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Funds News

TEXT-U.S. SEC chairman's testimony at House hearing

 March 11 (Reuters) - Following are excerpts from the
written testimony submitted by Securities and Exchange
Commission Chairman Mary Schapiro to the House Appropriations
subcommittee on Wednesday:
 Important questions have been raised concerning the
agency's handling of tips or whistleblower information related
to the activities of Bernard Madoff.  Former Chairman Cox asked
the SEC Inspector General to look into what happened, what
failed to happen, and to report back to the Commission.
 It is clear that, regardless of the ultimate findings of
the Inspector General, the agency needs to improve its ability
to process and pursue appropriately the more than 700,000 tips
and referrals it receives annually.
 We have retained the Center for Enterprise Modernization to
begin work immediately on a comprehensive review of internal
procedures to evaluate tips, complaints, and referrals, with a
goal of establishing a process that will more effectively
identify valuable leads for potential enforcement action. In
addition to these changes, it is essential that we work to
improve our risk-based oversight of broker-dealers and
investment advisers.
 Our Office of Compliance Inspections and Examinations
(OCIE), together with other agency staff, are presently working
on an initiative to identify the key data points that would
facilitate a risk-based oversight methodology and better allow
the staff to identify and focus on those firms presenting the
most risk.
 These steps will build the knowledge base of our
inspections program, better enabling them to conduct oversight
of complex trading strategies and products that exist in our
markets today. In addition, the examination staffs of the SEC
and FINRA are working together to identify better ways that
incipient frauds might be detected at an early stage.
 CREDIT RATERS, ACCOUNTING
 I also plan to focus on the critical role played by rating
agencies, and to improve the current ratings process. The SEC
recently approved additional rules, pursuant to our authority
under the Credit Rating Agency Reform Act, to address certain
weaknesses in the ratings process. These rules were a step in
our continuing efforts to bring transparency and accountability
to the ratings process, which plays a critical role in the
market's pricing and allocation of capital.
 In the area of accounting standards, the SEC staff
completed a congressionally-mandated study of fair value
accounting. The staff issued guidance to financial institutions
so that they can give fuller disclosure to investors,
particularly with respect to hard-to-value assets.
 We have also continued to work closely with the Financial
Accounting Standards Board to deal with such issues as
consolidation of off-balance sheet liabilities, the application
of fair value standards to inactive markets, and the accounting
treatment of bank support for money market funds.
 In the area of combating false rumors and manipulative
activity in the marketplace, the agency initiated examinations
of the effectiveness of broker-dealers' and investment
advisers' controls to prevent the spreading of false
information. The SEC adopted a package of measures designed to
strengthen investor protections against naked short selling,
including rules requiring that "fails" from short-sales be
closed out in a significantly shorter time; eliminating the
options market maker-exception of Regulation SHO; and expressly
targeting fraud in short-selling transactions.
 As we move forward, the Commission will consider other
steps necessary to eliminate manipulative and illegal activity
in our markets, as well as limit market volatility.
 In an effort towards bringing the unregulated world of
credit default swaps into the sunlight, the agency has worked
with private parties and its regulatory counterparts at the
Commodity Futures Trading Commission and the Federal Reserve to
facilitate the development and regulatory approval of central
counterparties, clearance and settlement systems, and trading
platforms for these products.
 Over the coming year, we will also have an agenda that
focuses on issues of corporate governance, including proxy
access, risk disclosure, disclosure related to executive
compensation; money market fund regulation; retail investor
protection; and international cooperation.
 SEC BUDGET, STAFFING
 Between 2005 and 2007, the agency lost 10 percent of its
employees, a decline that inevitably affected all of the SEC's
major programs. The SEC oversees more than 30,000 registrants
including 12,000 public companies, 4,600 mutual funds, 11,300
investment advisers, 600 transfer agencies, and 5,500 broker
dealers. We do this with a total staff of 3,600 people.
 With support from this subcommittee, during the last two
fiscal years the SEC was able to lift its hiring freeze and
begin rebuilding its workforce.
 As you know, the previous Administration's request for FY
2009 gave the SEC an increase of less than 1 percent over last
year. But, the SEC will require a 5 percent increase just to
sustain current staffing levels and provide cost-of-living and
merit adjustments for staff. As a result, the previous
Administration's request would have resulted in a cut of nearly
100 staff. The subcommittee's support for a 2009 appropriation
of $943 million for the SEC will be enormously helpful as we
work to reinvigorate and strengthen the agency in the wake of
the last few difficult months.
 However, I have learned since coming to the agency several
weeks ago that this funding level would still require the
agency to make significant cuts in its current operations. I do
not believe it would be wise for the SEC to retrench during
such perilous times in our markets.
 For this reason, I have submitted a reprogramming request
to the subcommittee to use $17 million in the SEC's unspent
prior year funds in fiscal year 2009. These are monies
appropriated to the agency and obligated in past years, so this
is not a request for the subcommittee to find new funds for the
agency.
 FY2010 BUDGET
 The President is requesting a total of $1.026 billion for
the agency in FY 2010, a 9 percent increase over the FY 2009
appropriation. This proposal demonstrates the Administration's
firm resolve to strengthen oversight over our financial
markets. It will fund an additional 50 staff for the SEC,
enhance our ability to uncover and prosecute fraud, and begin
to build desperately needed technology.
 Specifically, we plan to add staff to the SEC's Enforcement
program to focus on pursuing tips, complaints, and other leads,
thus increasing the resources the SEC can dedicate to frauds
that citizens bring to our attention. The Examination program
would also receive new positions to expand its inspections of
credit rating agencies, and to strengthen risk-based
surveillance and examination oversight of investment advisers.
 Finally, I plan to increase the number of staff in our
Office of Risk Assessment specifically dedicated to deepening
our understanding of risk, and incorporating risk assessment
into all aspects of operations.
 With the additional IT funds provided under the President's
Budget for FY 2010, I plan to focus on several key projects:
 First and foremost, we will use additional funds to enhance
our systems for handling tips, complaints, and referrals. The
SEC has a number of different processes to track this kind of
information, but there is no central repository or system
through which this information comes together to ensure it is
handled consistently or appropriately.
 The SEC also plans to use additional technology funding to
improve our ability to identify emerging risks to investors.
We have many internal data repositories that have resulted from
filings, examinations, investigations, economic research, and
other ongoing activities. But we need better tools to mine this
data, link it together, and combine it with data sources from
outside the Commission to determine which firms or practices
deserve a closer look.
 Finally, we aim to complete the multi-year efforts to
improve the case and exam management tools available to our
enforcement and examination programs. These systems will give
our senior managers better information on the mix of cases,
investigations, and examinations, so they can apply resources
swiftly to the continually evolving set of issues and problems
in the markets.


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