes a very interesting point. we should not be telling you to decide whether not to do things we said you had to do. if you read the bill, it is to give them the option of deciding to regain. more seriously, they take this back. and maybe perhaps more intensive, it covers not just regulation but orders it.

before you do that, am i correct index would it mean that an enforcement order would have to go through cost/benefit? what would that mean for you? >> it would require a cost- benefit analysis-. it would have securities fraud. it enabled them to bring profits more quickly. it to operate by virtue of a sense of order. >> i appreciate that. the notion seems really quite odd. >> it to be very damaging. >> i really appreciate the

quality of the report and the way you presented it. what you're saying is that there are ways to be made more efficient. continue itsoing to major new responsibilities, the biggest single response ability is that we gave them derivatives. is there any way for them to ?ake on this ta >> as we described, as the sec is currently constructed, and given the productivity of the resources, the workload of leaves them at a capacity cap. we also identified the initiatives which we recommended they adopt.

we restructure the organization in a way that will clarify roles and improve productivity. it goes toward addressing a capacity cap. the challenge to know how far it that it is determined by the agenda. this is a big issue. depending on where the agency is, it should be increased. it has a very material impact. >> a man at the about to come back. he had one thing in there in

which she talked about how logical it would be if we're able to merge them. to which i say i wish. if i was making a new country, there would be one such entity. i will say that is a little .eyond its peer there is the real emphasis of this self funding operation. that is something within our grasp. that that defeated by turf. they felt so strongly about that that we lost it. there are ways to make that confirm. thank you. >> thank you.

our staff is working on the question. they have determined it would be a fresh water swim either way. but ask for clarification. it asks for the cost benefit before even a role is proposed. >> that would be before? under the security laws or issuing any one person went. >> before it proposes. the cracks that would be tough to do. -- >> that would be tough to do. >> that gets into the cost- benefit analysis.

these are things he has asked that the to a caught carrying be continued and that the two witnesses have agreed. their only two witnesses out there. they will hold the hearing to examine the impact that they have on the national security to a later date. this has been rescheduled. >> thank you. i hope i'm not off message. he required the sec -- that was to study the current standard of the care for broker-dealers and investment in pfizer's.

-- investment advisers. i am not happy with the outcome of that. that was to harmonize the different standards that currently exist. can you point to any economic resources showed the need? >> this study did go through some economic analysis. we did see the data from common shares about that. the enormous provide our analysis, proposed to roll. what the staff is sinking through what it may look like, continuing to meet with industries and investors that have interest in it, we have asked our economists to gather whatever data is available in that process. we cannot propose to go forward.

>> no. there has been talk about this. so much is involved. oversight of investment advisers. it is suggested that there be this. you're very familiar with that. what you think would happen? >> i did not participate because of my affiliation with the staff study. i was within the refusal time frame. i think we can agree that covering or examining 9% of investment advisers, only examining nine some a year is not sufficient. there might be a mechanism for of pfizer's to pay for them to be able to examine.

they be given the authority to do at least examination of the broker-dealers. unless there is sufficient funds, we have to look closely at about an sr0. we have to find a way to have better oversight. this is one of the vehicles to do that. >> despite your efforts, i was concerned that the department of labor king complected any one may propose. i know there was some talk about

getting together and working together. i was surprised that they came out. it was the head of what you decide it. i do not know there is any real coordination. he tried to get together. >> we reached up to the department of labour. we participated in some of their round tables. they have responsibility for the its ministration. the sec is just not have that responsibility. it is not with regard to the standards. >> thank you. >> i yield back. >> thank you. >> thank you.

>> in the bcg report, your estimate it range from 200 million to $300 million and gave a sharp fall needed to but still the current mess in -- the current mission. we are all aware that the funding level is 1.18 5 billion paren. did you consider the effects of limiting the sec's budget to 1.18 5 billion? >> as we looked at the sec as

constructive, we analyze the workload and said there is a capacity gap. we laid out a set of plans against that. it will create material efficiencies. we also recommended that given the circumstance the agency should look hard at the resources to the most important activities. it indicates what activities it will have to scale back or stop and ordered to do this. >> you did not recommend what they should not do? there is quite of a gap when you

need $203 million. people need to do the job. this is quite a gap. i would like to ask, how will investor protections be impacted by the funding proposal and the cap when the report says the you need three to 400 more just to get what is required to do the job? did you do an investigation of how it will be impacted by this cap that limits the number of people you can hire? clearly you have more to do than the resources that are there before you. did you look at how it will impact investor protection stacks the personnel is not

reduce protection -- did you look at how little impact protection? the personnel is not there. >> depending on what they choose to emphasize, that would have impact. the agency is best suited to address that. it includes a lot capital. this is a budget increase. this sets up a lot of productivity. >> did you break this down in your report? >> we identified a number of areas where money would have to be sent. there's never again upgrades and need to be made for individual systems and capabilities.

>> that would be helpful if he gave as a clear break down. >> how will investor protections be impeded by a funding level proposed by the house that is 1.18 5 billion even though your responsibilities have grown? >> what we are engaged, our responsibilities about what is important for this agency is important to do. the cast aside whole areas of responsibility. we will not be doing them any more. we do not have the funding. under the house budget proposal, there are a couple of areas i

would focus on. this is one of them. there are nine clearing houses. we have 10 dedicated examiners. will not be able to of rationalize the derivatives role. we would get them done. will not able to do this. i think we'll see the number and scope of the decline. the may decline to prosecute some or it is too high. -- it may decline to prosecute it or it is too high. coverage is already inadequate. it shall suffer. 1/3 of examiners have never been examined.

we do not have it for hedge fund advisers. even in areas we will have to cut i.t. spending. that would be unfortunate. we need to modernize systems. this is used by the public and the staff. it is a critical system. ourl also be hindered in ability to hire expertise. it to be under the house number. something that business cares much about is our ability to quickly and efficiently review the increase in flow of ipos. across the agency, you will find there are real impact on investor protection.

>> much time has expired. >> thank you. very quickly, i'm curious to follow up on the comments and questions with regard to the role. have you been working with him too shy and resolve the situation? -- to try and resolve the situation that >> we have been talking and trying to educate the securities laws and how investors are protected their i their fiduciary duties or other requirements. there's the panoply of regulatory requirements. as i said at the end of the day, we do not administrate the law.

it has to be their call. >> is it your assertion that the ruling does not infringe on an area of the juicier responsibility? -- of judiciary responsibility- quite are some ones that they have responsibility for. they could be advising them about the ira accounts. >> you're not concerned about that? >> i know the industries concerned about that. they need to do what they need to do. we have no capability with respect to it. >> don't you think you should work with them to let them know that they have overstepped?

they cannot hide behind that authority and make a debt rules here that will affect other things that they should not have any ability to impact. >> they do have the ability. did the most the sec can do is to see how would protect investors. the people subject to regulation may also be subject to state insurance regulation and deregulation by the subject urging and subjects. -- deregulation and the subject. >> my concern is that we're certainly going to limit the

ability of individuals to have the expertise to revise them predict to advise them purities the only gentlemen in the entire county that has been his security license. he continued to allow them to get into security advising situations. i think it will continue to impact individuals to get the expertise to make the wise decisions. >> i share that concern. we are sensitive. we have to be careful about being business model neutral to the extent we can. access to financial services is something that all citizens should have at a reasonable cost and in a reasonable way. we're very sensitive to those. >> i would urge you to be working with the treasury to

find to find a way to roll. i'm not against trying to make sure that they are protected. i think a pen dimon went in a long way. we have to bring these together. we have to have the best common ground to allow them to be sold by the individual so consumers can get what they need. i and the sponsor of the search staff with an independent group of bankers. we are wanting to raise the threshold on some small companies. i know raising this is why you do not have to have as many to examine. we're taking a little burden off the shoulders.

crisis is very important to us. i leave the community banks sur's on this committee. we were to the number of bankers have raised this issue. there are burdens better place in the community. -- that are placed in the community. we have a number of issues around small-business capital formation. the 500 shareholder limit is well advanced in our deliberations. iran looking at a number of other issues like crab funding and the general solicitation. we have a full menu. we are anxious to get our first meeting called. >> i'm anxious to see results. thank you. >> thank you.

when we drafted the dodd/frank bill and pass it in the house and senate, one of the things we did was say that there would be a steady so we could streamline the securities and exchange commission. one of the bills they had before us today would codify the recommendations made by the study group. it would help you streamline and improve the security and exchange commission. >> there are some things in the bell that -- bill that are worth exploring.

it did not evolve quickly and rapidly enough. we need the flexibility to organize the sec on an ongoing basis of overtime to be responsive for a market place. this a probably be my primary concern with the bill. there are some other issues for which i would also disagree. we would also be willing to work with the committee to see if there was some legislative a person made sense. when we know we have a long way to go.

>> let me follow up with a following. what my you need to respond and failures you have come to address t? >> they have to be achievable and consistent with our mission. i feel the way this is structured almost no agency of government could be all of these requirements. we already do cost-benefit

analysis. we look at the effect on competition of our rulemaking. we consider the impact on small business. we estimate the paperwork burden. we look at whether the rule making will promote capital formation. we do extensive cost-benefit analysis. we know we can do better. we're committed to doing it better. this at some any new provisions and factors -- >> 11 new factors before you can do what? >> regulations and orders tur a orders approving self-regulatory organization roles.

>> they're always speaking about new requirements and new standards. they are advocating for smaller, less government and fewer regulations. when it comes to the agency accused major purpose is the security and exchange commission to watch, they want to hamper it. they want to tie it up and not. i do not understand how it comes to government in general when it

comes to the business community. we have a group that this supposed to monitor that. we will want more regulation. in a society in which something as simple as a credit card for 25,000 miles, i did get it. at the 25,000 miles. the only ticket i could get was from chicago to milwaukee, a 90 minute drive. apart from that, i did not get any other benefit. but those to the consequences to me, imagine the other kinds of things consumers aren't subjected to. thank you for your time here today and your commitment. >> thank you. milwaukee feels a little despair's right now.

>> i am a republican here defending more regulation. let me read something. did the american people deserve a system that works for them. the recognized that the policies are the best economic growth. this is all the way back to 1993. it is with a piece of legislation that we're discussing. i know a couple of issues came up through the ranking member. one pertains to our legislation dealing with the issue applying to orders. since this is a discussion draft, this is a reason why we're going to regular order.

we would like to go their -- regulatory order. that is long where most happy to discuss. the second point was the issue with regard to the cart before the horse. you have to identify the problem first. tois what you're going potentially address. it seems to be the reverse order. let me go back to the executive order of bill clinton. that is something you have to identify. each agency shall identify the problem. >> this only makes sense. to begin doing it and that

matter. you did say that you already do have assessment analysis. the d.c. circuit court of appeals of begs to differ with the nature and quality of the rulemaking. what is your reaction to that? what steps are you going to take with reaction to the decision? >> we are disappointed by the decision. they vacated the role. we thought it important that it be important for an economic stake for them to have this. we take very seriously our obligation.

i believe if you were to look at the roles compared to many other financial regulatory agencies, you would see that we do much more extensive cost-benefit analysis. >> i do not mean this flippantly. if you have information on other agencies, out be happy to take a look with them. i know it sounds that way. we should be making sure that we agree on the same level. >> i think it is important that everyone do cost-benefit analysis. i think our staff has done a very good job. as some to reevaluate the whole process for conducting the analysis. it is assuring that we better

integrate their economic analysis throughout the course of the rulemaking process. we are expanding our risk in. we have more economic firepower. we're taking more care to explain the choices we make. >> use of our legislation would have this. our legislation says that he may consider those things. >> they are not mandatory. they are contained in statute. they're highly likely to be used in the next roll. finally, we want to explain more clearly. i think this is learning. this is how we found this.

>> much time is really up. there's a city that comes out of that. it is the adjusted number of examinations but the actual nature of the examinations. >> i'm sure we could do ballpark figures. >> they had a few provisions.

>> i regard this as pretty consequential. they made this part of the bill. you're not even going to change the boxes. you have the two existing boxes talk to each other. it makes it even less consequential. my concern is that there's a very consequential provisions. it requires the sec to create a system to assign the credit rating agency.

the wonder what the analogy would be if they still like to the umpire. it might not been done over backward. they get paid $1 million or more. if there's nothing about this undertaking a, is this close to undertaking it? is this report simply irrelevant? >> i will have my colleagues address this as well. we think it is a tremendous consequential park. >> i am referring to the reorganization tax cuts i am

referring to the study. there is a business model that might be explored. the staff can proceed. it does not close to the one- year deadline. it to get place behind other things. we expect the office. the work is ongoing. >> the answer seems to be that they do this study and that you are free to redefine the status quo.

i think he are required to -- you are required to dramatically change it. >> we are required to either implement the proposal or come up with another proposal. this study is a privilege to our being able to do that. as an annualing it exam. we have created the office that is not reporting directly to the chairman. we do not have the authority to do that. >> who reports to whom? >> these charts here do not mean that you are ready to implemented the result of that study.

maybe they can comment. is your proposal envisioning that bit would be for each debt issue were? is the organizational chart for them to undertake it? >> it was not part of our scope of that work. they have been made. existing functions have been there. to recognize the importance of that. we were laying our options of how best they would be organized. >> you seem to be saying your

report ignored the possibility of the mandate. the issue report layout a program for organizing the sec that would be selecting the credit rating agencies for debt issuers? >> i report says that the agency will follow what is required under the legislation. this was an organizational design issue that we reform this -- that we were focused on. >> my reading is that you simply ignored that they would undertake that function. >> at the time to study was completed and they determine

what the rights structure is, it is what ever we determined to be the optimal new business. we will have to restructure them to accommodate that. >> hopefully the group will cover any additional work necessary. i yield back. >> he has a motion and then we will move. >> you say to enter the record to the commission with regard to ownership reporting rules and how the mayor may not be changing. >> unanimous consent. >> thank you very much.

a colleague came up to me and said the sec is crazy. -- is frakking crazy. i thought they needed a vocabulary lesson. they said that they will regulate frakking in the mining issues. with all the victim's and citizens that are at risk for securities, why in the world would they feel it is necessary to go into the environmental business now. there's so much work yet to be done. there were warning about not having enough money in the budget now. they can involve themselves in

what appears the most to be their responsibility of an environmental agency. >> they're not in the business akking.ting fr when they change their rules for public companies to report their oil and gas reserves, as a result of them being liberalized to allow for reporting of potential reserves as opposed to only proven reserves, that companies were exaggerating where they were. were that investors rely upon. i believe our review group for that industry and corporation finance division have comment letters as they send them back and forth to companies as far

as their methodology for estimating their research. i would be happy to get more information for you. i want to assure you that we are fracking in anyfrankin way. >> generally, i trust what they're right in "the wall street journal." when you get back to the office, if anyone tells you do for me or there is in the light shed on that, please let me know. i will take your comments as the absolute gospel and i will engage anyone that indicates that you're doing anything other than just your find reserves. >> i do not know that we are asking more questions than just

the verification of reserves. there may be other agents and comment letters. but what i was trying to make clear is that we were not telling people they cannot cannot engage in fracking or any of those kinds of issues. but we do have questions to have complete disclosure about risks, about reserves, proven or estimated, and so forth. >> the space between not regulating fracking and merely making sure the disclosure requirements are correct under reserves is big enough to drive a million space shuttles through. i think that would be important. i think that you would respond to me and anyone else who has an interest here in writing within the next week. >> would be happy to do that. >> anything else?

thank you. mr. kearnecarney. >> first, to the bcg folks, how would you accommodate the concerns that mr. hynes particular? >> this issue was outside the scope of our city. >> i am not asking you -- and if you do not want to offer an opinion -- you do cost-benefit analyses for clients? >> yes.

>> how would you envision accommodating some of the concerns that he had about getting low probability the facts that have cataclysmic impacts on the financial system in this instance? do you have any thoughts on that? >> we will have to reflect on this and come back to you. >> all right. if mr. garrett's bill were to pass, how would you implement that? how will you accommodate the concerns articulated which i think our real concerns. but you look at the financial crises we have had historically that have been created by some of these things that are not expected? >> i think it is a difficult question. the costs are easier to quantify them the benefits. we struggle with that and we try as we can to quantify the benefits and discuss as fully as we can what we believe benefits

will be and balance from there. >> but that is an essential part of doing analysis. you have to enumerate costs and benefits and what they are and assign values to them. as was pointed out, that is sometimes difficult to do. >> failure to act as its costs as well. i think that a cost-benefit analysis would be more useful if we did talk sometimes about if we do not act with the potential ramifications are of that if other events come to pass. >> do you have a view of how you might implement something like this in a way that would result in what is in legislation? >> while we have not done it

perfectly, i think what we do now is geared toward getting a recent judgment about whether a rule benefits will outweigh the costs. i fear about this legislation is that it layers so many analyses on top of what we already do. that we were said to fail. but there's no way that this agency or any other agency can possibly view of these things, some of which conflict, some of which seek to protect market participants. sometimes we need to protect market investors from market participants. we would be happy to work through these issues in this legislation as constructively as possible. but i think there's policy that make it very difficult for us. >> in concert, mr. garrett's

idea makes sense, but the limitation is difficult to do, particularly to accommodate the concerns that mr. hynes has. i only have a minute ago and there has been a discussion about priorities. there are things you do not think are getting the priorities that you think they ought to. you think you can go over that again? i agree that we need to have a discussion over what those priorities are and so that congress knows what those priorities ought to be a new can geladas or tell us what you think they ought to be and -- and you can challenge us or tell us what you think they ought to be. hindering of hiring expertise and one other that you mentioned -- >> building the necessary investechnology and infrastructo be more efficient, derivatives

rules, and i would add that our ability to ensure that we have a stable equity market structure in this country so that market companies can be efficiently and transparently have their stock traded and investors feel like they are participating in a market that is built for them. it is an area where we have to have data and it will to really do a good job and those costs money. >> i see my time has expired. i do believe that we should extend this conversation for some time in the future to go over these priorities and had to implement some of these things you're trying to implement. >> thank you. mr. pierce. >> thank you, mr. chairman. i agree that this conversation should be longer. if we get to visit with mr. shapiro did, that would be good. -- with ms. shapiro again, that would be good.

i seeing your report, page 10, page 11, twice on page 11, resources constrained, resources to not permit, and you're drifting off into this environmental question. i wonder if you are asking the same questions of the manufacturers of windmills, the electric generating windmills in new mexico. they kill birds and are affecting the environment. are you asking for the same environmental impact on those companies? >> i would like to get back to you with more detail. our goal is not to address any environmental issues. >> i would appreciate it if you would get back with me. $2.8 billion, how much of it came from the settlement of mr. madoff? >> i do not believe any of that.

>> has any investor been compensated anything from your efforts and from the efforts of the sec? >> i would have to get back to whether any fines or penalties went into a specific fund. >> so we have the most highly visible investor defrauding that has ever occurred and you do not know the answer to that? >> because our goal would be enough to take money to the treasury and deprive -- >> i asked if any payments have been made back to investors. >> i am sorry. i just not know that. >> you understand that, from my point of view, how outstanding that is? back in 2008, and as the company had assets of two billion

dollars. they had solar cells. they had public money and went bankrupt. do you have that on your radar scope? >> i am not familiar with it. i will have to get back to you. >> spectra inc. spun off from intel. they took money from goldman sacks, who you do have. specter was a private firm, but it took lots of money from goldman sacks. they also took money from new york state. i wonder, after they filed for bankruptcy, did you have any insights on them? >> again, we have thousands of investigations ongoing at any one time. i am happy to find any information for you. >> but your agency does have the time to go in and worry about fracking. i am not saying that we do or do not have investigations going

on those companies. >> what i am saying is that you do have a front-page article about those companies doing these activities. i am saying you should do your business instead of the epa's business. >> i understand. >> is very visible firm named solendra -- given the events of the last two days to three days, have you done anything to look at that company and warn the american people before you gave them $4 million or $5 million? >> i cannot comment on the open investigation. >> do you have an investigation? are you looking at that? >> i cannot comment on whether or not we have an investigation. >> ok.

we have begun to get information from the small investment advisers. they are facing standards that maybe the big guys do not face. again, i would like to hear your observations. we do not have time today. but i would like to hear your observations on why you'd be concentrating more efforts on the small fish than the made off fish -- than the madoff fish. i worry that we will implement regulation on mom-and-pop organizations across the country that do not having to do with the big ones off of wall street. i expect you will be considered of where the big fish are to fry. thank you. >> i was not going to get this,

but i want to respond to my friend from new mexico. chairmanship here, you are familiar with a company called the reserve fund. >> yes. >> the reserve fund probably cost state government and zillions.istrictand the sec was all over it and helped recover the mexico's special districts who had a lot of money it help them recover on average 95 cents on the dollar. that was a big one. it affected each state. and they were all over it. i do not know the specifics of all little questions you were just asking. in defense, i want to say that could let's get to the guts of this thing. i appreciate the gentleman from boston consulting and your study.

the question is should there be more private, in effect, assistance and enforcement and oversight within an umbrella kind of -- i mean, what we are saying is that there is not enough money to do all the jobs that are assigned to the sec at this point. there may be other ways to do it, using finran or of -- using finra or other sources. a study found that on average, the federal government paid contractors two hundred $60,000 for computed while government workers made $136,000. human resources was 228484 contractors, more the than twice the 1100 thousand dollars for the same services done in the

house. i have no problem with the private sector making a lot of money. we have testimony saying they wanted to be fully accountable to the congress. i am sure he does not mean all of that. but the salaries are substantial. whoever it is, whether it is the public organization, the sec, or signing it to somebody else to help, there is responsibility. i mentioned earlier about 6000 drop on the stock market translates to $7.80 trillion, which is a lot of money. that is a huge user fee for a lot of people. so explain to me, if you would, there is responsibility with or without dodd-frank, can this be

done on the budget that you have today? >> i have been pretty consistent with the appropriations and testimony over the past year that we cannot operational lies they dodd-frank rules without further resources. we are looking for savings wherever we can find them. we have some opportunities to do things differently that we think will free up some resources. at the end of the day, we are taking a piece of a $6 trillion -- hedge fund regulation, credit rating agencies, municipal advisers, large new areas of responsibility that the congress and frankly the american people will expect us to do well and without significant additional resources -- that simply will not happen, even if we become very efficient, very effective, very agile. all the things we're working towards, at the end of the day, there is a gap. >> in preparing this report -- i

do not know if we asked you to look at it -- but you consider the catastrophic losses. we're talking about hard-benefit analysis and i think we ask for that in our study, but maybe not. did you consider the catastrophic losses we saw in the fall of 2008 when the sec at that point had not been doing its job? >> our focus was looking at the organization structure of people technology and how they work. we took the sec as we found it when we arrived and looked ahead at what capabilities they need to have to deliver against their mandate and mission. our focus was forward-looking. >> thank you. >> dr. heyward. >> thank you mr. chairman. chairman shapiro, i know that the sec is forming an advisory

committee on small and emerging companies. i think that is an important step in the direction of facilitating enterprise. we want our small businesses to be able to acquire capital. we want investors to be able to engage in that marketplace more fully. one of the questions the procedure one of the challenges that proceeds from that action is that we need a market for those stocks once they are issued. as you know, right now, we really lack that kind of a marketplace in the united states for various reasons. but a marketplace helps investors to observe and to set a market value for these sorts of investments. would you be willing to work -- my office has taken a particular interest in try to facilitate

the united states-based market place -- could we work with you to see what we can do to facilitate setting up the kind of a market? >> absolutely. we would be happy to do that. the nasdaq has created a venture market place from the roots of the boston stock exchange that they bought. while i do not think it is fully up and running yet, the commission did approve that. it is one of our efforts to try to create a better and more transparent trading market for lower priced securities. but we would be happy to work with you. >> great. i appreciate that. we look forward to working with you. our staff will get in touch with yours and we will continue to move forward on that. i do have another question regarding revisiting the williams act and regulations 13 thd.

a lawsuit is requesting that the time frame for disclosure is to be reduced from 10 days to one day. that could have a substantial effect on that sort of investor engagement. and many an ankle and -- and many unintended consequences. it does strike me that the division of financial innovation should be dissolved and the potentiald, effects. are you looking at the the costnimplications with benefit? >> yes.

they will be very involved. >> great. i appreciate that. clearly, we are functioning in an environment in which everybody is exceedingly concerned about our being a destination for working capital in this country. i know your dedicated to doing the right things in that regard. i appreciate hearing that. i think that is a great and thoughtful approach. i yield back, mr. chairman. >> thank you. >> i want to thank the chairman and all of the witnesses today for being here. one of the things that concerns us the most in my rural southern virginia district is jobs, of course. i think it is on the top of everybody's mind. i was pleased that the president last week to it is had to capital formation as something that is important to get this economy going. one of the bills that has been passed out of this committee is

a bill that would extend the same exemption to private equity that has been given to venture capital. it would repeal the part of dodd-frank dealing with that issue. in my mind, that is a mainstream issue. i know hundreds of jobs, if not thousands, in virginia's fifth district and across the comments -- across the commonwealth and in this country that have been created by the capital formation provided by private equity i was wondering, chairmanship your -- chairman shapiro, if you could articulate any benefits to requiring advisers to private equity to register with the sec and what could possibly be the benefits of the quarterly and sometimes monthly evaluation reports.

with its strapped resources, what to the sec do to improve what private equity is done for the economy, especially at a time when our economy is failing and private equity has proved again and again to be able to create jobs at a time when we are losing jobs. let's talk about the benefits first and then we will talk about the cost. what possible benefits can you see? >> i am familiar with the bill that would basically exempt private equity. i think that is an interesting .pproach th the commission followed the requirements of dogdodd-frank. our obligations there with respect to -- or with respect to

reporting only. it is our understanding the broad scope to participate in financial services industry and the economy that have the potential to impact other financial institutions and investors in a fundamental way. >> the reason i ask is a couple of reasons. most people agree and i think the view of this committee was the private equity is different. it is not the leveraged. you have highly sophisticated investors. and for foes, by design, are not necessarily diversified. -- and portfolios, by design, are not necessarily diversified. there is no systemic risk to be concerned with. the stock about the cost. i am glad that you brought up the cost-benefit analysis. obviously, the costs, in my

opinion, are significant. we had one witness who testified that it would cost their company's $750,000 and up to $1 million to register. and then the ongoing cost of hundreds of thousands of dollars to continue to file these reports. in my view, my main street view, southern virginia view, that is money that could be invested in the district. that creates jobs. i'm wondering if you believe that that is what i would call and a sister reporting and registration that would negatively affect private equity firms that would have to comply with this. >> i would have to look at the analysis with the rulemaking was promulgated to perhaps answer that more completely. i've happy to do that.

we met with a number of middle- market firms. one of the things they asked for was a delay in the registration of a year. i think we have done those. we have some opportunity to continue to crotalk. i would be happy to continue the conversation. >> it would appear to me that you have the authority to exempt. is that something that you consider? >> we do. we were conscious of the fact that the congress made an explicit choice here. sometimes things just do not happen. but this is an exclusive choice of registration. again, that is something we can talk about. >> thank you very much. >> thank you. >> i yield back. >> i know there is a vote that has been called. i was hoping i could draw a couple questions and then you

get to abandon us speaking both for the chairman and everyone here, we really appreciate your time. chairman shapiro, you were kind enough to mention the 500 shareholder rule. and of the sec has been looking at that for a while. a, what do you know about your rulemaking or your discussions internally? if you have warm and fuzzy things to say about my legislation, we can talk about that. only if warm and fuzzy. >> i think of two pieces of legislation in this arena. one would requires to raise it from 5 million most to $55 million. then the 500-holder chairman,

whether that would be limited or the number of investors ought to be raised. even employees could be on the threshold. those are values that the staff is looking at right now. i would say that the 500- shareholder limit is probably the first item on the agenda that we hope to bring to the small business advisory committee to get their thoughts and perspectives on it and in the burdens of reporting, whether there are any other alternatives. but we are moving very -- forcefully it may be too strong moving to do we're what we have to do. there had been years of study and it was carefully calibrated. i think we do not want to just toss it out the window. we want to do an analysis, perhaps a cost-benefit analysis as well. but we're committed to moving ahead on this. >> this is one of those moments

on the republican side where you have been very kind working with our staff, particularly the reggae issue. in regards to the 500, in many ways, that is more about capital formation, particularly for small and the coming businesses. it is sort of modeling access to capital. >> right. >> i have an offshoot and you will have to help me a little bit on this one. municipal advisers -- i hear a lot for my banking communities saying that we are regulated by everyone and there is this sort of sense of concern. will they get another layer, particularly when they're doing some of the advisor practices within those banks? >> when we proposed the principle of visors, we brought in to that definition otherwise regulated person who probably we

ought not include at the end of the day. the final recommendation will be coming to the commission very soon. we have gotten 11,000 comment letters. >> you have heard from the other 11,000. >> i think we have heard from almost every member of congress as well. we understand the issue. we cast a very wide net, perhaps inappropriately one, and we're working on those issues. >> i appreciate the "wide net" phrase. i know we're trying to move forward with another hundred million dollars in '90 and technology money, believing that and itcess to technology - will make your ability to do

your job easier. i had this great fear taking on something that was actually a the banking sector and huge and almost untenable in the current budget situation. with that, if there is any burning comment left, if not, thank you for spending time with us. thank you. we are in recess and we will be moving to the second panel. [captioning performed by national cap [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] >> the financial services committee will come to order. for purposes of hearing

testimony from our esteemed second panel. to include the honorable paul atkins, visiting scholar of american enterprise institute, and former commissioner of the u.s. securities and exchange commission. paul, it's great to have you back. a good friend. look forward to your testimony. mr. steven clemons, partner, k. and l., and former deputy chief of litigation counsel, division of enforcement with the sec. >> thank you, mr. chairman. >> glad to have you. i've read all your testimony and i believe all of it is of value as we try to determine with the sec what's the best approach, and a collaborative effort. former secretary, u.s.

securities and exchange commission on behalf of the u.s. chamber of commerce. >> good afternoon mr. chairman. thank you for inviting me. >> thank you. welcome. we have assembled this panel because we believe all of you have valuable insight into what direction both the commission should go in and the congress and addressing it. the honorable harvey pitt, chief executive officer, and former chairman of the u.s., securities and exchange commission. it's great to have you back. always enjoy your testimony, your insight. mr. j. w. -- assistant professor of law at george mason university who of law. and this is your first time to

testify as a witness for the majority? >> as a majority witness. yes, sir. nine times as a minority witness. >> so it probably will be a very similar experience. >> we welcome all of you. we're not going, this five minute clock, if you need to take six minutes, seven minutes, feel free. when i going to limit you. if you get up to eight or nine we might suggest that you wrap up, but commissioner atkins, former commissioner, we will start with your testimony. >> thank you very much, mr. chairman. >> and our mike max, we're actually getting new microphones if you could pull it up where it is almost hitting you in the mouth it will really do -- i know that is awkward, but it will help.

try to jazz up -- thank you. >> thank you very much, mr. chairman, ranking member frank, and members of the committee for inviting me to appear today after hearing. it's an honor and privilege for me to be able to provide information for your deliberations regarding organizational issues at the sec. i'd like to begin by congratulating this committee for taking up this issue of improving and enhancing the sec. i've had the privilege of working there for a total of 10 years. first as a staffer in two terms of offices and then as commissioner under three chairman including chairman pitt who's on the panel as well. because of the public sector lacks the crucible competition, allow inefficiencies and promote better management for the system i think it's periodically necessary for congress and the president to step in to do so. a good example of this approach was what congress in the truman administration did with her we

organization plan number 10 of 1950. in about one page he gave the chairman of the sec clear authority over executive and administrative function and radically reconfigure the sec's governance in the process. in contrast to your plan 10 dodd-frank's 2319 pages haphazardly address too many things on and i think not very well. it created a grab bag of ideas that through micromanagement has made the management of the sec much more difficult. for example, dodd-frank added for statutorily mandated direct reports to the chairman, the investor advocate, the office of minority and women affairs, and the office of municipal security. because these provisions are statutory the chairman has little alternative to do things differently, especially since the chairman already has more direct reports than is practical. so these and other statutory provisions etched in stone. one way of doing things to the

exclusion of others. under dodd-frank section 967 the sec commission bcg to do a supposedly independent review of its management and organization. unfortunately, this review does not appear to be independent and i don't think it was very well done. jackal give you much more detailed critique of the bcg report in his testimony which i've read, and i subscribe to. suffice it to say i think the taxpayer ought to get a refund of the $5 million or so that the sec spent the last report. i commend the committee for taking a fresh deliberate look at the organizational structure of the sec with a draft legislation that is under discussion today. i also commend chairman bachus for perceiving in regular order holding legislative hearings to gather commentary and consider openly the best approach before introduction of actual legislation. the committee correctly perceived that the sec desperately need organizational and management philosophy

changes to increase its efficiency and uproot its revelation in the markets. considering how dramatically the markets have evolved over the last decade or more. with that said i would caution against being too prescriptive regarding the internal organization of the sec. times and circumstances change. an example of re-org plans demonstrate that general guidelines but with a firm sense of what of congress is, may be sufficient. but, of course, much depends on good managerial experience to lead the agency, which, of course, cannot be legislated. the draft bill contains many good ideas. for instance, recognizing the second class status of economists at the sec in seeking to enhance their participation in policymaking, and promote them to first class status i think is badly needed. the endemic problem, the

economic analysis at the sec has been performed on a post hoc exercise. the policy for rulemaking is mostly determined first by lawyers and only near the end of the process are the economists brought into justify the actions on a cost-benefit basis. in this vein chairman garret proposed sec regulatory accountability act i think is a very good step forward. and adulterous the sec to to utilize to determine whether or not to propose or adopt a regulation, and to do so only after considering the cost in the benefits. the criteria set out in the draft bill are in the main commonsensical and an economist worth his salt should take those criteria, or similar ones into account. the trouble is at the sec, cost-benefit analyses are usually done by lawyers in the rule writing division, and only shown to the economists at a much later stage. the sec, after all, is an agency

of, by, and for lawyers. now, this morning mrs. waters, mr. frank and others raised the point regarding the applicability to enforcement cases of this draft legislation. that actually i think is a very good point, but it's an easy fix i think by carving out administrative orders and perhaps other things as we look at it. even regulations mandated by congress could benefit from such an analysis outlined in the draft legislation. ..

>> in my written submission i raised concerns regarding expanding the empire without a fundamental reevaluation of its statutory functions and organization. now, the subject of sec funding often comes up in the context of discussing management failures at sec. it's far from a problem that's easily addressed by money or by creating new offices as dodd-frank has done. madoff and stanford did not result from parsimonious funding. self-funding is certainly not a solution for these problems either. if current leadership cannot handle leasing as the chairman asserted in a hearing a couple months ago, how in the world can it handle self-funding? there are many intelligent, competent, dedicated, hard working people at sec. it's the management system and

be how it determined priorities over the past decade or more that's let them down. the system, essentially, is unchanged today. i salute this committee for taking on this issue and continuing a public discussion. in the past decade the sec's budget has increased threefold, and the fundamental problems remain. everyone in the current economic environment has to do more with less, and before the sec gets any more money, i think it needs to show that it has garnered efficiencies and can use its billion-plus dollars well. so for the sake of investors who have lost billions in fraudulent schemes that should have been discovered earlier, it's high time that these organizational issues be addressed. so thank you again for the invitation to come here today and testify. thank you very much. >> thank you. mr. krill min? >> thank you, mr. chairman. by last summer most of the criticisms that are now being thrown by many at the sec were

already out on the table. all of this had long before heard of bernie madoff, robert allen stanford, we'd heard of employees viewing internet porn on company time, about the sec lacking the same quality bookkeeping systems as the private sector has. but, mr. chairman, last summer we also heard that every year through thick and thin, the sec manages to file almost 700 complex securities cases against almost 2,000 defendants. now, the sec which has 3700 employees reviews tens of thousands of disclosure documents each year while writing over 11,000 investment advices, 5,000 broker dealers, 7500 security exchanges, rating agencies, sros and a market trading 8.5 billion shares a day. so having already heard most of the same criticisms we're hearing today but facing the

worst financial crisis in 80 years, what did congress decide to do? congress last summer enacted legislation to double the sec's budget and specified steps over five years. now, as you've noted, mr. chairman, and as has been mentioned this morning, since 1996 the sec has always been run entirely on noncontroversial wall street user fees, never spending a dime of taxpayer money. so the double budget would not have any deficit impact. after running the sec on a shoe string even with increases in recent years, still a shoe string for what they have to ride herd over, congress wisely realized that to get out of the worst downturn since the '30s, to promote growth and create jobs we need a securities market overseer that has the resources to make a difference. mr. chairman, 12 months later we still know pretty much what we knew last summer, but instead of actually moving forward and

getting that doubled sec budget in place, we're hearing from consultants, albeit sophisticated, talented consultants about things like optimization initiatives, time-phased multiyear integration, and we're forgetting, mr. chairman, that a wall-to-wall restructuring like this will effectively paralyze the sec for a year, two years or longer. endless meetings to plan and replan new reporting chains, job descriptions, reallocations of power and authority among sec offices, staff members obsessing over resumés and how to handle internal job interviews. mr. chairman, i suggest that you got it right when you said earlier this morning, heal thy self-. heal thyself, realize what you have to do and do it. having heard mary schapiro this morning and others that we've heard in recent months, they get it, they get what has to be changed and, mr. chairman, you referred to some of the changes

that ms. shapiro has effected. capital formation, market surveillance and fraud detection. this is the worse of all possible times to do this kind of comprehensive reorganization. at the same time, we can't freeze things in time, and chairman shapiro this morning talked about her concerns that the modernization act while very well intentioned and focused might have that effect, that it might freeze the chart, and it would take an act of congress to change things. mr. chairman, your comment that, certainly, you're looking for flexibility, and this is a discussion draft and this is something that you want to consider further as does the committee, um, you and mr. frank have both commented this morning about the need for flexibility, and we all appreciate that. another point, mr. chairman, in last week's joint session the president urged us all to, as he

put it, cut away the red tape. cut away the red tape that prevents start-up companies, those people in garages and warehouses and so forth, put companies just in the starting phase from raising capital. we all want the sec to write those rules so -- providing cheap and efficient procedures for america's small businesses to raise capital to give us the growth we need, to give us the jobs we need. but procedures that still insure that investors, obviously, get the information they need on their own to make informed investment decisions. but, mr. chairman, i have a concern, and my concern is that we can forget about this kind of rulemaking to streamline capital formation or anything else if we keep handle rulemaking opponents of all ideological persuasions more and more tools to block anything that the sec tries to do. now, mr. garrett's bill is, again, very well intentioned and very thoughtful, but as a

proposal the regulatory accountability act would have an unintended consequence. it would let opponents file lawsuits to block any new rule by arguing that the sec had failed to appropriately consider a whole laundry list of -- and this is the key point, mr. chairman -- vague factors, vague factors that any plaintiff's lawyer can easily exploit. things like is it good for society? sure, we want it to be good to society, sure, we want cost benefit analysis. that's a given, absolutely right. but do we want to give that to the plaintiff's bar as a tool regardless of what their particular persuasion is on a particular issue? do we want to give them as a tool to just tie stuff up, prevent these rules getting through that we actually do need? mr. chairman, i think what hasn't been mentioned is if you look at any sec rulemaking, the release, the second half of

it -- dozens of pages -- is all about cost benefit. they've got the regulatory flexibility act, the paperwork reduction act, a whole bunch of stuff which hold their feet to the fire and make them do this kind of stuff. that court of appeals case we talked about this morning, unfortunate, maybe the economic analysis should have been better as the judges said, but the point is the execution is not piling on more requirements. cost benefit is, clearly, a requirement, it's clearly something they do if they need to do it better to execute better in particular instances, absolutely right. mr. chairman, a back-to-basics focus on the sec's core missions of capitol formation, market surveillance and antifraud enforcement is what these difficult times demand, not micromanaging the sec, not paralyzing it by piling on mandated, multiyear reorganization studies and new requirements and procedures. it's time to let the sec get to

work. in conclusion, mr. chairman, last summer with all the recent criticisms already out on the table, congress made a sound decision to double the sec's budget, again, using wall street user fees that are already available, that wall street is willing to supply their peanuts compared with the user fee that i pay to take my family on a relative basis into a national park. if wall street's okay with using those and no tax dollars, no tax dollars, no deficit impact to help get us out of this pressing crisis and do what we can to avoid future crises. mr. chairman, i would respectfully suggest to the committee it's time the deliver on that promise and give the sec that doubled budget. thank you very much, mr. chairman. >> thank you, mr. crimmins. and mr. katz? >> thank you, mr. chairman. good afternoon. good afternoon, congressman. >> week earth. thank you for giving me the

opportunity to participate in this hearing. as you may know, i spent most of my professional career at the sec until i retired in 2006. i believe very strongly in its mission, and i care deeply about its future. since my retirement i have had an association with the center for capital markets competitiveness at the u.s. chamber of commerce, and it's provided me with an opportunity to continue to express my viewss and do what i can to support the agency. i believe that the sec must change in many ways, and for this reason i consider the bcg report has really been a missed opportunity. the analysis and findings in the report are conclusions, they lack insight, they lack empirical foundation. simply put, i think the report ends with recommendations that should have been the starting point of the report. for example, it recommends that the agency should consider

reorganization. recommends that the agency should re-examine its priorities and then consider how to realign its staff with these priorities. these statements should have been the starting points for this study, not its findings. during the past two years under chairman shapiro, the sec has actually initiated some really significant changes in its operation. the report, however, fails to assess what's been accomplished, if anything. it just restates the changes in a general and uncritical manner. it fails to conduct a meaningful assessment, and in doing so i think it's done a disservice to the commission and to the people at the commission who spearheaded these changes. if these changes have had a positive impact in the sec, a report that documented the benefits of these changes would have been really useful in restoring the credibility of the commission. given the way i feel, i applaud

you, chairman bachus, for focusing attention on the need for reorganization at the sec. it really is long overdue. the current structure is antiquated, it's cumbersome. it's largely based on a design to regulate the u.s. capital markets of the 1970s, not the markets of today. in addition to being antiquated, it placed an unrealistic burden on the chairman. the ceo of any organization should not have 20 direct reports. reorganization by itself isn't going to solve all of these problems, but an intelligent reorganization structured properly can really contribute measurably to a stronger agency. so while i support the objectives of your proposal, i believe that the focus of the legislation should be reoriented. i think congress must be responsible for determining the authority and powers of a government agency. it should be responsible for

monitoring agency performance, for holding the agency accountable for its actions. and it's the responsibility of the government agency for execution of those policies and implementation of its responsibilities. and this necessarily should encompass organizational structure and the assignment of duties. for the same reason, i believe that the dodd-frank provisions requiring the creation of five new offices is a mistake that should be corrected. i have a second concern with reorganization through legislation. the reality is no organizational chart is ever perfect. agencies, to be effective, must change over time. if structure of the sec could only be changed by an act of congress, we would be exacerbating the problem we already have. an agency that is already slow to adopt to changing markets would become even slower to change. and i have a similar perspective on congressman garrett's bill. i sport his effort to -- support

his efforts by clearly specifying the components of a careful analysis of a rules, costs and benefits. but i worry that a preadoption cost benefit analysis will always be fundamentally limited in what it can achieve. it requires the staff to estimate the impact of events that have not yet happened. a regulator rarely has the capacity to predict with certainty how individuals or firms will respond to a new rule. if regulator can't predict the response, it's difficult to accurately quantify the cost of compliance or the value of benefits. for this reason i believe in a different approach. i would combine the preadoption cost benefit analysis with a postadoption lookback requirement for the sec. in my written statement, i have a detailed explanation of how i think this could be implemented. my written statement also has several other suggestions for how congress could act to

facilitate and contribute to an sec turn around. in closing, i just want to briefly mention two of them. the first is an amendment to the government in the sunshine act that would permit two or more commissioners to meet informally with commission staff to monitor staff activities and participate in the early discussions where the action really is concerning formulation of rulemaking policy. in 20 years as commission secretary, i had the privilege of working for seven chairmen, four acting chairmen and almost 20 commissioners. every one of them at some point in time expressed deep frustration with how the sunshine act was preventing them from really doing their job to the best of their ability. the second recommendation that i want to highlight is the need for creation of a special study team to engage in a systematic and come prehence i review of u.s. capital markets and our

regulatory system. the fest study was completed in 1963, it produced a five-volume report that really was the basis for the bottom of

. >> yet stay within the time restraints that you've asked us to respect, i'd like to briefly raise five overarching points for your consideration. and i leave the details in my written statement. first, the sec is vital to the proper functioning of this country's economy and capital markets and has been given an extraordinary and ever-increasing mandate over the past 77 years. these days the agency's mission is off overwith looked -- often overlooked, and its successes are often ignored. instead, the sec has been converted into an institutional

pinata, attacked whatever it does or what it doesn't do. the sec has made some significant and serious mistakes. but it is taking steps to correct the perceived weaknesses. second, enhancing the commission's effectiveness is a proper and important goal. the agency must improve its organization, structure and efficacy, but it cannot and should not do so without the constructive assistance and oversight of this committee. and yet accountability, efficiency and effectiveness while concepts for which the agency must strive, and i encourage those efforts, can also be an effective euphemism for creating impediments to the agency's ability to meet these goals.

third, sustainable change in agencies as well as in individuals can only come about if the agency embraces the need for change and the proposed way in which change should be effected. this does not give the agency the right to thwart congress' directives. but no amount of legislation can force a change in the agency's culture or performance unless the agency and its employees embrace both. fourth, without ignoring the instances in which the agency failed to meet legitimate expectations, public attacks on the agency's bona fide use, the potential failure to give it appropriate resources and the

assumption that the agency can't can even get wrong right can demoralize those whose participation in sustainable change is crucial and, ultimately, prevent this committee from achieving its very laudatory objectives. fifth, the sec must do better and change. it has too important a role to play. principle among the requirements, i think, is for the agency to be creative in the figuring out how to meet its new responsibilities including those under the dodd-frank act without receiving any additional funding. one such way is effectively for the agency to improve its compliance examination function, the very function that did not capture the madoff and stanford

ponzi schemes. it could do this, um, if congress gives it the authority to require every money manager to be examined either yearly or this case of smaller firms, every other year, um, at no cost to the taxpayer by an independent, um, expert group that would do an examination pursuant to standards the sec could create. we proposed this policy in february of 2003 when i was chairman, and it, i think, will offer some very valuable opportunities to get better examinations and perform what i would call compliance audited in the same way financial audits are performed. of course, we have financial

audits, and that doesn't prevent financial frauds, and compliance audits won't prevent compliance frauds. but this will, um, allow the agent -- agency if it gets reports on all of these examinations to focus its attention, to see new trends as they're arising and effectively be able to do the kind of oversight it should do with no burden placed on the american taxpayer. that, it seems to me, is the kind of creativity that the agency has to mow come up with and be in the forefront of efforts to achieve. i appreciate this opportunity to discuss these important issues, and i'll try to respond to any questions you have, and i also offer without meaning to sound presumptuous to make myself available if there's any way in which i can assist this committee in its very important

work. thank you. >> thank you. let me say this to all witnesses, we plan to, to give all of you an opportunity to, you know, not only give your testimony today, but to continue to advise us as we go forward. mr. barrett? or professor. >> thank you, chairman bachus. i appreciate the -- and divisioned members of the committee, i appreciate the opportunity to testify. my testimony today will focus on two important and necessary reforms. first, i will argue that clarifying the sec's legislative mandate to conduct economic analysis and a commitment of authority to economists on staff at the sec are both vital to insure that new rules work for investors rather than against them. second, i will urge that the sec be required to consider the impact of new rules,

particularly corporate governance type rules, on the state-based system of business and corporation. every president since ronald reagan, including presidents clinton, obama and bush, have requested that independent agencies like the sec commit to sincere economic cost benefit analysis of new rules. further, unlike many other independent agencies the sec is subject to a legislative mandate that it consider the effect of most new rules on investor protection, efficiency, competition and capital formation. the latter three principles have been interpreted as requiring the sort of cost benefit economic analysis using empirical evidence, economic theory and compliance cost data. these tools help to determine rules, rule impact on stock prices and stock exchange competitiveness and also measure the compliance costs that are passed on to investors. three times, three times in the last ten years private parties

have successfully challenged sec rules for failure to meet these requirements, for failure to make the grade. over the three cases, no less than five distinguished judges on the d.c. circuit appointed during administrations of both republican and democratic presidents found the sec's economic analysis severely wanting and insufficient. one failure might have been an aberration. three failures out of three total challenges is a dangerous pattern. many sec rules have treated the economic analysis requirements as a mere afterthought. this is in part a consequence of the low priority the commission places on economic analysis, evidenced by the fact that economists have no significant authority in the rulemaking process or the enforcement process. and i realize that rules have a section called cost benefit analysis, but having it there is no substitute for having quality analysis.

as an example of the level of analysis typically given to significant rulemaking, consider the sec's final release of its implementation of a very controversial and often-reviewed rule, section 44b of the sarbanes-oxley act. the sec estimated that the rule would impose -- this is at the time the rule was adopted -- an annual cost of $91,000 per publicly traded company on average, $91,000 was their best guess. in fact, a subsequent study five years later found average costs of $2.87 million per company. that's a big, um, miss in the mark in a big way. that error in judgment only applies to estimates of direct costs. the sec gave no consideration to the more important category of indirect costs and the much larger cat four. the impact of the rule on new volume of ipos on u.s. exchanges n. business round

table v. sec alone, the sec estimates it dedicated over $2.5 million in staff hours to a rule that was struck down. that represents an estimate of about $100 an hour for sec time. now, for securities lawyers of that experience, i think most would agree that $100 an hour is probably a very conservative estimate of their, the hourly opportunity costs of their time, but let's assume that estimate, $2.5 million in staff hours. an honest commitment by the sec to empower economists in the rulemaking process will be a vital first step to insure the mistakes of the proxy access rule are not replicated in future rules. i also support the goal in h.r. 2308 to further elaborate on the economic analysis requirements. i would suggest in light of the importance and pervasiveness of the state-based system of corporate governance that the bill include a provision requiring the sec consider the impact of new rules on the states when rulemaking touches

on issues of corporate governance. the u.s. supreme court has noted that no principle of corporate law in practice is more firmly established than a state's authority to regulate domestic corporations. delaware's one prominent example and is the state of incorporation for half of all publicly-traded companies. its code is so highly valued that the mere facts typically earns a publicly-traded company a 2-8% increase in value. many other states also compete for incorporations like new york, massachusetts, california and texas. in order to fully appreciate this fundamental characteristic of our financial market system, i would urge adding the following language to h.r. r. 2308. the commission shall consider the impact of new rule on the troitional role of states and governing the internal affairs of states without pretempting state law. the sec can comply with this requirement by taking into account commentary from state governors and state secretaries

of state during the open comment period. it can minimize the preemptive effect of new rules by including references to state law where appropriate, similar to one already found in section 14a8 promulgated under the exchange act. it can also commit to a process for seeking guidance on state corporate law issues by creating a mandatory state court certification procedure similar to the one that was voluntarily used by the sec in the case in 2008. now, we've heard a number of comments from some members about the importance of the financial crisis and the importance of risk. i would note that regardless of relitigating the merits of items in the dodd-frank act, a thurm of items in the act were unrelated to the financial crisis and to risk. the dodd-frank act was a big bust coming through congress, and there were a lot of old ideas that had been germinating for ten years, particularly

proxy access that got on the bus. that was, essentially, a union-driven special interest item that managed to get tacked on. i've done some independent analysis at the economics department. we studied the impact on a very small subset of firms, about a few hundred firms, and found that proxy access causes actuallily half a billion dollars in losses for just a few hundred firms. as of the event date of august 25th, and i'll be happy to submit that full study to this committee. so i think this is a very important issue to consider, and i appreciate the opportunity to testify. i also want to clarify on a personal note and correct a very serious error in a prior testimony during the dfa hearing on this issue on proxy access, i represented to congressman frank that i was a red sox fan, and in the interim i've married, i've been lucky to marry a phillies fan, and so i want to go on the record as saying i am a phillies

fan and correct that prior error in my testimony. thank you. >> thank you. you would say you went over to the dark side, i think. [laughter] thank you. i think most of your testimony was pretty clear, and i don't have any questions about what you testified. one thing that i do want to ask you, and this is sort of -- you've not testified about this, but i think you're all, i would like an answer to it. the stanford case, we've talked about the sec and the failures of the sec in the stanford case. as i understand it, it was a financial product, not a security. and that it was actually advertised as a foreign-based product. i mean, at -- it, you know, what

effect did that have on the sec, you know, their jurisdiction on it was somewhat, you know, clouded, i would think, and i'm just trying to get a handle on that. can anybody comment on that? >> i'm not sure -- i'm not sure i articulated that right. but it was not a security, it was a financial instrument. >> yeah. there were, certainly, when the sipc issues came up, the claim was that they were banking and financial entities, not brokerage firms and, therefore, there was no coverage. but if i'm not mistaken, the sec did file a lawsuit in which it alleged fraud a on the part of an entity it claimed was acting as a brokered dealer. and so i think the sec, um, found jurisdiction. the real issue was what happened

between, um, the years when this ponzi scheme was going and when it finally came to light and whether or not the process used was effective. but i think they came up with sufficient authority. >> right. and i think they, obviously, did have jurisdiction, i think they had -- but i'm saying, did that cloud some of the initial investigation or enforcement? i mean, if you look at the perspective, it's been some time. there, actually, was a representation that they were buying something -- >> mr. chairman, if i could add something. i've always believed that stanford was actually in the perspective of what happened in the sec a far more troubling -- >> what? >> a far more troubling instance than madoff.

>> okay. >> and if i could make the comparison, in madoff the staff were presented with information, and they dropped the ball. they didn't see it, and they didn't figure it out. what troubles me about stanford is if you look at the facts as they've been made public, the examination staff in the fort worth regional office spotted it, they recognize it as a potential ponzi scheme. through their examination program, they tried very hard to get the enforcement staff to follow up, and for a variety of reasons the enforcement staff had no interest in it. >> yeah. >> and for that reason this was not a legal issue, this was not a question of authority -- >> okay. >> -- this was a question of staff making a bad decision when other staff in the commission were saying this could be a very serious problem.

>> right. in fact, some of that staff was then let go. that made the recommendation to go forward. so i do believe there's something there that -- >> if i could just tie it into a broader theme. >> yeah. >> metrics count. staff do what they're evaluated on. and i have written in a law review article a couple years ago that the problem, one of the problems in this enforcement division was it used the most simplistic measure of performance which is how many cases did you bring. and a nickel and dime case was one stat, a massive investigation was one stat. and that there were offices that knew how to game the system, and they realized we can devote four or five people for several years to this really complex, difficult case and have one case to show for it, or we can bring five, ten, fifteen or twenty

smaller cases and sort of really knock the ball out of the park when it comes to our evaluation. and that was what i think happened in stanford. they looked at this, they saw this is a huge, complicated case. we're a small office. if we try and take this case on, we're just not going to bring as many cases. and to me, that's the management problem at the sec -- >> right. >> -- that stanford illuminates. >> right. >> just to chime in there too. i would not want to, i'm not up-to-date on the stanford case, i wouldn't want to -- >> would you pull that -- >> yes, sir, sorry. but i do agree with what jack katz was just saying, that the real problem in which the bcg report didn't really address, the elephant in the room is how does one gauge whether, um,

enforcement attorney or the enforcement program, what have you, is successful, and, you know, what does success mean, how do you measure what the sec does? when you look at simple numbers of cases brought, that's not really a fair gauge. it's easy to goose the numbers every year. the sec brings accounts as a statistic, and that's simply where a company should no longer be listed. it's forcibly delisted. so every year that's 100 or more cases that sort of add to the, um, it's a good way to, um, make the numbers look better. so i think that's one rule challenge with respect to how to run the -- at least the enforcement program and to alesser extent the examination program. >> and mr. crimmins -- >> mr. chairman, if i could just weigh in also. i think you're exactly right in terms of overlapping jurisdiction.

i mean, if you have a stanford where maybe the securities jurisdiction if you posture it the right way, but there were also the banking industries and various other financial services agencies, things can drop between the cracks. one agency can figure, well, the other one -- it's passing muster over with the other agency. so i think you hit the nail on the head, mr. chairman, that when you have overlapping jurisdiction, there can be, there can be those issues. but also the other short point i'd make is that competing priorities. we had madoff and stanford, in the midst of other stuff we had the enron worldcom crises, we had option back datings, all these things where they had to pile on, keep up with the new york attorney general, keep up with finra. and when somebody walks in the tour, you know, diligent and hard working and sincere as mr. mar cop louse absolutely is,

and he walks in the door and says, hey, i've got a hot one for you, it's the former chairman of finra, a guy who also was the vice chairman of the securities industry association, and he's a fraud. and meanwhile that office, that particular office of the sec is in the midst of running to catch up with other regulators and keep up with other regulators or trading and market timing. a question, to wrap it up, mr. chairman, about competing priorities in an agency run literally on a shoe string, half the budget it should have, especially post-1996 when we took it off the taxpayers' back and made it wall street user-fee funded. it needs to deal with those competing priorities. that's how it'll deal with the madoff and a stanford going forward. thank you. >> um, one thing, and i'm going to give all questioners ten minutes. several of you have referred to

them focusing on what their job is. and i have, one of my concerns has been that they and really all the federal agencies have been papered and run to death. they're spending a tremendous amount of resources just reporting and -- to congress. which is a legitimate function of the congress. but in the legislation that -- the draft, not -- that i proposed it would allow the chairman, several of you have indicated she ought to be free to do her job and not have -- or his job, whoever it may be. and we've reduced, i think, from 24 to 14 the number of reporting, people that report to

her. but it, it is a, i think it is a problem. and you, you do see that the ceo or the chairman ought to focus on some, you know, fewer things and more important things. and the vision. um, let me ask each of you this. is, does anyone disagree that because of the added jurisdiction there is a need for more money? now, i know there is a need, you know, there's expanded jurisdiction. would we all agree there is an expanded jurisdiction first? i think we all, you're all --

where, however it comes through an appropriation or through user fees, um, can a reform happen without money? without additional funds? i would ask that. and i'm not saying -- i'm saying that a condition to additional funds ought to be a reform. but just give me a comment there. >> well, i do think that reform can happen without additional funds because it depends on what, i mean, we're talking about here managerial reforms, we're talking about how do you, um, manage an agency to try and incentivize people to do the best. i remember sitting in a senior staff meeting one year where the

senior, where certain senior staffers from certain divisions asserted that everyone in their division ought to get a merit bonus. regardless of who they were. but it had to be equal throughout. an interesting concept that i don't think is duplicated in the private sector. so that's just one indication of how managerial attitudes probably need to change and, again, things like that were not -- >> and i'm sure the employees' union and some of those presents some challenges. >> perhaps, but this was coming from senior staff people who were saying that in their division they thought that it would be untenable to differentiate between people. and so other divisions disagreed, of course, but some were taking that tack. >> sure. >> so that's just one -- >> yeah, and i disagree, too, with that thought, that they

ought to all get a merit. [laughter] >> i would just express agreement and also add that reform can also save money, you know? and with respect to the debate over funding, um, i would just note also that the taxpayer though taxpayers don't fund the sec through taxes, they are the residual beneficiary of the user fees, so to that extent it is a relevant discussion, and there's some debate over funding the sec and how much and such. but part of this discussion ought to be the fact that the taxpayer is a residual beneficiary, so the debt and deficit discussion does play in at least tangentially to that discussion. >> all right. and, obviously, if they don't have the resource, there is often a cost from not doing something which is -- >> part of the difficulty, i think, is, um, there's no agency that's ever been created that won't tell you that they could

use more money. >> right. >> they all want it. so one of the issues is how do you, um, manage what you have? i think, first, the sec's, um, increase in responsibilities has been so large that there is a huge gap. but, second, i think that there are ways in which the agency can save money such as the one i mentioned on the examination process that would actually do better for america's investors than what the sec is able to do, um, and somebody has to be thinking creatively to try to come up with those ways. so i think both things have to be done in order to make sure that the resources the agency does have are used, um, appropriately. we're at 1.1 or 1.2 billion when i took over, our budget was

about 300 million. and it was a lot of money although we needed more, of course. >> excuse me, mr. chairman, if i can echo and expand on what harvey just said, you know, i was at the commission a long time. and through the fat times and the lean times, and i remember after '86 the budget of the agency doubled, and then there's a period in the early '90s after the passage of the remedies act where the commission got a huge increase in it funding. harvey mentioned when he was there, and there was also a similar increase. congress has a phrase, they refer to something as being necessary but not sufficient. my problem with increased funding is i absolutely believe it's necessary, and i absolutely believe it's not sufficient. what i saw happen when the agency got these huge budget increases was it enabled them to avoid taking a hard look at what it was doing well and what it

was doing poorly. so that when the enforcement division got a massive increase in staff and everybody said, good, now they'll have the resources to do more complex, difficult cases, and they'll do them faster, sadly, that's not what happened. more staff just meant they brought more cases, not necessarily better case. additional funding is absolutely essential, but it is absolutely essential that it be coupled with substantive internal change in what the agency does and how it does it creatively. harvey's idea is just one of a number of examples of ways the agency could be imaginative in its use of resources. >> all right. in fact, i will say this, and i think it's very important, i think that's an important point is that funding, increased funding can actually mask the need for reform or retard

reform. sometimes it, you can find and decide what is the most important and prioritize, and it's true not only of a goth agency or -- government agency or a corporation, but also of a family. >> i would say, mr. chairman, that's an area where i think the commission would benefit from outside help. when we would look at the budget, um, the first thing that a chairman is told, well, that's sacred. we can't touch that. and if you start to ask questions about why it's sacred and why it can't be used, um, you don't find that you always get great can answers. i think that it is, um, important to have somebody outside the agency look at how the agency can use its resources more efficiently.

not change the resources, but use them more efficiently and determine whether or not subsequent increases are going to be necessary. >> thank you. of course, you know that congressman frank has indicated earlier in this hearing that he realized that there needs some rollback on some of the charges or the responsibilities that have been assigned to the commission by dodd-frank. he's acknowledged that that could be reviewed. >> mr. chairman, if i could just add, it's certainly something to consider the new jurisdiction, the expanded jurisdiction, the new duties and burdens put on the sec by dodd-frank, and as you've indicated and as mr. frank has indicated. but i would also respectfully ask the committee to consider how the old stuff that the sec has to deal with has radically changed in the last ten years, and what i'm talking about, mr.

chairman, high-speed computerized trading. we just department have that ten or twenty -- we just didn't have that ten or twenty years ago where computers without consulting a human being can put in huge order, change them, test price, change -- i mean, they get so far ahead of the average retail investor that it's a totally different market. that has to be -- that costs a lot of money to get the sophistication and the people you need on top of it to get the technology on top of it so you can see the markets in realtime and not only then, volume soaring through the roof where it's 8.5 billion shares daily, hugely bigger markets than we ever had before. and lastly, mr. chairman, the complex new products we have before we talked about derivatives earlier today, all kinds of new products, complicated stuff that sometimes the people creating them don't even understand them. that's the old stuff and how it's radically changed. so again, mr. chairman, thank you for being open to those additional resources that this commission really needs. >> thank you.

you're, obviously, right. we were dealing with products that was hard for people that were trading them or constructing them to explain what they were. mr. frank, you have 20 minutes of questions. >> do i have to use it? [laughter] >> as much as you want. >> thank you. >> and then the two, mr. schweikert. >> maybe i'll take six or seven. and i thank the witnesses for staying with us, and i think this has been a very useful hearing. i'm trying to go back and, um, mr. pitt, was it your statement, i'm trying to find it again. one of the -- and i apologize, i read this, maybe i misread. i had some concerns about finra. was that mr. pitt or mr. atkins? >> that was me. >> yeah. would you -- i'm interested in

your, obviously, one of the key questions for us is what is the appropriate devolution and interrelationship between the public agency and self-regulatory agencies? there are great advantages to self-regulatory agencies, but there were some problems. would you explain your opinion on finra and how we can begin to restructure these relationships? >> yes, sir. well, thank you. yeah, i put that in, i wasn't, obviously, at the last hearing. but we need to look now at, i think, how self-regulatory agencies operate in the current climate. you have sros, you know, historically were the nasd and also the various markets. now the markets are for-profit companies, and so i think a lot needs to be done to step back and really look at, you know, should a for-profit company still be categorized as an sro with all the paraer if nail ya

which goes with that as far as rule approvals, especially when you compare to the cftc and how on that side rules are approved or not. with respect to finra, it's now, basically, a monolithic, monopolistic regulator of broker-dealers. everyone has to be a member of finra. in the old days you could be an sec-only registered broker. um, and so the world has really changed. and so my point is before you designate an sro like finra, if it'd still be an sro, then you need to take a ten back and look -- >> i appreciate it. let's look at would it be that you would find some of these if they were for-profit, inherently inappropriate to be given these responsibilities, or would you write a code or conduct that was binding from the sec that

protected the rights of the state act of issue? which general direction would you go in? >> well, for the most part the for-profit agencies have bifurcated their enforcement arms, and a lot has gone over to finra. they still retain oversight over their market itself. but they still are subject to sro type of regulation with respect to rules and that sort of -- >> would you tighten them? should we get more explicit? >> you could actually do the opposite of tightening them. you could still have the ser oversee it and then, ultimately, wield the regulatory hammer if things are noncompetitive or something like that. but you could take it to make things more streamlined, you could take a page from the futures industry. but with respect to the state action of finra, um, the closer that it gets to being, you know -- >> well, how close is it now

would you say? >> well, if you look at the -- [inaudible] case, i think that is an indication of where things could go. >> do you think, i'm trying to get your opinion, not your commentary on others. [laughter] >> right. well, i mean, i won't say i think it's a state actor. i think there have been some really good -- i've written some articles, and i'd be happy to forward them to you. but i think it's dangerously close to becoming a state actor, and so that's why -- >> but not yet? >> it probably depends on the case. it depends on how finra acts within -- >> oh, okay. but then the answer is they are to some extent, they're a state -- given that, they're a state actor, they may not act like one particular case, but given what you say, they should be treated as a state actor. >> with the proper challenge, i think they could be found that. >> so you're surprisingly tentative for someone who's no longer in the job. [laughter] should we treat them, should they be treated as a state actor or not in their current form?

>> if they remain monopolistic type of regulator -- >> as of today. >> i'm sorry? >> if a year from now they look the same way they look today, should they be a state actor? >> you know, again, i'll just say given the right case, um, you know, i don't want to say yes or no. >> obviously, you don't want to -- >> sorry. >> let me ask mr. verrett on the question of preemption. you say the garrett bill should be changed to say the commission has the impact of new rules on the traditional role of states in governing the internal affairs of business entities without pretempting state law. but, of course, the garrett law is not confined in its subject matter, only the matters of governance. should we not, then, put that in there for all manners of preemption, or should we worry about the preemption of state laws and not the others? why not just say shall consider

the impact of new laws on states? and whether it can keep its stated objective without preempting state law? >> well, i would answer with a, um -- very simple distinction that there are some types of preemption that are beneficial and some that are not. and i think there was some bipartisan support, for example, for the national securities markets improvement act in 1996 -- >> no, but you're cutting to -- >> just to answer your question about the reason i focused on corporate governance is because that type of preemption deals with the type of -- >> that's not what i asked you, and i understand, and i'm not asking you for the substantive view. although i must say, i tell you, with a lot of my colleagues a lot of us, people invoke states' rights versus national, preemption versus not. and my sense is that for many people their decision on what level of government a policy should be set depends on where

they think they're likeliest to get the outcome they want which, by the way, is perfectly reasonable. i don't think there's any kind of fundamental moral principle here. people should just acknowledge that. so i understand there'll be differences. but you haven't answered the question i asked you. you've told me why you want to talk about golfer -- governance, but would you want to broaden that, or would you have us consider the action of preemption only on governance, or would you have a general requirement in the list of things to be considered, the impact on state law? >> well, to the extent you want to generalize it -- >> no, excuse me. i don't want to generalize it. you are, at least two of you, an unusually deferential panel. it's okay to tell us what you think. [laughter] i'm asking what you would think. this is your language, you want to do it for state governance. would you have that cover preemption in general not for or against it, but -- and because this doesn't say f