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




                     THE US-EU REGULATORY DIALOGUE:
                     THE PRIVATE SECTOR PERSPECTIVE

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                       DOMESTIC AND INTERNATIONAL
                 MONETARY POLICY, TRADE AND TECHNOLOGY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 17, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-95


                    U.S. GOVERNMENT PRINTING OFFICE
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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
 Subcommittee on Domestic and International Monetary Policy, Trade and 
                               Technology

                   PETER T. KING, New York, Chairman

                                     CAROLYN B. MALONEY, New York
JUDY BIGGERT, Illinois, Vice         BERNARD SANDERS, Vermont
    Chairman                         MELVIN L. WATT, North Carolina
JAMES A. LEACH, Iowa                 MAXINE WATERS, California
MICHAEL N. CASTLE, Delaware          BARBARA LEE, California
RON PAUL, Texas                      PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois         BRAD SHERMAN, California
DOUG OSE, California                 DARLENE HOOLEY, Oregon
JOHN B. SHADEGG, Arizona             LUIS V. GUTIERREZ, Illinois
MARK R. KENNEDY, Minnesota           NYDIA M. VELAZQUEZ, New York
TOM FEENEY, Florida                  RAHM EMANUEL, Illinois
JEB HENSARLING, Texas                CHRIS BELL, Texas
TIM MURPHY, Pennsylvania
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 17, 2004................................................     1
Appendix:
    June 17, 2004................................................    25

                               WITNESSES
                        Thursday, June 17, 2004

Oldshue, Paul, Immediate Past President, Bankers Association for 
  Finance and Trade..............................................     6
Scott, Hal, Nomura Professor of International Financial Systems, 
  Harvard Law School.............................................     7
Thornburgh, Richard, Chairman, Securities Industry Association...     4

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    26
    Oldshue, Paul................................................    28
    Scott, Hal...................................................    45
    Thornburgh, Richard..........................................    57

 
                     THE US-EU REGULATORY DIALOGUE:
                     THE PRIVATE SECTOR PERSPECTIVE

                              ----------                              


                        Thursday, June 17, 2004

             U.S. House of Representatives,
                       Subcommittee on Domestic and
                     International Monetary Policy,
                               Trade and Technology
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 10:02 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Judy Biggert 
[acting chair of the subcommittee] presiding.
    Present: Representatives Biggert, Feeny, Maloney and 
Hooley. Also present was Representative Bachus.
    Chairwoman Biggert. [Presiding.] This hearing of the 
Subcommittee on Domestic and International Monetary Policy, 
Trade and Technology will come to order. Without objection, all 
members's opening statements will be made part of the record. I 
will recognize myself for 5 minutes for an opening statement.
    Good morning. It is my pleasure to chair this hearing on 
the US-EU Regulatory Dialogue: The Private Sector Perspective. 
I want to thank Chairman Oxley for his leadership on this issue 
and for focusing attention on the growing dialogue between 
financial regulators on both sides of the Atlantic. There is no 
doubt that increased interest in the dialogue reflects the 
growth in economic and financial activity on both sides of the 
Atlantic, and the interdependency of those growing markets.
    It is because of that increased interest and 
interdependency that we are conducting this second hearing 
today. Held at the full committee level last month, our first 
hearing featured those who are official parties to the 
dialogue. Government officials from both the U.S. and the EC 
had the opportunity to share their views on the status and 
outstanding challenges that the dialogue will address in the 
near future.
    Today, we hear from those who are not official parties to 
the dialogue, but who nonetheless have much to add to its 
future success. It is the private sector's turn today, and 
representatives from the banking and securities markets, as 
well as academia, will have the opportunity to voice their 
views on how the dialogue should evolve.
    One of the great strengths of our capital markets in the 
United States is the active engagement of our private sector in 
the shaping of emerging laws and regulations. Their involvement 
can help us ensure that our system responds quickly and 
efficiently to market developments, while at the same time 
preventing abuses. We look forward to hearing those views 
today.
    As we seek to work more closely with our economic partners 
in Europe, some in the private and public sectors have 
increased their calls for greater trans-Atlantic harmonization 
in regulatory standards. I continue to believe that case-by-
case determinations make more sense than would a wholesale 
commitment to harmonize, regardless of topic or market 
structure. I agree with Chairman Oxley that convergence for 
convergence's sake is not a wise public policy choice. I also 
doubt that one must endorse convergence up front in order to 
achieve greater comparability and mutual understanding. The 
success of the dialogue to date has proven this.
    Besides addressing the issues of convergence, next steps, 
and inclusion of other parties in the dialogue, there is an 
issue whether the U.S. government is structured appropriately 
to represent our best interests in the dialogue. I look forward 
to testimony from our witnesses on whether the dialogue, our EU 
counterparts, or other mechanisms for US-EU cooperation are 
adequately open to views from the private sector. I look 
forward to considering whether the U.S. Treasury structure in 
Europe, with attaches in Paris and Frankfurt, but not Brussels 
and London, is consistent with the shifting centers of economic 
power in Europe during the 21st century.
    Specifically, London and Brussels represent the financial 
and political capitals of Europe, yet our Treasury Department 
still posts representatives in Frankfurt, the location of the 
European Central Bank, and Paris, the location of the 
Organization for Economic Cooperation and Development. As 
important as these missions may be, times have changed and 
centers of influence and activity have changed, yet our 
resource allocation apparently has not changed.
    Financial markets are the engine for economic growth in any 
economy. The U.S. and the EU mutually benefit from economic 
integration as consumers and businesses find new products and 
services available to finance their productivity activity. 
Government's role is not to stand in the way of productive 
activity. Its role is to find a way of ensuring that minimum 
common standards protect the system from abuses.
    Our witnesses will provide perspective on whether an 
appropriate balance is being struck in Europe and what the U.S. 
government can do to better address our goals. I look forward 
to hearing suggestions and to advancing the dialogue that is so 
important to our economic future.
    With that, I would recognize the ranking member for 5 
minutes.
    Mrs. Maloney. I thank the gentlelady for yielding. I 
request permission to put my opening statement in the record in 
the interest of time.
    I would like to take this opportunity to welcome a fellow 
New Yorker who will be testifying today, the chairman of the 
Securities Industry Association, Richard Thornburgh. Mr. 
Thornburgh is the chief risk officer for Credit Suisse Group 
and a member of the Credit Suisse Group executive board. The 
Credit Suisse Group through CSFB may be the quintessential 
trans-Atlantic firm with operations in Europe and the United 
States. It has global capabilities, with offices in 35 
countries.
    It is clear from Mr. Thornburgh's background that he has a 
great deal of experience and expertise on the issues before us 
today. I look forward to his testimony. I would also like to 
congratulate Credit Suisse on celebrating 70 years of service 
in our country. Founded on June 15, 1934, it was the first 
public securities firm after the creation of Glass-Steagall and 
they are an outgrowth of the First Boston Group.
    I might also add that Credit Suisse is a major civic leader 
in the city that I am proud to represent, employing over 6,000 
New York residents and participating in the civic fabric of our 
city. We thank him for being here and for your service to 
safety and soundness in our financial institutions, and we look 
forward to your testimony.
    Thank you.
    Chairwoman Biggert. Thank you very much.
    Does the gentlewoman from Oregon have an opening statement?
    Ms. Hooley of Oregon. I do not, Madam Chair, but I would 
like to introduce one of the panelists, if this is the time you 
want me to do it.
    Chairwoman Biggert. Please proceed.
    Ms. Hooley of Oregon. Thank you.
    Thank you, Madam Chair and Ranking Member Maloney for 
holding this hearing today on the European Union-United States 
regulatory dialogue. It is important that we address issues 
that are facing U.S. financial firms doing business in the EU, 
and to make sure that there is an ongoing and healthy dialogue 
between the United States and the EU officials.
    I am honored to be joined by a fellow Oregonian who is 
testifying today on behalf of private enterprises. Paul Oldshue 
has been living in Portland, Oregon since 1978. He has been a 
productive and energetic member of our community. He is the 
executive vice president and manager of U.S. Bancorp's 
International Banking Group. Prior to joining U.S. Bancorp in 
April of 1991, Mr. Oldshue headed PacifiCorp Financial Services 
Broker-Dealer, led Security Pacific Bank's Oregon Commercial 
Lending Group, and served as treasurer of Orbanco Financial 
Services Cooperative.
    Mr. Oldshue has a BA degree from Williams College and an 
MBA from New York University School of Business Administration. 
So he is from your area, Ranking Member Maloney. He is past 
president and director of the Arc of Multnomah County, 
immediate past president and director of the Bankers 
Association for Finance and Trade.
    I am very happy that you have decided to join us today, and 
look forward to your perspective on the ongoing regulatory 
dialogue between the EU and the United States. Thank you for 
being here.
    Chairwoman Biggert. Thank you very much.
    I guess I am left to introduce the final witness here. 
Professor Hal Scott is the Nomura professor and director of the 
Program on International Studies at Harvard Law School. Mr. 
Scott is the author of several books, including one recently 
published on international financial policy and regulation. 
Professor Scott is also a governor of the American Stock 
Exchange and a member of the American Enterprise Institute 
Shadow Financial Regulatory Committee.
    There is some tie to my home State of Illinois. In fact, he 
has been working with Ken Dam, who is the Max Pam professor of 
law at the University of Chicago. So I guess I will say that we 
have somebody that is within this realm.
    With that, let me just say that without objection, your 
written statements will be made part of the record, then you 
will be each be recognized for a 5-minute summary of your 
testimony. Following that, then we will recognize for 5 minutes 
each the members of the committee to ask questions. So we will 
begin with Mr. Thornburgh. You are recognized for 5 minutes.

STATEMENT OF RICHARD THORNBURGH, CHAIRMAN, SECURITIES INDUSTRY 
                          ASSOCIATION

    Mr. Thornburgh. Madam Chair Biggert and members of the 
subcommittee, thank you for your continued interest in the US-
EU financial markets dialogue and the EU financial services 
action plan. My testimony today will stress the following 
points:
    One: The EU capital markets are a critical source of 
capital for U.S. companies and vital to U.S. investors seeking 
portfolio diversification.
    Two: a U.S. action plan is needed to complement the FSAP 
implementation.
    The US-EU financial markets dialogue is working. We need to 
build on what is now in place. We commend the Treasury 
Department for opening a specific dialogue on financial 
services issues. The US-EU relationship provides the U.S. 
securities industry and its clients with tremendous 
opportunities. The EU offers U.S. investors alternative 
investment options for portfolio diversification. For example, 
U.S. investors own more than $1.3 trillion in foreign stocks, 
of which over $700 billion or 53 percent are EU shares. U.S. 
holdings of EU bonds total more than $227 billion, or 45 
percent of total foreign bond holdings.
    The EU also offers U.S. companies an alternative pool of 
capital for raising debt and equity. Last year alone, U.S. 
companies raised $164 billion in debt and almost $7 billion in 
equity in the EU.
    Looking forward, we suggest a coordinated U.S. interagency 
effort, or otherwise known as a U.S. action plan to fully and 
effectively engage EU governments and regulators at all levels 
about the need for open and competitive markets. Our action 
plan includes, one, the establishment of a Brussels attache; 
two, increased Treasury coordination with the State Department; 
three, further U.S. Congress-EU Parliament contacts; and four, 
coordinated SEC-CESR focus on regulatory conversions.
    First, we strongly believe that the U.S. Treasury 
Department should place a financial attache in Brussels. Such a 
post would advocate U.S. industry interests and support the 
dialogue. In this regard, we support additional funding to 
bolster Treasury's ability to advocate U.S. interests in the 
global marketplace. The expected pace of change in the EU 
financial market over the next years justifies this type of 
focused presence at the center of the newly expanded EU.
    Second, Treasury clearly has the leadership role in the 
dialogue. We believe, however, the U.S. State Department 
through its embassies and consulates in all 25 member states 
can enhance and support Treasury's efforts. This activity is 
essential because individual EU member states can and often do 
play a pivotal role in key EU legislative decisions.
    Third, we firmly endorse the further development of greater 
understanding and closer relationships between key financial 
services legislators in the U.S. Congress and the European 
Parliament. We believe these efforts should encourage 
constructive discussion of existing extraterritorial issues 
such as Sarbanes-Oxley and the EU's financial conglomerates 
directive; facilitate and encourage mutual prior consultation 
on legislation with potential extraterritorial effects to help 
prevent future conflicts; and identify common future 
legislative goals and common solutions wherever possible.
    Finally, we welcome the new SEC-CESR effort for cooperation 
and collaboration. SIA's support of this regulatory dialogue is 
consistent with the industry's goal to minimize regulatory 
differences and improve the efficiency of the trans-Atlantic 
markets through regulatory convergence. To this end, SIA has 
proposed a number of issues that could be resolved in the near 
term to mutually benefit the marketplace. The areas in which we 
have suggested that the SEC and CESR study convergence are, 
one, public offering documents beginning with nonfinancial 
disclosure; two, broker-dealer registration requirements; 
three, rules relating to credit rating agencies; four, 
international anti-money laundering standards that not only 
promote uniformity and cooperation and efficacy, but also 
allows for reliance on financial intermediaries across borders; 
and five, corporate governance standards.
    Lastly, the U.S. securities industry still has significant 
concerns about the implementation of the EU's financial 
conglomerates directive. We urge the subcommittee to monitor 
the situation carefully.
    The U.S. securities industry plays a vital role in the EU 
capital markets and is fully committee to the integration of 
those markets. We look forward to working with the EU, the 
administration and this subcommittee in achieving a European 
capital market that is transparent, open and efficient.
    Thank you. Madam Chair, please allow me one personal 
comment. I also want to take this opportunity to thank the 
members of the committee on the fine work that you have done on 
the Basel II capital accords. The public discussion of these 
issues in both the House and the Senate has had a tangible 
impact that has moved the Basel Committee to a place where a 
large portion of the overwhelming problems we faced 18 months 
ago have been resolved. The House Financial Services Committee 
was the first to publicly discuss those issues. My firm and the 
industry are appreciative of your efforts.
    [The prepared statement of Richard Thornburgh can be found 
on page 57 in the appendix.]
    Chairwoman Biggert. Thank you very much. That is nice to 
hear.
    Our next witness is Mr. Oldshue.

 STATEMENT OF PAUL OLDSHUE, IMMEDIATE PAST PRESIDENT, BANKERS' 
               ASSOCIATION FOR FINANCE AND TRADE

    Mr. Oldshue. Chairman Biggert, Ranking Member Maloney and 
members of the committee, I am pleased to be with you today to 
discuss the banking industry's views regarding the financial 
markets dialogue between the United States and the European 
Union. Regulation of financial products and services imposes 
additional costs on financial firms and affects their 
customers' cost of capital.
    Unnecessary regulatory conflict, inconsistency and 
duplication can only add to those costs, and those of us in the 
financial services business strongly support the efforts of 
U.S. and EU officials to limit regulatory dysfunction. We are 
grateful for this hearing and for the full committee's earlier 
hearing on May 13 to examine this important subject.
    I am testifying today as the immediate past president of 
BAFT, the Bankers' Association for Finance and Trade. BAFT is 
an affiliate of the American Bankers Association and its 
membership includes most of the major American banks that are 
active in international banking, and also many of the major 
international banks chartered outside of the United States.
    My employer, U.S. Bancorp is the seventh-largest financial 
services holding company in the United States. Our principal 
bank subsidiary, U.S. Bank, operates in 24 states throughout 
the Midwest and West. We maintain correspondent relationships 
with more than 2,000 banks in 125 countries.
    The United States and the European Union have a close 
economic relationship, and close cooperation should be good for 
both of us. There is no doubt that the US-EU financial markets 
dialogue has been a constructive exercise and that it has 
accomplished a great deal simply by establishing new lines of 
communication. Moreover, since the dialogue began in March 
2002, discussions between U.S. government and EU officials have 
contributed to resolution of a number of important issues 
arising in the context of the EU's financial services action 
plan.
    We think that this is a good start. We believe that the 
value of the dialogue will increase as it continues and as 
relationships deepen and issues are added. But more can be 
done, and we think the dialogue can be improved in several 
respects.
    We feel that the dialogue should be more transparent. It 
would be a big improvement if U.S. participants made a greater 
effort to consult with U.S. banks, securities firms and other 
financial firms early in the process and on an ongoing basis. 
This would give us a chance to provide our views as to what 
should be on the agenda and what the priorities should be, in 
our view.
    We also think that participation in the dialogue should be 
broadened. The dialogue should include financial regulators and 
also members of Congress and staff, particularly those who are 
on this committee. We think much could be gained if the members 
of Congress and their staffs engaged in a continuing dialogue 
with appropriate officials in the EU, again with input from the 
private sector.
    We would also like to recommend that the U.S. Treasury 
Department consider putting more of its people on the ground in 
Europe. In my experience, there is nothing like local knowledge 
in order to anticipate, understand and react to new 
developments in particular markets. Treasury should seriously 
consider adding staff in various locations in Europe, 
particularly in Brussels.
    I would like to mention several specific issues that 
concern the banking industry that are or should be on the 
dialogue's agenda.
    They include implementation of Basel II. Bankers are 
concerned that there could be significant differences in the 
application of Basel II from country to country, and that these 
differences could impede banking across national borders. To 
address our concerns, we recommend that the US-EU financial 
markets dialogue include a discussion of how to coordinate the 
application of the new capital standards.
    We are also concerned about convergence between the U.S. 
GAAP and international accounting standards. In this respect, 
we recommend that the dialogue focus on three particular areas: 
first, lack of transparency in the IASB's rulemaking process; 
secondly, the potential shortcomings of principles-based 
accounting, which can become inconsistent if the principles are 
interpreted differently by those who apply them; and last, 
weighing the costs and benefits of convergence of existing 
accounting rules.
    Another issue that merits attention is privacy and data 
protection. Specifically, we are concerned about the potential 
impact on U.S. banks and other financial institutions arising 
out of the European Union's directive on data protection. A 
stand-still agreement between the EU and the United States 
expired on July 1, 2001, leaving U.S. banks and other financial 
firms vulnerable to action by government authorities in the EU 
countries. EU restrictions on information-sharing across 
corporate affiliates would affect U.S. financial firms more 
than their European counterparts because financial 
organizations in the United States tend to have more separately 
incorporated entities than the European universal bank model. 
We are eager for the EU to acknowledge that the Gramm-Leach-
Bliley Act and other financial privacy laws such as the 
recently enacted Fair and Accurate Credit Transactions Act 
provide adequate privacy protection for personal financial 
information.
    In conclusion, we strongly support the US-EU financial 
markets dialogue, but also believe it can be improved in 
various respects. We also have specific issues that we would 
like the dialogue to address. We are very encouraged by the 
progress that has been made so far, and enthusiastic about the 
potential that the future holds.
    Thank you very much for holding this important hearing and 
allowing us to participate and provide our input. Thanks.
    [The prepared statement of Paul Oldshue can be found on 
page 28 in the appendix.]
    Chairwoman Biggert. Thank you very much.
    Professor Scott, you are recognized for 5 minutes.

 STATEMENT OF HAL SCOTT, PROFESSOR OF INTERNATIONAL FINANCIAL 
                  SYSTEMS, HARVARD LAW SCHOOL

    Mr. Scott. Distinguished members of the committee, thank 
you for permitting me to testify today on matters relating to 
the informal US-EU financial markets regulatory dialogue. I 
will be reading from a statement prepared by myself and Kenneth 
Dam.
    Let me summarize our views. While the dialogue has made a 
significant contribution to better relations with the EU, it 
has failed to resolve the most important issue confronting the 
two markets: whether or not the U.S., like the EU, will accept 
international accounting standards. We also believe the 
dialogue should be more proactive in removing obstacles to the 
development of what we call an efficient trans-Atlantic market 
in financial services. Its work should not be limited to 
firefighting.
    Finally, we believe that the dialogue needs to include 
additional government participants and to become more 
transparent. The most successful result of the dialogue has 
been to temper the application of Sarbanes-Oxley to foreign 
firms, some of which had great difficulty in simultaneously 
complying with the new Act and their own laws. The SEC sought 
to accommodate these firms by adopting a flexible approach to 
the Act's requirements.
    The dialogue had no formal role in this regulatory process. 
However, we believe the presence of the Treasury's broad 
perspective on US-EU relations and its deep concern with the 
health and efficiency of capital markets may have contributed 
to the willingness of the SEC to react sympathetically to EU 
concerns. In this sense, the dialogue is as much an internal 
process among U.S. regulators as it is an external process with 
the EU.
    The most noteworthy shortcoming of the dialogue is its 
failure to resolve a potential crisis that may be precipitated 
by the EU's anticipated adoption of international accounting 
standards in 2005. Currently under SEC regulations, foreign 
firms may only issue securities or have their securities traded 
in the U.S. public markets if such firms either state their 
accounts in or reconcile their accounts to U.S. GAAP.
    Absent a change in SEC policy, EU firms which state their 
accounts in IAS will be unable to access the U.S. public 
market. This could lead the EU to take the position that U.S. 
firms could no longer use U.S. GAAP in the EU market. This 
could have a severe effect on U.S. firms issuing capital abroad 
and further increase the segmentation between the U.S. and EU 
markets. This is an important issue that must be resolved.
    We believe the dialogue should be broadened beyond solving 
particular problems, to embracing the positive agenda of 
creating a single trans-Atlantic market in financial services. 
The goal of this effort would be to remove barriers to cross-
border transactions, particularly in capital markets where 
significant barriers remain. The EU is now in the process 
itself of adopting a common prospectus and a common approach to 
continuous disclosure through the implementation of two new 
directives. Further, it has created a new body, the Committee 
of European Securities Regulators, CESR, to facilitate these 
efforts. The SEC should start working with CESR to harmonize 
disclosure rules so that the two sides could develop a common 
trans-Atlantic prospectus and ongoing disclosure rules.
    There is also much to be done in creating common 
distribution rules and a coordinated approach to market 
structure. Finally, there is also a need for further thinking 
on ways to resolve enforcement differences between the two 
sides of the Atlantic. A joint SEC-CESR committee could also 
work on these matters.
    In our view, an effective trans-Atlantic market in 
financial services would be best achieved through common 
regulatory rules and enforcement throughout the U.S. and EU. We 
do not believe the equivalence alternative offered by the EU is 
workable for rules pertaining to the offering of securities. 
The equivalence approach would require the U.S. to allow EU 
firms to offer securities in the U.S. under EU rules, which 
include the rules of various member states as well as the EU's 
own rules. This home country approach for securities offerings 
has not even worked within the EU, and is in the process of 
being replaced by harmonized rules in the form of the common 
prospectus.
    We conclude with a few thoughts on process. The U.S. and EU 
should consider including the Commodities Futures Trading 
Commission, CFTC, and state insurance commissioners on the U.S. 
side. The EU also needs to have some member state 
representation. While EU financial regulation is significant, 
many important areas, like enforcement, are still left entirely 
to member states. We should also consider whether this should 
be a US-EU dialogue or a U.S.-Europe dialogue. If it is the 
latter, states like Switzerland and even Russia may need to be 
included in some fashion.
    Thank you very much.
    [The prepared statement of Hal Scott can be found on page 
45 in the appendix.]
    Chairwoman Biggert. Thank you very much.
    We will now proceed to questions. I will begin.
    The first question that I would like to ask is, Mr. Oldshue 
and maybe the other witnesses would like to give some answers 
on this also. Mr. Oldshue, I think that you present good 
arguments for increased transparency and participation among 
policymakers in Europe. However, I understand that a great deal 
of informal consultation and information exchanges already 
occur between members of the private sector and participants in 
the US-EU regulatory dialogue. Are you suggesting that a more 
formal structure is needed for these consultations?
    Mr. Oldshue. I do not know that a more formal structure is 
needed. There have been conversations. There has been dialogue. 
I think from our perspective it has taken too much work to stay 
informed about the process. So an encouragement of continued 
openness and transparency and open dialogue and proactive 
dialogue in anticipation of problems is really what we are 
suggesting here.
    Chairwoman Biggert. Concerning the transparency, what is 
the likelihood of the EU developing what we have here with the 
public comment period and publishing in the Federal Register? 
How important is the difference in taking public comment?
    Mr. Oldshue. I think we are really not looking for there to 
be an identical process to what we have here. I think what we 
are looking for is an encouragement from your chair and from 
comparable chairs in Europe of an openness in dialogue in 
conversation on these points.
    Chairwoman Biggert. I think you indicated that the US-EU 
regulatory dialogue should squarely address the privacy issues 
regarding the sharing of personal information within affiliates 
in Europe, especially after the passage of the FACT Act here.
    Mr. Oldshue. Right.
    Chairwoman Biggert. What reaction have you received from 
the U.S. and European regulators?
    Mr. Oldshue. This is a fairly thorny issue. It really boils 
down to very different philosophies on how our financial 
organizations are structured and set up. We tend to conduct 
financial activities through separate and distinct subsidiaries 
of our holding companies that under U.S. law have restrictions 
on how they can share financial information from one to the 
other. European banks tend to be universal banks with 
everything under the same umbrella. The sharing of information 
is not similarly restricted or discouraged.
    The difficulty a U.S. firm has in competing in that 
environment is that clearly as you are marketing financial 
products, it is a significant impediment to not be able to use 
information gathered in one part of the firm to market your 
products in another. This is not an issue that has an easy 
solution. I think from a regulatory perspective, it is going to 
boil down to allowing U.S. firms to share information across 
corporate entities so that they function in the same way as a 
European bank within its own corporate structure.
    Chairwoman Biggert. Professor Scott, would you have 
anything to add to that?
    Mr. Scott. I do not see the need to make the dialogue more 
formal than it is. But I think that we need to know more about 
what it is doing. I think that, as Paul has said, and it is my 
understanding that the U.S. participants widely consult the 
private sector before determining their positions, and that is 
good. I do not think that needs to be formalized, but I do 
think that it would be useful to have some regular reports, at 
least to the Congress, about what is going on in this dialogue. 
There is no formal process for reporting results, basic 
information, what are the issues on the table, what progress 
have we reached with respect to these issues. I think that that 
kind of transparency would be good to have, that kind of 
enhanced transparency.
    Chairwoman Biggert. Thank you.
    Mr. Thornburgh?
    Mr. Thornburgh. I guess there are really two parts of 
Paul's recommendation. I think one is that our own regulatory 
agencies and administrative agencies should reach out to our 
collective industry to seek input, as opposed to us trying to 
find the shadows in the closet. The second is the Lamfalussy 
process, which I think has made some good progress in Europe 
once it was put in place, which does call for more 
consultation. I think the UK regulatory law-setting process 
also has a very good consultation process which is equivalent 
to the U.S. But I think we would encourage our own agencies to 
seek out our input and we would complement the Lamfalussy 
process.
    Chairwoman Biggert. Okay, thank you. My time has expired.
    The Ranking Member, Mrs. Maloney from New York, is 
recognized for 5 minutes.
    Mrs. Maloney. Thank you.
    I believe it was Richard Thornburgh who said in his opening 
statement that Brussels and London are important financial 
centers. I would like to add that we want to keep the United 
States as an important financial center. I am concerned about 
any rules, regulations, accords that in any way limit the 
ability for American business to compete and win in the world 
economy.
    I am proud to have authored a bill that required Basel II 
to come back to the Congress for approval. It did not pass. It 
probably will not pass, but it got everybody's attention. We 
had several hearings on this important accord that is going 
forward. Some members that have testified before us believe 
that it will apply not just to our large international banks, 
but once you start a standard it starts applying to everyone. 
There is some concern from some of our financial institutions 
and businesses that the capital requirements will be stronger 
and harder on America than it will internationally.
    Also, our regulators are very tough and they are very 
experienced and they are very good. Usually, it is a crook, 
when you have these scandals, it is someone who is just not 
following the regulations; it was an enforcement issue more 
than a regulation. So my point is, I am very concerned about 
Basel II. I think our regulators will enforce it. I am not so 
sure that Europeans and other countries will enforce it. We are 
going to be having a hearing, I think it is next week, on Basel 
II? Or is it Tuesday on Basel II? I hope that the leadership, 
the majority party, will invite the two gentlemen who made 
strong statements about their concerns to come back and testify 
at that hearing, too, so we can get their input.
    I just would like to hear the comments from the industry 
representatives on Basel II and your concerns. Do you think it 
is fair? Do you think the capital requirements are going to be 
tougher on American firms? Your comments on that. The 
enforcement issue, it will be enforced on Americans. Will it be 
enforced in Europe. And also, I think your comments are very 
well taken that we need professionals in Brussels, in London, 
in the EU, really advancing and being part of the discussion so 
that we are in on the ground.
    Thank you for your testimony and what you do for the 
country. On Basel II?
    Mr. Thornburgh. If I may make three comments, I think the 
first comment is it is very important that the FSA representing 
the European Community recognize the SEC as an equivalent 
regulator. I think the SEC's CSE proposal, which is put out for 
comment, clearly establishes an equivalent regulator and we 
have to keep our eyes on the fact that the FSA needs to make 
that determination this month in order for our firms to be able 
to comply with the capital directive.
    Two is our concern would be on the whole area of 
operational risk. It has yet to be implemented. The allocation 
of operational risk among countries and subsidiaries will be a 
very tricky issue. That then leads to the whole home host issue 
in making sure that there is appropriate guidance so that the 
home regulator would have predominance over the host regulator.
    I think, Paul, you have some more specific comments?
    Mr. Oldshue. I would share your concern, Congresswoman, 
about the difficulties ensuring that the regulation is even and 
fair and consistent across borders. We do have capital 
standards in the U.S. that in many cases are more stringent 
than would be called for under Basel II. As Basel regulations 
are applied and regulated across borders, there is a risk that 
the standards could be different from country to country and 
bank to bank, and put our institutions at a competitive 
disadvantage.
    We have recommended that the principle of lead supervision 
by a home country regulator be an objective. It would require 
that we defer to home country regulators, but I think it is a 
way of ensuring that information is shared across borders, that 
there is dialogue between the regulators, that we make every 
effort possible so possible that the regulations are the same 
and are applied consistently. This is the key issue from our 
perspective.
    Mrs. Maloney. I have asked this question at several 
hearings, and I have never gotten an answer that answers what I 
am really concerned about. Who is really looking out for 
American interests? In a sense, I do not think you really 
understand unless you have done the job yourself, no matter how 
good a regulator is. They do not know what it is like to be a 
major institution that is supplying capital in this country and 
across the world. Who is there to make sure that our interests 
are taken care of and that what you two are saying actually 
happens? Because the people there are not the real people in 
the field that understand what it is really like. Do you 
understand what I am saying?
    Mr. Oldshue. Exactly. The Federal Reserve is the point 
agency.
    Mrs. Maloney. I know who is the point agency, but I think 
that they do not have the experience that someone like yourself 
has.
    Mr. Oldshue. I think it is an issue. Our concern is that 
there be constructive and continuing and regular contact on 
these points. I think there is dialogue going on. Our concern 
is not so much that the Federal Reserve does not have an 
understanding of what our concerns are. Are concerns are really 
across borders and making sure that the things they do not 
really have direct control over are negotiated and implemented 
so that the various governments in the EU and other parts of 
the world are applying standards in the same kind of way.
    I think they understand. It is a very thorny political 
issue.
    Mrs. Maloney. But how do we make sure that that happens?
    Mr. Oldshue. I think it is cheerleading from your chair; it 
is an awareness that it is a significant issue. It is an 
awareness that as difficulties arise in implementing----
    Mrs. Maloney. How do you structurally work it into the 
format of the whole program?
    Mr. Oldshue. I think it ends up needing to be an agreement 
between the regulatory authorities in the major financial 
markets. I do not know that you can legislate it.
    Chairwoman Biggert. The gentlelady's time has expired.
    The gentleman from Florida, Mr. Feeney, is recognized for 5 
minutes.
    Mr. Feeney. Thank you, Madam Chair. I appreciate the 
testimony from the witnesses.
    Mr. Scott, this is a hearing primarily about U.S. and 
European Union financial regulatory issues. You mentioned 
Switzerland and Russia for example as being European countries 
that are not currently part of the EU. Can you give us some 
perspective about our relationship with the EU and trying to 
break down some of the regulatory burdens and hurdles in terms 
of the global capitalization markets. Can you talk to us a 
little bit, even though this is a hearing about the EU 
relationships, about the Far East, for example, and the Mideast 
and other places where we have a significant amount and growing 
percentage of our commercial market interchange.
    Mr. Scott. You have a number of questions there. Let me 
start with the last one. Actually, I just got back from a 
symposium that I helped organize with Chinese counterparts on 
U.S.-Chinese financial relations. It is a major place in Asia, 
and I have done similar symposiums with Japan.
    Interestingly, this term ``dialogue'' and ``financial 
markets dialogue'' has gotten over to China. This committee may 
be aware that the Secretary of Treasury has appointed a special 
emissary, I think unprecedented, to China, Ambassador Speltz, 
who also represents us with the Asian Development Bank. He is 
engaged in a financial markets dialogue with Chinese 
counterparts on solving specific issues in China.
    So I think, while we are focused here on the US-EU, the 
Congressman is quite right to point attention to the importance 
of the Far East, China and Japan in particular. I think that 
the Treasury has been taking a productive lead in trying to 
resolve issues in those areas in which there are a number.
    In terms of the question of the EU and Europe, the EU 
itself, Switzerland is obviously a major factor in Europe, as 
Mr. Thornburgh can readily attest.
    Mr. Feeny. Especially when it comes to markets and 
transparency, right?
    Mr. Scott. Yet, Switzerland is not part of the EU. The EU 
itself has had a number of outstanding issues with Switzerland, 
trying to resolve issues between them. Switzerland is an 
important part of the world's capital markets, an important 
part of the banking system, particularly in private banking.
    So I think it would at least be worthwhile thinking about 
whether some kind of inclusion of the non-EU countries like 
Switzerland and Russia, which is going to be and is becoming a 
factor in world capital markets, need to be folded into this. 
Now, of course, then that raises the issue as to why are we 
doing this on a regional basis at all; why isn't this a 
worldwide effort; why US-EU; why not, U.S.-world.
    I think that in the end, that is what we will try to 
achieve. But each region has its set of special issues. So I 
actually think that this kind of regional approach makes a lot 
of sense, but all the participants have to keep their eye on 
the bigger picture, which is the world capital market, and I 
believe they do. I think the people that we have participating 
from the U.S. side clearly are not just knowledgeable about 
Europe, because the Federal Reserve Board and the Treasury and 
the SEC are also concerned about the rest of the areas of the 
world.
    Mr. Feeny. Thank you.
    Another thing that you said that really interested me is 
that you suggested or implied there were some problems with 
what you called the ``equivalence'' approach where we sort of 
just acknowledge a home country's rules and regulations. But it 
seems to me, particularly a professor at the University of 
Chicago Law School, may see some advantages to having 
regulators compete. Maybe you can touch on how we get the best 
of both worlds so we have standards, but we also are not 
adopting the most onerous and rigorous and anti-competitive 
standards available. Because often that is the way we descend 
as governments and regulators.
    Mr. Scott. I should point out that I am the Harvard part of 
this team.
    [Laughter.]
    But lest you despair, I went to the University of Chicago 
Law School.
    Mr. Feeny. Very good.
    Mr. Scott. So I think Ken Dam and myself would share a 
common perspective, also being part of the Shadow Financial 
Regulatory Committee at the AEI. We are not generally in favor 
of more and more regulation and think markets should have the 
major role in determining what financial institutions do. That 
being said, I believe that in the area of securities offerings 
that this idea of regulatory competition is kind of 
theoretically attractive, but it just does not work.
    Most financial firms would tell you that they would like 
common rules across all borders to do business. It is highly 
efficient. The question then becomes, well, if we have 
harmonized rules, where is the competition? How does the system 
change? I believe that there are always going to be ideas in 
competition. You do not need regulation in competition. As long 
as ideas are in competition, regulations can be changed.
    Both sides of the Atlantic can continue to make very good 
suggestions about how those harmonized rules should evolve, but 
I think that the efficiency of our trans-Atlantic securities 
markets would be greatly aided by a common set of rules.
    Chairwoman Biggert. Thank you.
    The gentleman from Alabama, Mr. Bachus, is recognized for 5 
minutes.
    Mr. Bachus. I thank the Chair.
    Mr. Thornburgh, you have expressed a desire for a 
structured program of interaction between U.S. congressional 
members and their staffs, and their EU counterparts. What 
particular benefit do you think that type of exchange would 
provide that the current exchange of information does not?
    Mr. Thornburgh. The benefit that that kind of exchange 
acknowledges or allows for is a better understanding of why 
certain rules and regulations are being proposed, so that the 
rhetoric can be removed when people get caught off-guard. We 
clearly made some great compromises on Sarbanes-Oxley and the 
PCAOB, but if we would have had better discussions before those 
items came to the forefront, they could have been resolved with 
a lot less emotion and heat in the media and the press and in 
the marketplace, which I think can create some inefficiencies 
in competition and in markets.
    Mr. Bachus. Would you explain in detail your suggestion, I 
think you made a request for the placement of a Treasury 
financial attache in Brussels. How would that benefit the 
financial services industry here in the United States?
    Mr. Thornburgh. Thank you for the opportunity to address 
that question. I take this really from the perspective of the 
role that I have played. I moved to Switzerland in the late 
1990s to become the CFO of a European company. My predecessor 
had lived in London and commuted between London and Zurich to 
perform that function. What I learned from my personal 
experiences is to be an effective participant in shaping public 
policy and having an impact, one needs to live in the 
community. I think that the sign that the U.S. would make by 
moving the attache from Frankfurt to Brussels would acknowledge 
that Brussels is the heart of the EU legislative community. By 
having that permanent presence there, it shows a commitment and 
involvement in the community.
    More importantly, it supports U.S. industry, not just the 
financial services sector, but U.S. industry. I think that 
ability to be around for the informal conversations which you 
all recognize much better than I do, would have a major impact 
in furthering the agenda for our economy and our companies.
    Mr. Bachus. Okay. You proposed in your statement a U.S. 
action plan. Would you explain why that is important and how we 
would formulate such a plan, what the mechanism would be for 
coming up with a plan?
    Mr. Thornburgh. The action plan really has four components. 
I think the first, as we have just talked about, is the 
Brussels attache. The second, which we have not really talked 
about, is Treasury coordination with the State Department. 
There are 25 EU member states and the new member states will 
have a major impact on how votes and decisions are made in the 
EU community. We have found out in the past in the financial 
services directive that although rules and regulations were 
proposed to the Parliament, they were voted down by a number of 
member states's ministries of finance.
    So I think that ability to use the diplomatic corps to help 
us watch out for ourselves is a good attribute and addition to 
the treasury's coordination. We have talked about Congress and 
Parliament, and of course the last component is getting more 
communication, dialogue and action out of the SEC and CESR, 
which the professor I think has adequately addressed.
    I would add, though, to the question from the Congressman 
from Florida, that I think accounting equivalency is important. 
We may not need equivalency in laws and maybe that is the wrong 
way to go, but I think accounting equivalency is extremely 
important to attracting foreign issuers to our markets.
    Mr. Bachus. Okay. What were some of the lessons learned 
from the ISD debate on market structure? There were some 
problems there that the private sector had. How do you think 
that could be resolved more successfully with this United 
States-EU dialogue?
    Mr. Thornburgh. Actually, the excellent lesson there was in 
fact that there was a group of southern core states of the 
European Union which took a different position from the more 
developed capital market states of the UK and Germany. What we 
found there is had we been using the State Department to be 
working on some of these issues, better progress would have 
been made, especially as it related to some protectionist 
aspects of the proposal, which really preserved the local stock 
exchanges in the southern states as opposed to helping create a 
more global European stock exchange or marketplace.
    Mr. Bachus. Okay. I see my time is up. I thank you.
    Chairwoman Biggert. Thank you very much. We will start 
another round. Just briefly, I assume, Mr. Thornburgh, that the 
EU has assigned someone to our capital, an attache?
    Mr. Thornburgh. Yes.
    Chairwoman Biggert. Thank you.
    Professor Scott, do you believe that financial regulators 
in the U.S. and Europe currently have the legal authority to 
undertake the sharing of information and responsibility 
suggested not only by your testimony today, but also by some of 
the government witnesses at last month's committee hearing on 
the issue.
    Mr. Scott. I think that most of the measures that I am 
focused on have to do with capital markets. The question would 
then be whether the SEC, which is our primary regulator, would 
have the legal authority to enter into agreements.
    Chairwoman Biggert. It seems like each of the regulators's 
authority is based on laws enacted by their physical 
jurisdiction. So can they delegate or converge standards 
without seeking additional authority from the legislatures of 
the various countries?
    Mr. Scott. Your focus is on the EU side as opposed to our 
side?
    Chairwoman Biggert. Really on our side, too.
    Mr. Scott. I have not looked into this in any detail, so I 
preface my remarks with that, but I would think that the SEC 
could not basically enter into any agreements, changing our 
basic approach to securities regulation, which might be 
required in an effort to harmonize the rules on both sides of 
the Atlantic, without authority from Congress.
    So in that sense, the SEC could certainly entertain 
discussions, but at the end of the day if our securities 
regulations were to change in some ways that were different 
from what we currently have in our laws, there would be a need 
for additional congressional authority.
    On the EU side, it is complicated by the fact that there is 
a split of authority between the EU and the member states with 
respect to a number of issues. I think I have already 
testified, for example, that enforcement is left almost 
entirely to member states in the EU. So the EU cannot really 
negotiate about enforcement without making some changes in the 
EU with respect to their authority to, at the European level, 
deal with enforcement. As I am sure you can appreciate, 
enforcement is what this is all about at the end of the day. We 
have already discussed that issue with respect to Basel. The 
same will be true with respect to securities regulation.
    So I do not think that the EU is particularly well set up 
today to implement as opposed to discussing agreements that 
might be reached between the U.S. and EU. So some changes in 
legislative authority would be required on their side as well.
    Chairwoman Biggert. Okay, thank you.
    In today's testimony, we have heard recommendations that 
the US-EU regulatory dialogue be expanded to include the CFTC 
and members of Congress and the private sector. Would such an 
expansion make such a forum unwieldy and unable to reach 
decisions, if it gets too big?
    Mr. Scott. At the risk of being unpopular here, I do not 
think I was advocating that the Congress participate.
    [Laughter.]
    Chairwoman Biggert. Okay. That is all right. We have enough 
work to do already.
    Mr. Scott. I certainly think that the Congress should be 
kept fully informed and there should be regular reporting to 
the Congress, but I find it hard to envision how the Congress 
could actively be involved in these discussions in meetings. I 
just do not think that is particularly workable, but I think 
that the Congress needs to be fully informed.
    I think it is very important that the insurance sector in 
particular, which is not represented here on this panel, get 
some inclusion in this process because I think that there are 
beginning to be a number of EU initiatives in the insurance 
sector which are already affecting U.S. insurance firms, and 
yet insurance regulators do not have any standing. As you know, 
this is a matter of state regulation, but I think we could try 
to find some ways, either through the trade associations or 
supervisors association of the insurance regulators, to get 
some representation on insurance. So I think that would be a 
very important expansion.
    CFTC, I think, it also seems to me that they should be 
included. They are on the President's Working Group on 
Financial Markets, which is our internal attempt to coordinate 
regulatory activity. That being the case, I see no reason why 
they should be omitted from the informal dialogue with the EU.
    Chairwoman Biggert. Okay, thank you.
    Mr. Thornburgh, I believe in your testimony that you seek 
convergence across the Atlantic regarding anti-money laundering 
strategies, and that the trans-Atlantic business dialogue of 
which you are a member is making a similar recommendation. 
Could you provide us with a better sense of what kind of 
convergence you are recommending and how it could be achieved?
    Mr. Thornburgh. When we talk about convergence, I think we 
are talking about common rules and reporting requirements of 
those people who act as financial intermediaries. One of the 
complications, I understand, in the current setup is the 
inability to rely on a financial intermediary in another 
country to make a representation.
    For example, at Credit Suisse First Boston we have to deal 
with the Swiss money laundering rules, the EU money laundering 
rules, and the PATRIOT Act. We deal with a client across 
borders so we may deal with a hedge fund based in Bermuda who 
wants to do a transaction with us in Switzerland; wants to do a 
transaction with us in the UK; and do a similar transaction 
with us in the U.S. There may be three legs of that 
transaction, so it is one transaction with three different 
booking centers.
    The ability to allow us to rely on our own representations 
to ourselves is very important. I know from personal experience 
in a project we had to do for the FSA in the UK, we spent 
roughly $50 million to adhere to some standards in the UK, and 
after we did it the FSA told us, you know, we know realize it 
is too expensive; we will not make any of your other 
competitors go through the same process.
    So we are all for the goal of catching the terrorists, 
catching the drug lords, but there should be some practical 
understanding of how institutional companies, dealing with 
institutions, might be able to ease up the rules to get to the 
same result. Hopefully, that is enlightening.
    Chairwoman Biggert. Thank you very much. My time has 
expired. The gentlewoman from New York, Ms. Maloney.
    Mrs. Maloney. Professor Scott, will you please send my 
regards to Larry Summers?
    Mr. Scott. I will do so.
    Mrs. Maloney. We miss him. Okay.
    You mentioned that the insurance industry in America may be 
affected somewhat by EU initiatives. Could you forward to the 
committee or speak about examples of certain initiatives that 
are impacting on the insurance business?
    Mr. Scott. Yes. The EU has taken a European-wide initiative 
about regulation of insurance companies in general, and 
particularly with respect to capital adequacy. This is both at 
the level of insurance firms, as well as reinsurance firms. The 
question looming on the horizon is similar to the one that is 
raised by the conglomerates directive, which is well, if they 
are requiring all these kinds of controls on their own 
insurance firms, under what conditions are they going to allow 
American insurance firms to come into the EU. Are they going to 
require that there be some kind of equivalent regulation of 
insurance firms by us?
    So I think those broad terms are the kind of issues that 
are going to be confronting the insurance industry in the near 
future, or are already confronting them.
    Mrs. Maloney. You mentioned how helpful you believe 
Secretary Snow's initiative of a special financial envoy to 
China is, which basically is the same idea of Mr. Thornburgh to 
have a special envoy in Brussels. Where else do you think we 
should have special envoys, ideally? We are in a world 
community and a world market, and the points that both of you 
raised are important.
    Mr. Scott. I actually think this China initiative goes 
beyond what Mr. Thornburgh is suggesting.
    Mrs. Maloney. He was just Brussels.
    Mr. Scott. But he is I think asking for a Treasury 
representative in the embassy in Brussels.
    Mrs. Maloney. Yes.
    Mr. Scott. I think what we have done in China goes a step 
beyond that. The Secretary of the Treasury himself has an 
emissary from the Treasury Department there, not part of the 
State Department's operation in China, to give a direct link 
between Mr. Speltz who is his emissary and the Secretary with 
respect to ongoing negotiations with China on loosening up 
capital controls or preparing for more flexible exchange rates 
and things like that. I think that that signifies the special 
importance that the Treasury attaches to ongoing issues with 
China at the moment.
    I think one could ask, what is more important in the big 
picture? Is Europe less important than China? Why should China 
have this kind of special status? I think that it is probably 
because China is in a more delicate stage. In our relationships 
with China, we are building a series of relationships there. We 
already have these relationships with the EU. I do not think I 
could recommend a proliferation of special emissaries.
    Mrs. Maloney. But you said a regional approach would be 
useful.
    Mr. Scott. Right. I would support Mr. Thornburgh's idea for 
representation in the Brussels embassy of a Treasury attache.
    Mr. Thornburgh. May I make a comment?
    Mrs. Maloney. Sure.
    Mr. Thornburgh. We did meet with Under Secretary of 
Treasury Taylor at the Treasury. What we found out is that 
there are two budgets. This is classic. There is a budget for 
the permanent representatives which have gone down from 230 
employees to 165, and then there is the budget for assistance 
slots which allow for special assistants in special countries, 
and that actually gets a little bit of the State Department 
foreign aid money. So what we may have is the classic problem 
of the pot going down on one side and going up on the other 
side, although it is still the same taxpayers's pool of dollars 
and perhaps we could be a little more efficient in how that 
money gets spent.
    Mrs. Maloney. You testified you felt that it was very 
important to the financial interests of America to have 
representations in Brussels and possibly other countries to be 
on the ground with the information. I am not going to suggest 
that.
    I want to really ask you about capital. You testified, Mr. 
Thornburgh, that we are thriving very much on foreigners buying 
American securities and investing in America. I am concerned, 
we just 2 weeks ago, maybe it was 3 weeks ago, raised the debt 
ceiling an additional $2 trillion. The deficit now is galloping 
towards $600 billion or $500 billion, the numbers are huge. At 
what point do you think foreigners may decide they do not want 
to invest in America because of the huge debt that we have? We 
have always been in a stronger financial position than foreign 
countries, but now they may be concerned about our mounting 
debt.
    Do you see that, any ramifications from that? Is that an 
issue or it is a non-issue? I am concerned about it for my 
grandchildren and my children, but I am also concerned about 
how far can we go in this direction before other countries may 
not want to invest in American securities and other 
investments. Are you hearing anything in your world community 
in which you interact with 35 countries every day, any concern 
about the growing debt of America for our financial strength?
    Mr. Thornburgh. That is a pretty loaded question. Luckily, 
I am not Alan Greenspan. I think the dollar will continue to be 
a reserve currency around the world. What we need to worry 
about, and the implication of your statement, which is a very 
serious question, is one about the cost of capital and about 
the value of the dollar. So the implications really come out to 
the strength of the dollar and what will the dollar buy 5 years 
from now versus what goods and services a dollar can buy today, 
and what will the cost of capital be for U.S. corporations and 
those corporations raising funds in dollars.
    So I think the concerns that we would hear about the 
deficit really speak to the value of the dollar and the level 
of interest rates. I do not personally worry about the dollar 
losing its reserve currency status, although we should 
acknowledge that the EU now is the second-largest economy in 
the world, and a lot of us 10 years ago did not think that 
countries would give up their local currency to exchange it for 
a common currency, and that of course has happened.
    Mrs. Maloney. Okay. My time has expired.
    Chairwoman Biggert. Thank you.
    Mr. Bachus?
    Mr. Bachus. Thank you.
    Mr. Oldshue, I appreciate your endorsing this idea of a 
Treasury attache office in Brussels to advocate U.S. interests, 
and it may be that Congress needs to fund such an office. I 
think Mr. Thornburgh mentioned maybe relocating the attaches 
office in Frankfurt, which should not cost additional funds.
    Let me ask this about the financial markets dialogue. There 
is a broad array of issues being discussed, but I ask all three 
of you gentlemen, are there other issues that ought to be 
included that are not? I will just start with Mr. Thornburgh 
and go down the line. Maybe also while you are answering that, 
any issues that should be included, what do you consider the 
most pressing issues?
    Mr. Thornburgh. I think for me the most pressing issue is 
making sure that the EU acknowledges U.S. GAAP as an equivalent 
accounting standard; two, that under the financial services 
conglomerate, that the SEC is acknowledged as an equivalent 
supervisor, because although Basel is not fully implemented 
until 2008, for capital regime purposes in the EU a new law 
comes into place in 2005, where equivalency of the home 
supervisor is very important. That impacts our U.S. securities 
firms doing business overseas.
    An added issue that we would add to the list on the 
dialogue would be issues around the European clearance and 
settlement system. I think there have been recent articles that 
acknowledge that the cost of setting a securities transaction 
in Europe is roughly 97 cents and cross-border 35 cents, 
whereas in the U.S. that is 10 cents. So I think there are some 
inefficiencies in the European rules and regulations around 
clearance and settlement that do impact the cost of investing 
in the EU.
    Mr. Bachus. Okay. Mr. Oldshue?
    Mr. Oldshue. I think I would reiterate the three issues 
that are our principal concerns. Certainly, the fair and 
consistent application of capital standards across foreign 
borders is one of three major issues for us. Secondly, and this 
goes beyond the financial industry, ensuring that convergence 
of accounting principles between Europe and the United States 
is managed in an intelligent, logical and useful way. Lastly, 
it is ensuring that the sometimes conflicting regulations 
governing the sharing of financial information, within our very 
different corporate structures in Europe and the U.S. are done 
in a way that is fair and consistent across borders. Those 
would be our three major issues.
    Mr. Bachus. Okay. Mr. Scott?
    Mr. Scott. I think the issue of GAAP equivalence, as Mr. 
Thornburgh mentioned, is very important, but recognize that 
this is a two-way street. Unless the U.S. allows foreign firms 
to come in here, especially European firms under IAS. It seems 
to me unlikely the Europeans are going to allow our firms in 
the future to go in there under U.S. GAAP. This is an issue 
that is right around the corner. It is coming up in 2005. As I 
have testified, I do not think that this point, and this is the 
most important issue between U.S. and Europe today, and it has 
not been resolved by this dialogue and needs to be resolved. I 
think anything Congress can do to help this get resolved would 
be a good idea.
    In terms of adding things to the process, my testimony has 
focused on the fact that we need to be more proactive and not 
just react against particular problems. I would set the 
dialogue's agenda to create a trans-Atlantic market in 
financial services. When you look at it in that respect, you 
are not just fighting problems. You are saying what needs to be 
done in order to make this happen.
    For instance, I think if you look at that as an objective, 
you start focusing on common rules for the distribution of 
securities on both sides of the border, which is not really an 
active point today in the dialogue. Accounting standards are, 
but beyond accounting standards, just general questions of what 
elements of disclosure must be made in a prospectus; how 
securities need to be distributed; how we enforce our rules 
with respect to distribution of securities.
    All these issues would come up if one had an objective of 
establishing a trans-Atlantic market in financial services.
    Mr. Bachus. Can I have one follow-up question? You have all 
mentioned accounting standards, international accounting 
standards. Within that is a single set of international 
accounting standards. That brings to mind the IASB 39, Italy, 
Spain, France, and Belgium have all objected to. I would be 
interested in hearing from you about their reported objections 
to IASB 39. I think that is right.
    Mr. Scott. We had quite a to-do when we were dealing with 
the same kind of issue in the U.S. In fact, many of our banks 
had problems with this. Indeed the Chairman of the Federal 
Reserve was not sure that he liked the idea of constantly 
marking the securities of financial institutions because it 
introduced volatility. So in a sense, it is no surprise that 
this same issue is being actively debated there.
    It may turn out that they do not accept IAS 39. I think if 
that occurs, that does not mean the end of IAS in the U.S., 
even though that would be a key missing part. I think what the 
U.S. could then do is say, okay, you can come in here under 
IAS, but you have to put in a 39 as well. That is, if we have 
some important differences between IAS and U.S. GAAP in 2005, I 
do not think we need to say, oh, we cannot have IAS. We can 
have IAS with some additions or some modifications. I think we 
need to start thinking in that direction.
    Mr. Bachus. Okay. Mr. Thornburgh, would you like to comment 
on the IASB 39 and some of the Europeans' objections to that?
    Mr. Thornburgh. Fortunately, Congressman Bachus, I might be 
viewed as the fool at Credit Suisse who moved Credit Suisse to 
U.S. GAAP. I started that project when I was the CFO in 1998. 
It took us until 2003 to actually be able to move from Swiss 
accounting standards to U.S. GAAP. It cost us over $150 million 
to do it. When we got there, we had to deal with FAS 133, which 
is the equivalent to IASB 39.
    I must say this is a quite problematic issue. It is very 
costly for firms to reconcile to a different accounting 
standard. It is very expensive to convert accounting standards, 
especially in the financial services industry. FAS 133 is 
actually more restrictive than IASB 39. We are, and I think 
most of us in the financial services industry today, dealing 
with the type of volatility issues that the Europeans are 
concerned about. But IAS 39 actually allows for more lenient 
accounting to take some of that volatility out. So I think it 
is a very serious issue. If there is too much of a gap between 
the two of them, we may not be able to achieve the professor's 
goals, which I think are the right goals.
    The last thing I would say is, then you go to Basel II. If 
you have a number of internationally active European banks 
using one accounting standard for treating derivatives, and 
U.S. banks using another accounting standard, we will have an 
unlevel playing field as it relates to the application of 
market risk capital under Basel II, and we will have an unlevel 
playing field as it relates to the ability of firms to compete 
around the globe. Frankly, I am not too sure the investors in 
securities really can tell you the difference between the two 
accounting standards and would make an investment decision 
based on the difference in the accounting standards.
    So anything that Congress could do to knock these two folks 
together to agree on acknowledging equivalency of accounting 
standards, it is hugely important to the capital markets.
    Mr. Bachus. If these objections block the adoption of a 
single set of accounting standards, how critical is that to 
impeding or blocking this trans-Atlantic market that we are 
talking about?
    Mr. Thornburgh. I think it is absolutely fundamental to the 
functioning of these markets. It is the underlying data and 
information on which financial markets depend. I do not think 
there could be anything more important to trans-Atlantic 
financial markets than common accounting rules.
    Mr. Oldshue. I concur. I think they do not necessarily have 
to be the same in every aspect, and there may well be costs of 
convergence that are not worth the trouble in some of its 
details, but I think the general theme here is entirely 
correct.
    Mr. Bachus. But a single set that may allow for some 
differences. Mr. Thornburgh, do you agree?
    Mr. Thornburgh. I think it is usually important to 
companies like GE Capital, Ford Motor Credit, General Motors 
Credit, banks, the agencies. If they have to reconcile or adapt 
to IAS to have access to the European pool of capital, that 
could be very restrictive because it will take a while to make 
that conversion which I talked about. In the interim period of 
time, our corporations will not have access to a huge pool of 
capital around the world.
    Mr. Bachus. All right. Thank you.
    Chairwoman Biggert. Thank you very much, Mr. Bachus, for 
those questions. I think we are just about out of questions, 
but I have just one quick question. That is, should the Office 
of the U.S. Trade Representative be involved in the US-EU 
regulatory dialogue? If not, why not? And if yes, why? I guess 
that would be the alternative.
    Professor Scott?
    Mr. Scott. I will take a stab. I think traditionally we 
have not put financial regulatory issues into the WTO. I think 
that the reason for this is a good one. Certainly, WTO has 
dealt with financial issues, insofar as they have been access 
issues, access to foreign markets. But with respect to 
regulation, it has been left out. There is a so-called 
prudential carve-out in fact, it is called a prudential carve-
out from WTO.
    I think this is a good idea that regulation be separate. I 
think financial issues are different from trade issues. 
Certainly, the agencies in the United States that have 
responsibility for this are different from the parts of the 
government that have responsibility for trade. So I think that 
it would not be good to try to fold this into WTO.
    WTO also has, as I know you are aware, a large panoply of 
processes, formal processes that take place with respect to 
resolving disputes, panels, issues. It is a very legalistic, 
kind of setup. Perhaps I should be in favor of that as a law 
professor, but I really am not for financial issues because I 
think financial issues tend to be not quite so legalistic; tend 
to deal with more general policy issues. So I think we have it 
right that the USTR should not be dealing with these kinds of 
issues.
    Chairwoman Biggert. Anyone else? Okay.
    Is there anything else that you think we left out that you 
would like to comment on?
    Mr. Oldshue. I do not think so. We really appreciate the 
opportunity to speak with you today. It has been good for us.
    Chairwoman Biggert. We really appreciate your being here. 
The expertise that you all have has been most, most helpful and 
I hope that you will be back again sometime. We really 
appreciate it.
    The Chair notes that some members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    With that, this hearing is adjourned.
    [Whereupon, at 11:23 a.m., the subcommittee was adjourned.]


                            A P P E N D I X



                             June 17, 2004


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