[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]




 
                     THE US-EU REGULATORY DIALOGUE
                             AND ITS FUTURE

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 13, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-86



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                 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 Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
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 FOSSELLA, 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            CHRIS BELL, Texas
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 13, 2004.................................................     1
Appendix:
    May 13, 2004.................................................    27

                               WITNESSES
                         Thursday, May 13, 2004

Bies, Hon. Susan, Governor, United States Federal Reserve Board..     8
Quarles, Hon. Randal, Assistant Secretary for International 
  Affairs, United States Department of the Treasury..............     6
Ross, Samantha, Chief of Staff, Public Company Accounting 
  Oversight Board................................................    10
Schaub, Alexander, Director-General, Directorate General for the 
  Internal Market, European Commission...........................    20
Tafara, Ethiopis, Director, Office of International Affairs, 
  United States Securities and Exchange Commission...............    12

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    28
    Biggert, Hon. Judy...........................................    31
    Gillmor, Hon. Paul E.........................................    33
    Bies, Hon. Susan.............................................    34
    Quarles, Hon. Randal.........................................    47
    Ross, Samantha...............................................    52
    Schaub, Alexander............................................    68
    Tafara, Ethiopis.............................................    82

              Additional Material Submitted for the Record

Quarles, Hon. Randal:
    Written response to questions from Hon. Joseph Crowley.......   101


                     THE US-EU REGULATORY DIALOGUE
                             AND ITS FUTURE

                              ----------                              


                         Thursday, May 13, 2004

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to call, at 10:06 a.m., in Room 
2128, Rayburn House Office Building, Hon. Michael Oxley 
[chairman of the committee] presiding.
    Present: Representatives Oxley, Biggert, Hart, Hensarling, 
Garrett, Watt, Ackerman, Sherman, Inslee, Moore, Lucas of 
Kentucky, Emanuel, and Bell.
    The Chairman. [Presiding.] The committee will come to 
order.
    Two years ago, this committee convened a hearing to address 
``The European Union's Financial Services Action Plan and its 
Implications for America's Financial Services Industry.'' 
Today's hearing explores how the US-EU Dialogue has worked over 
the last 2 years and how participants expect it to evolve in 
the context of a united Europe consisting of 25 countries with 
a wide range of economic strength and development.
    We welcome back witnesses from the SEC, the Treasury, and 
the Federal Reserve to discuss this issue. I look forward to 
seeing whether their expectations 2 years ago were met and what 
they think the future might hold. We welcome for the first time 
on this topic our PCAOB witness who will provide a perspective 
on how innovative and productive a variety of informal 
processes can be in resolving difficult transatlantic 
regulatory issues.
    I am particularly pleased to welcome for the first time 
before this committee the European Commission. It is not often 
that a foreign authority testifies before Congress. I 
understand that Director-General Alexander Schaub will use the 
opportunity of this hearing to present significant new ideas on 
how the US-EU regulatory relationship might evolve. We look 
forward to this testimony.
    Two years after our first hearing on this issue, many of 
the same issues remain on the forefront of the transatlantic 
regulatory debate: The supervision of financial conglomerates, 
international accounting standards, convergence in accounting 
standards, transparency in prospectuses, and making 
consolidated supervision function on both sides of the 
Atlantic.
    And yet, much has changed. We convene today shortly after 
the historic accession of 10 Eastern European countries into 
the European Union. This fulfills the dreams of many, including 
myself, that Europe after World War II could one day be united, 
whole, and free. Much of the European financial services 
agenda, especially after the fall of the Berlin Wall, has aimed 
to create a financial services marketplace to serve a European 
market nearly equivalent in size to ours.
    The financial markets have also changed. The end of the 
Cold War and a revolution in risk management and 
telecommunications together have created opportunities and 
enthusiasm for global capital markets to integrate across 
borders. I believe that transatlantic trade in both goods and 
services benefits consumers and businesses on both sides of the 
Atlantic and helps create a vibrant job market here in the 
U.S.. It generates competition in both markets and forces firms 
to be more efficient, innovative and effective in serving 
customers. These trends place pressure on financial regulators 
to find better ways of working together.
    Following our hearing 2 years ago, the US-EU Financial 
Markets Dialogue was created. It fosters regulatory discussion 
on emerging transatlantic issues and attempts to avoid 
conflicts. I understand that the Dialogue has been extremely 
successful. In fact, it has been so successful that some have 
suggested it needs to grow and become more formalized. Others 
have suggested that the Dialogue should seek to accelerate 
financial market integration and foster convergence of 
regulatory standards across the Atlantic. Our witnesses today 
will provide insight into the innovative tools used today to 
increase transatlantic mutual understanding and cooperation.
    This is a very important initiative. Financial firms 
operating in multiple states must comply with multiple, 
sometimes conflicting, regulatory requirements. These 
requirements reflect government efforts to protect consumers 
and to foster financial system stability, safety, and 
soundness. The Financial Services Committee seeks to strengthen 
the U.S. regulatory framework, permitting it to adapt to a 
world where significant changes in capital market behavior and 
the world around us require new approaches to accounting, 
auditor oversight, consolidated supervision and protection from 
abuse from terrorists and money launderers.
    This committee also seeks to reduce regulatory burdens. 
Last fall, we enacted major banking regulation relief 
legislation, and we are right now working on an insurance 
regulatory package. I am committed to reducing inefficient 
regulatory burdens for all financial institutions doing 
business in the U.S. subject, of course, to security and 
financial stability considerations.
    Relieving regulatory burdens in the U.S., however, is only 
part of the picture. America's largest financial institutions 
are major players in the European capital markets. Major 
European firms are a significant and growing presence in all 
three sectors of the United States financial services market: 
banking, securities and insurance. The choices one country 
makes for how best to protect its investors and depositors may 
not always coincide with the choices other countries make.
    Different policies can be driven by differences in market 
structure. Such differences are legitimate and do not easily 
lend themselves to calls for convergence. I believe that 
convergence and equivalence in regulatory structures can only 
make sense where convergence is already underway in the markets 
and where differences in regulation can have a detrimental 
impact. To endorse convergence as a goal without considering 
the needs and views of the voters that brought us to Washington 
to represent their interests would be irresponsible.
    I hope this hearing will help us understand which 
differences in regulatory standards are needed to address 
different market structures and which differences are 
inefficient. I am skeptical that transatlantic regulatory 
convergence will occur quickly in all areas. While the 
financial markets continue integrating, national regulators 
will need authority and a legislative mandate to protect 
consumers and markets at home. I note that it took Europe 
almost 40 years to achieve a legal framework based on mutual 
recognition, and this framework is still under construction.
    Some might question whether the mutual recognition concept 
can operate outside the EU. In addition, the EU's new framework 
has not yet been fully tested. The Financial Services Action 
Plan will not be implemented until next year, and concerns have 
already been expressed that full implementation may impose 
unnecessary costs or create unnecessary conflicts. Questions 
also exist concerning how the new regulatory structures in 
Europe will interface with the rest of the world, putting 
pressure on the execution of consolidated home country 
supervision.
    Here in the U.S., we have our own regulatory burdens to 
consider and address. The specter of listed firms needing to 
provide financial statements using two different accounting 
standards and the prospect of having two different regulatory 
capital frameworks for financial institutions are two examples 
of areas where regulators on both sides of the Atlantic face 
common challenges. I believe that practical working 
relationships such as those created through the US-EU Dialogue 
and other transatlantic discussions can help generate a process 
for differences to be discussed and understood better.
    We will not all agree today on the right solutions for any 
of the issues before this transatlantic regulatory Dialogue. In 
the future, we cannot expect disagreements will disappear 
regarding how best to regulate the very fluid and innovative 
financial sector. But I firmly believe that increased dialogue 
can lower the temperature of our disagreements and can lower 
the odds that serious misunderstandings can develop. The 
capital markets will not stop integrating, and it is our 
responsibility as policymakers to ensure that the rules 
generated to protect consumers and enhance market discipline do 
not generate excessive and inefficient compliance costs.
    Are there other members seeking for an opening statement?
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 28 in the appendix.]
    The gentleman from California, Mr. Sherman?
    Mr. Sherman. Thank you, Mr. Chairman. No discussion of our 
trade and international economic relationships can be complete 
without a mention of the one-half trillion dollar trade deficit 
of the United States. The world is building a house of cards. 
It is a beautiful house of cards. They are happy living in the 
house of cards. But every year we add another half trillion 
dollars of debt of the United States to the rest of the world, 
we build another story on the house of cards.
    And in a perfect world we could hope that somehow that 
trade flow would be not only--the negative would be slowed but 
even reversed. We can dream of a world in which the second half 
of this decade involves us sending a Cadillac to Europe for 
every Mercedes they sent us in the first half of this decade. I 
know of no one in the automotive industry planning for that as 
an eventuality. The world is addicted to the United States as 
importer and as borrower.
    And so in perhaps a decade, individual actors in the 
economic system, whether they be countries, banks or individual 
investors, will probably and unfortunately in a very short 
period of time suddenly lose faith in the dollar, wonder why 
the world has lent so much to a country that has done so little 
to repay.
    Now, I would like to think that we can avoid this 
catastrophe, but that would involve a weak dollar. Instead, our 
Asian governmental friends and trading partners are 
deliberately and I would say illegally or at least wrongfully 
weakening their own currencies. That would involve a U.S. 
budget surplus. I don't know of anyone who dreams of that at 
any time in the near future.
    So since we are unlikely to avoid the disaster, the 
question is whether we are building our financial institutional 
system to prepare for the disaster, to make sure that the panic 
does not become a depression.
    We have, I believe, in our stock markets circuit breakers 
to deal with sudden drops. I hope that our witnesses today will 
discuss with us here or supplement the record with a discussion 
of what we can do to have equivalent circuit breakers for 
sudden declines in the U.S. dollar, for sudden and multi-
trillion dollar outflows of capital from the United States, and 
from all the things that you would expect will eventually 
happen, and you can wonder whether it happens in 5 years or 15 
years, but what eventually happens to a country that is almost 
force-fed like a European goose, import after import, 
consumption after consumption until suddenly it breaks.
    I would hope that this international financial system is 
not just the most efficient way to deal with how to live in a 
house of cards, but also that we build in mechanisms to deal 
for what happens when the house of cards falls over. I yield 
back.
    The Chairman. The gentleman's time has expired.
    The gentlelady from Illinois seeks recognition.
    Mrs. Biggert. Thank you, Mr. Chairman, and thank you for 
calling this important hearing today. As you noted in your 
opening statement, the financial services markets in the U.S. 
and Europe are increasingly intertwined.
    I think this hearing is well-timed, coming as it does just 
2 weeks after the historic accession of 10 Eastern European 
states to the Union. I would like to congratulate you for 
organizing a hearing that includes our key partner in the 
Dialogue--the Commission of the European Union. This is an 
excellent opportunity for the Financial Services Committee to 
hear both American and European perspectives on the key 
transatlantic regulatory issues of our day.
    The relationship between the American and European capital 
markets is of keen importance to the U.S., generally, and of 
particular importance to those of us who come from Chicago. 
Last year, there was a great deal of controversy associated 
with the proposal for a European options exchange to establish 
itself as a competitor to the traditional options exchanges in 
Chicago. The resolution was that the exchange submitted to the 
jurisdiction of the CFTC and established a subsidiary. Along 
the way, many people in my home state began to think in very 
concrete terms about what it means to have such integrated 
capital markets.
    I am a firm believer in the adage that political 
friendships follow the trade lanes. Free and fair trade fosters 
competition and communication, benefiting workers and consumers 
on both sides of the relationship. My impression from the 
testimony submitted is that the regulatory Dialogue underway 
right now between the U.S. and the EU contributes to these 
goals.
    While I support these goals and the accomplishments 
achieved to date within the Dialogue, I think it is important 
to sound a note of caution as well. We must be careful that in 
our zeal to find new and better ways for our regulators to work 
together internationally, we do not lose sight of our own very 
important domestic policy goals.
    In this country, we have over the last century built the 
deepest, most transparent and most liquid capital market in the 
world. This capital market and the economy that it supports are 
the engines of global growth and innovation. One critically 
important component of that market is the framework of laws and 
regulations that protect investor access to information and 
provide for rigorous oversight of financial institutions.
    Financial innovation and economic growth in the U.S. have 
thrived under this framework. Growth and innovation have been 
slower in Europe, but are accelerating with a number of 
reforms. On this side of the Atlantic, we must be sensitive to 
the views of the financial markets and ensure that the EU 
package of reforms does not stifle growth and innovation 
through imposition of significant compliance costs.
    I also believe that policymakers on both sides of the 
Atlantic must consider more carefully the nuts and bolts of how 
consolidated home country supervision will in fact work. This 
is especially important for the highly complex financial 
institutions that are at the heart of both the American and 
European financial systems.
    I agree that we can and must work more closely together. I 
am just not so sure that agreeing up front to wholesale 
harmonization of legislative frameworks or treating all 
regulations as equal is wise. I think that a case-by-case 
determination of where convergence might be necessary to 
achieve increased market efficiency and stability is more 
appropriate. It is for these reasons that I support the US-EU 
Dialogue and look forward to hearing testimony about it today.
    Thank you very much and yield back.
    [The prepared statement of Hon. Judy Biggert can be found 
on page 31 in the appendix.]
    The Chairman. The gentlelady yields back. Are there further 
opening statements?
    The gentleman from Washington State.
    Mr. Inslee. Thank you. I look forward to your discussion 
about coordination in regulatory affairs, because I think we 
have seen some good successes in coordination with the American 
and EU regulators, but we have seen some different approaches, 
temporarily at least, taken by the EU and American regulatory 
structure, particularly an anti-trust issue that provokes my 
concern from the 1st district of the State of Washington.
    And we think there are problems that can happen when there 
are obviously inconsistent approaches by the two regulatory 
branches that can force American companies to undergo different 
treatments, has wide implications in privacy issues and piracy 
issues and the like.
    So we obviously are very interested in anything we can do 
to promote a true coordination, and I just hope that the panel 
will address the prospects of working on the issues at the 
upcoming US-EU Summit or the G7 meetings in the hopes that we 
can really reach that happy day when we have got total 
coordination between these two regulatory bodies. Thank you.
    The Chairman. I Thank the gentleman.
    We now turn to our distinguished panel. The Honorable 
Randal Quarles, Assistant Secretary for International Affairs 
at the United States Department of the Treasury; the Honorable 
Susan Bies, Governor, United States Federal Reserve Board; Ms. 
Samantha Ross, Chief of Staff of the Public Company Accounting 
Oversight Board and Mr. Ethiopis Tafara, Director of the Office 
of International Affairs, United States Securities And Exchange 
Commission.
    Welcome to all of you folks, particularly Ms. Ross who 
makes her first appearance before our committee as a 
representative of the PCAOB.
    Mr. Quarles, we will begin with you.

   STATEMENT OF HON. RANDAL QUARLES, ASSISTANT SECRETARY FOR 
INTERNATIONAL AFFAIRS, UNITED STATES DEPARTMENT OF THE TREASURY

    Mr. Quarles. Thank you, Mr. Chairman.
    The Chairman. Get your mike on there, Mr. Quarles.
    Mr. Quarles. Thank you, Mr. Chairman and members of the 
committee. With your permission, Mr. Chairman, I would like to 
submit my written remarks for inclusion in the record.
    The Chairman. Without objection, all of the prepared 
remarks will be made part of the record.
    Mr. Quarles. Thank you, sir. And I want to begin by 
thanking this committee for its support for the US-EU Financial 
Markets Dialogue, which I, at least, think has been really 
integral to the progress that we have been able to make over 
the last couple of years, having that support.
    As you mentioned at the outset, sir, the US-EU Dialogue 
began in March of 2002, and since then we have had technical 
meetings that have been led jointly by the Treasury and the 
European Commission. That includes active participation of the 
U.S. regulators, principally the Federal Reserve and the 
Securities Exchange Commission. Those have taken place on 
roughly a quarterly basis, and in addition to Dialogue it is 
supplemented by substantial interaction of senior policy 
officials.
    The United States has a keen interest, a self-interest in 
the success of Europe's Financial Services Action Plan, because 
a central aim of our foreign economic policy is to promote a 
strong and growing global economy. And we know that strong and 
efficiency capital markets support robust growth.
    Also, U.S. financial institutions are a vital and leading 
part of the European financial landscape, and we want our firms 
to be able to compete globally on fair terms that reward their 
competitiveness. And so just as the United States is interested 
in the evolution of European capital markets, so Europe is 
interested in the evolution of U.S. capital markets and some of 
the recent steps that we have taken here.
    Both the U.S. and the EU recognize that our financial, 
legal, historical and cultural traditional are different. The 
challenge of the Dialogue is to see through these differences 
and work to achieve our common objectives and substance and 
manage the spillovers of these differences into each other 
jurisdiction. If we are successful in this effort, then both 
sides will win.
    So against this background, the United States strongly 
supports Europe's Financial Services Action Plan. And in fact 
we commend Europe for the ambition and the progress that they 
have made to date.
    In my written remarks, I cover a broad range of issues, but 
let me mention two of the many key issues that we are 
discussing with Brussels. The Financial Conglomerates Directive 
requires a foreign supervisor regime to be deemed equivalent by 
Europe for firms from that country to operate within Europe 
without making costly changes to their method of operation. 
While there is always room for refinement and improvement, of 
course, it goes without question that the U.S. supervisor 
regime is a gold standard for the world's capital markets, and 
all U.S. regulators have cooperated closely with Europe in 
explaining their approaches to consolidated supervision. We are 
confident that a positive equivalence finding will soon be 
made.
    Second, the Prospectus and Transparency Directives 
initially suggested that U.S. firms that would be listing new 
U.S. securities in Europe should prepare financial statements 
on the basis of international accounting standards by 2005, 
rather than US GAAP or they would have to cease issuing in 
Europe.
    Moreover, the draft directives didn't make any provision 
for grandfathering previously listed issues. We discussed these 
matters with Brussels for the last year, and the final text of 
these directives provide for grandfathering of existing issues, 
and we fully expect that U.S. firms that will be listing new 
securities in Europe will be permitted to continue preparing 
their statements in US GAAP.
    In addition to these specific matters, we applied the 
increased transparency of European rulemaking, growing 
consultations of regulators with market participants. These 
have improved European rulemaking in the same way that they 
improve our own rulemaking here in the U.S.. They have created 
a greater consensus and buy-in for proposed regulations, and 
they have strengthened European financial markets.
    I think it is inevitable that there will be compromises in 
building an integrated capital market in light of different 
European country practices. That will be part of the FSAP 
process. But Brussels, the parliament, the member states and 
the commission, in our view, are working to instill as liberal 
a vision as possible for the European capital market.
    The FSAP's implementation is a work in progress. It will 
continue to evolve, but it represents an important step forward 
and the extension of this vision at the European-wide level to 
the so-called passport, and that will contribute to the growth 
in global capital markets.
    Following the selection of a new commission and European 
parliament later this year, the Dialogue will need to tackle 
new challenges in promoting a more vibrant transatlantic 
capital market. Among these are promoting convergent accounting 
standards, improving corporate governance, strengthening 
investor protection and reducing the cost of clearance and 
settlement in Europe.
    In conclusion, the Dialogue has increased the transparency 
of rulemaking and it is been part of the momentum to European 
financial market reform. I think that it is rightly credited as 
having helped diffuse transatlantic tensions in an important 
area that is vital to the functioning of the world economy.
    And, finally, if those of us on both sides of the Atlantic 
can agree on financial regulatory standards, then others around 
the globe will follow. I think the potential benefits of this 
effort are enormous and that it is important that the Dialogue 
succeeds, and I believe it will.
    Thank you, sir, very much.
    [The prepared statement of Hon. Randal Quarles can be found 
on page 47 in the appendix.]
    The Chairman. I thank you for your testimony, Mr. Quarles.
    And, Ms. Bies--it is Bies, right? I am sorry, I had it 
wrong, but we will correct the record.

 STATEMENT OF HON. SUSAN BIES, GOVERNOR, UNITED STATES FEDERAL 
                         RESERVE BOARD

    Ms. Bies. My husband will appreciate that very much. Thank 
you, Mr. Chairman. I appreciate the opportunity to speak today 
on matters relating to the US-EU Financial Markets Regulatory 
Dialogue. I am going to comment briefly on the Dialogue's role 
in helping us to monitor European-wide regulatory developments 
in financial services and understand the effects on U.S. 
banking organizations operating in the EU.
    At the time the Treasury Department initiated the Dialogue 
in 2002, the European Union was continuing with efforts to 
establish a single market in financial services by implementing 
measures comprising the Financial Services Action Plan. U.S. 
regulators were continuing to implement provisions of the 
Gramm-Leach-Bliley Act, and Congress was considering reforms 
that led to the adoption of Sarbanes-Oxley.
    U.S. and EU financial services firms were and remain major 
participants in each other's markets. These regulatory 
developments will impact those firm's operations for years to 
come. In the United States and internationally, it is generally 
accepted that a foreign firm conducting business in a local 
market should receive national treatment; that is, the foreign 
firm should be treated no less favorably than a domestic firm 
operating in like circumstances.
    Implementing national treatment can be challenging, as 
local rules must be adapted to foreign organizations that 
operate under different legal and regulatory structures. It is 
therefore critical that supervisors have timely and full 
information in order to have a good understanding of the 
supervisory and regulatory environments in which global firms 
operate.
    The Dialogue has served as a useful forum for information 
sharing among regulatory experts who are responsible for 
implementing rules embodying national treatment. It helps to 
foster a better mutual understanding of U.S. and EU regulatory 
approaches, developments and time tables and to identify 
potential substantive conflicts in approach as early as 
possible in the regulatory process.
    Although the Federal Reserve has an established program of 
working with foreign supervisors, both bilaterally and 
multilaterally, the Dialogue is the only venue specifically 
dedicated to US-EU regulatory issues. It complements the 
Federal Reserve's ongoing relationships and discussions with EU 
national regulators.
    The Dialogue provides an efficient and effective forum for 
discussion of issues across a spectrum of financial services. 
As such, it has great utility for supervisors of large, complex 
financial services organizations. We have been able through the 
Dialogue to advance our views on the application of the EU's 
Financial Conglomerates Directive to U.S. bank holding 
companies.
    Under EU rules, foreign financial firms must be subject to 
supervision at the holding company level by competent home 
country authority which is equivalent to the supervision 
provided for by the provisions in the directive. In the absence 
of an equivalence determination, U.S. financial firms with EU 
operations could be subject to higher capital and risk control 
requirements or be required to create an EU subholding company.
    The Federal Reserve and the Comptroller of the Currency 
have provided information regarding the supervision of U.S. 
banking organizations. We anticipate that the commission will 
keep us informed of member states' progress in this regard, and 
we expect that U.S. banking organizations will be found to be 
in compliance with the supervision standards of the directives.
    I would like to comment briefly on the relationship between 
the Dialogue and international developments in the areas of 
capital, accounting, and auditing standards. As you know, the 
Basel Committee on Banking Supervision is in the process of 
revising the Basel Capital Accord. Dialogue participants have 
discussed application, implementation, and timing concerns 
regarding Basel II. It has not focused on technical issues that 
have been under discussion within the Basel Committee. 
Technical issues have been left for the experts to work 
through.
    The Dialogue has served as a useful venue for participants 
to gain a better understanding of implementation procedures 
that are anticipated. This discussion has helped both sides to 
achieve a better sense of the implementation challenges we all 
face and the commitment to see the process through.
    The Federal Reserve and U.S. banking agencies are actively 
involved in the efforts of the Basel Committee to promote 
enhanced international accounting and disclosure standards and 
practices for global banking organizations. For example, an 
official of the Federal Reserve Board is a member of the 
Standards Advisory Council that advises the IASB and its 
trustees. Federal Reserve also has been active in supporting 
the Basel Committee's project with the International Federation 
of Accountants and other international regulatory 
organizations, such as IOSCO.
    Although we have been actively involved in addressing 
international accounting and auditing issues primarily through 
our involvement in the Basel Committee's projects, the 
Securities and Exchange Commission has had the primary role in 
discussing these matters with the EU representatives in the 
Dialogue.
    In summary, the Federal Reserve has found the Dialogue to 
be a useful vehicle in monitoring the rapid regulatory 
developments in the EU and exchanging information. At the 
Federal Reserve, we have an obligation to keep apprised of 
these developments on a timely basis in order to fulfill our 
supervisory functions and ensure a level playing field for U.S. 
banking organizations operating in the European Union. We are 
confident that continuing the Dialogue in its present informal 
form will facilitate these objectives. Thank you.
    [The prepared statement of Hon. Susan Bies can be found on 
page 34 in the appendix.]
    The Chairman. Thank you, Ms. Bies.
    Ms. Ross?

  STATEMENT OF SAMANTHA ROSS, CHIEF OF STAFF, PUBLIC COMPANY 
                   ACCOUNTING OVERSIGHT BOARD

    Ms. Ross. Thank you, Chairman. Good morning. I am pleased 
to appear before you today on behalf of the Public Company 
Accounting Oversight Board to discuss the regulatory Dialogue 
between the Board and the European Union.
    While we are not part of the official Financial Markets 
Regulatory Dialogue, under the leadership of our chairman, Bill 
McDonough, we have established a very effective working 
relationship with the EU related to oversight of the auditing 
profession. Both we and Europe have learned from experience 
that no borders can contain the losses and uncertainty that 
occur with large corporate failures.
    Beginning with the work of this committee, Congress took 
steps to restore the public's confidence in our markets with 
the Sarbanes-Oxley Act. The act created the Board to oversee 
the auditors of public companies and gave it significant 
powers.
    Among these powers, the Board has the authority to register 
public accounting firms that prepare audit reports for issuers 
as well as to conduct inspections of those firms. The board 
also has the authority to conduct investigations and 
disciplinary proceedings concerning public company audit work. 
Further, the Board has the authority to establish the standards 
governing the preparation of audit reports.
    One of the Board's first steps was to establish a 
registration system for accounting firms that audit public 
companies, including non-U.S. firms that issue audit reports 
for companies that have registered securities in the U.S.. This 
includes the auditors of U.S. multinational companies that have 
significant operations abroad and the auditors of foreign 
companies that have elected to access the U.S. capital markets.
    Today, 840 accounting firms have been registered by the 
Board, including 35 non-U.S. firms from countries such as the 
United Kingdom, Germany and Hungary. More than 145 additional 
non-U.S. firms have applied for registration, and we expect 
that as many as 300 may register in the near future. 
Registration is only the beginning of our oversight, however.
    As we prepared for our oversight of non-U.S. firms, we 
began exploring with international auditing regulators ways to 
enhance the effectiveness of our oversight and minimize 
duplicative regulations. Based in large part on these 
discussions, the Board has developed a cooperative framework 
that would allow it to gain insight from and rely on the 
inspection by a firm's home country regulator.
    This approach would permit varying degrees of reliance on 
the home country system of inspections, depending on the 
independence and rigor of that system. The board would place 
the greatest reliance on those systems that maintain the 
highest level of rigor and independence from the accounting 
profession. Conversely, the Board would participate more 
directly and rely less on those systems that are less 
independent or rigorous.
    The European Commission is facing the same issues relating 
to audit quality that we face. The Parmalat scandal, which came 
to light last December, galvanized investors in European 
securities to demand more reliable financial reporting and 
auditing. With the proposed 8th Company Law Directive, European 
Commissioner Frits Bolkestein and Director-General Alexander 
Schaub have taken important steps to restore confidence in 
European markets.
    Shortly after the 8th Directive was proposed this past 
March, Commissioner Bolkestein and our Chairman held an 
unprecedented roundtable discussion in Brussels with EU member 
state representatives. Our primary discussion focused on the 
key objectives of auditor oversight upon which we are all 
building our new regulatory systems.
    The oversight system required by the 8th Directive appears 
to mesh quite well with the oversight system we are putting in 
place here in the U.S.. The 8th Directive would require 
external independent oversight of auditors in a manner that is 
transparent, well-funded and free from undo influence by 
auditors or audit firms. It would also provide for cooperation 
with other regulators. These provisions should substantially 
enhance our ability to coordinate with our European 
counterparts.
    While the assistance of non-U.S. regulators will help us 
achieve our objectives under the Sarbanes-Oxley Act, true 
collaboration is a two-way street. The board has previously 
stated it is willing to assist non-U.S. regulators in their 
oversight of accounting firms. Because the needs of every 
regulator are different, we plan to work out the details of our 
assistance through direct discussions.
    In conclusion, we still have much work ahead of us to 
establish lasting relationships and working protocols with 
other regulators, and the Board is optimistic. Cooperation 
among regulators requires good will and flexibility. Our 
experience with the European Commission has demonstrated that 
European regulators share this view. We are confident that with 
the continuation of our open and constructive Dialogue with 
both the EU and its member states, we will be able to work 
together to fulfill our important missions to protect 
investors. Thank you.
    [The prepared statement of Samantha Ross can be found on 
page 52 in the appendix.]
    The Chairman. Thank you.
    Mr. Tafara?

STATEMENT OF ETHIOPIS TAFARA, DIRECTOR, OFFICE OF INTERNATIONAL 
   AFFAIRS, UNITED STATES SECURITIES AND EXCHANGE COMMISSION

    Mr. Tafara. Thank you. Chairman Oxley and distinguished 
members of the committee, I am delighted to have been invited 
to testify about the US-EU Regulatory Dialogue on capital 
markets. The Dialogue is the result of historic changes in the 
way capital markets function and our likely to develop. Today, 
almost all developed markets and even a considerable number of 
developing markets have adopted forms of security regulation 
similar to our own. At the same time, capital markets have 
become global. The result is something unique--a truly global 
capital market but operating in a world of expensive domestic 
capital market regulation.
    At this point, I should say that I firmly believe that the 
U.S. securities laws and SEC market oversight are two of the 
principal reasons why our markets are as efficient and 
effective as they are at fueling the capital needs of our 
economy. These laws focus on investor protection and have 
created in investors a certain bedrock confidence in the 
integrity of our securities markets that even sizable financial 
scandals have not been able to diminish entirely.
    In Europe, the union has promised to create an EU-wide 
capital market and a rationalized coordinated European 
securities regulatory structure. These initiatives will improve 
the efficiency and liquidity of Europe's securities markets, 
developments that will benefit both U.S. investors and issuers 
in the long run by providing the former with greater investment 
opportunities and benefiting issuers by possibly lowering their 
cost of capital.
    The U.S. and EU securities markets are too large to be 
ignored, and potential conflicts between the regulatory 
requirements of these markets can have an adverse impact on 
cross-border flow of capital. Some of these conflicts may prove 
difficult to avoid, stemming, as they may, from differences in 
regulatory philosophy. Nonetheless, some duplicative or even 
contradictory regulation in this cross-border environment may 
offer little in the way of investor protection and merely place 
an unnecessary burden on issuers, firms and investors. The SEC 
is committed to avoiding such situations where possible.
    The US-EU Dialogue was created as a form in which to 
discuss such conflicts and other regulatory matters and fulfill 
several functions. Most importantly, it has served to reinforce 
our common ground. With respect to financial services 
regulation, the U.S. and EU share the same fundamental goals: 
Protecting investors, maintaining the stability of our markets 
and allowing free and unfettered competition among all market 
participants.
    The Dialogue is also proving useful in resolving potential 
problems by providing an opportunity for both sides to air 
concerns about the possible impact of upcoming regulations and 
to explore adjustments.
    Finally, the Dialogue has afforded an opportunity to learn 
from each other's experiences. The learning process allows us 
to consider possible new avenues of regulation for our own 
markets which ultimately enriches the regulatory rulemaking 
process and helps us each to better carry out our regulatory 
mandates.
    We have made a connection with the Dialogue on a number of 
occasions and on these occasions we have discussed a number of 
key issues, including the implementation of the Sarbanes-Oxley 
Act, EU Financial Conglomerates Directive and international 
financial reporting standards. Although the US-EU Dialogue 
began before the Sarbanes-Oxley Act was signed into law, 
implementation of the act added new significance to the 
Dialogue.
    As the SEC began to implement the Sarbanes-Oxley Act, it 
quickly became clear in some cases implementing the provisions 
in certain ways could conflict directly with laws and 
regulations in other jurisdictions. The SEC worked very hard to 
resolve these conflicts in a manner consistent with the spirit 
and intent of the act.
    The Dialogue played a key role. Through our interactions 
with representatives of the European Commission, the SEC 
learned where potential conflicts lay, while the European 
Commission came to understand the objectives of our proposed 
rules. These discussions, in turn, led us to consider 
modifications to our proposed rules and avoided putting foreign 
market participants in the unenviable position of being asked 
to comply with conflicting laws while still ensuring that the 
objectives of the Sarbanes-Oxley Act were met.
    The cross-border impact of securities regulation travels 
both ways, as the SEC also had to respond to legislative 
initiatives in the European Union. And one example we had to 
respond to was the EU legislation called the Financial 
Conglomerates Directive. This directive had cross-border 
implications given that it requires non-EU holding companies or 
financial firms operating in the EU to be subject to 
consolidated supervision.
    Again, the Dialogue played a key role. As the EU went 
through the process of proposing, amending and finalizing the 
directive, we discussed as part of the Dialogue the 
implications of the directive for U.S. broker dealers with 
operations in Europe. Indeed, the SEC provided detailed 
explanations of the SEC's form of oversight to EU regulators 
and policymakers and at this juncture expects that the European 
Commission and EU member states will find our system of 
consolidated supervision to be equivalent to the Financial 
Conglomerates Directive.
    Going forward, the SEC and the European Commission will be 
examining many of the same regulatory issues partly in response 
to very similar financial scandals in both our markets. The 
Dialogue is proving to be fertile ground for exploring new 
ideas and approaches, as both sides consider whether to 
introduce new regulation or to strengthen existing regulation 
to address regulatory concerns.
    To complement our discussions with the European Commission, 
I expect that we will in the near future also develop a 
framework for cooperation between the SEC and the Committee of 
European Securities Regulators, or CESR. The committee 
comprises securities regulators from all EU member states and 
is responsible for implementation of EU laws and day-to-day 
oversight.
    In conclusion, I would note that the US-EU Dialogue is a 
key element in a web of connections between the U.S. and EU 
policymaking community. It serves the important function of 
providing a forum for developing greater understanding of each 
other's approaches, for airing concerns about actions that 
either the U.S. or EU has taken with respect to financial 
services and ultimately will help us achieve more converged 
regulations relating to financial services while ensuring the 
highest level of investor protection.
    I believe the Dialogue will lead to better securities 
regulation in the U.S. and the European Union and in the long 
run better protection and choices for investors. Thank you.
    [The prepared statement of Ethiopis Tafara can be found on 
page 82 in the appendix.]
    The Chairman. Thank you, Mr. Tafara, and we now turn to our 
panel, and I will begin with a series of questions.
    I would first like to ask Mr. Quarles, since the Treasury 
coordinates the views of the U.S. Federal regulators regarding 
the issues before the Dialogue, one of the most striking 
differences that I have noticed between the Federal regulators 
until recently has been that the SEC did not regulate holding 
companies and supervise holding companies. That appears to be 
changing. It would seem to the outside observer that the SEC is 
finally using the Gramm-Leach-Bliley authority in order to 
converge with the EUs legal standard.
    I understand the equivalence determination in Europe 
regarding our state-based insurance regulators could be at 
least as thorny as the determinations in the securities 
industry. Having said that, what is the Treasury doing to help 
facilitate the equivalency determinations for all sectors of 
the U.S. financial services industry, and where do we go from 
here?
    Mr. Quarles. The question of equivalency has been one of 
the central ones that we have been discussing in the Dialogue, 
and we have--what the Treasury has been doing is attempting to 
deal with all of the aspects of that as it arises in the 
discussion. What the SEC is proposing has been helpful. We have 
been encouraging direct conversations between the commission 
and the regulators on the topic of equivalency and some of the 
technical issues that arise.
    And on the insurance side, there is a direct Dialogue as 
well between the commission and the insurance regulators. It is 
an insurance regulatory Dialogue that is led by the NAIC, the 
National Association of Insurance Commissioners, which we are 
monitoring, and occasionally representatives of the NAIC will 
participate in our Dialogue on issues related to the Financial 
Conglomerates Directive and equivalency determination. So we 
have attempted to strengthen their separate Dialogue by 
including them in ours.
    The Chairman. Does our system of insurance regulation at 
the State level complicate your efforts?
    Mr. Quarles. I don't know that I would use the word, 
``complicate.'' Obviously, because there isn't a Federal system 
of regulation for insurance, we have to approach that in a 
different way than we approach the regulation of other 
financial institutions. But that said, I think that the 
Dialogue that there has been between the State insurance 
commissioners and the European Commission, which we have been 
monitoring, has been helpful in addressing some of the concerns 
about varying State regulations that the European institutions 
face when they come into the United States.
    The Chairman. When you get into Dialogue sessions, do you 
have a coordinated approach going into those, and that is 
directed by the Treasury, you are kind of the quarterback? Is 
that how it works?
    Mr. Quarles. Yes.
    The Chairman. In areas of competency and regulatory 
structure?
    Mr. Quarles. Yes. Generally, the technical group when they 
meet, for example, usually will meet in advance, not always, 
but usually will meet in advance to go over the issues that 
will be presented in the discussion, so that there is a unified 
view.
    The Chairman. Thank you. Let me ask all of our witnesses, 
and I am kind of running short of time, so we will try to do 
our best to get some answers. The exercise of consolidated home 
country supervision in the world of modern finance is going to 
involve a lot of sharing of information across borders--sharing 
data, verifying models implemented properly, even on occasion 
sharing enforcement and investigative authority.
    Let me start with Mr. Tafara and we will work that way. Do 
you believe that all of these things can be accomplished 
through the informal networks that exist, such as the Dialogue, 
or are we going to need at some point some more formal 
arrangements to accomplish our goal?
    Mr. Tafara. I am not sure that we need something more 
formal. Indeed, today, I mean as we have put into practice our 
risk assessment program, which involves gathering certain 
information from broker dealers and assessing their exposure 
and the capital that should be charged as a consequence of that 
exposure, we do meet regularly with our counterparts in Europe 
at the national level, particularly with respect to broker 
dealer groups that have a presence in the major countries, in 
Europe, Germany and the UK and indeed a country outside of the 
EU, the Swiss.
    We meet with them one to two times a year to share 
information about what we see, concerns that we have identified 
and to hear from them about the same thing. And that process 
has worked extremely well over the course of the past several 
years that we have been meeting with them. And I expect that 
will continue going forward, that we would continue to meet on 
a rather informal basis but yet share information relevant to 
the risks and the risk exposure of these firms that we should 
be taking into account.
    The Chairman. Thank you.
    Ms. Ross? Don't forget that mike.
    Ms. Ross. Yes. We do plan on establishing working protocols 
and procedures with the various auditor oversight bodies that 
we hope to be able to gain assistance from and rely on in our 
inspection work and our other oversight programs. That is one 
of the things that we are beginning now to get working on. The 
European Commission has been very helpful in establishing a 
framework for that kind of work through the ACE Directive.
    In addition, the European Commission is now helping us 
establish relationships with the various member states which 
will be forming these new auditor oversight bodies as we are 
forming now so that we can work together.
    The Chairman. Thank you.
    Ms. Bies?
    Ms. Bies. Mr. Chairman, the Federal Reserve already has 
legal agreements that allow us to share information with all 
the major banking regulators across the world, and where we 
have specific cases of investigations, our experience has shown 
we work very well together under the period where you are sort 
of under stress and have a real problem situation.
    So we are very comfortable we have the authorities that we 
need day-to-day coordinate the activity between the home and 
host regulators.
    The Chairman. Mr. Quarles, specifically to you in terms of 
terrorist financing and anti-money laundering, do we need to go 
beyond the informal arrangements and look towards MOUs and 
other forms of agreements? I know that based on the PATRIOT Act 
that the Treasury has been quite busy and successful in many 
cases in implementing that law. Could you give us some details?
    Mr. Quarles. Sure. There obviously are a number of ways in 
which we would want Europe to, again, refine and improve the 
procedures it has in place for addressing anti-money laundering 
and counterterrorist financing. I don't know--at this point, I 
don't know that we would say that it requires something more 
formal than what we have been doing.
    We have a regular interaction with the Europeans on these 
issues, and, for the most part, it is fruitful, and we have had 
some significant successes, for example, in September of 2003 
when Europe moved to designate the entire Hamas organization 
rather than attempting to split it up from its charitable arm 
and its political military arm.
    But, for example, in that same vein, they still don't 
designate all of Hezbollah, and that is something that we are 
working with them to improve. We think they need to streamline 
the clearinghouse process that they have for handling 
information related to preparing designations and for moving 
quickly to disseminate information about designations to banks 
in their jurisdiction. We think they need to develop a more 
flexible standard for designation. It is really more of an 
actual criminal standard as opposed to an administrative 
standard, and that isn't flexible enough to be able to act 
quickly enough, and speed is of the essence in this effort.
    So there are clearly issues like that--I think those are 
the principal ones--there are issues like that we want them to 
move on and are continuing to work with them to move on. But 
the progress that we have had so far, while it is not complete, 
I think would not say that we need a thorough overhaul of the 
way that we are engaging with them.
    The Chairman. My time has expired.
    The gentleman from Washington?
    Mr. Inslee. I was so enthralled with your questioning that 
I was just momentarily rendered speechless, which doesn't 
happen very often.
    [Laughter.]
    The Chairman. That is true. I won't start your time running 
until you tell me when you want.
    [Laughter.]
    Mr. Inslee. Okay. Maybe it goes without saying that U.S. 
businesses have a huge interest in having consistency between 
American and EU regulatory structures. And where we have 
consistency, we frequently have global kind of concurrence, 
other nations follow. And where we don't, it can give 
inconsistent results, not only in the EU but folks who feel 
free to start new regulatory schemes around the world.
    This was brought home to me. Obviously, frankly, with the 
Microsoft case, it has two different at least potential, and 
there are some good signs, actually, that we may find more 
coordination in those policies, so that is--we have optimism 
about that.
    But I just wondered what you could tell us, particularly, 
Mr. Quarles, about efforts at upcoming summits, EU-American 
summit, G7 and the effort to really emphasize our need and 
explore ways to improve our consistency across the pond knowing 
how important it is to U.S. business.
    Mr. Quarles. This Dialogue, for example, is something that 
forms an important part of the discussion at the summit, at the 
US-EU summit. And in the context of the G8 summit that will be 
coming up, a central theme is the agenda for growth, which is 
to say measures that all of the G8 economies need to take in 
order to--we call them supply side measures that improve the 
environment for economic growth in each of those economies. And 
an important part of that is the regulatory environment and 
ensuring that business climate is conducive to economic growth.
    We have made that a constant and central theme of our 
engagement with the developed countries at the summit level, at 
the ministerial level and in various international forums, and 
I think you can see that it is beginning to bear some fruit, 
both from the support that the Dialogue has at the heads level 
because it is always, as I say, a central topic of the US-EU 
summit but also in some of the structural changes that European 
countries are making in their economies that are pro-business 
and pro-economic growth.
    Mr. Inslee. Well, we encourage those efforts, we hope you 
are successful, because this has enormous ramifications for 
companies that need predictability, need consistency, need to 
trust one judicial system instead of having to go through 100, 
and we hope you will be successful. Thank you.
    The Chairman. I thank the gentleman.
    Let me ask Ms. Bies and Mr. Tafara, and I am going to be 
asking a similar question to Dr. Schaub when he testifies. It 
is a complicated issue and it is one that really has enormous 
consequences going forward. Many U.S. institutions have been 
listing in the Euro markets on the basis of US GAAP standards.
    The euro markets are obviously huge. I understand that the 
new EU directives imply that unless US GAAP is soon found 
equivalent for the purposes of listing in Europe, these firms 
may not be able to continue using the Euro markets. It would 
seem to me that such a development would mean lower liquidity 
and volume in the European capital markets, which would be 
contrary to the basic purpose of the FSAP.
    In the meantime, uncertainty in the markets could inhibit 
issuances. Governor Bies and Mr. Tafara, there has been much 
debate and concern in Europe regarding the IASB's proposed fair 
value standard for derivatives. What is your impression of how 
that debate is likely to turn out? Do you agree that it could 
be a problem for the balance sheets in Europe and the United 
States to have different standards for evaluating and valuing 
derivatives?
    Ms. Bies?
    Ms. Bies. Mr. Chairman, the proposal that Europe is 
debating at the moment would bring the international standard 
closer to the U.S. Today, we have a very wide difference 
between the two accountings. In the United States, several 
years ago, the Financial Accounting Standards Board required 
all corporations, not just financial institutions, to recognize 
on their balance sheet financial derivatives of all types. 
Europeans still don't do that.
    So one of the things in terms of a level playing field and 
transparency of these complex organizations, we think it is 
important that they do move forward and provide that 
transparency.
    Now, the U.S. companies, to their advantage, had to adopt 
all these changes one by one because these are in different 
standards in the U.S. and so had more time to implement, and 
that is one of the issues I think the Europeans are struggling 
with to adopt all this at once. But the European firms who are 
already preparing under US GAAP will find that much of the work 
they are already doing will help them.
    And, furthermore, some of the approaches that are in IASB 
proposals 39 and 32 actually provide some interesting 
alternatives to some of the areas in the US GAAP that we have 
found problematic and might provide an alternative. So I am 
hoping that we get to a closer consistency across the two 
standards, and I think the Dialogue that is going on now 
between the FASB and the IASB and our work with the other 
banking regulators in Europe to talk about how to look at 
financial standards in the two countries is very productive.
    I would also add that even if we get comparable standards, 
the issue is going to be whether they are implemented and 
interpreted the same way, and that is going to require some 
work. We think some of the new standards, for example, on loan 
loss reserve accounting should move us closer than what we have 
in practice today. And, obviously, the work of the PCAOB is 
important because a lot of the issues that we struggle with 
that we call accounting issues, even in this country, are not 
accounting, they are audit failures.
    The Chairman. Well, maybe we should ask Ms. Ross then to 
comment on that since you brought her into the equation here.
    [Laughter.]
    Ms. Ross. Thank you, Chairman. Our board has not taken a 
position on accounting standards, and I don't really expect it 
to, because we really are in the audit area. But, of course, 
once the accounting standards are established, we do play a 
very big role in helping to ensure that these accounting 
standards are applied in a consistent manner, just as Governor 
Bies is saying.
    So that will be critically important to us as we move 
forward in our inspections of accounting firms work on public 
companies, both those public companies that are the sort of 
bread and butter companies we have here in the U.S. and then 
also the foreign private issuers that are listed and registered 
with the Securities and Exchange Commission. So this is 
something we are very mindful of.
    The Chairman. Thank you.
    Mr. Tafara?
    Mr. Tafara. Don't know that I have much to add to what 
Governor Bies had to say about IS 32 and 39. We have tried to 
stay outside of the debate that is raging in Europe with 
respect to whether or not they should use IS 32 and 39, as they 
have been currently proposed, other than to note that a 
financial instrument standard is pretty important to add and to 
note that the conceptual underpinnings to 32 and 39 are the 
ones that are in FASB 133 and our institutions have been able 
to adapt to use the standard.
    With respect to convergence, I want to add on to what 
Governor Bies had to say and say that we have been strong 
supporters at the SEC, at least at the staff level, of the 
convergence project that is taking place between the IASB and 
the FASB, the exercise of identifying the principal differences 
and trying to eliminate them over a period of time, and we 
think that actually will increase the transparency and the 
comparability of financial statements as investors look to the 
choices they have for their capital.
    But as Governor Bies pointed out, critical to the 
acceptance of IAS on a cross-border basis will be a robust 
infrastructure for consistent interpretation, application and 
enforcement of the standards. Without that, what is supposed to 
be one standard can quickly devolve into 15, 25, 30 different 
standards, and that is something we are working with our 
counterparts across the Atlantic on establishing.
    The Chairman. I would assume that all of the witnesses 
would share the same concerns expressed by Mr. Tafara in terms 
of having numerous standards and trying to deal with all of 
those. I see everybody shaking their heads. And, of course, one 
of the purposes of the hearing was to get some of those issues 
out there, and that is been enormously helpful, and your 
testimony has been enormously helpful to the committee in 
making a record as we move forward.
    I think the encouraging thing is that we have made 
significant progress already, and in many ways we are just 
probably in the first inning of this process, but it is quite 
encouraging, and for that we thank all of you and we are now--
you can go back to work, and thank you for your testimony.
    The committee is now pleased to welcome Mr. Alexander 
Schaub, Directorate General for the Internal Market of the 
European Commission.
    Mr. Schaub, it is great to have you here to share your 
expertise. The committee is very familiar with your background 
and your reputation in the European Union, and we most 
appreciate your coming across the Atlantic to be with us this 
morning and testify, and you may begin whenever you feel 
comfortable.

 STATEMENT OF ALEXANDER SCHAUB, DIRECTOR GENERAL, DIRECTORATE 
         GENERAL, INTERNAL MARKET, EUROPEAN COMMISSION

    Mr. Schaub. Good morning, Chairman Oxley and members of the 
committee. Thank you very much for inviting me to testify on 
behalf of the European Commission and in addition for the first 
time on the informal EU-US Financial Markets Regulatory 
Dialogue.
    Cooperation in this area is not an option, an extra. It is 
an economic, political and regulatory necessity. We are 
economically interdependent. In the global markets, our 
regulations inevitably spill over on each other, not only in 
this area, it was already talked about, competition policy 
where you have exactly the same phenomenon.
    The financial integration that we are undertaking in Europe 
offers huge opportunities for the U.S.. And we can cooperate. 
Within the EU, we have had to ensure that also in an enlarged 
union investors in one country can feel secure about the offer 
of service from intermediate in another. We have taken, and we 
continue to take, stringent steps to ensure that high 
regulatory standards prevail. Such cooperation, which we have 
been training and practicing over 4 decades now within the 
European Union, must also be possible with our friends in the 
U.S.
    We have taken a fresh start in our cooperation. That has 
involved recognizing the need, not necessarily to take 
identical approaches, but to agree on equivalent approaches. 
That is, in our view, the only viable way forward, and it is 
based on our practical experience over the last 40 years. We 
have taken a fresh--excuse me.
    The Financial Markets Regulatory Dialogue is key to this 
exercise. There is no magic to the term, it just refers to the 
fact that we are talking to each other frequently. It does not 
matter whether that takes place face to face or by telephone. 
What matters is that it does happen and in a constructive and 
effective way which removes hurdles and prevents the creation 
of new ones.
    What makes it tick is its informality, meeting only as on 
as an as and when basis and concentrating on solutions. We are 
constantly looking at improvements by organizing our 
discussions better, delegating work to experts, encouraging 
parallel Dialogues, including that, by the way, between 
yourselves and the European parliament, and we were always 
pleased to see you in Brussels, and between industry, while 
keeping all stakeholders informed of progress achieved.
    One of the key issues will be, as already mentioned, 
auditing. We welcome the excellent and extremely pleasant 
cooperation with the PCAOB, and we hope this will continue.
    On conglomerates, we recognize the need for certainty, and 
we hope to be able to announce guidance shortly, European 
guidance to be applied by the national supervisors. It is vital 
that we work together on the reconciliation of international 
accounting standards with US GAAP, and there are indeed 
practical questions which have to be further clarified.
    It is crucial that supervisors continue to work closely on 
the implementation of a new capital accord, and I think we can 
congratulate our negotiators from both sides of the Atlantic on 
the outcome of the latest meeting in Basel. Banks must not find 
the benefits of the new framework undermined by conflicting 
approaches to implementation and interpretation.
    There are benefits to cooperating on the regulation of 
securities and exchanges and the possibilities of remote excess 
to trading screens of exchanges based in the jurisdictions of 
the other side. We also see benefits in the increased 
cooperation on the collateralization of reinsurance, allowing 
insurers on both sides to diversify risk.
    Finally, there are issues such as credit rating agencies, 
financial analysts, mutual funds and hedge funds which offer 
real opportunities for more upstream convergence and practical 
cooperation.
    Mr. Chairman, I welcome the support that you have brought 
to this process, and I ask this committee to support us as we 
proceed. Our citizens, intermediaries and companies all stand 
to benefit from it. Thank you for your attention.
    [The prepared statement of Alexander Schaub can be found on 
page 68 in the appendix.]
    The Chairman. Thank you, Mr. Schaub, again for--Dr. Schaub 
for appearing before us today and your very positive comments. 
And, indeed, what you say is correct, that our constituents on 
both sides of the Atlantic are depending on policymakers to 
work together to make certain that the free flow of services 
and their financial future is well in hand and that we do have 
the benefits of regulation that provide the kind of safety and 
protection for investors and for savers at the same time.
    Let me begin. The EU's Financial Conglomerates Directive 
states that the U.S. securities firms operating in Europe must 
be subject to an equivalent consolidated global supervision 
system which would be determined by the relevant Member State 
regulator beginning in 2005, next year. As you know, the SEC 
and others have been working closely with the European 
Commission for over 2 years in order to ensure that the SEC's 
regime is determined to be equivalent. As a matter of fact, we 
had some discussions in Brussels about that, I guess, almost 2 
years ago.
    And I understand that the Commission will not issue its 
guidance to start the equivalency determination process until 
at least June of this year. This delay is causing some concern, 
as you might guess, within the U.S. financial services 
industry. Is there any reason for us to be concerned that the 
SEC's new regime will not be found equivalent in time for 
compliance?
    Mr. Schaub. First of all, I should underline that this 
equivalence requirement is not a way of torturing unnecessary 
our friends and partners. It is a natural prerequisite before 
you enter into cooperation in such sensitive, important matters 
with important partners, and we find it perfectly natural that 
in cases where the U.S. is supposed to cooperate--U.S. 
supervisory structures are supposed to cooperate with us, that 
they would naturally first have a look whether the partner, 
their cooperation partner is at the equivalent quality level.
    Now, on the concrete case, you will understand that I 
cannot prejudge the outcome of this process, but personally I 
am very much convinced that this exercise, which is a new 
experience, which has taken more time also because American 
companies needed more time to present the practical details, I 
believe that at the end we will clearly come to a positive 
outcome.
    That is my firm, personal expectation, and I can tell you 
that we in the commission, Mr. Bolkestein, in the first place, 
are following closely this process. And if there should be any 
problem in the further development, because, as it was said, 
the final decision on equivalence is taken by the national 
supervisors on the bias basis of community-wide guidance, on 
the application of uniform rules at community level. But the 
last word is delegated to the national supervisors, and we will 
be in very close contact to make sure that unnecessary 
accidents can be avoided.
    The Chairman. Thank you. Do you think that the insurance 
issues will perhaps create the thorniest problem? What is your 
view just on the overall insurance issues within the scope of 
your jurisdiction?
    Mr. Schaub. Well, I think it is not a secret that the 
insurance industry on both sides of the Atlantic is not in the 
most brilliant state of its history and that market 
participants rightly expect that this industry gets its act 
together. That is what is happening on the European side, what 
is happening certainly on the American side, and I believe that 
we have an interest on both sides to make sure that this 
process is closely followed and that it is pursued over time, 
because the scandals have already created enough doubt and 
hesitations in the marketplace, and it is vital for both sides 
that confidence comes back, and confidence is created in the 
first place by market players who visibly get their act 
together.
    The Chairman. And you heard the testimony from our panel. 
Was there anything that the previous panel discussed that you 
would like to comment on? Are there any glaring omissions or 
differences that you may have noted during that testimony?
    Mr. Schaub. I would say on the contrary, what is striking 
for me and what is at the same time very encouraging is that we 
are speaking more and more the same language and that your 
concerns on the U.S. side are our concerns in Europe.
    Let me just take one particularly crucial example, that is 
the introduction of international accounting standards. We both 
agree that this would be a major step forward, because what is 
happening at present that big internationally active companies 
have to present their annual results in four, five and 
sometimes even more different techniques with the amazing 
result that exactly the same company in some countries presents 
losses of $2 billion and in other countries comes out with a 
positive result of a billion. That is very amazing and puzzling 
for the market participants, and it undermines, obviously, the 
credibility of the whole system.
    Therefore, there is deep conviction on both sides of the 
Atlantic that this is certainly one point where we need to come 
to single rules. We don't need single rules for everybody and 
for everything, but this is a key element where do need, like 
on capital requirements for companies, we need common single 
rules. And I share the expectation and the strong wish of the 
U.S. authorities and of Congress that this crucial step is done 
soon.
    As you know, these activities of the International 
Accounting Standards Board is entering now in a dramatic final 
phase. It seems to us clear if there is no agreement by mid-
June, it will practically be impossible to create the 
conditions for companies to apply the new international 
accounting standards as of January next year, which was 
foreseen, which was the target date for a long time.
    So we are working very intensely with Mr. Bolkestein, 
personally involved with very intensive contacts with Paul 
Volcker and with David Tweedie, the chair of the IS Board, on 
how to solve the very few still open questions. And my 
conviction is, and I was very pleased to see that this is also 
Paul Volcker's conviction, that we can solve these one or two 
open points until mid-June in a pragmatic way, which means that 
we need not on every last detail come to solutions which would 
be considered as solutions for the next decade.
    If we come to solutions which are as a provisional 
solution, acceptable on the condition that a credible process 
is immediately now launched with a target date to further 
improve the provisional results, which, as I see today, will, 
in any case, imply very significant improvement if such a 
pragmatic way could be followed, it should be possible to 
terminate mid-June and to assure that as of January next year 
companies will apply these new standards.
    It would be an enormous breakthrough. It would give the 
signal to the world that this target of credibility and of 
reinsurance for the marketplace will be pursued and therefore 
it is worthwhile that all forces are concentrated on this final 
breakthrough.
    If we would fail, we should have no illusions that this 
would be a major shock for the marketplace, because it would 
not just mean probably that the efforts to go forward are not 
concluded, it would open a major risk that the process could be 
brought backwards, because there are people in the marketplace 
who would not be unhappy to work on more regional standards, 
and the whole dynamic towards convergence risks to be 
undermined and destabilized, and we could lose a decade if we 
can't bring this now to a positive end. We really hope that it 
will be possible, and I am personally confident that it will be 
done.
    The Chairman. And so we are really talking about a month. 
We are already in the middle of May, so we are talking a matter 
of 4 or 5 weeks; is that correct?
    Mr. Schaub. That is exactly the case.
    The Chairman. So as we would say over here, it is crunch 
time.
    Mr. Schaub. Yes.
    The Chairman. Is the likelihood of fair valuation for 
derivatives the key issue to be decided?
    Mr. Schaub. This is certainly the most difficult remaining 
issue, and I believe it is crucial that on this point real 
significant progress is achieved, because I would understand 
that it is not acceptable that on such a key point simply 
nothing happens that would undermine the credibility.
    From my point of view, what is absolutely essential is that 
at least clear transparency is created, that investors in the 
marketplace have a possibility to get an idea what this hedging 
exercise, which is so complicated that only very few people 
understand it and I don't belong to these people.
    The Chairman. Nor do I.
    Mr. Schaub. But I can understand that the simple human 
being participating in the marketplace wants to know what does 
this hedging exercise mean for my company in January, in June, 
in December, and the minimum is that such transparency is 
introduced as a compelling element of the future rules.
    The Chairman. We have had some discussions with private 
sector folks on this side of the Atlantic that they are 
concerned about what appears to them to be lack of transparency 
in the EU process. To what extent do you take into account 
those views from private sector people that will be affected, 
obviously, by the rulings?
    Mr. Schaub. We are deeply convinced that high quality rules 
cannot be produced without systematic implication of the 
private sector on both sides of the Atlantic, because we are 
talking about rules which should be applicable worldwide.
    Now, it is not a surprise, certainly not for you, that 
private does not appear spontaneously with a common view. So we 
are systematically exposed to quite diverging views which are 
reflecting often the diverging position of the companies or the 
association of companies which appear. It is simply a fact that 
there are--some of them are much more affected, and others are 
much less or not at all affected. So they will not sing the 
same song when they come, but our task is to make a sound 
judgment what should be taken into account of their wishes and 
what cannot be taken into account without endangering the 
credibility of the new future rules.
    The Chairman. Thank you. I think we have pretty well 
covered the IASB issues, and, by the way, we have had testimony 
from Mr. Volcker on a couple of occasions, and we could not be 
better represented than someone with his stature and ability, 
and we have certainly relied on him and leaned on him in many 
cases to help the committee better understand this 
transformation that is taking place across the Atlantic.
    The home country supervision issue, the term, ``home 
country,'' I just need to get this in my mind, home country 
supervision, from our perspective, means, of course, U.S. 
supervision. With the EU now, we are really talking about an 
expanded breadth of home country supervision, correct? In other 
words, the European Commission and European Union represent 
that home country supervision. I am correct, right? In other 
words, we are not talking about individual states here now, we 
are talking about the entire European Union when we define home 
country supervision.
    Mr. Schaub. Well, in Europe, we do not have the same 
structure than the one you have since very recently. We don't 
have one single European supervisor. There is a lot of debate 
about this. We have at present a decentralized European 
supervisory system, and that means that there are common 
European rules, there is a European body for security, CESR, 
and corresponding bodies for banks and for insurances, which 
are closely following the application--together with the 
commission the application, the enforcement of the common 
European rules by the national supervisors.
    So it is a bit more complicated than your system today, but 
the purpose is to assure, like on the U.S. side, convincing, 
efficient, credible results. And we agree with the Bill 
McDonough and your PCAOB that an intelligent work sharing 
between the two sides is only possible if each side has 
convinced itself that the system on the other side offers 
comparable, equivalent guarantees.
    Now, this is not done just because we like the Americans so 
much or because you like the Europeans so much, it is largely a 
question of efficiency, how are we from London or from 
Frankfurt able to assure the supervision of a Japanese company 
located in Kobi and having a Japanese auditor? That is very 
difficult. So the same is true if you want to supervise an 
Italian company located in Milan and Bill McDonough has 
certainly highly qualified staff, but it is not sure that he 
has enough Italian-speaking people who could really do the job 
on the spot.
    So the idea is that there is work sharing to the point that 
it remains credible, that the guarantees of reliability of this 
joint effort is the same. And we believe that this work sharing 
is probably the only way to get out of the problem in an 
increasingly global system.
    The Chairman. Dr. Schaub, what is the--just having gone 
through an enlargement now, what commitments do the new 
countries that have joined the EU, what kind of commitments do 
they make in terms of their regulatory structure and all of the 
negotiations that are going on currently?
    Mr. Schaub. Well, you know, the fundamental requirements, 
preconditions for accession are for each of these 10 new 
members that they introduce as of the 1st of May fully--they 
introduce fully because there are no derogations accepted--the 
implementation of the so-called community acquis that is the 
totality of European Union rules on financial services. And it 
is the task of the European Commission to make sure that the 
community rules are effectively respected.
    Now, it is not a secret that we have been working 
frantically until the end of April with some of these countries 
to make sure that they do the very few remaining elements of 
homework which had not been delivered yet.
    So we are now in a situation where they have introduced the 
rules where they do have supervisory structures, and we will 
now be in a much better position than in the past via the 
multiple committees where the representatives of these 
supervisory authorities from all 25 member states are regularly 
meeting. It will be much easier to assure that all these 25 
supervisors are effectively applying the same rules, that they 
are making the same interpretation of these rules, and that 
they deliver convincing results. That will be, of course, an 
important responsibility for the commission and for these 
Europe-wide committees, but it is an exercise which has been 
applied in many other areas before.
    So it is not something totally new, and it is something 
which has successfully worked in other cases. Personally, I 
remember particularly the positive experience after the last 
accession exercise in the new member states at the time, and I 
remember very well in the competition area the remarkable 
efforts the 10 new member states have undertaken over the last 
years to get their own competition authorities now, their own 
financial supervisory authorities into the shape required to be 
part of a convincing European system.
    The Chairman. Very good. Again, we thank you profusely for 
coming over and testifying before the committee. We know that 
your trip was a brief one here, and for that we are most 
appreciative that you did take the time to come over and visit 
with us and impart some knowledge for the committee and make an 
excellent record.
    So, again, Dr. Schaub, thank you, and the committee stands 
adjourned.
    [Whereupon, at 11:40 a.m., the committee was adjourned.]


                            A P P E N D I X



                              May 13, 2004


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