(Updated to add signatories) Federal Bar Associ: Securities Law Committee Executive Council June 11,2010 Sen. Saxby Chambliss Rep. Judy Biggert Rep. Gregory W. Meeks Sen. Bob Corker Rep. Leonard Boswell Rep. Dennis Moore Sen. Mike Crapo Rep. Shelley Moore Capito Rep. Gary Peters Sen. Christopher J. Dodd Rep. John Conyers, Jr. Rep. Collin C, Peterson Sen, Judd Gregg Rep. Elijah Cummings Rep. Ed Royce Sen. Tom Harkin Rep. Barney Frank Rep. Bobby L. Rush Sen. Tim Johnson Rep. Scott Garrett Rep. Heath Shuler . Patrick J. Leahy Rep. Sam Graves Rep. Lamar Smith Blanche L. Lincoln Rep. Luis Gutierrez Rep. Edolphus Towns Sen, Jack Reed Rep. Jeb Hensarling Rep. Nydia M. Veldzquez Sen. Charles E. Schumer Rep. Darrell Issa Rep. Maxine Waters Sen, Richard C. Shelby Rep. Paul E. Kanjorski Rep. Mel Watt Rep. Spencer Bachus Rep. Mary Jo Kilroy Rep. Henry Waxman Rep. Joe Barton Rep. Frank Lucas Rep. Howard Berman Rep. Carolyn Maloney RE: Support for Securities and Exchange Commission Self-Funding Proposal in Financial Services Reform Legislation — H.R. 4173 (S. 3217) Members of Congress: We the undersigned ate senior securities law practitioners, each with decades of experience working on Securities and Exchange Commission matters. Many of us are former SEC senior officers, and many of us now represent or have represented private sector clients in sophisticated matters before the SEC. We are all members of the Executive Council of the Securities Law Committee of the Federal Bar Association We write in our personal capacities in support of what we feel is one of the most important parts of the financial services reform legislation presently before you — the proposal to give the SEC the kind of self-funding presently available to many other financial services regulators. We offer the following points for your consideration: 1, Self-funding is critical to eliminate chronic SEC under-funding, The chronic under-funding of the SEC has severely impeded the SEC's ability to keep pace with market and technology changes. After shrinking in size for a number of years, the SEC is only now beginning to grow again. Meanwhile, the securities industry and corporate activities it regulates have grown tremendously in size and sophistication over the last two decades. To cite just a fewmetrics by way of example, we saw the SEC enforcement and examination staff decline 10% between 2004 and 2007 and its information technology initiatives plunge 50%, while at the same time, trading volume doubled, the number of investment advisers jumped 50% and the funds they managed grew almost 60%. The practical result of this diminution in the SEC’s regulatory presence has been an inability to carry out needed inspections and to follow up on numerous credible enforcement leads ~ sometimes with tragic consequences for investors. To deal with this situation, the SE presently needs the dollars it will take to play serious catch-up and then to keep pace with our ever-expanding markets and with increasingly complicated new investment products and transactions. It is also likely that the SEC will need additional resources to undertake new responsibilities such as oversight of hedge funds and some OTC derivatives. With competing national budget priorities, it may be difficult to find these needed resources for the SEC if itis kept under the current appropriations model and not moved to self-funding. 2. Self-funding will enable the SEC to make needed multi-year commitments to build the technology and other infrastructure it needs. Traders now use banks of powerful computers to execute huge volume transactions in multiple trading venues in a fraction of a second, and then change their positions just seconds later. Regulators cannot be expected to keep pace with this kind of sophisticated activity using technology appropriated over a year ago and installed within a 12-month fiscal-year window. Self-funding will allow the SEC to plan and execute much needed technology and other infrastructure initiatives over a multi-year continuum. By having the flexibility to plan long-term, the SEC will get the tools it needs to effectively police our increasingly technical and sophisticated markets, and to work smart and efficiently leverage its human capital 3. Self-funding for financial services regulators has become the usual approach and not a novel or untried idea. Financial services regulators that have long operated on a self- funding basis include the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. The Financial Industry Regulatory Authority (FINRA) and other self-regulatory organizations sharing responsibility for market surveillance and enforcement activities under the Securities Exchange Act necessarily operate on a self- funding basis. The SEC is one of the few financial services regulators funded with the appropriations model. 4. The money for SEC self-funding would come from transaction and registration fees that Congress has already endorsed. Congress has already determined, under the existing annual appropriations model, that it is appropriate for SEC expenses to be borne by those whose activities necessitate SEC regulation. In Section 31(a) of the Securities Exchange Act, Congress directed the SEC to “collect transaction fees and assessments that are designed to recover the costs to the Government of the supervision and regulation of securities markets and securities professionals, and costs related to such supervision and regulation, including enforcement activities, policy and rulemaking activities, administration, legal services, and international regulatory activities.” Under Section 31(i), the SEC must deposit these fees into the account providing its funding. Sections 13(e) and 14(g) similarly direct the SEC to collect certain additional registration fees that are likewise used to fund the SEC.‘There has been no serious objection to this Congressional determination, and the amounts assessed over the years have been miniscule relative to the transactions involved. It is important to note that, under the self-funding proposal, SEC funding would continue to come only from the same transaction and registration fees that Congress has already endorsed, and not from the very substantial penalty payments the agency obtains through its enforcement program. So there would be no possibility that the SEC would ever demand higher penalties to increase its own funding. The billions in penalties the SEC collects through its law enforcement activities go to harmed investors where possible and otherwise into the Treasury's general funds. The proposal presently under consideration would have the SEC submit an annual budget to Congress, just as other self-funded financial services regulators must prepare a budget. Congress would, of course, continue to have the same oversight over the SEC that it has over all of the other self-funded financial services regulators. * * * The havoc caused by the recent financial crisis clearly shows that adequate funding for the SEC is critical for the protection of investors and the public interest. We recognize the serious budget constraints facing our nation, but self-funding for the SEC would not require “new money.” Rather, the funds would come from fair transaction and registration assessments Congress has previously endorsed — deployed through the self-funding mechanism that has worked well for other regulators. When viewed from this perspective, we submit, the decision in favor of self-funding becomes an easy one. Investors lose when the SEC must struggle to sustain operations on a subsistence basis and when the SEC must limit its field of vision to a single appropriations year. To empower the SEC to effectively deliver on its statutory mandate of investor protection, we the undersigned respectfully urge you to retain the proposal for SEC self-funding in the financial services reform legislation before you. If you or your staff have any questions about the points we have raised, or if we may be of further assistance, please do not hesitate to contact us through Giovanni Prezioso at 202.974.1650 or gprezioso@cgsh.com, or through. Stephen Crimmins at 202.778.9440 or stephen.crimmins@klgates.com. Thank you for your consideration of this submission, Very truly yours, Giovanni P. Prezioso, Outgoing Council Chair Cleary Gottlieb Steen & Hamilton LLP (former SEC General Counsel) Stephen J. Crimmins, Incoming Council Chair K&L Gates LLP (former Deputy Chief Litigation Counsel, SEC Enforcement Division)Diane E. Ambler K&L Gates LLP William R. Baker III Latham & Watkins LLP (former Associate Director, SEC Enforcement Division) Brandon Becker Executive Vice President and Chief Legal Officer, TIAA-CREF (former Director, SEC Market Regulation Division) Alan L. Beller Cleary Gottlieb Steen & Hamilton LLP (former Director SEC Corporation Finance Di Paul R. Berger Debevoise & Plimpton LLP (former Associate Director, EC Enforcement Division) Alan J. Berkeley K&L Gates LLP Gregory S. Bruch Willkie Farr & Gallagher LLP (former Assistant Director, SEC Enforcement Division) Martha Cochran Amold & Porter LLP (former Chief Counsel and Staff Director, US. Senate Subcommittee on Securities) Robert L.D. Colby Davis Polk & Wardwell LLP (former Deputy Director, SEC Trading and Markets Division) James R. Doty Baker Botts LLP (former SEC General Counsel) Martin Dunn O’Melveney & Myers LLP (former Deputy Director and Acting Director, SEC Corporation Finance Division)Meyer Eisenberg Senior Research Scholar and Lecturer-in-Law, Columbia University School of Law (former SEC Deputy General Counsel, Acting Director of Investment Management Division and Executive Assistant to the Chairman) Ralph C. Ferrara Dewey & LeBoeuf LLP (former SEC General Counsel) ‘Matthew P. Fink Independent Director, Oppenheimer Funds (former President, Investment Company Institute) Robert J. Haft Professor, Georgetown University Law Center (former SEC Special Counsel) Michael Halloran Haynes and Boone, LLP (former Counselor to the SEC Chairman) John J. Huber Latham & Watkins LLP former Director, SEC Corporation Finance Division) Dixie L. Johnson Fried, Frank, Harris, Shriver & Jacobson LLP Andrew M. Klein Schiff Hardin LLP (former Director, SEC Market Regulation Division) Dennis J. Lehr Hogan Lovells LLP Michael D. Mann Richards Kibbe & Orbe LLP (former Director, SEC Office of International Affairs) David B.H. Martin Covington & Burling LLP (former Director, SEC Corporation Finance Division)Paul Mason (former Assistant Director, SEC Trading and Markets Division) Wilmer Cutler Pickering Hale and Dort LLP (former Director, SEC Enforcement Division) Herbert E. Milstein Cohen Milstein Sellers & Toll PLLC (former Chief Enforcement Attorney SEC Investment Management Division) Allan S. Mostoff Dechert LLP President, Mutual Fund Directors Forum (former Director, SEC Investment Management Division) Annette L. Nazareth Davis Polk & Wardwell LLP (former SEC Commissioner and former Director, SEC Trading and Markets Division) ‘Thomas C. Newkirk Jenner & Block LLP (former Associate Director and Chief Litigation Counsel, SEC Enforcement Division) John F. Olson Gibson, Dunn & Crutcher LLP Richard M. Phillips K&L Gates LLP (former Assistant to the SEC Chairman, Assistant General Counsel, and Staff Director of SEC Corporate Disclosure and Investment Company Studies) Paul F. Roye Senior Vice President, Capital Research and Management Company (former Director, Investment Management Division) David Silver (former President, Investment Company Institute)Marianne K. Smythe (former Director, SEC Investment Management Division) Richard H. Walker General Counsel, Deutsche Bank AG (former SEC General Counsel, Director of SEC Enforcement Di Director of SEC New York Office) ision, and Consuela Washington (former Chief Counsel for Commerce, Trade, and Consumer Protection, U.S. House Committee on Energy and Commerce, and Special Counsel, SEC Corporation Finance Division) Harry J. Weiss Wilmer Cutler Pickering Hale and Dorr LLP (former Associate Director, SEC Enforcement Division) John W. White Cravath, Swaine & Moore LLP (former Director, SEC Corporation Finance Division) Susan Ferris Wyderko Executive Director, Mutual Fund Directors Forum (former Director, SEC Office of Investor Education and Assistance, and Acting Director, SEC Investment Management Division)