[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
H.R. 658--THE ACCOUNTANT, COMPLIANCE,
AND ENFORCEMENT STAFFING ACT OF 2003
AND
H.R. 957--THE BROKER ACCOUNTABILITY
THROUGH ENHANCED TRANSPARENCY ACT
OF 2003
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
MARCH 6, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-9
87-797 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice JULIA CARSON, Indiana
Chairman BRAD SHERMAN, California
RON PAUL, Texas GREGORY W. MEEKS, New York
PAUL E. GILLMOR, Ohio BARBARA LEE, California
JIM RYUN, Kansas JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois CHARLES A. GONZALEZ, Texas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey
TIM MURPHY, Pennsylvania BERNARD SANDERS, Vermont
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises
RICHARD H. BAKER, Louisiana, Chairman
DOUG OSE, California, Vice Chairman PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York
PETER T. KING, New York JAY INSLEE, Washington
FRANK D. LUCAS, Oklahoma DENNIS MOORE, Kansas
EDWARD R. ROYCE, California CHARLES A. GONZALEZ, Texas
DONALD A. MANZULLO, Illinois MICHAEL E. CAPUANO, Massachusetts
SUE W. KELLY, New York HAROLD E. FORD, Jr., Tennessee
ROBERT W. NEY, Ohio RUBEN HINOJOSA, Texas
JOHN B. SHADEGG, Arizona KEN LUCAS, Kentucky
JIM RYUN, Kansas JOSEPH CROWLEY, New York
VITO FOSSELLA, New York STEVE ISRAEL, New York
JUDY BIGGERT, Illinois MIKE ROSS, Arkansas
MARK GREEN, Wisconsin WM. LACY CLAY, Missouri
GARY G. MILLER, California CAROLYN McCARTHY, New York
PATRICK J. TOOMEY, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
MELISSA A. HART, Pennsylvania STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota BRAD MILLER, North Carolina
PATRICK J. TIBERI, Ohio RAHM EMANUEL, Illinois
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
C O N T E N T S
----------
Page
Hearing held on:
March 6, 2003................................................ 1
Appendix:
March 6, 2003................................................ 25
WITNESSES
Thursday, March 6, 2003
Kelley, Colleen M., National President, National Treasury
Employees Union................................................ 5
McConnell, James M., Executive Director, Securities and Exchange
Commission..................................................... 4
Shulman, Doug, President, Regulatory Services and Operations,
National Association of Securities Dealers..................... 16
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 26
Emanuel, Hon. Rahm........................................... 27
Israel, Hon. Steve........................................... 29
Kanjorski, Hon. Paul E....................................... 30
Kelley, Colleen M............................................ 32
McConnell, James M........................................... 40
Shulman, Doug................................................ 46
H.R. 658--The Accountant, Compliance,
And Enforcement Staffing Act of 2003
And
H.R. 957--The Broker Accountability
Through Enhanced Transparency Act
of 2003
----------
Thursday, March 6, 2003
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:05 a.m., in
Room 2128, Rayburn House Office Building, Hon. Richard Baker
[chairman of the subcommittee] presiding.
Present: Representatives Baker, Kelly, Ryun, Hart, Tiberi,
Harris, Renzi, Kanjorski, Sherman, Meeks, Inslee, Moore, Lucas,
Israel, McCarthy, Matheson, Lynch, Miller, Emanuel and Scott.
Chairman Baker. [Presiding.] I would like to call the
meeting of the Capital Markets Subcommittee to order. Today,
our purpose is to receive testimony with regard to two
legislative provisions, H.R. 658, the Accountant Compliance and
Enforcement Staffing Act of 2003, and on our second panel, H.R.
957, the Broker Accountability Through Enhanced Transparency
Act of 2003.
With regard to the former, it is clear that the SEC
resources have been limited and the ability to engage
appropriate levels of technical assistance in the complex
securities world we find ourselves in is of extreme concern to
all members. The question before us today is the appropriate
mechanism by which we can secure professional staff to engage
in the many new requirements recently adopted by the Congress
pursuant to many of the identified problems in the performance
of the markets.
It is my belief that some immediate action should be taken
to provide needed resources. It will be difficult to instill a
high level of confidence in consumers, and therefore have them
return to the investing market, without the assurance that the
SEC has the strength, ability, and capacity to ferret out
wrongdoing and provide remedies for those investors who feel
they have not been professionally treated.
In addition to that legislation, H.R. 957, is legislation
which the NASD and others have expressed interest in, to enable
a clearer and sharper picture to be drawn about activities in
the marketplace legislation which I also believe to be of value
in providing for enhanced investor confidence.
I am looking forward to hearing the witnesses. I believe we
have good testimony, and I believe this will be helpful to the
members in making determinations about action that should be
taken with regard to both matters.
At this time, I recognize Mr. Kanjorski for any opening
statement he chooses to make.
Mr. Kanjorski. Mr. Chairman, thank you for the opportunity
to offer my initial thoughts about H.R. 658 and H.R. 957 before
we hear from each of our witnesses. As you know, Mr. Chairman,
I have made investor protection one of my top priorities for
work on this committee. As a result, I have regularly supported
sensible and well-crafted legislative initiatives designed to
advance this goal.
During the last year, and only after a series of large-
scale corporate scandals, many of my colleagues finally joined
me in recognizing the importance of maintaining a strong
federal regulator to protect the interests of American
investors. Accordingly, we have significantly augmented the
resources available to the Securities and Exchange Commission,
including increasing the agency's budget by more than $270
million, thus allowing it to hire more than 800 new employees.
Unfortunately, the SEC has encountered some difficulties in
identifying and hiring the best workers for these new
positions, particularly in a number of specialized professional
fields. Accordingly, H.R. 658, the Accountant Compliance and
Enforcement Staffing Act, would seek to streamline the hiring
process for accountants, competent examiners and economists
that the SEC uses, similar to the rules all government agencies
use to recruit and hire attorneys. Former SEC Chairman Harvey
Pitt suggested this accelerated hiring process for these
professionals earlier this year in a letter to the Congress.
We will also hear from a witness later today about H.R.
957, the Broker Accountability Through Enhanced Transparency
Act. This bill seeks to provide investors with easy online
access to critical information about securities firms and their
brokers. These disclosures would include information on
regulatory investigations, disciplinary actions, legal
proceedings and customer complaints. The bill also will give
the National Association of Securities Dealers certain legal
protections for providing this information over the Internet.
Since Congress required the NASD in 1990 to make such
information available to individual investors without charge,
this disclosure program has become increasingly popular. Today,
the NASD maintains information on more than 665,000 registered
security employees in this automated electronic system, and in
2002 investors made 2.5 million requests for information about
these professionals. The vast majority of those requests were
made via the NASD Web site.
In general, I believe that both H.R. 658, in expediting the
hiring of SEC professionals, and H.R. 957, in expediting the
access of investors to important information about their
brokers and brokerages, have merit. Nonetheless, I also believe
that our panel must answer a number of critical questions
before proceeding with any markup on these matters. Moving in
haste on legislation could cause multiple unintended
consequences.
Regarding H.R. 658, we should, for example, discern how the
SEC will ensure a fair hiring system in the absence of
competitive service process requirements. We should also
examine how we can protect the civil service status of
professionals hired through an expedited process. In my view,
we may ultimately identify alternatives to the proposed
legislation that achieves the same objective.
With respect to H.R. 957, we must make sure that the
information distributed by NASD about brokers and their firms
via the Internet is accurate and proper, allowing individuals
to dispute and correct information contained in the database.
After all, a broker should not lose customers because they are
guilty until proven innocent. The limited liability provisions
contained in this bill should also not provide immunity for
willful and malicious actions. We must additionally understand
how the NASD resolves disputes concerning the information
contained in the database.
In closing, Mr. Chairman, I look forward to the hearing
from our witnesses on these two important legislative
proposals. I also look forward to working with you to improve
these measures in the weeks ahead, and encourage you to move
forward deliberatively on these matters.
[The prepared statement of Hon. Paul E. Kanjorski can be
found on page 30 in the appendix.]
Chairman Baker. I thank the gentleman for his statement.
Mr. Renzi, did you have an opening statement?
Mr. Renzi. Thank you, Mr. Chairman.
I thank Chairman Baker for convening this important
hearing, and for our guests; I am looking forward to your
testimony. I also remain thankful not only to the chairman, but
to the staff for allowing me to be involved in this important
legislation.
I think it is important that I make a statement that this
kind of common sense, simple legislation will help all
investors. In particular, I agree with the comments that we
have just heard, that the information be accurate and reliable.
It is the intent of this legislation, that the association be
able to put in place, procedures that allow for this accuracy
and these proper reliable holdings to be made on different
types of brokers.
I would also point out that good, useful disclosure is the
foundation of our security laws, and is the enhancement to
investor protection that we seek in this bill. I think the bill
increases transparency and fairness in the market and does so
at no cost to the investor.
So I look forward again to your testimony and thank you so
much for joining us this morning. Thank you, sir.
Chairman Baker. I thank the gentleman.
Mr. Israel, do you have an opening statement?
Mr. Israel. Mr. Chairman, in the interest of time, I will
submit my statement for the record.
Chairman Baker. Mr. Emanuel, do you have an opening
statement at this time? Are there additional members on our
side with opening statements? If not, then I would proceed to
the first panel. I would like to welcome here this morning two
distinguished individuals, Mr. James M. McConnell, Executive
Director of the Securities and Exchange Commission, and Ms.
Colleen M. Kelley, National President of the National Treasury
Employees Union. Your official statement will be made part of
the record. We would ask if possible to make your statement
within the five-minute period if possible.
At this time, I would like to welcome Mr. McConnell to make
the opening statement.
STATEMENT OF JAMES M. MCCONNELL, EXECUTIVE DIRECTOR, SECURITIES
AND EXCHANGE Commission
Mr. McConnell. Thank you.
Chairman Baker, Ranking Member Kanjorski and members of the
subcommittee, I appreciate the opportunity to testify before
you today on behalf of the Securities and Exchange Commission
in support of H.R. 658, the Accountant, Compliance and
Enforcement Staffing Act of 2003. This legislation would
provide essential authority to the Commission in its effort to
quickly hire accountants, economists and securities compliance
examiners. We thank you, Mr. Chairman, and the members of the
subcommittee for your leadership on this vital issue.
Dramatic changes have occurred in the Commission's
personnel environment during the past year. Thanks in large
part to the efforts of this committee, the Commission has been
granted the authority to pay higher salaries, provide
additional benefits, and has received increased appropriations
to fill over 800 new positions this fiscal year.
While the new pay authority and increased appropriations
have eased the Commission's crisis in hiring and retaining
attorneys, substantial difficulties remain in our ability to
hire accountants, economists and securities compliance
examiners. The reason for this distinction between attorney
hiring and the hiring of other securities industry
professionals is clear. Attorney hiring is excepted from civil
service posting and competitive requirements; the hiring of
Commission accountants, economists and examiners is not. When
we are filling a vacancy under the competitive service, the
process can take months to complete. Under excepted service
authority, the hiring process can be completed in a few weeks.
In January, 2002, the Commission received its long-sought
pay parity authority as part of the Investor in Capital Markets
Relief Act. All Commission employees now have salaries
comparable to the other federal financial regulators.
Additionally, in August 2002, the Commission received a
supplemental appropriation of $30.9 million, of which $25
million was earmarked for 125 additional staff positions.
Higher pay and the additional slots have worked well with
respect to our ability to hire and retain the attorneys the
supplemental provided. However, our experience in hiring
accountants has been far less successful. Despite our best
efforts, only a few more than half of the new accountant
positions made available in the supplemental have been filled.
The Commission's efforts to hire accountants under existing
authority are further complicated by the special caliber of
accountants that our mission demands. In order to ensure the
adequacy of public company disclosures and to review the books
and records of broker dealers, investment advisers and mutual
funds, the Commission needs hundreds of accountants, most of
whom must have specialized experience in public accounting.
Our hiring difficulties are not limited to accountants. The
complexity of the issues facing the Commission requires a
similar level of skill and experience in our economists and
securities compliance examiners. The solution to these problems
is to allow us to hire accountants, economists and examiners as
we have successful hired attorneys for years.
Most of the civil service protections accorded to excepted
and competitive service personnel are exactly the same. These
include veterans preference, bargaining rights and union
representation, health care options, EEO rights, and retirement
and leave benefits. There are a few differences. First, MSPB
appeal rights are limited for a new employee's first two years
in the excepted service, as compared to one year for the
competitive service. However, the Commission has historically
provided a one-year probationary period for all staff,
including excepted service employees, and we will continue this
policy.
Another difference might occur if the agency were to
experience a reduction in force, since mandatory protections
are lessened for excepted service employees in a RIF. A RIF is
highly unlikely at the SEC, and we have the authority to extend
the protections and we would exercise it to treat all employees
the same.
Finally, an employee in the excepted service would not have
the same advantages an employee in the competitive service if
he or she wanted to transfer to another government agency. For
all practical purposes, we simply do not lose program staff to
other federal agencies. For all these reasons, there is no
meaningful distinction between excepted and competitive service
at the SEC.
Some may view the legislation you have crafted as highly
technical and not very exciting, but I want to assure you that
it is among the most important actions that Congress can take
to support the SEC and its mission of protecting investors and
restoring confidence in our markets. It is very exciting to
those of us responsible for enforcing the securities laws.
Thank you for your support. I look forward to your
questions.
[The prepared statement of James M. McConnell can be found
on page 40 in the appendix.]
Chairman Baker. Thank you, Mr. McConnell.
At this time, I now call on Ms. Colleen Kelley.
STATEMENT OF COLLEEN M. KELLY, NATIONAL PRESIDENT, NATIONAL
TREASURY EMPLOYEES UNION
Ms. Kelley. Thank you, Mr. Chairman, Ranking Member
Kanjorski, and members of the subcommittee.
NTEU represents the 2,000 bargaining unit employees who
work for the Securities and Exchange Commission across the
country, including the accountants, the examiners, and the
economists. As a professional accountant myself, I understand
and appreciate very much the work that they do. With me today
also is Mike Clampitt, the president of NTEU Chapter 293, which
is our local chapter at the Securities and Exchange Commission.
Mr. Chairman and members of the committee, you know as well
as I do of the serious staffing and morale problems at the SEC.
For all too many years, this went unaddressed. Pay and benefits
were grossly substandard; working conditions were not conducive
to a positive working environment; and morale was very low. The
good news is that we are making progress at the SEC. For
example, a newly negotiated agreement between NTEU and the SEC
has given employees confidence that they will be treated fairly
on the job. Under the leadership of the Financial Services
Committee, pay parity legislation was passed by Congress.
We are still, however, in need of the full funding that the
president has requested, and we also need SEC management to
fully implement pay parity and benefit parity with other FIRREA
agencies. As the SEC struggles to recruit more employees, it
would be a shame to lose qualified current employees to other
agencies because they still offer better pay and benefits.
On the matter of new hiring, I think all interested parties
are substantially together on the need to be able to quickly
hire qualified employees as authorized. The question is, what
is the best way to do this? I believe that the goals of this
proposal can be fully realized without taking away the
competitive service status from the accountants, the economists
and the examiners at the SEC. I believe we should preserve the
competitive service status for these employees because it does
provide distinctions and advantages and rights for the
employees once they are hired.
Keeping competitive service status for these employees is
important when applying for positions elsewhere in the federal
government, such as at the FDIC, at the Treasury and other
agencies. Without it, employees cannot count their years of
experience at the SEC when applying for other government jobs.
One of the arguments for pay parity was that the disparity
in pay between the SEC and other FIRREA agencies meant that SEC
management lost out on the advantage of an exchange of
employees among FIRREA agencies. The argument was that such
movement of employees was a benefit to the development of
experienced, well-rounded professionals, and it was a benefit
to the FIRREA agencies as well as to the employees.
In addition, as you have heard, excepted service employees
have a two-year probationary period rather than a one-year. I
am pleased to hear that the SEC has made a commitment that in
any circumstances that would be a one-year time frame instead
of the two-year. But this is a significant issue, and it is
still a pending one prior to any formal resolution on the
issue.
Competitive service is also important for bump and retreat
rights in the case of a RIF. While I am sure today no one can
imagine the SEC ever in that situation, we have seen agencies
put in that situation with unintended consequences. I would
suggest that the better approach would be to keep the SEC
accountants, examiners and economists in the competitive
service, but to grant the SEC the hiring flexibilities it needs
independent of a change in status for employees.
In electing to focus on hiring flexibilities, rather than a
total change from competitive service to excepted service, a
model you may wish to look at is the government-wide provisions
that are included in the recent homeland security legislation
that were developed by Senator George Voinovich. This gives the
OPM the right to grant direct hiring authority to an agency
that faces a critical shortage of qualified applicants. The SEC
may have concerns about the length of time required to go
through an OPM approval process, but Congress could directly
grant this authority to the SEC. In doing so, I believe it is
very important that it should be directed to first-level
positions only. Obviously, employee morale would be severely
hurt if new hires were brought in at higher-graded positions
and the qualified on-board employees were not given the chance
to be placed in these positions.
I would also urge that any such authority be temporary, and
that the SEC provide this subcommittee and other appropriate
congressional committees with a report detailing the guidelines
used, the numbers, types and grades of employees hired under
the authority, and the benefits and shortcomings associated
with any change in the policy.
Again, I thank you for the opportunity to be here this
morning to share NTEU's views with the subcommittee.
[The prepared statement of Colleen M. Kelley can be found
on page 32 in the appendix.]
Chairman Baker. I thank you, Ms. Kelley.
Mr. McConnell, I want to make sure that I am understanding
the characterization of current SEC treatment of excepted
service employees. Although by statute I presume there is a
two-year probationary period, by matter of practice you limit
yourself to the first year review, as is the case for
competitive service employees. That being the case, and
apparently this being a significant issue, is there any
advisable reason why the committee should not simply make that
change in this bill as well, to simply state that excepted
service employees shall be subject to a one-year probationary
period?
Mr. McConnell. We would have absolutely no objection to
that, because that is the way we will operate. If you were to
ask an attorney at the SEC how long their probationary period
is, they would say one year. So we would be happy to have that
memorialized in whatever way.
Chairman Baker. With regard to an excepted service
employee, prior to their engagement, it is my understanding
that they are given in writing a description of the
consequences of going from competitive into excepted service,
meaning if there is an issue with regard to a RIF or any other
condition that might ultimately lead to their dismissal, they
are made aware of that prior to their engagement and their
employment is voluntary. They could remain in the competitive
service by not coming to the agency, or taking that particular
position.
Mr. McConnell. That is correct, yes, sir.
Chairman Baker. So there is notice. Are there any other
elements where excepted service employees are treated
differently from competitive service that you could offer to us
that could be included in the bill to mitigate some of these
concerns, beyond the probationary period? We have not really
talked about it.
Mr. McConnell. There is. In cases of a reduction in force,
we actually have the authority to treat everybody the same. We
have specific authority to do so. We would do so, but you could
add to this bill a specific provision that says the SEC shall
treat all employees using their authority in the same manner
under the circumstances of a reduction in force.
Chairman Baker. So that would then leave us with just the
one issue of a person who voluntarily applies for an excepted
service position, knowing that if they were to leave and go to
another position in the federal government they would have
potential liability for lack of accumulated seniority, which is
the only other point that I understand is being raised as an
objection to the legislation.
Mr. McConnell. Yes, sir, that is my understanding as well.
Chairman Baker. Given the fact that these folks, and let me
phrase a question; I am making an assumption that may not be
correct. The difficulty in hiring most of these individuals is
that they are not B-school graduates. It requires a certain
level of skill sets in order to do the work the SEC is looking
for. Much the same in the legal profession; that you are going
after a certain type of individual with a very narrow, but very
good set of abilities to perform a very specialized task within
the agency. Given that person then is likely to be mid-career
or advanced in career, this is a person who is fully capable of
making a judgment about whether the risk of excepted service is
good for their long-term career or not. How long, if nothing
changes and we proceed with the current system, even though you
have funding and authorization, to go from where you are today
to get to the end of the process of having 100 percent ability
within the agency?
Mr. McConnell. If we do not obtain this legislative
authority, I cannot tell you precisely how long it would take.
I know that we could not do it this year. We have looked at
this very carefully. We have analyzed it. I would like to be
proven wrong, but I am confident that unless this legislation
passes and passes quickly, the SEC will not be able to hire the
staff that it has authorized for 2003. When it may actually
happen will be certainly, I think, well into next year.
Chairman Baker. And that is what the current statutory
requirements that Congress has passed. If the Congress were to
enact any additional standards in any new area, that would even
make your job even more complex.
Mr. McConnell. It would compound the problems we have.
Chairman Baker. I think you have made a case for action,
and given your responses I think we can make some modifications
to the proposal that would go a long way down the road to
eliminating objections.
Let me ask Mr. Kelley, while I still have a few seconds, if
we were to make those two modifications, would you still have
strong objection to the passage of the legislation?
Ms. Kelley. Mr. Chairman, I would be very interested in
seeing whatever the language would say, of course, and I would
surely consider any suggested changes. It was very good news,
as I said, to hear Mr. McConnell say that this morning. I was
not aware of those commitments by the SEC. But the competitive
service, the way it operates today within the federal
government, is as a rule it is not given within an agency. It
applies across the board to an occupation. For example, the
attorneys; attorneys throughout the federal government are
excepted service. So this would be putting a whole new
definition on excepted service. So I would want to have a
chance to look through and think over the ramifications of
that, and of course then react to whatever language you would
be suggesting.
Chairman Baker. I thank you, Ms. Kelley.
Mr. Kanjorski?
Mr. Kanjorski. Mr. McConnell, do I understand that it is
the intention of the SEC to work closely with Ms. Kelley to
resolve these issues, and to see if we cannot get a very
cooperative stance so that we could move this legislation as
speedily as possible?
Mr. McConnell. That is correct, sir. We have worked closely
with the union so far. We have had several meetings and a good
bit of interaction. I understand that the local union supports
this legislation. I think we are very close.
Mr. Kanjorski. Is it possible in the next week you could
all meet and send us a nice letter saying all the issues are
resolved and we should proceed through with this on suspension
and get you this authority before we go home for Easter?
Mr. McConnell. I am certainly ready to make the effort.
Mr. Kanjorski. Well, let's do it. It sounds to me like the
agency is pliable in regard and sympathetic to some of the
issues raised by Ms. Kelley, and I think she has raised some
important issues that, rather than expanding and changing all
these definitions, we can get to expedited hiring very quickly,
without a lot of major disturbances. So if I could recommend
you do that over the next week and communicate that back to my
chairman so we can move on this legislation as quickly as
possible.
With that said, I wanted to take advantage of your
appearance, Mr. McConnell, and I apologize for talking about an
issue completely unrelated to what is here today. But Senator
Grassley the other day I thought made a very significant point
in raising the question that there is about to be a settlement
against some of the corporations involved in the scandals, of
about $1.5 billion. As a result of the structure of the
settlement, the entire proceeds from the settlement will go to
the investors fund for payment for losses. But because of the
structure of the settlement, tax benefits will be derived by
the corporations, which will reduce their tax burden and
payment to the federal government. The end result of the $1.5
billion fine will be a negative revenue flow to the federal
government of significant proportions.
I think he commented that he was surprised that the SEC had
informed him that they do not consider anything else other than
the immediate nature of the fine, and they do not consider the
implications of the tax code and how that impacts on the
revenues of the United States government. As you know, that
should be important to us, and since we just increased your
budget to $720-odd million dollars, you know, obviously we are
going to have a shortfall, and we are going to be asking either
for additional taxes or additional debt. I suspect that we are
not going to have additional taxes. Because of the tax cut, we
are actually imposing additional debt on future generations of
Americans.
Are you familiar with this issue I am talking about? Do you
have any reason why; I thought Senator Grassley was eminently
correct in his analysis of a federal agency imposing fines that
directly impact in a negative way on taking more revenues from
the tax payers, and those benefits not passing into the
treasury, but passing onto the benefit of investors who lost in
the recent debacle in the market.
Mr. McConnell. Sir, I am not sufficiently familiar with
that topic or that issue to discuss it. I can assure that we
will take it back and have the appropriate people respond to
the subcommittee or directly to you in whatever manner.
Mr. Kanjorski. I would appreciate it if you could do that
very quickly, and also respond to Senator Grassley, because I
thought it was an extraordinarily well-raised issue that
generally does not catch the light of day, but has a tremendous
impact on $500 million or $750 million on the loss of revenue
to the United States government at a time when we are
struggling, and we have given your agency a significant
increase.
It would be a shame to see the significant increase that we
have given the SEC reverberate with the loss of funds for other
vital projects of the United States government through the loss
of these revenues as a result of your structured settlement. So
if you could address that issue, and if for some reason you are
not familiar with it, I happened to see it in a news statement
by the Senator, so we could contact whatever media that had
that news conference. I suspect he must have written a letter
on the subject. But I would appreciate a response for myself on
that issue, and also to Senator Grassley if that is possible.
Mr. McConnell. Yes, sir. We will take care of it.
Mr. Kanjorski. Thank you very much.
Chairman Baker. I thank the gentleman.
Mr. Renzi?
Mr. Renzi. I yield back my time to the Chairman, for any
comments he might have.
Chairman Baker. Terrific. I appreciate the gentleman
yielding.
While we are on the topic that Mr. Kanjorski was speaking
to, since we are speaking through you to other people, I will
try to keep it brief. I also have concerns previously
expressed. From published press reports, I think the companies
that have been found guilty of wrongdoing should have the
fiscal responsibility for paying the obligation and not have it
engaged through insurance or the shelter of tax provisions. But
there is another important element of this as well, and that is
that the defrauded investors get some recompense as a result of
these settlements. The proposed settlement, as I have read it,
was $1.4 billion, with approximately $900 million previously
identified in press reports as likely to be given back to
defrauded investors, as identified by the SEC.
The troubling thing that I have read in recent days is that
some states now are planning on whatever portion they may get
back of these funds, rather than using them for investor
restitution, are talking about DMV offices and a whole host of
operational concerns. I believe that is highly inappropriate,
unless of course, we are going to repeal the driver's license
of some fraudulent investor as a result of his DMV office. I
think people would feel much better if they got a small check
in the mailbox saying, the United States government has been
working on your behalf, one, to put these guys behind bars;
secondly, to get compensation back; and thirdly, this is your
money. I liken it to the case where you are back home, your car
is stolen, you call the sheriff, you get a call back two days
later and he says, good news, we found your car; the bad news
is the sheriff's going to keep it. Somehow that does not seem
to me to be justice.
This has been a bipartisan effort of this committee, to get
investor restitution, and to have the biggest settlement ever
by the SEC and others hammered together over many, many months,
I would hope that this glimmer of provision would also be
constrained, much like the gentleman suggested with regard to
corporate abuse, that we constrain the disposition of that $900
million or whatever, specifically to investor restitution. So
when the folks are responding to Mr. Kanjorski's issues--just
please add mine onto the bottom of the letter.
Mr. Kanjorski?
Mr. Kanjorski. If you will, Mr. Chairman. I think you would
join me, that you would be displeased to see the Federal
Treasury suffer the loss because of the tax credits that the
corporations may gain as a result of the nature of the
structure of the agreement, so that all the taxpayers become
losers, even though a significant amount goes to the investor
fund, but it really is not corporate money that is going there,
it is taxpayers money because we would be losing those revenues
as a result of the corporate tax credits.
Chairman Baker. I thank the gentleman for making that
point. I agree. The wrongdoers should be held accountable, no
one else. However we have to construct these settlements in
order to ensure that, I think that is of principal importance.
Secondarily, if we are going to have $900 million sent to
anybody, it ought to go back to the people it was taken from. I
think those two points can be joined together very
successfully.
I thank the gentleman for yielding his time.
Mr. Israel--
Mr. Israel. Ms. Kelley, you represent many workers in my
district, including employees at the IRS' Brookhaven campus and
customs workers at JFK. Can you tell me how employees at other
agencies will be impacted by this bill? Is there a "camel's
nose under the tent" problem here? What is the implication for
other agencies throughout the government?
Ms. Kelley. I guess depending on how the language is
written, it could be argued that no one would be impacted but
the SEC. But as we all know, as soon as this starts, then it is
just a matter of how quickly it spreads. In thinking about the
three primary issues that have been identified; the one-year
probationary period, the impact in a RIF and the ability to
have years of service count throughout the government; if the
SEC is willing to commit to the one-year probationary period
and use their authority to say all employees are treated
equally in a RIF, then it almost seems as if it would be much
easier to get to the crux of this problem to maintain their
competitive service status, and figure out how to get this
hiring done faster, rather than making up new definitions for
what excepted service will or will not be.
I do have the fear that you expressed, because we have seen
it over and over again in this whole area of flexibilities,
that once a new definition arrives for a traditional word or
phrase that has always existed, it tends to impact not just
those originally intended. So it is a very big concern--
Ms. Kelley. Again, I think probably the easiest way would
be to say they continue as competitive service employees, but
let's figure out a way to do the expedited hiring, which is the
only thing that the agency has, or the primary goal the agency
has identified, which we agree with. We want to find a way to
help make that happen. If these other things that are
traditionally in excepted service are not going to be, then it
does not seem to make a lot of sense to rewrite that. I would
hope we could focus in this next week's discussion on the
hiring issue, and figure out how to do that without impacting
the status and redefining everything that everybody knows
today.
Mr. Israel. I yield back.
Chairman Baker. I thank the gentleman.
Mr. Emanuel?
Mr. Emanuel. I was just trying to stall until I came up
with my questions.
Chairman Baker. I am sure that was sufficient time for a
guy like you.
[LAUGHTER]
Mr. Emanuel. I appreciate that confidence.
Actually, I do first of all, without trying to brush over a
point, that if you can work it out, clearly you have had
discussions. I think that would be a great thing. I think what
Ms. Kelley said in relationship to using the model that was
negotiated and recommended by Senator Voinovich during the
homeland security debate could be a guiding principle, since we
have been around this bend with other employees, and it may be
a good template here.
I do believe, as somebone who worked for a short period of
time as an investment banker, that clearly the SEC is
overwhelmed. Clearly, the SEC needs both not only financial
resources, but also human resources, and I think we can
accomplish that goal without doing any damage or long-term
hurt, not here, but using it as a model that other agencies
then would take too far. My goal is, and my wish, is that this
would not be an attempt to get one's goods through customs,
meaning that we would do something that would damage, I think,
worker protections that have been a long-term and long-time
standard here.
To the issue of what both the Chairman and the ranking
member talked about as it relates to the agreement reached on
some of the corporations, I have one clarification. Usually, it
is not a choice. This is not a choice between the investors and
the United States Treasury. That is a false choice. It really
relates to how the company is getting the tax benefit.
I do not in any way want the language to come back, and it
is presumed that somehow we want Treasury to get the resources
and then do it as chump change to the investors. Those two are
not the trade-off. It is whether the corporation that has been
in violation that passes, and then getting extra credit in the
tax structure. So I would say, how you do that is very--and I
know again, Mr. McConnell, we are talking through you to others
at the agency. I think it is a very, very important point,
because I do not think it should be constructed or implied by
any of the questions that we somehow presume that it is a
choice between the investors and the Treasury.
Thank you very much to both of you, and good luck over the
next week.
Chairman Baker. Thank you, Mr. Emanuel.
Mr. Scott?
Mr. Scott. Yes. What time frame does the SEC believe that
it will be fully staffed in order to meet the demands of the
Sarbanes-Oxley legislation?
Mr. McConnell. That question depends on the success of this
legislation, it seems to me. Speed is of the essence with us
obtaining the authority to be able to hire more efficiently. As
I stated earlier, if this authority is not available to us for
hiring, we will not be able to do it this year. We will not be
able to hire those people this fiscal year. How far into next
fiscal year it would go, I cannot speculate. As you may
appreciate, the same people who make the hiring decisions are
the same people who are implementing Sarbanes-Oxley and who are
going after the bad guys. So we just cannot but throw so many
resources at hiring. We have got to have some help to do it.
Mr. Scott. The federal government is experiencing a large
number of employees who are eligible for retirement coming up.
What impact would this have on the SEC? Are you all expecting a
similarly large surge of retirements?
Mr. McConnell. We are not facing that same sort of bulge
that a lot of other agencies do. We have a very young
workforce. Our turnover in the past has been so high that we
have dealt with planning for replacements as a regular course
of business. With pay parity, we have substantially improved
our ability to retain people. Our attrition rates are down
dramatically and it has been very helpful. But at the moment,
currently we do not have that same kind of retirement bulge
that you see in a lot of other agencies.
Mr. Scott. Finally, if I have time, did I hear you
correctly, did you state that the unions are fully on board?
Mr. McConnell. I do not think I can make that statement.
[LAUGHTER]
I believe that we have a very common interest all across
the spectrum on this, and it seems like we can work something
out, but there are certainly some differences.
Mr. Scott. What are those differences, may I ask?
Ms. Kelley. Based on our public conversation this morning
for a half an hour, it seems like the only difference now is
figuring out how to get the hiring done fast. It is not about
redefining or the concerns that NTEU had raised about
probationary periods, because it would be the same as in
competitive service, so let's just leave them there. They would
not have different rights in a RIF, so let's just leave them in
competitive service.
So I think we have isolated the issue to quick hiring and
the Commission's ability and authority to do that. I think that
is the open question, and hopefully we can find a resolution
that we could agree on that would maintain the competitive
service and get these new employees on board as soon as
possible, which is what we all want. We do have a common
interest in that.
Mr. McConnell. If I may, I would like to wade back in on
that same issue. Speed is critical. We need this authority
right now. Anything that delays it, delays our ability to bring
people on and to meet the goals of Sarbanes-Oxley and to meet
the goals this Congress has set for the SEC. I just have to
leave you with that.
Mr. Scott. Thank you.
I yield back the balance of my time.
Chairman Baker. Thank you, Mr. Scott.
Ms. McCarthy?
Mrs. McCarthy of New York. Thank you.
We are hoping, too, that certainly with the passing of this
legislation it is going to make it a lot easier for you to do
the hiring. But hiring is one part of the process; accepting
the applications is another part that you have to go through.
From what I hear from an awful lot of people, not just with the
SEC, but from other job applicants, they apply and then they
hear nothing. Obviously, when someone is applying for the job,
they are not going to wait a long time. Obviously, they want to
get into the job market and work faster. Just looking at how
you take the applications and the process that it has to go
through before it can be moved on back to the point of being
hired, hopefully we can streamline that for you a little bit.
I guess basically what it comes down to, do you have any
idea how long it actually takes from the time someone applies?
Do you actually call those people back, say, that they are in
the pocket, that they have a decent chance of being hired, or
anything else like that so they know? That is usually how the
best applicants usually end up going somewhere else.
Mr. McConnell. I am afraid that I must admit that at the
SEC, like at many other agencies, it takes months sometimes for
people to hear. This legislation will give us the ability to
move that along in weeks, so people will know very quickly what
their status is and they can move on to other employment
opportunities if that is necessary.
Mrs. McCarthy of New York. What I would say which would
help obviously everyone is to really sit down, as the chairman
has mentioned, and work out your differences so we can get this
on a suspension bill and get you going. That would be the best
thing for everybody.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Ms. McCarthy.
Mr. Lynch? Do you have a question?
Mr. Lynch. Thank you, Mr. Chairman.
I would like to thank both of the witnesses for coming here
and helping the committee with their work.
President Kelley, I just have a two-part question, if you
will. First of all, I understand under the legislation that
current employees may be grandfathered under certain treatment
under civil service, and then new employees would be treated
somewhat differently. As a former union president myself, that
always presented a difficulty for me in trying to enhance
solidarity and unity, while having two sets of different rules
for my employees.
My first question is, have you had discussions with your
members about how this would be handled, and if you might
relate to the committee some of their concerns, if you have
heard from them. And also just a general question, how do you
think this legislation could be improved? What do you think
might not be addressed here within this bill that you would
like to see addressed?
Ms. Kelley. On the first question about the grandfathering,
that is a very interesting point. As a former union president,
I can see why it would be on the top of your list. The
discussions with the employees in large part have to start with
the education process as to what it means to be excepted
service versus competitive service. Once the discrepancies are
understood, then there is a clear concern that, will they be
impacted, too? While not often, but once in a while, it is
important for unions to agree that there has to be a different
treatment and grandfathering has to occur, but that is in a
case where I think there can be such distinct or specific cases
made as to why that is necessary to the success of the agency,
as well as the success of the government. I do not think that
is the case here. I do not think the separation between
excepted service and competitive service is necessary.
I think we have established today that really at the core
of this is just about expedited hiring, and not about the other
things that go along with the excepted service. So I can tell
you that the local chapter, Chapter 293, and the employees who
we represent are opposed to the hiring of future employees as
excepted service employees, and are interested in figuring out
how, of course, to get the Commission staffed up to where it
needs to be, but to find the right solution and not to create
this grandfathering provision when it really is not necessary.
That is not the problem. The problem is how do we get employees
hired faster and the qualified employees that the SEC needs.
So that is the first part. I guess to the second part of
your question about what else, I have really been focused
solely on this issue because it is the one that touches the
employees, both current and future, and their working
conditions. And also I view it as a responsibility of NTEU's to
help to ensure the ability of the SEC to hire qualified
employees. Employees who we represent want to be successful in
the workplace. For them to be successful, the agency they work
for has to be successful. So we come at this from the same
direction.
Mr. Lynch. That is great.
Thank you. I yield back.
Chairman Baker. Thank you, Mr. Lynch.
If no member has any further questions, I want to express
my appreciation to both of you and offer that if my office can
be of any assistance in facilitating a resolution on the
pending matter, I certainly want to be involved and helpful. It
would be my intent to try to move this bill as quickly as is
practicable. I think any protracted delay would not be good.
Let me suggest that if we can informally visit over the course
of early next week, perhaps we can get to a point where we can
move this to the suspension calendar and accomplish what we all
want to see happen.
I thank both of you for your appearance here today. Thank
you.
Mr. McConnell. Thank you.
Chairman Baker. I would also at this time ask for our
second panelist to come forward.
The purpose of our second panel is to receive testimony
relative to H.R. 957, the Broker Accountability Through
Enhanced Transparency Act of 2003. To that point, I welcome Mr.
Doug Shulman, President, Regulatory Services and Operations,
the National Association of Securities Dealers.
Welcome, Mr. Shulman.
STATEMENT OF DOUG SHULMAN, PRESIDENT, REGULATORY SERVICES AND
OPERATIONS, NATIONAL ASSOCIATION OF SECURITIES DEALERS
Mr. Shulman. Thank you, Mr. Chairman.
Chairman Baker. Your formal testimony will be made part of
the record, and if you wish to present your views within the
five-minute expectation, that would be great.
Mr. Shulman. Thank you very much. That would be great.
First, I very much appreciate the opportunity to be here
and testify on the Broker Accountability Through Enhanced
Transparency Act of 2003. This bill will allow NASD in summary
basically to take information we can now make available via
toll-free line and via mail, and move that information onto the
Internet, which is what investors are looking for now.
Let me give you quick background on NASD and our public
disclosure program. As you know, we were chartered by Congress
to write the rules which govern the behavior of securities
firms, investigate firms and do examinations of their conduct,
and when necessary do enforcement actions and disciplinary
actions on those firms. Every broker-dealer who does business
with the investing public must be a member of the NASD. Our
responsibilities range over a wide variety of activities,
including transparency in the fixed income world, to our trade
system, licensing and registering brokers, doing our
traditional regulatory activities, investigation, enforcement,
and dispute resolution.
Clearly, as a regulator, we have a couple of jobs. One is
the traditional job, writing rules and making sure they are
enforced. The second, and vital to what we do, is getting
information into the hands of the investing public, so they can
make informed decisions when they enter the capital markets. In
the case of what we are trying to get done and what your bill
would help us do today is getting information about the brokers
with whom they do business.
A quick background on our public disclosure program. We
have 665,000 brokers in the securities industry who do business
with the public. All of them register with us. We then make
certain information available to the public to help them make
decisions about which broker to use. The information we make
public is disciplinary actions, customer complaints,
arbitration decisions, civil judgments in securities or
commodities-related activities, felony and misdemeanor criminal
convictions that are investment-related, as well as
bankruptcies and unpaid judgments and liens. To give you a
sense of the volume of the program, we launched this program in
1998. We had about 6,000 people look for information on their
broker in 1998. Last year, we had 2.5 million people come in
looking for information on their broker.
To speak specifically about the bill, what we are looking
to do is to provide the same exact information we make
available to people via paper online in real time. In 1990,
Congress passed the statute which gave us statutory liability
protection for our toll-free number and for paper-based
information that we give to investors. Clearly, Congress was
quite wise in insisting at that time that make a toll-free
number available. The toll-free number was the way that an
investor could easily get information on their broker and
quickly.
Over the intervening years, the last 13 years, we had the
Internet revolution. Today, 96 percent of the inquiries that
come into NASD come in via the Internet. Simply put, what we
are trying to do is make the process for those investors to get
the information from NASD about their broker meet the
investor's expectation of getting that over the Internet.
Let me comment, in speaking with some of your staff, a few
questions have come up, and let me comment on those directly.
One is the 1990 statute gave us good-faith liability. This
statute does not have the qualifier of good faith in there.
There are three reasons why we think this is sound. First is
our desire to secure a uniform federal standard. The good-faith
criteria that was in the bill, if it ever came to this and an
investor disputed that, we would have to basically look at and
understand defamation laws in all 50 states. It would be
cumbersome and expensive for us to do that. Our rules are
written under federal security rules approved by the SEC, and
we think establishing a uniform standard for all 50 states is a
good thing.
Second, this bill would conform to the current case law
that is out there on NASD as an SRO with liability protection.
We have been given absolute liability without qualifiers in
every case that has come along about us doing our regulatory
job. This bill, without putting the good faith in there, would
basically be a conforming, and make sure the statute conformed
to what the courts have ruled.
Finally, this bill, and wisely so, you asked us to make
sure that we had procedures that were approved by the SEC to
handle any disputed information that goes out in the public
about a broker. We think those procedural safeguards are in
essence the same thing as making sure we operate in good faith,
and hence obviating the need to have that good faith standard.
Let me just finish up by saying that while this bill does
not address what we put in the system, it only addresses how
investors can get this information from the system, you should
know what we go through and how we try to decide the balance of
information we put out about a broker. The word "balance"
speaks clearly. What we need to balance is transparency in the
capital markets and getting as much information out to
investors as possible, against the fact that we are getting
information about a broker out into the public and we need to
make sure we are sensitive about getting the right information
about a broker, and that broker is treated fairly in the public
eye.
When we go through a process, which we are going through
now, which really has nothing to do with the bill, but when we
look and see what information we put into the public, we have
extensive dialogue with the industry, both the firm
representative and brokers, with investor groups, with the
states and other SROs, and finally any of our proposals have to
be approved by the SEC.
We continually strive to get that right balance. It is not
an easy balance to get. Our default is always towards getting
investors more information, with one major caveat. We are quite
aware of the issue of identity theft. We do not and will not
put information out about a broker that could be used to
compromise that broker's safety or reputation, et cetera. The
things we will not put out are Social Security numbers, home
addresses, physical descriptions, the kinds of things that are
used in identity theft. We are very careful about that.
In conclusion, this bill is trying to get investors
information in the form that they clearly are demanding it. It
is going to go a long way towards letting us as a regulator do
our job better, which is to get information into the market, to
keep markets safe, and to make sure that investors are
protected.
I would be happy to answer any questions.
[The prepared statement of Doug Shulman can be found on
page 46 in the appendix.]
Chairman Baker. Thank you very much.
I think it makes a lot of common sense, given individuals'
access to the Internet to get information. I do not have any
hesitancy to think that this is a good thing to do. I guess the
only point that we need to have clarification on is the
mechanisms to ensure that accurate information is provided.
With regard to a civil judgment, felony, misdemeanor,
bankruptcy; those things are pretty clean and clear-cut. You
are not going to put anything out just because they are in
court. You are going to wait until the appeals are final and
determinations or sentence is imposed.
The area where I have some sensitivity, though, would be
customer complaint. If I called in and said I am entitled to
return of funds from my account and I have not gotten them in
six months, that is a complaint. If I call in and say I acted
on my broker's advice and I lost money, I do not know if that
is a complaint. How do we sort that out? What process do we go
through before we report a broker has 26 complaints against
him? What is the review process that enables you to feel
comfortable in moving forward and having that on the Internet?
Mr. Shulman. That is a great question, Mr. Chairman. Let me
try to answer it.
First, let me just state what I said before, that this bill
is not about what information is out there, but clearly it will
make sure there is more information out there and that the
right information is out there. In terms of customer
complaints, as I said before, it is a very delicate balance. We
do a couple of things to ensure that when complaint information
is out there, it can be put in context.
The first thing we do is when we release customer complaint
information, that information, the broker has the opportunity
to have their side of the story right there next to each other.
So basically if it is in dispute that this is a legitimate
complaint, that will be flagged by the investor. Second, when
we look--this is a long-standing procedure in the securities
industry; it has been for years we have released this kind of
information; when we look at the balancing act around
customers, first as I mentioned, the industry is fully
involved, lots of people are involved in this. If there is
information on someone's record that is clearly erroneous or
defamatory in nature, it can be expunged from the record.
What we try to do is have information out there that will
engage someone in a dialogue with their broker. So if someone
comes out and sees there is one customer complaint, first they
will see what the complaint is and see the broker's answer.
Second, we are trying to put information in context separate
from this legislation. We have a review going where what we are
trying to do is get authority from the SEC to put this
information in context, so we would be able to say 4 percent of
all brokers have a complaint against them; less than .5 percent
of brokers have five complaints against them, or whatever the
information is. So we can put it in context for an investor.
Chairman Baker. Let me jump to another point before I
expire my time.
Assuming for the moment we have got a system in place that
minimizes erroneous reporting, that reflects accurately the
professionalism of a particular brokerage firm, using your
information from 6,000 inquiries in 1998 to 2.5 million last
year, once we are fully online, it is not incomprehensible,
given the ease with which people would feel they could access
this information, to have several millions of hits beyond the
2.5 million you currently are responding to. What about your
resource limitations to be able to adequately respond? I know
in a congressional office, the number of e-mails you get versus
letters, versus telephone calls, a disproportionate share is
moving radically in one direction. It makes it very difficult
to stay up with it.
Do you have concerns, or what is the prognostication a year
or two out from now if this is authorized? How are you
preparing for the additional inquiries?
Mr. Shulman. It is a great question. First, my team just
told me I said "1998." I meant "1988." So hopefully it will not
escalate. We want investors coming in, but we do not anticipate
huge escalation.
This actually would make it much easier because right now
we have to go through the cumbersome process of getting the
phone call, putting the information in mail, mailing it out to
the investor, because the investor then cannot access the
information quickly, they might have to come back and ask for
more information, et cetera. What we think this would do is
actually limit the resources and save us resources, because the
investor could pop it up online. All we need to do is have the
program coded correctly so that the information can be accessed
online.
Chairman Baker. So this will not facilitate online
complaint initiation. Complaints will still have to be
originated in the traditional way. This is only to send the
information out, not to collect it.
Mr. Shulman. Exactly. This is just about the information
that the investor gets, not about all the channels that
information comes into the NASD and other SROs.
Chairman Baker. Terrific.
Mr. Kanjorski?
Mr. Kanjorski. This is just about publication?
Mr. Shulman. Yes.
Mr. Kanjorski. That is pretty important, isn't it? Isn't
that the whole issue in libel law and slander law; publication?
Mr. Shulman. Excuse me?
Mr. Kanjorski. Publication is the important thing. It is
one thing to send a letter or information to an inquiry made
over the telephone, and another thing to hire a bulletin board
and put up information on it, that everybody that drives down
the highway can see, or everybody that uses the e-mail bulletin
board can see. I am very much interested in this whole idea of
what happens with a mistake. In your testimony you said you
were worried about identify theft. Hell, I am worried about
character theft. What if you make a mistake? The person is
dead. What happens if someone makes a customer complaint or
some information is put up on the Internet that is absolutely
false. You say there is a method to expunge it. If you get a
court order, how much does it cost for an average broker or
person who feels they are being slandered or libeled to get a
court order? You are talking tens of thousands of dollars, and
months of time, before you can get that off.
Mr. Shulman, I am very sympathetic that the best
information be made available, but I qualify it with "best"
information, truthful information; examined, studied,
conclusive information. I hear you talking about customer
complaints, not final jurisdiction or a judicable issue that
has been finalized, but something that is in the process of
occurring, where we do not know what the final result will be.
Once you put that on the Internet, it never leaves existence.
Now, I know you are not in public life, but I am and I know
the Chairman is, and all you could do is make one charge
against a politician that gets printed, and it can be the most
ludicrous charge in the world, and it can never be expunged
from the obituaries that exist across the country. You revisit
that erroneous mistaken charge a million times.
We are sort of enamored with a certain thickness of skin to
accept that. But now we are talking about people's livelihoods.
What more important thing to a broker does he have than his
integrity and his credibility? If you mistakenly put something
up on the Internet that is grossly erroneous, he probably will
not find out about it for a reasonable period of time, until
some of his friends at the bar several weeks later are joking
about it, and he happens to hear his name mentioned. I mean, no
broker is going to get in the morning and run to the office and
throw on NASD and see what they are saying about me today. So
it is out there, and once out there, it gets captured in many
lines or recordings across the country.
Something said in a U5 report would be put on the Internet,
if I understand this. That is a one-sided statement, as I
understand it, why a person was discharged. Have you ever been
in a circumstance that there has been an employee-management
disagreement, and either a discharge or a firing occurs, or a
quitting occurs, and there are different facts and
circumstances as to why it happened?
Let me give you an example, that I would worry about just
from a sexual aspect. The young lady is not honoring
indications from her employer to be responsive in ways that are
improper to be responded to and she gets fired. He puts down
that she was fired either for incompetence or she was fired
maybe for being promiscuous. How in the world when it comes to
that U5 is she ever going to capture back her character or
integrity?
Now, I think information, and this is the issue that I want
to get to; are there such corrupt brokers in the United States
that we really need all this information put up on bulletin
boards in a permanent way? I mean, we are doing like a Megan's
Law here. I understand that with sex perverts, but these people
are generally not sex perverts. They have complaints filed
against them; some proper, some improper. I am wondering, the
standard you are using here in your industry; even doctors who
commit acts of negligence or gross and wanton negligence in the
majority of cases once resolved or settled, are sealed and no
one can ever hear about it. There was an actual court case
where the damage that occurred, proven or ceded to, means that
everything is locked up.
Most lawyers who are subject to charges are limited as to
what part of the proceedings can be made public. Judges; well,
they are a special branch in our system. Very seldom do we ever
find out their dalliances. But most of these things are held in
very tight control because of the tremendous amount of damage
to the individual, the irreversible nature of that damage to
the individual if improper facts or statements or conclusions
are made and posted.
So it would seem to me that you have a burden to show us
how bad your industry is, that these crooks are running all
over Wall Street, and if we do not throw out the whole thing on
the Internet, that the financial markets are going to come
apart. I do not believe that is true. I do not think there is
any more impropriety out there than in any other profession or
activity. We want to find a way to protect the public against
the 1 percent, that 2 percent, that 3 percent--whatever it is.
But at the risk of damaging the other 97, 98 or 99 percent,
with irreparable damage if mistakes are made, I do not
understand that. I think the balance is out here.
It is one thing about; hello, NASD; you have a broker Jack
Smith who I would like to find out information about. You send
him a confidential letter back to that one inquiry. That is
just one single person getting that information. Once you put
it on the Internet, anybody can use that for any purpose. If
that information is not absolutely accurate and tested, it can
never really be expunged because it exists somewhere in its
improper form. Secondly, you literally have committed a
character theft or assassination. Those people can never get
their reputations back.
I think we ought to slow down. We are not trying to prevent
terrorists from attacking the country here. We are not trying
to save a life here; maybe some assets. But aren't we running
to open up a field of uncontrolled flow of information based on
innuendo and charge, without substantiation, to the extent that
it could be tremendously injurious to individual lives? What do
we do? You are asking here for immunity. You want to even take
good faith out. What, do you want to be able to put bad stuff
on the Internet under bad faith? Why wouldn't you want to make
a standard of at least good faith?
What if you had somebody working for NASD that did not like
their spouse, and they decided to open up, just write charges
out there? What do they do?
Mr. Shulman. If that happened, sir, clearly we have
rigorous SEC oversight. I think the SEC--
Mr. Kanjorski. You what?
Mr. Shulman. There is rigorous SEC oversight.
Mr. Kanjorski. Oh, you are going to call them in and
discharge them for a couple of weeks or give them a fine, or
maybe even fire them. What does that do to the person who is
injured? They do not give a damn. It just seems to me that we
have an obligation. We are dealing here with the most sacred
and important thing and privacy that we have, the ability to
destroy character and integrity of individuals. Unless the
injury, if it occurred in society generally, is so much greater
that we should waive that protection, I think we have to walk
very softly.
I hate to think that I was a broker for 25 or 30 years, and
some dissatisfied customer could write anything about me and
make any charge, and it gets up on the Internet and my career
is gone, particularly if I am in a small town or a small
community. It is gone. What do I do? Who do I look to? I go to
you and I say, that is not right. There is no factual support
for this. And you say, oh well, it was done in good faith, but
hell, we do not even have to have good faith; we just have
immunity. Congress gave it to us. We just stripped you of your
protections.
I would urge, Mr. Chairman, and Mr. Shulman, we should do
something to make sure we make information more readily
available. But let's not run down this road. I was just
thinking here. I remember in contract law in law school, hell,
I think it is the law in all 50 states of the union, you cannot
post on a bulletin board in a business place if somebody owes
you money. Why? Because you destroy that person. It is a
private relationship and you destroy that person's reputation.
And yet you can put on that somebody did not pay an
account; somebody owes money; somebody did not do something.
You are vitiating all that expression of the long-time common
law protections for individual rights.
Chairman Baker. Mr. Kanjorski, if I can suggest that with
this vote announcement that just occurred; there is a series of
three votes. Given the few number of members remaining, it
might be possible to proceed with other members?
Mr. Kanjorski. Sure.
Chairman Baker. And try to conclude.
Mr. Renzi, do you have a question? Mr. Renzi waives.
Mr. Scott?
Mr. Scott. I have one. I have some reservations about this
as well. I do not think I can more eloquently state them than
Mr. Kanjorski did--excuse me, I hope I pronounced your name
correctly.
I would like to ask you about the toll-free number that you
are currently working under. How do you get that toll-free
number out, communicate it out to the investor community so
they know that it is there?
Mr. Shulman. We use a variety of venues. We try to make it
available through PSAs in the past. We have done statement
stuffers with securities firms so that they know that there is
a place to come and get that information. We continually talk
about it in public appearances. We do that on our Web site so
people know where it is. So we try all of the traditional
mechanisms that you would use to get information out into the
public.
Mr. Scott. Okay. Thank you.
Chairman Baker. Thank you, Mr. Scott.
Ms. McCarthy?
Mrs. McCarthy of New York. Thank you.
Just to follow up, I live on Long Island and we have
certainly a number of brokers that are in my district, my son
included. Where exactly do you get the information that is
going to go up on the Web site, especially any information that
might be damaging? And just to follow up quickly because we are
on time, being that people seem to want this information, based
on the hits that you have had on the Internet, why wouldn't the
securities firms themselves actually as a service bring this up
themselves? I do not know whether they have ever been asked or
not, but at least they would have a little bit more control
over the information that is going up, to protect their brokers
from, in my opinion, God forbid somebody makes a mistake. You
can ruin somebody's life.
We have seen that. Talk about reputations; we have to go
through campaigns every two years, and I look on the Internet
and what they say about me, I do not even know who they are
talking about most of the time. So I am very sensitive to this.
But where do you get your information?
Mr. Shulman. It is a great question. Let me answer it.
First, just for clarity, we are not planning on posting
information up on the Internet that people control. We are
looking to get the exact same information. When someone calls
and does an inquiry right now and says, send me information on
that broker. What they would have to do is go in, not look
through a list, but query and say, send me information on Joe
Broker. The only difference would be instead of receiving it
via the mail, it would come up on the Internet. But it is not a
list.
The place we get the information is, information comes into
NASD; comes into the New York Stock Exchange and other SROs;
comes into states; comes in via registration forms where we run
all of that information; as well as complaints that go into the
SEC and other kind of information. So it comes from a broad
range of federal, state regulators; from the firms themselves;
as well as from SROs, is where the information comes from.
Chairman Baker. Thank you, Ms. McCarthy.
Mr. Sherman?
Mr. Sherman. One quick question. I share the ranking
member's concerns. Would the broker be able to put right there
a rebuttal to anything?
Mr. Shulman. Yes, absolutely. The other thing I would say
about that is, these brokers, Congressman Kanjorski brings up
many very good points.
Mr. Sherman. Let me ask one other thing, and that is, if
something was posted about a broker, would that broker be
notified immediately that something was posted or supposed to
be posted?
Mr. Shulman. Yes. The debate that has gone on around this
is trying to weigh the investor's interest if they are on the
complaint, which is clearly the most controversial; the
investor's interest to know that there are complaints out
there, against the broker's privacy right. I just would remind
you, this legislation does not address that issue. It only
addresses the way that that information--
Chairman Baker. Will the gentleman yield on that point?
Mr. Sherman. I yield after noting that a broker's life can
be ruined by bad and false charges, but an investor's life can
be ruined by a bad or false broker.
Chairman Baker. I thank the gentleman for yielding.
I just want to make a point which I think I understood
previously, that prior to the publication, distribution, 1-800
number response, that the broker is informed prior to the final
determination and the information being released. Is that
correct?
Mr. Shulman. The complaint usually comes directly to the
broker. There are multiple pieces of information, but we focus
on the complaint. That comes to the broker.
Chairman Baker. But let's take an odd case. Let's take
where the person is sophisticated and does not go to the broker
and make the complaint, but goes directly to the SEC and files.
Prior to publication of that information, does the SEC contact
the broker? How does that work?
Mr. Shulman. If it comes into us before, we make that
information available to the broker.
Chairman Baker. I think what would be helpful to us is if
you just gave the committee two or three practical examples.
Joe Broker hears the complaint stemming directly from the
defrauded investor or angry investor; it comes to the SEC;
angry investor comes to the broker first; angry investor goes
to some local consumer organization and they file. In other
words, give us a practical view of how your world works, and I
think it will be a great help to allay the concerns of the
members that the brokers are not going to be put in an
untenable position by publishing this on the Internet, as
opposed to mailing it out or giving a phone call; that the
processes that you vetted over the past 13 years give ample
protection, or otherwise we would be getting significant calls
from brokers, I suspect right now. Is that a fair request?
Mr. Shulman. I think that is a fair request.
Chairman Baker. If you could get that back to us at your
convenience, it would be a great help to us in having the
committee reach a level of comfort.
If there are no further questions or comments, I certainly
appreciate your appearance here today and your support of the
legislation. We look forward to working with you in the days
ahead.
Mr. Shulman. Great. Thank you very much.
Chairman Baker. We stand adjourned.
[Whereupon, at 11:24 a.m., the subcommittee was adjourned.]
A P P E N D I X
March 6, 2003
[GRAPHIC] [TIFF OMITTED] T7797.001
[GRAPHIC] [TIFF OMITTED] T7797.002
[GRAPHIC] [TIFF OMITTED] T7797.003
[GRAPHIC] [TIFF OMITTED] T7797.004
[GRAPHIC] [TIFF OMITTED] T7797.005
[GRAPHIC] [TIFF OMITTED] T7797.006
[GRAPHIC] [TIFF OMITTED] T7797.007
[GRAPHIC] [TIFF OMITTED] T7797.008
[GRAPHIC] [TIFF OMITTED] T7797.009
[GRAPHIC] [TIFF OMITTED] T7797.010
[GRAPHIC] [TIFF OMITTED] T7797.011
[GRAPHIC] [TIFF OMITTED] T7797.012
[GRAPHIC] [TIFF OMITTED] T7797.013
[GRAPHIC] [TIFF OMITTED] T7797.014
[GRAPHIC] [TIFF OMITTED] T7797.015
[GRAPHIC] [TIFF OMITTED] T7797.016
[GRAPHIC] [TIFF OMITTED] T7797.017
[GRAPHIC] [TIFF OMITTED] T7797.018
[GRAPHIC] [TIFF OMITTED] T7797.019
[GRAPHIC] [TIFF OMITTED] T7797.020
[GRAPHIC] [TIFF OMITTED] T7797.021
[GRAPHIC] [TIFF OMITTED] T7797.022
[GRAPHIC] [TIFF OMITTED] T7797.023
[GRAPHIC] [TIFF OMITTED] T7797.024
[GRAPHIC] [TIFF OMITTED] T7797.025
[GRAPHIC] [TIFF OMITTED] T7797.026
[GRAPHIC] [TIFF OMITTED] T7797.027
[GRAPHIC] [TIFF OMITTED] T7797.028
[GRAPHIC] [TIFF OMITTED] T7797.029