[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
                       AMERICA'S CAPITAL MARKETS:
                          MAINTAINING OUR LEAD
                          IN THE 21ST CENTURY

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                    CAPITAL MARKETS, INSURANCE, AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 26, 2006

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-87


                    U.S. GOVERNMENT PRINTING OFFICE
30-538                      WASHINGTON : 2006
_____________________________________________________________________________
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
RON PAUL, Texas                      JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              WM. LACY CLAY, Missouri
GARY G. MILLER, California           STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio              CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota           JOE BACA, California
TOM FEENEY, Florida                  JIM MATHESON, Utah
JEB HENSARLING, Texas                STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey            BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina   ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida            AL GREEN, Texas
RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania            MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico            DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin,
TOM PRICE, Georgia                    
MICHAEL G. FITZPATRICK,              BERNARD SANDERS, Vermont
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
JOHN CAMPBELL, California

                 Robert U. Foster, III, Staff Director
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 
                              Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair         PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio                DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware          GREGORY W. MEEKS, New York
PETER T. KING, New York              DENNIS MOORE, Kansas
FRANK D. LUCAS, Oklahoma             MICHAEL E. CAPUANO, Massachusetts
DONALD A. MANZULLO, Illinois         HAROLD E. FORD, Jr., Tennessee
EDWARD R. ROYCE, California          RUBEN HINOJOSA, Texas
SUE W. KELLY, New York               JOSEPH CROWLEY, New York
ROBERT W. NEY, Ohio                  STEVE ISRAEL, New York
VITO FOSSELLA, New York,             WM. LACY CLAY, Missouri
JUDY BIGGERT, Illinois               CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MARK R. KENNEDY, Minnesota           JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
J. GRESHAM BARRETT, South Carolina   BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
TOM FEENEY, Florida                  NYDIA M. VELAZQUEZ, New York
JIM GERLACH, Pennsylvania            MELVIN L. WATT, North Carolina
KATHERINE HARRIS, Florida            ARTUR DAVIS, Alabama
JEB HENSARLING, Texas                MELISSA L. BEAN, Illinois
RICK RENZI, Arizona                  DEBBIE WASSERMAN SCHULTZ, Florida
GEOFF DAVIS, Kentucky                BARNEY FRANK, Massachusetts
MICHAEL G. FITZPATRICK, 
    Pennsylvania
JOHN CAMPBELL, California
MICHAEL G. OXLEY, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 26, 2006...............................................     1
Appendix:
    April 26, 2006...............................................    53

                               WITNESSES
                       Wednesday, April 26, 2006

Carter, Marshall N., Chairman of the Board, NYSE Group, Inc......    12
Copland, James R., Director, Center for Legal Policy, The 
  Manhattan Institute............................................    42
Evans, Donald L., Chief Executive Officer, The Financial Services 
  Forum..........................................................    10
Franko, Lawrence G., Professor of Finance, University of 
  Massachusetts-Boston, College of Management....................    45
Gingrich, Hon. Newt, former Speaker, U.S. House of 
  Representatives................................................    14
Pinelli, Maria, Americas Strategic Growth Markets Leader, Ernst & 
  Young, LLP.....................................................    41

                                APPENDIX

Prepared statements:
    Baker, Hon. Richard H........................................    54
    Brown-Waite, Hon. Ginny......................................    58
    Hinojosa, Hon. Ruben.........................................    59
    Carter, Marshall N...........................................    61
    Copland, James R.............................................    77
    Evans, Donald L..............................................    90
    Franko, Lawrence G...........................................    98
    Gingrich, Hon. Newt..........................................   102
    Pinelli, Maria...............................................   130

              Additional Material Submitted for the Record

Feeney, Hon. Tom:
    The Sarbanes-Oxley Debacle--What We've Learned; How to Fix it   140
Hinojosa, Hon. Ruben:
    HESTEC Documents.............................................   277


                       AMERICA'S CAPITAL MARKETS:
                          MAINTAINING OUR LEAD
                          IN THE 21ST CENTURY

                              ----------                              


                       Wednesday, April 26, 2006

             U.S. House of Representatives,
        Subcommittee on Capital Markets, Insurance,
              and Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:10 a.m., in 
the Rayburn House Office Building, Hon. Richard H. Baker 
[chairman of the subcommittee] presiding.
    Present: Representatives Baker, Gillmor, Lucas, Kelly, 
Feeney, Hensarling, Fitzpatrick, Campbell, Kanjorski, Hooley, 
Meeks, Moore, Capuano, Hinojosa, Israel, McCarthy, Baca, Lynch, 
Miller of North Carolina, Scott, Velazquez, Watt, and Davis.
    Chairman Baker. We have the good fortune of having a 
distinguished panel with us this morning. I very much look 
forward to hearing their opinions on the issue of global 
competitiveness.
    The ability to have the world's most efficient capital 
markets is not an American birthright, but rather a position 
earned through hard work over the years. If the U.S. capital 
markets are to retain this distinction, there must be a 
continual recognition of the principles that enabled our 
historic success. Further, for those who regulate, and for 
those of us who legislate, these markets must necessarily 
undergo reform from time to time, to maintain this position of 
primacy, or we stand to inherit consequences of our own 
inaction.
    Over the last 5 years, both legislators and regulators have 
spent a great deal of effort in responding to the identified 
crises and the consequential erosion of investor confidence. 
Enron, WorldCom, Global Crossing, and Tyco--all of those 
related matters--caused the Congress to act as a result of the 
dotcom bubble bursting.
    It also brought home the reality that there were material 
weaknesses not only in the way the companies operated, but 
perhaps more importantly, in the manner in which the regulatory 
structure was organized. As a result, Congress enacted a series 
of reforms, creating the PCAOB, enabling SEC with new actions, 
and creating other new courses for business management to 
follow.
    As a result of these actions, investor confidence has 
improved. And with 95 million American households now invested 
in the markets, investor confidence has never been more 
important.
    Restoring fairness and enhancing transparency in the 
markets requires continued vigilance. However, I believe our 
markets are now facing an even greater challenge in order to 
retain their supremacy in the form of global competitiveness. 
If the NYSE/Archipelago and the NASDAQ/Instinet mergers were 
not enough proof of the changing nature of our markets, NASDAQ 
has just purchased 14 percent of the London Stock Exchange, 
while the NYSE has expressed interest in gaining a share of a 
European exchange as well.
    Innovations in technology have had dramatic impact on both 
trading and capital formation. And such innovation has resulted 
in great strides in increasing market efficiency. Today, U.S. 
markets are the most sophisticated and technologically advanced 
in the entire world. But why are so many companies, therefore, 
choosing to list abroad, in other exchanges, as well as taking 
IPO's overseas?
    I have come to the conclusion there are three basic areas 
for us to be concerned about: number one, the irresponsible 
attitude to litigate, and the cost it imposes on businesses, 
shareholders, and consequently, consumers; number two, 
inefficiencies in our current regulatory structure of capital 
markets; and number three, the historical lack of progress in 
addressing accounting complexities.
    These domestic issues, combined with the increasingly 
efficient and liquid foreign markets, pose significant 
challenges to our continued supremacy. If unaddressed, these 
barriers to attracting capital will continue to put the United 
States at a growing disadvantage in a very competitive 
marketplace.
    Investor protection and global competitiveness, however, 
are not necessarily contradictory goals. Congress must ensure 
that the regulatory system is effective, while enabling 
innovative and profitable activities in the marketplace.
    Responsible tort reform is essential to combat the high 
cost of frivolous lawsuits. Class action suits oftentimes do 
little to provide restitution to injured investors, but all too 
often, only enrich a few legal representatives. There is a need 
for rebalancing justifiable actions vs. frivolous lawsuits. 
Such review and reform is essential.
    As an aside, I would point to actions taken in Sarbanes-
Oxley, with the creation of the fair fund, enabling the SEC, 
through its own legal counsel, to pursue wrongdoers, and to 
retain and regain control of ill-gotten gains.
    Since the passage of the Act, over $7.5 billion has been 
identified by the SEC for recovery. This is an effective way to 
respond to unprofessional conduct.
    Also, a comprehensive review of the manner in which 
securities transactions are regulated is essential. Smart and 
efficient regulation increases the value of a market for both 
companies and investors. Duplicative and unnecessary regulation 
does little other than to raise costs and lower returns. Many 
of the redundant and outdated regulations are within the 
authority of regulators to address administratively. However, 
aggressive oversight is still necessary at the Congressional 
level, and I intend to do so.
    Finally, our current accounting environment is being 
hindered by a rules-based, retrospective view of financial 
reporting. As we have heard from witnesses in recent hearings, 
fostering transparency through technological advance is 
absolutely a necessity. Projects such as XBRL, known as 
Extensible Business Reporting Language, will help provide 
participants in U.S. markets with relevant data more quickly, 
enabling all market stakeholders to understand and make more 
informed decisions, moving away from quarterly earnings 
statements.
    And the time reporting will also help to serve minimizing 
market volatility, while diminishing the need, or incentives, 
for management to be creative in managing their earnings. This 
will also assist toward an international convergence of 
accounting standards, enabling capital to flow more easily at 
the international level.
    For many years, the capital markets were considered by 
investors to be, in the United States, alone at the top. 
However, while we have been tying our own markets down with 
more regulatory rope, China, Europe, and other foreign markets 
have been pursuing the risk-based model that made our markets 
great.
    The foreign markets have now gained significant ground in 
the competition for capital. Of the last and most significant 
IPO's, 23 out of 25 have been issued in foreign markets. Many 
large companies now prefer to list in London or Tokyo, as 
opposed to New York. These facts should serve as a wake-up call 
to all of us.
    While we should be very concerned that capital is leaving, 
we also have an obligation to American investors. With over 
half of working Americans now invested in U.S. markets, we have 
a high standard of responsibility to ensure that markets are 
efficient, but also transparent to these investors. When 
necessary, there should be regulatory action taken against 
those who fail to discharge their fiduciary duties.
    This is not really a complicated task. The balancing of 
equities with investor protection and efficient market function 
just makes sense. When investors have confidence, capital flows 
freely. A free flow of capital means innovative products and 
job creation. This is the essence of a balanced capital market. 
This is what makes America work. We cannot accept anything 
less. Mr. Kanjorski?
    Mr. Kanjorski. We meet this morning to examine how we can 
maintain America's lead in our global capital markets. This is 
an important issue, and I commend you for convening this 
hearing.
    The United States has the strongest, most liquid capital 
markets in the world. As one of our witnesses comments in his 
prepared testimony, ``With just 5 percent of the world's 
population, and 25 percent of its gross domestic product, the 
United States has captured more then 50 percent of the global 
capital markets.'' We need to work in Washington to ensure that 
we continue to maintain that lead to the maximum extent 
possible.
    In my view, we can preserve our lead by continuing to 
protect investors. About 1 year ago, then SEC-chairman 
Donaldson delivered a speech in London. At that time, he noted 
that efforts to promote transparency for investors and the 
fiduciary duties of corporate leaders are helping to raise 
standards throughout the world. He also observed that there are 
still distinct advantages to listing on the U.S. exchange, and 
registering with the SEC.
    He went on to draw a parallel to the United States Marine 
Corps. Of all of our military organizations, the Marines are 
known as the best of the best. Because individuals want to be a 
part of that elite corps, the Marine Corps has traditionally 
had few problems in meeting its recruitment goals. We want our 
U.S. capital markets to be like the Marines, viewed as the 
elite, and attracting the best companies and the best 
investors.
    The many requirements of the Sarbanes-Oxley Act demonstrate 
our commitment to maintaining the highest standards in the 
world's capital markets. Many existing companies have stepped 
up to, and met, this challenge. Many emerging companies are 
doing the same. In fact, according to research by SME Capital 
Markets in 2005, a record 881 small companies registered with 
the SEC to raise more than $16.3 billion in capital.
    That said, we must do more to ensure that small companies 
are not discouraged from entering the marketplace. Arthur 
Levitt, another former SEC chairman, recently wrote in the Wall 
Street Journal that we need to work within the framework of the 
Sarbanes-Oxley Act to identify ways to make compliance easier 
and less expensive. I agree with his assessment.
    We must also ensure that investors are protected with 
access to accurate accounting information, regardless of the 
size of the public company. While it is somewhat off-the-
subject for today's hearing, which deals with publicly-traded 
companies, we must also remember that there are many smaller 
private companies seeking access to venture capital.
    I would be remiss if I, therefore, did not maintain that we 
must ensure that these fledgling businesses have access to the 
money needed to grow and thrive, so that one day they can 
register as a publicly-traded company on a U.S. exchange.
    Additionally, many of the participants in today's hearing 
will doubtlessly observe that we live in an increasingly global 
economy. Some others may point to one variable or another, like 
excessive regulation, frivolous litigation, unwarranted 
taxation, or lagging education as a reason why the U.S. capital 
markets may lose their competitive edge.
    In reality, we live in a multi-dimensional world, and no 
one factor alone is likely to contribute to America's 
continuing success or decline as the world's leading capital 
market. To ensure that we maintain that dominant role, we need 
to adhere to the principles of making sure that we have the 
quality of capital markets with appropriate investor 
protections.
    In closing, Mr. Chairman, today's hearing should help us to 
better understand what we need to do to make sure that our 
capital markets continue to lead the world. We should, in my 
view, remain on the cutting edge of quality regulation, ensure 
that every corporation plays by the rules, and make certain 
that all investors have access to reliable information needed 
to make prudent decisions.
    We must also strive to ensure that each party who violates 
our security laws is held appropriately accountable. I look 
forward to hearing from our distinguished witnesses on this 
matter.
    Chairman Baker. I thank the gentleman. Are there further 
opening statements? Mrs. Kelly?
    Mrs. Kelly. Thank you, Chairman Baker, for holding this 
hearing. I believe that keeping the United States competitive 
is vitally important. While today's hearing is going to focus 
on regulatory and legal barriers to competitiveness, the 
greatest threats to our competitiveness right now are the 
continuing rise in energy prices and the threat of terrorism 
backed by the specter of an Iran that may be building nuclear 
weapons.
    Our financial markets, no matter how well managed and 
regulated, will not be global centers of excellence if the 
economy they support is ravaged by declining production from 
high energy costs, or decimated by terrorist attacks. I look 
forward to asking each of the witnesses to address what we can 
do to protect our markets against these twin threats that we 
currently face.
    I appreciate you holding this hearing, and I yield back the 
balance of my time.
    Chairman Baker. I thank the gentlelady. Ms. Hooley?
    Ms. Hooley. Thank you, Chairman Baker and Ranking Member 
Kanjorski. Thank you for scheduling today's timely hearing. I 
hope it marks just the beginning of a critical debate about 
what actions should be taken to maintain, and even grow, the 
competitive advantage that our capital markets have earned in 
this last century.
    As the policymakers, it is critical that we work 
proactively to avoid losing our dominant role in global capital 
markets, rather than being forced to play catch-up after our 
advantage has been significantly diminished.
    At the same time, we should not act too hastily, and become 
engaged in a race to the bottom against our global competitors. 
Confidence is king, and we should not sacrifice investor 
confidence for a quick fix. While some will say IPO trends in 
the past year indicate a down turn in the fortune of our 
markets, I would note that, after closer examination, many of 
last year's largest IPO's were a result of emerging capital 
markets, the listing of state-owned enterprises, geographic 
barriers, and increased global competition.
    In fact, I believe it is somewhat disingenuous to argue 
that many of these companies would have listed in the United 
States if only regulations or litigations were lessened. Many 
simply listed on their more natural markets.
    I believe our markets maintain a significant advantage due 
to their well-earned reputation for transparency, good 
corporate governance, and appetite for innovation. These 
pillars of our markets continue to lead to significant 
valuation of U.S. offerings, valuations that are unmatched 
throughout the globe.
    Our markets remain pre-eminent in effectively raising 
capital. With leadership in our investment community and among 
policy makers, we will maintain our status as home to the 
world's strongest capital markets. In short, the sky is not 
falling, but we can do better.
    I look forward to working with members of this committee 
and with our investment community in a thoughtful way to 
facilitate the strongest and most innovative capital markets 
possible. And I yield back the remainder of my time. Thank you.
    Chairman Baker. I thank the gentlelady. Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman, and thank you for 
holding this hearing. With the noticeable exception of high 
gasoline prices, we are clearly enjoying one of the best 
economies that we have enjoyed in quite a number of years. Over 
five million new jobs have been created, and in a little less 
than 3 years we have one of the lowest unemployment rates we 
have enjoyed in 3 decades. We have the highest rate of home 
ownership that we have had in the entire history of the United 
States of America. Household net wealth is up, income is up. 
These are the benefits of capitalism.
    But you can't have capitalism without capital. And clearly, 
there are a number of worrisome trends that we see. They may be 
trends. But I was looking ahead, for example, to Speaker 
Gingrich's testimony, and learning that recently the London 
Stock Exchange had recorded 129 new listings by companies from 
29 different countries. And in the United States, NASDAQ gained 
a net 14, and the New York Stock Exchange, net 6.
    Clearly, there are some facts out there that should worry 
us, including 23 of the top 25 largest IPO's being registered 
outside of the United States.
    So, again, as I talk to members of--people who are actually 
out in the real world, rolling up their sleeves and creating 
jobs, talking to them about capital markets, I hear the same 
refrain over and over and over, and that is too much 
regulation, too much litigation, and too much taxation.
    And although it doesn't make a sexy sound bite, it was good 
that our committee would actually engage in looking into some 
cost benefit analysis, and looking very carefully--although we 
know the benefits of much of what we do, and obviously 
Sarbanes-Oxley was a terribly important law, and needed to 
restore confidence in the investor marketplace, too often we 
know, Mr. Chairman, that we, as Members of Congress, 
collectively do excel in unintended consequences, and it is 
good that we should look at these unintended consequences, and 
ensure that we do not imperil our global leadership in the 
capital markets, and do something that would undermine our 
great dynamic economy today that is helping to lift so many 
families and so many members of our Nation out of what would 
otherwise be low economic circumstances. And with that, I yield 
back.
    Chairman Baker. I thank the gentleman. Mr. Moore, do you 
have a statement? Mr. Moore? Mr. Capuano? Are there any further 
opening statements? Mr. Baca, then we are going to go to Mr. 
Hinojosa, and then Mr. Scott. Anybody else? Okay, we have one 
here on the side, too. Mr. Baca, please proceed.
    Mr. Baca. Thank you very much, Mr. Chairman, and Ranking 
Member Kanjorski. I am pleased to be here today to discuss the 
global competitiveness and how to maintain our lead in the 
global economy.
    While the United States still leads the world in economic 
power, our percentages are dropping, and we must be on guard to 
prevent further erosion. A number of factors can explain why 
our dominance is decreasing.
    For starters, corporate abuse continues to harm our economy 
and erode public confidence. CEO salaries have gone through the 
roof into hundreds of millions of dollars, where the Federal 
maximum wages haven't increased since 1997. We must do more to 
rebuild public trust and protect the American investors, and we 
must hold executives accountable.
    I know that Sarbanes-Oxley has not been popular with 
business communities. And as a former small businessman, I am 
sympathetic. For some small businesses, the burden of complying 
with filing requirements has been very burdensome. Some small 
businesses--the small business is the engine that sustains 
America and creates jobs. So we must make sure that Sarbanes-
Oxley is implemented in a way that makes sense.
    But if we are serious about keeping America strong, we must 
put our priorities in order. We must train our workforce for 
tomorrow's jobs. Today, fewer than 4 in 10 students who 
graduate high school will go on to college. At this rate, the 
United States will face a shortage of up to 12 million in the 
college-educated workforce by the year 2020, and we must close 
the gap. Closing the gap could add $250 billion to the Nation's 
GDP, and $85 billion in tax revenue.
    We must ensure that the American companies compete in a 
level playing field, and we must break barriers in corporate 
America. Hispanics are the largest minority group and the 
fastest growing consumer segment. Hispanics remain 
unrepresented in the workforce and corporate boards and 
investment world.
    As chair of a corporate American task force, I have led the 
fight, along with my colleagues, to ensure that qualified 
Hispanics are positioned for corporate America; to increase 
procurement for Hispanic-owned businesses; and to increase 
diversity in corporate senior management and corporate 
boardrooms. Removing these barriers will contribute to higher 
innovation and more productivity, and will enhance the American 
position in the global economy.
    With that, I look forward to hearing what our witnesses 
have to say about this issue, as well. Thank you very much, Mr. 
Chairman. I yield back the balance of my time.
    Chairman Baker. I thank the gentleman for yielding. Mr. 
Feeney?
    Mr. Feeney. Thank you, Mr. Chairman. And I really 
appreciate our distinguished panel. I will be brief, because I 
am excited to get to them. I am very interested in, now that we 
have some history with Sarbanes-Oxley, in the imposition, 
sometimes unnecessary imposition, that is put on the United 
States economy.
    According to one set of experts from the American 
Enterprise and the Brookings Institute, Mr. Butler from Chapman 
University, Larry Ribstein from the University of Illinois, the 
indirect costs of Sarbanes-Oxley compliance can be estimated at 
about $1.1 trillion to the United States economy.
    Sarbanes-Oxley did an awful lot of good, in terms of 
providing for accountability and transparency, conflict 
management, and internal controls. But I am very interested, if 
the witnesses can, in addressing what is good about Sarbanes-
Oxley, what is unnecessary, redundant, and bad about Sarbanes-
Oxley, and what fixes they think can be done by the SEC and the 
accounting oversight board. And then ultimately, is there a 
legislative fix that is necessary?
    So, I am thrilled to have this distinguished panel with us, 
and very interested--since this committee has direct 
responsibility for the Sarbanes-Oxley compliance issues--in how 
we can be helpful in protecting investor confidence, keeping 
what's good, but reforming what needs to be reformed. And with 
that, I yield back, Mr. Chairman.
    Chairman Baker. I thank the gentleman. Mr. Hinojosa?
    Mr. Hinojosa. Thank you, Mr. Chairman. I want to thank you 
and Ranking Member Kanjorski, and to express my sincere 
appreciation to you for holding this hearing today.
    The United States is currently at a crossroads. We can 
either decide to move toward a more responsible, effective form 
of government than we presently have, or we can continue down 
the road that has led to the rise and fall of great nations. 
Today's hearing is entitled, ``America's Capital Markets: 
Maintaining our Lead in the 21st Century.''
    I find it an interesting title, since some naysayers 
contend that we have already lost our lead in the capital 
markets, or at least are sliding down a slippery slope towards 
such a loss. I am not going to go into all the ins and outs of 
arguments that say we are still the lead country, in terms of 
capital markets, the lead economy, or the true sole superpower 
in the world. I will leave that to those who will testify here 
today: Secretary Donald Evans; Mr. Marshall Carter; and the 
Honorable Newt Gingrich. I look forward to hearing their 
presentations.
    Mr. Chairman, what I am most interested in is ensuring that 
our markets do remain competitive, and I believe that this 
requires an intensive and comprehensive investment in our 
children and their education, particularly in the stem careers 
of science, technology engineering, and math.
    To address this situation, I collaborated with The 
University of Texas--Pan American to develop Hispanic 
Engineering, Science, and Technology Week, known as ``HESTEC 
week.'' It's a year-round leadership program that emphasizes 
the importance of science literacy to thousands of pre-K to 
college students and teachers through professional development 
workshops, presentations by world-class speakers, competitions, 
and hands-on activities. Participants are encouraged to prepare 
for studies in math, engineering, technology, and science.
    Mr. Chairman, at this point I would ask that all of these 
documents pertaining to HESTEC be included in the record.
    Chairman Baker. Without objection.
    Mr. Hinojosa. Trying to bring this to a close, I want to 
say that the importance of HESTEC has never been greater. 
Statistics show that the United States is falling behind in the 
number of students excelling in those areas that I mentioned. 
During HESTEC, we give children and teachers the necessary 
tools, and encourage them to reach for new heights. HESTEC 
allows students and educators to interact with some of our 
country's top CEO's, engineers, scientists, astronauts, and 
designers.
    Events like Educator Day, the Hispanic Science Leadership 
Round Table, Latinas in Science, Engineering and Technology, 
Robotics Competitions, and Community Day allow students and 
educators the opportunities to meet top role models, and learn 
valuable leadership lessons.
    HESTEC is a key ingredient to ensuring that our Nation 
continues its entrepreneurial spirit, and that our capital 
markets remain competitive and world class markets. Mr. 
Chairman, I cannot stress enough how important it is for the 
United States to produce additional scientists and engineers. 
We need to do so in order to continue to be able to compete 
with our overseas counterparts, much less to remain a 
superpower. It is my hope that all of those present at today's 
hearing will review information on the HESTEC program at 
www.hestec.org. Mr. Chairman, I yield back the remainder of my 
time.
    Chairman Baker. I thank the gentleman. Mr. Israel, did you 
have a statement?
    Mr. Israel. Thank you, Mr. Chairman. I will be very brief. 
I just want to point out to everyone that I am particularly 
pleased to see Mr. Carter here. We had a good meeting 
yesterday.
    And Mr. Carter and Speaker Gingrich may not be aware of 
this, but they have something in common, other than the fact 
that they are on the panel today, and that is that they are 
both Civil War historians. Mr. Carter was in my office 
yesterday, saw a photograph I have of Joshua Chamberlain, and 
we debated, Mr. Speaker, whether Little Round Top really was a 
turning point in the Civil War, or, as some of my friends call 
it, the War of Northern Aggression.
    So, I appreciate you being here. I know this isn't about 
Civil War history. I just wanted to point that out, and I am 
looking forward to your respective comments.
    Chairman Baker. I am pleased to have a cessation of 
hostilities, Mr. Israel. Thank you.
    Mr. Miller? Mr. Scott?
    Mr. Scott. Yes. Thank you very much, Mr. Chairman. I, too, 
want to congratulate you and Ranking Member Kanjorski for 
holding this very, very timely and important hearing today on 
the strength of America's capital system in the global 
marketplace.
    The American financial system remains the vanguard of world 
markets, without a doubt. And we must maintain that strength. 
The high standards that we have continue to give respect and 
status to the companies that list in the United States. And 
even though we have the best capital system, we must not be too 
comfortable with our position.
    The American markets continue to face strong competition 
from foreign markets. And I am very concerned with the wide 
number--as to why a large number of companies are delisting 
from American exchanges. We have to ask why companies would 
choose to remove themselves from American exchanges.
    I am concerned about the impact of the financial services 
sector now moving to replace manufacturing as the dominant 
income-generator and money-maker in our system. What does that 
portend to the future of our country and our position in 
capital markets?
    I am also concerned about our overwhelming debt, and the 
deficit, and the impact of having so much of our debt in the 
hands of foreign nations and foreign institutions. What does 
that portend for us? The complexity of our tax code, and that 
is driving many of our foreign partners away from us.
    I also want to talk about--a little bit about--the need to 
invest in human capital, as well as our infrastructure. It has 
been mentioned before, but our failure to properly address, and 
give the incentives and encourage our young people to go into 
math and into sciences, and put the rewards systems there. 
Further attention and resources are certainly needed for our 
science and math education. And we must also consider, of 
course, revisions to our regulatory and our tax structure so it 
is consumer-friendly for our foreign friends.
    But as we discuss the global marketplace, I just want to 
take one moment to welcome my good friend from Georgia, former 
speaker Newt Gingrich, as a witness today. Speaker Gingrich has 
been a bright and shining light, an illuminating source of 
fresh and bright ideas on how we can keep our American economy 
and our economic system at the forefront. And I welcome you 
here. You continue to be a source of global innovative 
thinking.
    And Speaker, as you may know--I don't know if the rest of 
America knows--but I am honored and privileged now to soon be 
representing a great part of your former district in the House 
of Representatives, in Cobb and Douglas County. So we are glad 
to have you, as a fellow Georgian, and I am sure you will add 
so much to our hearing today.
    As this subcommittee discusses the future of our markets, 
we must keep in mind the need to have an efficient system that 
provides the best prices and information for a wide variety of 
investors. I look forward to our meeting, and I yield back the 
balance of my time.
    Chairman Baker. I thank the gentleman. I welcome each of 
our witnesses here this morning. The committee is particularly 
excited to have such a distinguished panel on this most 
important subject. And as you can tell, members' interest is 
significant, and the expression of concerns about our current 
posture in international markets is prevalent. And we are not 
clear as to the steps we should take to enhance our 
competitiveness, but we are greatly interested in hearing each 
of your perspectives and your recommendations.
    As each of you are quite familiar--I just say it for the 
purpose of saying it--your entire statement will be made part 
of the official record. Please feel free to proceed as you 
would like. We request that you try to keep your remarks to 5 
minutes to enable what I believe will be a lengthy question 
period.
    And at this time, I would welcome our first witness, 
Secretary Donald L. Evans, currently the chief executive 
office, The Financial Services Forum. A pleasure to have you 
here, sir.

  STATEMENTS OF DONALD L. EVANS, CHIEF EXECUTIVE OFFICER, THE 
                    FINANCIAL SERVICES FORUM

    Mr. Evans. Thank you, Mr. Chairman. Let me join the chorus 
of thanks to you for holding this hearing, and for your focus 
on America's competitiveness. I have certainly enjoyed our 
discussions on the subject, as well as discussions with other 
members of this committee on the subject. It was certainly a 
focus of the President's State of the Union Address, and I 
compliment you and the entire committee for staying very, very 
focused on this most important subject for America's ongoing 
leadership in the global economy.
    Chairman Baker, Vice-Chairman Ryun, and Ranking Member 
Kanjorski, thank you for the opportunity to participate in 
today's hearing on ways to preserve the competitive position of 
the U.S. capital markets. Today's hearing is both important and 
timely. America stands at a critical crossroads in our history 
as a Nation.
    Faced with the realities of globalization and international 
competition, will the United States retreat behind a wall of 
self-delusion and the false protections of tarriffs and trade 
barriers, pretending the world hasn't changed fundamentally and 
permanently, or will the United States embrace and meet the 
challenges of competition, to the betterment of all Americans, 
and the world?
    By calling this hearing today, Mr. Chairman, you have 
signaled that you understand that America must not turn inward. 
The financial services industry thanks you for your vision and 
your leadership. Not only would such a course be very damaging 
to the U.S. economy, the world at this critical juncture in 
history continues to need the United States to lead by example.
    Mr. Chairman, you are correct when you say that being the 
world's premier capital market is not our birthright. We earn 
that distinction by working to make the United States the 
marketplace of choice. In that regard, I think it's important 
to emphasize that preserving the international competitiveness 
of the U.S. capital markets begins with preserving the strength 
and vitality of the United States economy.
    The 20 members, CEO's of the Financial Services Forum, meet 
twice a year, our most recent meeting occurring earlier this 
month. At that meeting, for the first time, we conducted a 
survey of our members regarding their outlook on the U.S. 
global economies. As part of the survey, we asked our CEO's to 
rate, in order of seriousness, a dozen potential threats to the 
U.S. economy.
    The four most important threats, according to our CEO's, or 
the four most serious threats, according to our CEO's, were: 
one, energy prices; two, health care costs; three, terrorism; 
and four, U.S. Government's unfunded entitlement liabilities. 
Rated closely behind were complex regulations and frivolous 
litigation.
    We also asked the CEO's to rate a number of the potential 
actions taken by Congress to reflect their importance to 
keeping the United States competitive in a global economy. Our 
CEO's rated each of the following actions very highly: promote 
free trade; improve U.S. education; address unfunded 
entitlement liabilities; address litigation reform; extend tax 
cuts on capital gains and dividends; and address general tax 
reform.
    Clearly, our financial sector leaders believe that Congress 
has much important work to do to keep the United States 
competitive in an increasingly global economy. As you know, 
capital is the life blood of any economy's strength and well-
being, enabling the research and risk-taking that fuels 
competition, innovation, productivity, and prosperity.
    The foundation of any competitive capital market is 
investor confidence. When investors put their hard-earned 
capital at risk by purchasing shares in a company or its debt 
securities, they must have faith that the company is telling 
the truth about its business and its finances.
    We all want an equity listing in the United States to be 
what it has been for nearly 80 years: the global gold standard. 
But it is also true that successfully competing for scarce 
capital is becoming more difficult by the day. Simply stated, 
the United States is no longer the only game in town. It is 
entirely in keeping with the principles of our corporate 
governance standards to re-evaluate whether the rules and 
regulations written to implement those principles are effective 
and appropriate.
    Do they impose unnecessarily high and costly burdens on 
regulated firms, particularly small businesses? Do the costs of 
meeting the requirements outstrip the acknowledged benefits of 
listing in the U.S. markets? Are there steps that can be taken 
to alleviate some of the burden and cost, without undermining 
investor confidence?
    Asked another way, do certain of our securities laws make 
it easier or harder to compete in the global economy? These are 
reasonable, prudent questions to ask. And preserving a strong 
and vital capital marketplace is too important to the future of 
the United States not to ask them. Thank you very much for the 
opportunity to appear before your subcommittee, Mr. Chairman.
    [The prepared statement of Secretary Evans can be found on 
page 90 of the appendix.]
    Chairman Baker. Thank you, Mr. Secretary. Our next witness 
is Mr. Marshall N. Carter, chairman of the board, the New York 
Stock Exchange Group. Welcome, sir.

 STATEMENT OF MARSHALL N. CARTER, CHAIRMAN OF THE BOARD, NYSE 
                          GROUP, INC.

    Mr. Carter. Thank you. Chairman Baker, Ranking Member 
Kanjorski, and members of the committee, thank you for inviting 
me to testify on this issue of the competitiveness of U.S. 
financial markets. Chairman Baker and the committee are 
exercising strong leadership to address this issue at this 
time.
    For the past 50 years, global leadership of U.S. capital 
markets has been unmatched. Our markets are the most open, 
honest, liquid, and also the deepest in the world. They have 
enabled the United States to remain at the center of global 
capitalism, as the world's leading engine for capital 
formation, job creation, and economic growth.
    U.S. capital markets are still the world's best. However, 
we are facing stiff challenges. Let me outline the challenges, 
and discuss the reason why our leadership is being contested. I 
will conclude with a proposal to strengthen U.S. 
competitiveness, and enable U.S. markets to regain the 
initiative.
    First, the challenge to U.S. financial markets is real and 
growing. Despite a welcome resurgence in global IPO's, fewer 
are listing in the United States. In 2000, 9 of the top 10 
IPO's were registered on U.S. exchanges. By 2005, only 1 of the 
top 25 global IPO's were registered in the United States, and 
none of the top 10. Even with privatization and mergers, that's 
a significant drop, as Congresswoman Hooley mentioned.
    In addition, more companies qualified to list in the U.S. 
markets are listing overseas. And some currently listing on 
U.S. markets are actively delisting. Capital formation, though, 
is still robust. $86 billion was raised through 224 IPO's for 
non-U.S. companies last year. However, this capital was raised 
privately through 144A IPO's, which are not registered.
    Unfortunately, when capital is raised privately, millions 
of U.S. investors cannot participate, and accepted standards 
for corporate governance and transparency do not apply.
    The landscape is changing for four reasons. First, there is 
a rising perception abroad that litigation in the United States 
has run amuck. Increasingly, the United States is seen as a 
place where individual companies can be bankrupted by a single 
lawsuit, and their executives and directors placed at personal 
risk. Facing such threats, companies are saying, ``No thank 
you,'' and opting out.
    Second, we lack convergence in international accounting 
standards at a time when the realities of globalization mandate 
we need it the most. European companies are moving to a common 
standard. They wonder why they must meet the U.S. requirement 
for a separate reconciliation of their accounts, which is 
costly and redundant. Again, they are saying, ``No thank you,'' 
and are choosing to raise capital elsewhere.
    Third, overseas markets, especially in Europe, are growing 
deeper and more liquid, and benefitting from the success of the 
Euro. As foreign markets become better capitalized, and offer a 
greater choice of products, including the ability to trade 
across countries, they are taking away U.S. market share. It is 
happening from London to Hong Kong.
    Fourth, while Sarbanes-Oxley has strengthened investor 
confidence and reformed corporate governance, many companies 
believe the additional costs of annual section 404 reviews 
outweigh the benefits. To be sure, some of these costs are 
coming down, and that's good news.
    Nevertheless, when companies who recently listed IPO's on 
the London Exchange were polled, 90 percent responded that 
London's rules of corporate governance were more attractive, 
meaning less costly and burdensome. Section 404 is often cited. 
However, audit firms are also criticized for requiring a one-
size-fits-all approach, and for raising fees for certification.
    Mr. Chairman, we are not here to complain, but to propose a 
course of action. Our solution is not to replace or reopen 
Sarbanes-Oxley, which we believe has strengthened investor 
confidence and the integrity of corporate governance. We 
believe that three common sense reforms can stem the erosion in 
listings, and re-invigorate U.S. capital raising 
competitiveness.
    First, we would urge Congress to move forward with 
meaningful tort reform. Second, we would move rapidly to 
harmonize accounting standards. We strongly support SEC 
Chairman Cox's drive to eliminate the requirement for foreign 
issuers to reconcile their internationally accepted accounting 
standards to U.S. standards.
    Third, we would initiate a risk-based approach to annual 
404 certification. Companies and their auditors would annually 
review the internal controls of only the most risky of 
operations in finances, those that would have a material and 
significant impact on the company's earnings or operations.
    Let me be clear about what I am suggesting. Guidelines for 
what constitutes risk-based activities would be determined by 
the accounting oversight board and the SEC. A company would 
have to pass the annual audit of these risk-based materially 
significant criteria. Then, and only then, consideration should 
be given to permitting the company to undergo a full baseline 
404 audit every third year. We believe a pilot could easily be 
done on this concept by the SEC.
    I would like to point out that the accreditation of 
hospitals and audits occurs only every 3 years. Ensuring that 
our hospitals are safe for patients is arguably more critical 
to the safety and well-being of the American people.
    Should the United States fail to act to reverse the trends 
we have heard here today, U.S. investors will follow the flight 
of capital to overseas markets, and we will become more 
vulnerable. They risk losing the protection of the U.S. 
regulatory regime, the gold standard, and a regime that offers 
greater transparency than any other in the world. Our financial 
markets will become less liquid, and their preeminence and 
leadership will be in doubt.
    The U.S. economy, deprived of precious capital, risks 
becoming less innovative, dynamic, and prosperous, and we could 
face substantial job losses in the financial services sector.
    So, in conclusion, let me say that, despite the resurgence 
in global equity financing, the U.S. financial markets are 
losing the competition for these new listings. We clearly 
cannot afford to be passive and do nothing. We look forward, 
Mr. Chairman, to working with our regulators and the members of 
your committee to bring about that desired result. Thank you.
    [The prepared statement of Mr. Carter can be found on page 
61 of the appendix.]
    Chairman Baker. Thank you very much, sir. And our next 
witness is the Honorable Newt Gingrich, former Speaker of the 
House. Welcome, sir. Please proceed as you like.

STATEMENT OF HON. NEWT GINGRICH, FORMER SPEAKER, U.S. HOUSE OF 
                        REPRESENTATIVES

    Mr. Gingrich. Thank you, Mr. Chairman, and I want to thank 
both you and Ranking Member Kanjorski for hosting us, and 
allowing us to come and talk about a very, very important 
topic.
    You have heard from the former Secretary of Commerce, and 
from the chairman of the board of the New York Stock Exchange, 
that we are concerned about whether or not we will retain our 
leadership role. And this leadership role is very important, 
because it divides both the capital for our new businesses, and 
the opportunity for the kind of wealth creation which has made 
us, for the last 160 years, the most successful society in the 
world.
    I am not going to repeat the concerns that they had. I just 
want to start by saying that I do think there are some parts of 
Sarbanes-Oxley that need to be significantly revisited. The 
work that has been done by both Alex Pollock and Peter Wallison 
of the American Enterprise Institute--I outlined some of that, 
and I submitted that for the record as part of my written 
testimony.
    I would say, in particular, that the Congress should 
consider making the section 404 voluntary. In recent House 
subcommittee hearings, Representative Gregory Meeks of New York 
described the experience of an unidentified 65-employee New 
York biotech company with a market cap of $99 million, 
specializing in Multiple Sclerosis and spinal cord injury 
products. They spend $4 million a year on clinical trials, and 
$1 million for section 404 compliance.
    The entire issue of BioCentury for April 24th is devoted to 
this problem. And the work that Pollock and Wallison have done, 
I think, shows overwhelmingly that 404 is clearly very anti-
small business, very anti-entrepreneur, and very anti-start-up 
in the way it's been exercised. And the easiest way to deal 
with it would be to make it a voluntary act, and then the 
market will decide.
    If people think it, in fact, is an extra layer that they 
want to pay for, they will invest more in companies that have 
that procedure. If, in fact, they think it's not protecting 
them, they're not going to invest in it, and companies won't do 
it. But make it a marketplace opportunity, don't make it a 
government mandate. I think that part of Sarbanes-Oxley was 
both over-reach, and frankly, has turned out to be something 
like 50 times more expensive than the original estimates.
    So, Congress ought to recognize that this did not work the 
way people thought it would. It is not the right thing to do. 
And you have to fix that. You are going to hear from James 
Copland that the Center for Legal Policy, the Manhattan 
Institute, and I think that he will give you a strong feeling 
for this, but Marshall Carter has already testified that--about 
the problems of litigation. Let me offer you a set of reforms.
    One, I think that Congress should hold hearings on the 
impact of State attorneys general, and the way in which they 
have been using, frankly, criminal blackmail in which attorneys 
general in New York and elsewhere say to corporations, you 
know, ``Cut this deal, or you're going to risk going to jail.'' 
And very often involving cases they can't possibly win in 
court, but where the risk of going to jail is so great that 
they are creating economic havoc.
    And attorneys general in the United States are becoming a 
major problem. As a side part of that, Congress should also 
look at the degree to which attorneys general who are supposed 
to be instruments of the State are now hiring private sector 
trial lawyers to engage in, basically, a form of blackmail in 
which the private sector lawyer gets a large share of the 
recovery, the State gets a large amount of money, and companies 
are basically held hostage, because they're not in an equity 
fight. They're in a fight where they're going to go to jail if 
they lose.
    And so, it's a total abuse of the power of government. I 
also would urge Congress to pass a law instructing the 
Executive Branch that any interstate compact that is not 
approved by the Congress be filed in court automatically as 
being a violation of the Constitution.
    You have a number of attorneys general around the country 
who are now routinely cutting deals that have a direct effect 
on the United States economy. That is a clear violation of the 
Constitution, which requires that interstate compacts be 
approved by the Congress, or they be null and void.
    In terms of litigation reform, the system needs to be 
reshaped to favor arbitration over litigation. We should have 
the British losers pay model, where people who file phony 
claims would have to pay back not just the cost of litigation, 
but if it's truly phony, would have to pay 3 times the cost. 
The caps Congress has tried to bring to bear on malpractice and 
other kinds of litigation is exactly right.
    In addition, I would argue that law firms should be 
prohibited from bringing class action suits. If a class action 
is formed, the judge should allow the class to apply to law 
firms to file, and then pick the law firm which has the lowest 
bid. What we have created today is an engine of self-
aggrandizement and greed on the part of law firms that are 
machines for encouraging litigation.
    I also would strongly recommend that you explore banning 
lawyer advertising. I think the rule on that is, frankly, 
wrong. That's not a First Amendment right, and it strikes me as 
stunningly destructive to the country.
    You should look carefully at the Sarbanes-Oxley litigation 
time bomb, which is going to presently swamp the courts, 
because Sarbanes-Oxley sets up two great burdens. In addition 
to the regulatory burden, which accounting firms, obviously, 
enjoy and support, it also sets up the burden of many more 
lawsuits, and it sets up a burden that bond holders may have a 
cause of action for the simple failure to comply on time. And 
this is going to lead to a morass of lawsuits and of liability, 
and further drive businesses outside the United States.
    Three last things I just want to mention as it relates to 
what you're doing. There is a project to create a much more 
effective business language, and I would strongly--apparently, 
we have been doing some research on this--it apparently 
involves about $3.5 million to finish this. It's very important 
in creating the kind of language--XBRL is the title of it--
which enables us to have a very, very sophisticated ability to 
compare financial data at very, very low cost.
    It is absurd that this is sitting out there being worked 
on, I think currently, by one person, because it's essentially 
a voluntary project. For $3.5 million, the Congress could bring 
that online, and enable the United States to have a modern 
system of transparency.
    Chairman Cox, who is certainly very entrepreneurial in his 
own right, should be encouraged to really transform the 
Securities and Exchange Commission into a model 21st Century 
Federal agency.
    There is a paper I produced--you can see it at Newt.org--on 
21st Century entrepreneurial public management. But the essence 
of it is very simple. Entrepreneurship focuses on outcomes. 
Bureaucracies focus on process. Every time we have a scandal, 
we have a new set of process reforms which add another layer of 
burden to the next scandal, and we have another layer of 
process reforms. That is, in fact, a very obsolete model of 
trying to play catch-up. And I would strongly--I would 
encourage you to encourage Chairman Cox to look at a very 
dramatic proposal to rethink the way the SEC operations.
    Lastly, I would urge the Congress to revisit the question 
of stock options. It seems to me that particularly for small 
companies and for start-ups, there is an alternative model of 
being able to account for the dilution of stock value by the 
author of an options in a way which is much less discriminatory 
against giving options--stock options, historically, were a 
major method of attracting energetic talent to work very long 
hours for very small pay, because they had a huge upside.
    By requiring the kind of expense accounting we do today, we 
are dramatically limiting that kind of incentive. And over the 
next quarter of a century, that is going to substantially lower 
the amount of innovation and then start-ups that we have.
    And I would encourage you, for new businesses and for small 
capitalization companies, to strongly revisit how we deal with 
stock options. So I appreciate very much the chance to offer 
these observations.
    [The prepared statement of Mr. Gingrich can be found on 
page 102 of the appendix.]
    Chairman Baker. Thank you very much, Mr. Speaker. And I 
must say, I appreciate each of your thoughts and considerable 
contribution to our hearing this morning.
    I want to maybe take in steps what I believe, based on your 
comments, may be an advisable process to engage in over the 
foreseeable future. It was not something that would happen 
tomorrow.
    Starting with Mr. Carter's proposal relative to the 404 
pilot, that would be enabled by the SEC administratively, 
without the necessity of Congressional action. But that should 
be, I think, a precursor to a more long-term examination of the 
404 requirements, if not increasing the requirements that 
trigger compliance--in other words, get some of the smaller 
companies now subject to the requirements exempted, or even a 
longer period of re-examination, as the pilot may demonstrate 
is feasible to accomplish--and then, over time, move to the 
Speaker's recommendation as to the advisability of a voluntary 
compliance.
    I think the market has already voted, to some extent. The 
disclosures you have made today, relative to IPO's and the flow 
of capital, is already occurring. We need to understand the 
mechanisms, why this is the case. I think each of the reasons 
you have outlined are contributors, but we really need to 
understand the market decision-making process that causes a 
company to choose to avert our regulatory system.
    For example, another step would at least be to require a 
loser pay mechanism necessary for--to stem the flow of 
frivolous litigation.
    Another step would be to accelerate the pilot already 
completed at the FDIC on the implementation of XBRL, and make 
it applicable to all depositories, insurance depositories, 
within the next year. And assuming the taxonomy can be 
developed properly, then deploy it to all public operating 
companies with a view toward a more principles-based real time 
disclosure, and in my view, eliminating the quarterly earnings 
report, which I think contributed vitally to the--to managerial 
interest in creative accounting to beat the Street.
    If we couple that with logical tax code revisions to enable 
people to keep the money they make, maybe we've got a chance. 
But I will say that I am very concerned about what I see 
happening not only in India, but soon to come in China, and 
that unless there are some basic structural changes from where 
we stand today, vis a vis our foreign competitors, we are going 
to be the victims of our own ideology.
    We have always, as Americans, said, ``We are proud to stand 
up and compete with anybody, because we can outproduce, make a 
better product at a lower price; just get out of our way.'' I 
am afraid that we have created a box, intended for good 
purposes, to protect investors from manipulative action, and 
the consequence of that system is to establish a bureaucracy 
which does not enable efficiencies to be realized in a 
competitive marketplace.
    And I left out a couple of the things that the Speaker 
brought up that I have footprints on my back to know they're 
controversial, relative to attorneys general.
    In the Clinton Administration, the Congress prevented State 
legislatures from, in any way, affecting market structure in 
the securities world. I tried a couple of years ago to provide 
that same standard for State attorneys general--not to preclude 
them from pursuing wrongdoing, but where they were to require a 
market remedy that affected structure that they should at least 
consult with the SEC before proceeding, and obtain their 
agreement. It turned out to be more controversial than I first 
estimated.
    And with regard to expensing of options, I have agreed with 
you, and I have the voting record to prove, that I was not 
right, either. But I do believe those issues are things we need 
to return to over time, not precipitously, and lay out an 
agenda for a competitiveness that I think is highly defensible.
    Now, I have made more of a statement than asked a question, 
but can you add on individually to the list? I know, Mr. Evans, 
Secretary Evans, that the CEO's have identified their 
priorities. Would that agenda be responsive to your CEOs' 
concerns?
    Mr. Evans. Mr. Chairman, I think in great deal it would be. 
I don't think--let me say this. I have seen some studies that 
have asked a question as to whether or not Sarbanes-Oxley has 
been a reason other countries have--other companies have chosen 
to invest and list outside of the United States, as opposed to 
in U.S. capital markets.
    To me, Sarbanes-Oxley has become kind of a metaphor for all 
of the various elements that we're talking about here, where 
Federal Government gets in the way of productivity, gets in the 
way of corporate boards making good decisions. And one of the 
most important areas--I don't think you can emphasize it 
enough--is in frivolous litigation.
    I think that is an issue that has been around for many, 
many, many years. And as I talk to CEO's across the country, I 
think that is at the top of the list. I mean, some of the 
issues that we're talking about with respect to Sarbanes-Oxley 
I think are important to look at and review, particularly 404. 
I think maybe it's putting too heavy a burden on the small and 
medium-sized companies, and that needs a serious look. Maybe 
there are some adjustments that can be made there, and maybe 
it's a volunteer kind of program, or whatever it might be.
    But I don't think you can put enough emphasis on the 
importance of tort reform, the litigation reform, frivolous 
lawsuit reform in this country. This is--among the CEO's, among 
corporations around the country and around the world, they view 
America as a very litigious society. And so, as they hear more 
about that, they see more of the disasters of companies being 
closed or shut down, they say, ``I don't want any of that.''
    And so, I think if I was going to pick an area that I would 
really put a lot of emphasis on, and a lot of focus on, it 
would be the whole area of tort reform, litigation reform, and 
frivolous lawsuit reform. I think that can do more to kind of 
restore the confidence of companies here in America, and 
continue to kind of move this country in a direction that has 
made it so strong in a global economy, which--we're not afraid 
to take risks.
    When you put kind of--when you have--when you're worried 
about being sued around every corner, then you become risk-
averse. And if you're not taking risks, you're not being 
innovative. And if you're not being innovative, you're not 
being productive. And if you're not being productive, the 
economy is not growing.
    So, I just--I think it puts a chilling effect within the 
board rooms of America, and with small business owners, that 
they are less likely to take risk, for fear of being sued, fear 
of having a frivolous lawsuit.
    And so, I mean, as I look at all these issues that we're 
talking about, I think they're all important to address. But if 
you want me to put one at the top of the list, that's one that 
I would put at the top of the list.
    The other thing I would say that I don't think has been 
mentioned here, what happens in board rooms and businesses 
across America, they are spending far too much time dealing 
with these kind of process issues, and governance issues, and 
jurisdiction issues, and not near enough time on the strategy 
of their company, and where to invest, and where to take risk, 
and where to place capital.
    So, it's a big time drain. It's a big energy drain on the 
leaders of businesses, small, medium, and large, across 
America. So--and that's something that doesn't get mentioned. 
Congressman Feeney talked about it costing $1.1 trillion. I'm 
not sure where that number came from, but the only place I 
could see it coming from would be all of the time it cost these 
boards and businesses, in terms of just dealing with this over-
regulation, and worrying about lawsuits, etc.
    My time is way expired. I will come back in the next round 
and follow-up on my questions. Mr. Kanjorski?
    Mr. Kanjorski. Thank you, Mr. Chairman. I want to make two 
observations before I start. I am really proud to be--and Mr. 
Israel pointed out that the Speaker and Mr. Carter are Civil 
War veterans, and I'm proud to be in your presence.
    [Laughter]
    Mr. Kanjorski. But I want to make a second observation 
regarding my home State of Pennsylvania. We have two characters 
here, one on the committee, Mr. Scott, who was born in 
Scranton, Pennsylvania, and had to go south to Georgia to get 
elected to Congress, and Mr. Gingrich, who was also born in 
Pennsylvania, Harrisburg, and had to go south to get elected to 
Congress, which may indicate the flexibility and mobility of 
the American society. And I would tend to think that maybe that 
speaks well for our society in the past, coming up to the 
future, since we sent two of our great sons and bright candles 
south to help out the--
    Chairman Baker. Careful now, careful.
    Mr. Kanjorski.--and lessen the retardation of the South.
    [Laughter]
    Mr. Kanjorski. All that having been said--nastily, but in a 
friendly spirit--Mr. Gingrich, I appreciate your comments. But 
you know, it's interesting that you make this observation about 
Sarbanes-Oxley at this point in time, when the Enron trial is 
in process.
    And listening to your argument, you would think that we all 
sat up here a number of years ago, and said, ``How can we jab a 
stick in the eye of American corporations?'' And as you recall 
well, in history, that's not what happened. American 
corporations became abusive, to huge extents--particularly 
Enron--costing believing, innocent investors billions of 
dollars of their savings. And I think there is a responsibility 
of the government, as a last resort, to step in when there is 
irresponsible corporate activity.
    To listen to your argument, and the Secretary's argument, 
well by golly, we should just go back to laissez faire, because 
4 years is a great time that's past, we no longer need these 
protections. It's corporate America that caused Sarbanes-Oxley 
to be enacted, not the reverse. We didn't want to do it.
    And I guess I worry about as much the protection, not only 
of the investor, but also the worker. I didn't hear anything 
arguing to whether or not we have a fair return to the average 
worker in American industry, even though we have had this great 
productivity and all this efficiency that has occurred over the 
last decade or two. When you look at the numbers, to how that 
has squared to the average working American, they haven't been 
too successful.
    But let's look at the real facts of Sarbanes-Oxley. The 
Stanford Law School did a study on security law filings. And 
they found that they dropped from 213 in 2004 to 176 in 2005, 
below the average of the 8-year period from--in 1996 to 2004, 
of 195 cases a year. They attributed that dropping to the 
success of Sarbanes-Oxley.
    And in--the drop that continued even occurred when there 
were 1,200 restatements in the year 2005, and that the errors 
found in those restatements wouldn't have been found, except 
for Sarbanes-Oxley.
    Now, we are not dealing with a few errant executives or 
boards here, we are dealing with a pervasive activity in 
American corporate life that have forgotten fiduciary 
responsibility and responsible accounting processes, maybe as a 
result of competition, or whatever is out there. I can 
understand that.
    But it astounds me to hear you argue that, ``Let's go back 
to laissez faire with corporate life,'' when we have just come 
off, and are in the process of a trial now that is horrendous.
    I don't even like to listen to that trial, because to hear 
a CEO sort of give the German alibi that, ``It wasn't my 
responsibility, I didn't know, I was just following orders,'' 
and only this one guy out here is responsible, even though the 
chairman and the CEO ran the corporation, but it was so 
important and so well run that they didn't know that somebody 
was stealing money and cooking the books, and that caused the 
collapse of, I think what, the fifth largest American 
corporation in the United States. How many other corporations 
there are, we really don't know.
    I would say that I would always favor and would look at--
and I think Mr. Carter's suggestion that we evaluate how often 
we have to review 401 areas and how often we have to go, that's 
something reasonable to look at. We should understand that if 
something happens every 365 days isn't necessarily the Golden 
Rule. Maybe it could happen every 1,000 days. I don't know. We 
should examine that.
    But we should have some sort of an indictment, it seems to 
me, of corporate activities in the heydays of the 1990's and 
the early 2000's, because corporate executives and corporate 
boards did not carry the fiduciary burden that the American 
investor expected. And certainly, even today, they don't carry 
the responsibility to the American worker. And I think anybody 
who argues against that just is looking with a jaundiced eye 
toward everything for capital, and nothing for the participants 
of capital in our system. And I would just hesitate to think 
that should be our world.
    The other point I would like to make is I have heard so 
much about this litigation. You know, again, I am aware, and I 
would examine litigious activity in our system. But you know, 
it's very funny. I didn't hear anybody talk about advertisement 
of drugs, and the horrendous expenditure of the pharmaceutical 
industry in selling drugs.
    But, Mr. Gingrich, you referred to maybe stopping the 
advertising of litigation or lawyers. I may indicate to you 
that that was Chief Justice Warren Burger, who was appointed by 
Republican President Richard Nixon, who came up with that 
brilliant idea. I never did support it, and think it was a 
foolish decision, and I would reverse it tomorrow if we want to 
get, again, another layer of government into this system.
    As far as--as the trial bar and litigation, you know, if 
somebody comes up with a better system of protection, I would 
certainly look at it. But doing away with the trial bar, 
outlawing class actions, putting them aside, that's only going 
to turn the less responsible in corporate life loose to carry 
on.
    I appreciate your testimony. I think you--certainly, Mr. 
Speaker, you always give great ideas, and we appreciate them. 
Mr. Secretary, I know from whence you come, philosophically and 
politically, and we appreciate your activity now in your new 
role. Mr. Carter, as a former Marine, we sort of give him 
special reaction here, the best of the best. And I shouldn't 
say that, because I don't know what you--you look like a Marine 
too, so maybe I'm not being a fair guy.
    But I think that one of the things I'm proudest about with 
the chairman of this committee, subcommittee, and this 
committee as a whole, is it's one of the most bipartisan 
committees of the Congress. We do not try and politicize these 
issues. I, for one, have really searched my 20 years here on 
this committee, to do what is right, and appreciate the 
magnificence of the American capital system.
    But I always understand that there is a tendency--I think 
Mr. Carter and I talked about it yesterday--sometimes greed 
occurs. And I don't know how we cut it out, how we contain it. 
But we have to watch it, because the money, Mr. Secretary, that 
you are talking about today of investors, is basically pension 
and 401(k) money of American workers. And we just can't afford 
to cut irresponsible leadership loose.
    So, if you have suggestions of what we can do, and get the 
same standards that the Stanford study indicates the success of 
Sarbanes-Oxley has brought, I am all for it. But unless we find 
that, I am not for laissez-faire corporate activity. Thank you.
    Chairman Baker. The gentleman's time has expired. Anyone 
care to make a response?
    Mr. Carter. To your list, I would add two things. We need 
to set a date starting when we can harmonize accounting 
standards right now. Something is supposed to happen in 2009, 
but I do not believe that 3 years from now is going to be 
sufficient.
    And second, I would urge the committee to ask the 
accounting oversight board and the SEC to determine the 
feasibility of our proposal, which is to have materially 
significant risk items put into the 404 requirement.
    Chairman Baker. Thank you. Anyone else? Mr. Speaker?
    Mr. Gingrich. Two things. First of all, since I am not up 
for re-election, on behalf of Mr. Scott I want to say he is an 
able representative of Georgia, and should not be viewed in his 
campaign for re-election as being an export from Pennsylvania. 
I think you are running a very delicate line there.
    I say, although I am proud to have been born in Harrisburg, 
there is a delicate line in the South, as I am sure the 
chairman will be glad to share with you in detail.
    Second, the only observation I make about Sarbanes-Oxley is 
if you go back and look at the original estimates of what it 
would cost small businesses to implement section 404, I believe 
they are off by a factor of 50. And that is the one section of 
Sarbanes-Oxley I specifically thought is really worth your 
looking at, and either finding a carve-out for small businesses 
below a certain size, or doing something--and then the 
suggestion of making it optional below a certain size.
    And then the market would say to those small businesses 
either, ``I understand I am taking a slightly greater risk 
because you're not complying with 404, and I will buy the 
stock,'' or, ``I am not going to buy the stock, so you better 
comply with 404.'' But as it currently exists, it's a very 
anti-entrepreneur, very anti-start-up.
    The only other comment I would make, Mr. Kanjorski, is that 
to the degree we kill jobs, whether it's through litigation or 
through other devices--you know, France now has, for people 
under 30, the French have a 24 percent unemployment rate. And 
if you don't have jobs, you can't help workers.
    One of the reasons I so strongly favor your looking at 
stock options again is because stock options, historically, 
have been one of the ways that everyday workers suddenly become 
very successful. And you see this in a number of parts of 
American life, where over a 10 or 15-year period, they are 
dramatically rewarded for having invested in a small company. 
Again, I'm talking about stock options for start-ups, and for 
relatively small companies, and not for large corporations.
    But thank you so much for engaging us today.
    Chairman Baker. I thank the Speaker--
    Mr. Evans. Yes, let me just--I hope in my remarks I didn't 
suggest that I am ready to go back to a laissez faire kind of 
attitude. I mean, in terms of Sarbanes-Oxley, I think it 
accomplished some great things, which--one of the main ones is 
it put a white hot light on the boards of directors of 
companies all across the country, and gave them a clear, clear 
message as to what their fiduciary responsibility is to the 
people who own the company, which are the shareholders and the 
workers, and the people you talk about. I couldn't agree with 
you more.
    I think one of the attitudes that too often gets into the 
management structure of companies is that they own the company. 
They don't own the company, the shareholders own the company. 
The workers own the company. And I want a white hot light on 
the boards of directors, knowing that they have the 
responsibility to protect those shareholders' interests who own 
the company.
    So, agreeing with Speaker Gingrich, I couldn't agree more. 
I mean, what--you know, I am here talking about steps I think 
we can take to make sure our economy does continue to grow and 
create jobs for young men and women across this country, 
because I don't think we have any more important responsibility 
than to do that.
    But in terms of Sarbanes-Oxley, I think it has accomplished 
some great things. There is this one area of 404. As to what it 
does to stifle entrepreneurship and small businesses because it 
puts such a heavy burden on them, I think that's an area that 
can be looked at.
    Chairman Baker. I thank the gentleman. Mr. Feeney? Excuse 
me, is it--Mr. Hensarling, I'm sorry, is next.
    Mr. Hensarling. Thank you, Mr. Chairman. Gentlemen, each of 
you, in your testimony, I believe raise the specter of the loss 
of global competitiveness of the American capital markets. But 
I am curious what the implications of that loss of 
competitiveness is.
    If we do not change the way we do business here, what does 
America look like in--15 years from now. Not unlike Dickens' 
``Christmas Carol,'' the Ghost of Christmas Yet to Come, just 
how healthy is Tiny Tim 10 years from now? What does this mean 
for job creation, entrepreneurship, creation of family wealth, 
and our standard of living?
    And I believe, starting with you, Mr. Carter, I think you 
actually raised the specter that we could actually see greater 
risk and less transparency among investment opportunities for 
average Americans if they choose to diversify their portfolios 
with overseas holdings, if I read your testimony right. So why 
don't we start with you, sir?
    Mr. Carter. That's correct, you would see that because you 
are not protected with our set of rules and regulations when 
you invest outside the United States.
    This is especially important as we shift the pension burden 
away from companies to find benefit plans to the individual. We 
have 93 million Americans who own stocks and bonds, and they 
must be given a wide choice of flexibility for their 
investments. As we narrow that, we hurt our ability to have 
people set aside money for their retirement in adequate 
investments.
    Mr. Hensarling. Let me turn now to my fellow Texan, 
Secretary Evans. Do you have a view on this?
    Mr. Evans. Well, you know, I think it is important for us 
to create the environment here so that the investors of this 
country have the opportunity--vast opportunities.
    One of the trends that does concern me is the one that 
Marshall referred to. Lately, we are seeing more and more 
capital go into these private equity funds, and those private 
equity funds are typically for the larger investors and more 
sophisticated investors, and it takes away from the opportunity 
for the average worker to have a wide array of investment 
opportunities.
    So that is another reason I think it is so important that 
we kind of maintain a friendly kind of environment here for 
companies to list on our public exchanges. So anything that we 
can do to accomplish that, I think, is wise.
    Mr. Hensarling. Speaker Gingrich, let me turn to you, and 
let me first say for a number of us here, that you continue to 
enlighten and inspire. And for that, we appreciate you, sir. 
Your views on this question?
    Mr. Gingrich. Well, look, I think you are raising a very 
important question. And I do think hearings matter. And I would 
encourage, on a couple of the topics that may not be right for 
legislation, that this subcommittee look at very aggressive 
hearings. Because they do set a record that matters.
    And let me pick up your observation about 15 or 20 years 
from now. I believe we are actually entering a period of 
enormous challenge to this country. And several people 
mentioned at the beginning of this hearing comments about 
worker training, comments about education, comments about 
return to the folks who are working all their life, in terms of 
their pension funds.
    And I think we have to recognize that the system we 
inherited from the Second World War is not going to carry us 
through a world in which China and India and Japan are direct 
and aggressive competitors. When you get to a real-time, 
worldwide, global financial system, money flees risk. And so, 
if you have a high-risk litigation system, money is just going 
to leave. If you have a system in which you have rules that are 
so burdensome that it's not the right place to build the next 
factory, the next factory is not going to go there. And one of 
the tests that Congress should set for itself on a regular 
basis is, ``What are the ground rules?''
    And let me give you an example out of today's headlines. We 
have spent 30 years making it harder to build oil refineries in 
the United States. And now we are shocked to discover that we 
don't have refineries. Well, at some point we should have had 
Congressional hearings that raised your kind of question, which 
is if we keep doing this, what's the net result going to be on 
the price of gasoline? Oh, it's going to be a lot higher.
    Now, nobody offered the Higher Gasoline Amendment, but they 
created that by the way in which they established an entire 
series of energy patterns which have made it harder to produce 
energy, harder to refine energy, harder to move energy in the 
United States.
    I just want to say what you are doing in this hearing is 
the forerunner in the financial services world, of the energy 
mess we're in right now. Because if we continue to assume that 
the United States is going to continue to inherit the most 
successful economy in the world, there is going to be a point 
in the not-too-distant future, when we're going to have our 
lunch eaten by our competitors.
    Mr. Hensarling. Specifically on page 11 of your testimony, 
you reference that, ``Congress needs to assess how to pre-empt 
any Sarbanes-Oxley litigation time bomb,'' which is fairly 
strong language. Can you add a little more detail to what you 
see in your crystal ball, as far as this time bomb is 
concerned?
    Mr. Gingrich. Well--
    Chairman Baker. And let me just add, for process purposes, 
it's the gentleman's last question, as his time has expired. 
But please respond.
    Mr. Gingrich. Okay. Since you have cited my testimony, I 
have to comment. Let me just say again, I want to encourage you 
to look at Peter Wallison and Alex Pollock's works at the 
American Enterprise Institute on this topic. And you are 
presently going to have James Copland talk to you along the 
same lines.
    The point that has been made is, for example, securities 
class action settlements increased on an inflation-adjusted 
basis from $150 million in 1997 to $9.6 billion in 2005. 
Sarbanes-Oxley creates an entire new series of presumptions of 
sue-ability, and sets an entire new series of benchmarks. And 
anybody who has watched--and these things become--they are 
evolutionary. So whatever happens this year is not going to 
happen the same next year.
    There are a set of trial law firms who are engines of 
litigation, who have strategic sessions that say, ``Here is 
how, over the next 5 years, we will maximize our number of 
lawsuits.''
    If you take that track, and then you follow it up with the 
fact that one of the rules in Sarbanes-Oxley allows the bond 
holders to go after the equity value of the stock holders for 
any non-compliance, and that there is an emerging industry of 
exploiting any technical mistake in filing late in order to 
exert the ability to basically swap capital from the equity 
holder to the bond holder. That's going to lead to an entire 
second round of litigation on top of the current litigation.
    So, I do think that it is worth your while to hold some 
hearings, specifically on the degree to which Congress is about 
to inadvertently dramatically increase the amount of 
litigation.
    Mr. Hensarling. Thank you, sir.
    Chairman Baker. All right. The gentleman's time is expired. 
Mr. Meeks, did you have a question?
    Mr. Meeks. Thank you, Mr. Chairman. I am sorry, I was in 
another committee, and I didn't get a chance to hear all of the 
testimony. I am just trying to catch up by reading some real 
quick now, so I am not repetitive.
    So, I guess I will first ask Mr. Carter, being that you are 
a great New York Stock Exchange, with the recent merger of the 
New York Stock Exchange and Archipelago, I am wondering--you 
formed a nice group. Is the company now--do you believe it's 
well positioned so that you can compete with other 
international competitors?
    Mr. Carter. It will be, over the next 6 weeks, as we do a 
secondary offering of stock, and produce the capital that we 
need to compete in the world market as the stock exchanges 
around the world consolidate. My answer would be yes, we are 
positioning ourselves to be a player.
    Mr. Meeks. Right. And let me ask to anyone in particular--
to anyone, and maybe to Speaker Gingrich, since you brought up 
section 404--I, along with Congressman Foley, have been running 
around, and trying to get the word--and hear from businesses in 
regards to, particularly, section 404.
    One of the sections--I think it might have been as NASDAQ--
it was an offer with maybe some of the small businesses, of 
having a random audit, as opposed to everyone being--they 
thought that that might drive down some of the costs, in a 
similar style that maybe the IRS does random audits now.
    So, I would wonder--I direct the question to you, Speaker 
Gingrich, but then I would like to hear the comments from 
Secretary Evans and Mr. Carter, also.
    Mr. Gingrich. Thank you. I think I actually quoted you 
earlier in this hearing on the--my only observation is that 
there is a huge difference in public risk between a multi-
billion dollar corporation which, if it goes sour, carries 
enormous risk with it, and a very small--you cited a company 
whose market cap was $91 million in another subcommittee, and 
pointed out that they are spending $4 million in trials for 
drugs, and $1 million in compliance.
    When you are at a $91 million risk level, the level for 
certification--particularly in a setting where, as I said 
earlier, the original estimates of cost were off by a factor of 
50. And so, I would either look for some special carve-out for 
smaller businesses, or some kind of ability to get to a much 
more simplified, much less onerous process, or, as has been 
proposed, making it voluntary for smaller businesses, because 
the market will then test and say either, ``I trust your 
current level of accounting, and I will invest in your stock,'' 
or, ``I won't.'' But there is not a huge risk there.
    And so, we have sort of taken a gigantic hammer to a very 
small business, when in fact, what you may need at that level 
is a much easier and simpler process.
    Mr. Evans. The only thing I would add to that--and I think 
those are some excellent ideas--is that I think that we can 
give some thought to stepping over the accounting firms and 
going directly into the companies, and telling them what is--
what represents appropriate internal accounting controls. There 
is too much dialogue between the accounting firms and the 
oversight board, and not enough dialogue between kind of the 
oversight board and companies.
    If the companies are hearing directly from the oversight 
board as to, ``Here is what would encompass internal accounting 
controls,'' it seems like, to me, they could get themselves in 
better position to make sure they have those internal 
accounting controls, as opposed to the oversight board saying, 
``Okay, accounting companies, here is what represents internal 
accounting controls,'' and then the accounting companies trying 
to go in and say, ``Okay, here is what we understand our 
internal accounting controls.''
    Mr. Meeks. Let me just ask one quick question that--it's 
off the Sarbanes-Oxley just for a second, just a trend that I 
am noticing that affects--because I'm trying to make sure that 
we get as many minority financial companies involved, also.
    There seems to be a trend, where there are private equity 
firms that are taking--that are buying out public firms, and 
then they are going private again. And there was a period of 
time where I saw there was a growing trend among smaller 
minority investment banking firms, but with this new trend, it 
seems as though there are less minority firms being able to get 
involved in the financial markets. I was wondering whether 
anyone had any comments in regard to that, and how we could fix 
that, if at all, so that we could have more minority firms that 
are involved in the financial services.
    Mr. Carter. Well, some of the major minority firms, like 
Blalock, generally get into most of the underwritings, and most 
companies now realize that they need to have these firms in 
their underwritings. But I don't know--I have no solution to 
the issue of private equity or venture capital excluding those 
firms.
    Chairman Baker. Unless there is further response, the 
gentleman's time is expired. Anyone else wish to speak to that 
issue? If not, Mr. Campbell, did you have a question?
    Mr. Campbell. Yes, if I may, Mr. Chairman.
    Chairman Baker. Please proceed.
    Mr. Campbell. A brief question. I, at one time, owned 
dozens of securities. And last year, at one point, I--the post 
office actually had to call and come by and deliver about a 2-
foot stack high of lawsuit things, shareholder lawsuits where I 
was--and I was looking at all of these, versus the number of 
securities that I owned, and realized it was something like 60 
or 70 percent of every security I had ever owned in that period 
of time had been sued. Getting to--and obviously, as a--on my 
behalf, as a shareholder, without my knowledge or consent.
    You have all talked about it. And it is clearly an issue. 
What do you--what specifically do you--and I think you 
addressed this a little bit, Mr. Speaker, but what do you think 
will enable shareholders to still redress grievances when they 
have genuine, legitimate grievances, but will stop all this--
where every single company seems to get sued at one point or 
another for a manipulation, or some other--just simply because 
there appears to be there is something in it for the trial bar?
    Mr. Carter. My view would be a loser-pays type of tort 
reform would put a big dent in frivolous lawsuits.
    Mr. Campbell. Anyone else?
    Mr. Evans. No, I would support that, too. And I think 
that's a very good option to consider.
    Mr. Gingrich. And I would just say, first of all, that this 
is a topic--you should look at what Missouri has done recently, 
because they passed very extensive litigation reform. One of 
the things they did that is most important is they do not allow 
the plaintiff to shop for the right jurisdiction.
    Because, as you know, there are some counties in the United 
States which you could almost guarantee that you are going to 
lose the case to the plaintiff. And they now require that the 
case be filed in the county in which the incident occurred, 
unless both parties agree to move. That, by itself, has begun 
to change things.
    And I couldn't agree more on loser pays. I would simply add 
that--to go back to--there was an experiment run by a Federal 
judge in San Francisco, who said to the law firm that brought 
in the case, the class action suit, that he was going to put it 
up for bid, because he thought that since the law firm had 
formed the case, it clearly had a vested interest.
    At that point, when they put it up for bid, the entire case 
disintegrated, because in fact, law firms didn't want to be 
involved in actually bidding to provide this service on behalf 
of the people who sue.
    I just want to make an observation that is probably obvious 
to all of you, but I think we make it more complicated than it 
should be. The Chinese are graduating vastly more engineers 
than we are, and we are graduating vastly more lawyers. And the 
reason is, we have designed a system which incentivizes young 
people to think that if you want to some day own a baseball 
team, being a trial lawyer is a reasonable road to achieve 
that.
    As long as it is profitable for these firms to behave in a 
purely commercial manner--this is not about the profession of 
law anymore; this is about the manufacturing of money by the 
creation of conflict for the purpose of increasing incomes. 
Nobody should be surprised that we are going to have a rapidly 
growing litigation industry in America, and that the cost is 
going to be killing jobs, diverting money away from workers, 
and diverting money away from stockholders to lawyers.
    And as a result, other companies are going to look and say, 
``Why would I want to go to the United States and get sued?''
    Mr. Campbell. Thank you. I yield back.
    Chairman Baker. I thank the gentleman for yielding back. 
Mr. Hinojosa?
    Mr. Hinojosa. Thank you, Mr. Chairman. I have listened 
attentively to the information that the panelists have given 
us, and I want to address one of Secretary Evans' concerns 
whereas $9 out of every $10 raised by foreign companies through 
new stock offerings were raised in the United States in the 
year 2000, the reverse was true by 2005: $9 out of every $10 
raised by foreign companies through new company listings 
occurred outside the United States, principally in Europe.
    Also of concern, Secretary Evans points out that in 2005, 
23 out of the 25 largest IPO's did not list in the United 
States. It seems to me that this trend is going to have a 
negative impact on the stock market.
    Mr. Carter, with the recent merger of the New York Stock 
Exchange and Archipelago to form the New York Stock Exchange 
Group, is the new company well-positioned to compete with your 
international competitors? If yes, why? If no, why?
    Mr. Carter. Yes, it is, because prior to our becoming a 
public company and merging with a company called Archipelago, 
we only had a single product, which was equities. Today, we 
will be able to offer derivatives, options, and fixed income 
instruments through our own floor, or through our electronic 
crossing network.
    So, one of our strategic objectives was to increase our 
product offerings, which traditionally had not been offered 
through the New York Stock Exchange.
    Mr. Hinojosa. Thank you. Mr. Evans, you served as the 
chairman of the board of regents at the University of Texas, 
and I remember the tremendous leadership that you showed, 
helping us create more engineers and technicians. So some of 
your comments seem to lean toward education, which I like.
    What do you think we could do to encourage more ventures 
between the public and private sector? Would you support a line 
item in the budget to ensure that we invest both in the K-12 
programs and then our universities, in order to meet the 
Administration's goal of an additional 100,000 engineers in the 
next 5 years. We need your help.
    Mr. Evans. Well, Congressman, you do bring up a very, very 
important issue. I mean, in my judgement, in terms of America's 
competitiveness and global leadership in this global economy as 
we move into the next generations, there is not any issue that 
is more important than the development of scientists and 
mathematicians here in our own country. That's where innovation 
is, that's where problem-solving comes from, that's where 
creativity is, it's what is driving this economy today, the 
great focus we put on it in the 1960's and 1970's, and we need 
to renew that focus.
    I have been to your campus, the University of Texas--Pan 
American, and you have one of the finest engineering 
facilities, quite frankly, in the country. I compliment you on 
your HESTEC program. I think that spotlights it well.
    This is, I think, a national debate, a national dialogue, 
that is critical to our economic future and leadership, and it 
needs to be a dialogue between the public and the private 
sector. And I think corporations are, indeed, engaged in this 
dialogue.
    When I went to the University of Texas--Pan American, I can 
remember many, many, many Dell computers that were in the 
engineering labs there, and so I think you have companies like 
Dell, and Exxon, and others, that are getting very much 
involved in what they can do to promote science and engineering 
all across America.
    What we do further? I mean, it's just something we ought to 
talk about and discuss, because as I look at--you know, another 
issue that was brought up--I think it was Congressman Feeney, 
earlier--I mean, the two single most important issues, in my 
judgement, for our future are the development of scientists and 
engineers and mathematicians. The most important problem they 
have to solve is the delivery of affordable available clean-
burning energy.
    And so, those two issues are the biggest issues in my mind 
challenging our competitiveness and the future global economy, 
and it ought to be a joint venture between the public sector 
and the private sector. Some of that exists today. Can we do 
more of it? Yes, we can. I would suggest more--I would suggest 
hearings on it, quite frankly. What are the additional ways we 
can get the private sector more involved in promoting the 
education across campuses in America?
    Mr. Hinojosa. I personally want to thank each one of you 
three presenters, because I think that you bring forth a lot of 
good information. And I just hope that Congress can take it and 
do something with it. Thank you, Mr. Chairman. I yield back.
    Chairman Baker. I thank the gentleman. Mr. Feeney?
    Mr. Feeney. Thank you, Mr. Chairman. Earlier I referred to 
a study entitled, ``The Sarbanes-Oxley Debacle: How to Fix it 
and What We Have Learned.'' I would ask permission to insert 
this in the record.
    Chairman Baker. Without objection.
    Mr. Feeney. On page 18--or 11--of that study, by the way, I 
quote the authors, ``A conservative estimate is that the 
indirect costs of SOX are great than $1.1 trillion, and that is 
before we have imposed it on a lot of the smaller companies.''
    I really appreciate all three of your testimonies with 
respect to litigation abuse, and the competitiveness of 
America's world markets, and would hope that my Chairman 
Sensenbrenner would invite all of you to come back to the 
Judiciary Committee, where we have primary jurisdiction over 
those issues.
    But today, I am interested in the regulatory burdens 
imposed by Sarbanes-Oxley, in particular. As Congressman Meeks 
said, I have actually--sometimes with my good colleague--I 
visited all three of the major exchanges in Chicago. As Mr. 
Carter knows, I have visited both of the major exchanges in New 
York. I have come to the conclusion that Sarbanes-Oxley 
sections 1 through 403 are, on balance, a huge net plus for 
confidence in American capital markets. It's just 168 words in 
section 404 that have resulted in the $1.1 trillion indirect 
cost to our economy.
    And I am afraid that, because of those 168 words, we are 
outsourcing America's world leadership in capital markets. 
Roughly a century ago, that leadership shifted from London to 
the United States. I'm afraid it's going to the--in the 
opposite direction.
    Also, private equity is, as Mr. Carter suggested, a very 
inefficient way to raise equity. I wonder, if 404 had been in 
place, whether individual American investors would have ever 
had an opportunity to invest in a company like Dell, or 
Microsoft, or any of these others that have grown so 
exponentially, in large part, because of their access to 
competitive markets.
    And when I look at the fact that pre-Sarbanes-Oxley, 90 
percent of money raised by foreign entrepreneurs in the public 
forum was raised in America, and now 90 percent is being raised 
overseas, when I look at the London stock market that is 
advertising itself throughout the globe, including in America, 
as a Sarbanes-Oxley-free zone, I met with Mr. Tsang, the chief 
financial officer in Hong Kong, and asked him whether a Hong 
Kong entrepreneur would consider listing, as he went public, on 
the American stock exchange.
    He actually laughed at me. Not in an impolite way, but he 
said, ``Congressman, there is no way.'' And I said, ``Is that 
because their lawyer or accountant would advise them not to do 
so?'' He said, ``Nobody would have to talk to their lawyer or 
accountant to know that the burdens of Sarbanes-Oxley would 
preclude consideration of America as a place to raise 
capital.''
    That being said, section 404 is 168 words. Mr. Carter, do 
you know whether Standard & Poors, or Moody's, the most 
important rating services in the country, avail themselves, or 
use 404 on a regular basis?
    Mr. Carter. You mean for their own operations?
    Mr. Feeney. Yes.
    Mr. Carter. I am--
    Mr. Feeney. No, no, I'm talking about--evaluate the health 
of a company. Do they rely on 404 in a big way?
    Mr. Carter. Well, only to the extent, in the annual proxy 
or the annual report, if they saw that the company failed to 
meet 404 standards, as reported by their auditor, I think it 
would certainly impact their--
    Mr. Feeney. But they don't actually pull the 404 report, to 
your knowledge? Actually, I have talked to them, and they say 
they don't--they have never looked at a 404 report.
    Mr. Carter. I don't believe that would even be accessed by 
them.
    Mr. Feeney. Another question I have about the burdens that 
have been imposed. Last year, I am told, we had roughly 1,200 
restatements of--by corporations in the public arena in 
America. The standard for restatements is that if it's 
something that would affect investor confidence, there ought to 
be a restatement, which, of course, is expensive, requires a 
new auditing procedure.
    My understanding is that less than five of those 
restatements had any impact on investor behavior in the 
markets. And is the restatement proliferation that we're 
seeing, in part, imposed because of 404 and Sarbanes-Oxley 
requirements? Really, for any of the panelists, if you know. I 
don't know.
    Mr. Carter. I would think it would be more in line with the 
companies and the CEO's and CFO's are concerned about 
litigation if they failed to describe some change in accounting 
procedures, even though it was below the materiality standard, 
which might be 5 percent.
    Mr. Feeney. And finally, Mr. Speaker, you talked about the 
litigation explosion that's about to occur, in part, because of 
Sarbanes-Oxley.
    Do you think it's not just public companies that are 
threatened, but because of a--trial lawyers will assert that 
even privately-held companies, and even charities--I have them 
in my office all the time--they are terrified that they are 
going to be the next victims, once we set these impossible-to-
meet accounting standards that privately held firms and, 
indeed, charities may be subject to some of the same litigation 
abuses we now see in the public markets?
    Mr. Gingrich. I think we have managed, over the last 30 
years, to create a culture in which there--you have to think of 
it as an organic growth. There is a system evolving in which 
there is a permanent need to find new reasons to sue. Because, 
otherwise, you can't expand the pool of money flowing into the 
litigation industry.
    Just think of it as an industry. This is an industry that 
is in a growth curve, designed to find more and more--they've 
got very bright, new lawyers that show up at their law firm, 
and they say, ``Find the next four reasons to sue.'' And every 
year, there is a slight expansion of that.
    And part of the reason that I suggested that this 
subcommittee hold hearings on the impact of State attorneys 
general is the combination of State attorneys general who have 
criminal power, working with private law firms to, in effect, 
hunt down and blackmail companies, is a very chilling long-term 
prospect in this company, and is an intervention in the 
national economy by lawyers usurping Congress's role.
    And I think it's a--for big corporations, whether public or 
privately held, for big corporations and for fairly successful 
people, that is a very serious long-term threat if it continues 
to metastasize into a sort of a cancerous assault on the system 
at large. And it has grown dramatically in the last 10 or 12 
years.
    Chairman Baker. The gentleman's time has expired. I do 
understand that some of our panelists may have time 
constraints. We--don't let the committee arbitrarily hold you 
if there is a time obligation, but just let us know, as 
appropriate. Mr. Speaker has to leave at noon, or a little 
after noon? Mr. Israel, we will go with him, then.
    Mr. Israel. Thank you, Mr. Chairman. I would like to follow 
up with Mr. Carter on Mr. Feeney's concerns about section 404. 
I understand the notion of trying to exempt small firms from 
the--what some would argue are the onerous burdens of section 
404.
    One of the concerns I have is that if you look at the tech 
boom several years ago, small firms became big firms. And I 
wonder whether your suggestion of applying a risk-based review 
to all firms is the answer, and would provide for more 
consistency and reliability.
    As I understood your testimony, this will provide for a 3-
year benchmark with intensified annual reviews on specific 
criteria in the interim. And I noted from your testimony that 
you have a very good analogy. You talk about the joint counsel 
on the accreditation of hospitals, auditing hospitals every 3 
years. Their work is vitally important to the protection of 
U.S. citizens, and their very survival, and yet hospitals don't 
get audited on an annual basis.
    So, I wondered if you could just help us kind of flesh out 
the details of the proposal as you--
    Mr. Carter. Well, I am also--one of my other retired duties 
is that I am the chairman of the Boston City Hospital, which is 
the old St. Elsewhere, from TV days.
    If, in fact, the hospital has some serious lapses in 
treatment, patient deaths and things like that, then they do 
get audited, absolutely, every year.
    The proposal that we make, or the suggestion, is that if a 
company could establish the materiality criteria--that is, 
something in their operating environment, or their business 
model that produces serious risk--those particular items--and 
it might be anywhere from 10 percent for a small company, to 25 
percent for a big, multi-national company, would be audited 
every year.
    If, in fact, that audit produced a satisfactory result of 
internal controls, then there would be no 404 baseline audit 
done that year. So that would be year one. Year two, you would 
do the same thing. If, in fact, on year two they flunked that 
test, they would do a baseline 404. If they passed it, they 
would still do, at the third year, the baseline 404.
    But these are very specific criteria. For example, in a 
commercial bank you might look at the loan losses. And if the 
company was providing less loan losses than their loss 
experience told them to do over 10 years, that would be a 
materially significant risk, which is if loan losses go up, it 
will impact the revenue.
    The advantage of this, of course, is that it can be done by 
the SEC and the Oversight Accounting Board; it does not require 
reopening the legislation.
    Mr. Israel. Thank you. And before I yield my time, Mr. 
Chairman, let me just say that I have an interest in running 
the traps on this with you, and seeing if we can create a 
dialogue with some of my constituents in New York, who have 
complained to me consistently about the straight-jacket 
approach of section 404.
    Mr. Scott. Would the gentleman yield?
    Mr. Israel. Yes, I yield to my colleague.
    Mr. Scott. Thank you very much, Mr. Israel. I wanted to get 
this question in, and I appreciate your courtesies before the 
Speaker has to leave.
    I am very, very much concerned about our debt and its 
implications on our capital markets for the future. And as you 
know, I would like all of your opinions on this, but I 
certainly want to get to the Speaker before he has to leave.
    As an historian, Mr. Speaker, you fully realize that 
history is replete with those civilizations and great nations 
who have gone down, and have collapsed for three basic reasons: 
one, global over-reach; the other one is because of a loss of 
resources at home; but the most glaring one is a ballooning 
debt, especially in the hands of foreign governments and 
institutions.
    On all three of those criterion, it points to that the 
United States is in serious, serious trouble. But nowhere are 
we in as great a trouble as with our ballooning debt, and with 
that debt, nearly 50 percent of our debt in the hands of 
foreign countries and foreign capital markets.
    And I want to try to put our hands around this, especially 
given the fact that in the--in this last 5-year period, under 
the President, this present Administration, and under this 
Congress--couldn't have been without the collaboration of 
both--we have borrowed, in the last 5 years, more money from 
foreign governments and foreign institutions, than all of the 
preceding 41 Presidents and Administrations in the history of 
the United States.
    Chairman Baker. Mr. Scott, you are going to need to give 
him a chance to respond, because he is going to have to get out 
the door here in just a--
    Mr. Scott. Right. Would you please give me your response 
on--in terms of the significance of this debt, and the peculiar 
perilous position it is placing our country in?
    Mr. Gingrich. Well, you picked a heck of a question to 
close out my opportunity here. But it's an important question, 
and it's worth taking a minute on.
    First of all, I believe, both as a practical long-term 
matter, and as a moral matter, that governments ought to 
balance their budget. And I was very proud of the fact that, in 
the late 1990's, we did get 4 straight years of a balanced 
budget, and we paid off $405 billion in debt. And I think 
that's a useful--strategically, the Congress should try to get 
back to that.
    And to do that, frankly, you have to transform the health 
system, because health is 26 percent of all Federal spending, 
and the fastest growing section. So if you're serious about 
getting to a balanced budget, you have to really think through 
transforming health.
    Second, I worry a fair amount about the international debt 
and the degree to which we are spending more overseas than we 
are selling. There are some technical reasons, but that's 
partly a function of our strength, because a lot of people 
around the world want to send money here because we're the best 
place to invest in the world.
    But I would say this reinforces Secretary Evans' point that 
there is no single topic, other than transforming health, that 
Congress could take up that would be more important than the 
energy issue, because a substantial portion of our total 
balance of trade problem is the degree to which we now borrow--
buy huge quantities of oil overseas, and basically ship the 
money out.
    So, if you had--if you were back to where we were 30 years 
ago on energy, and if you had transformed the health system, 
you would be very close both to balancing the Federal budget, 
and having a dramatically healthier--long-term balance--so it 
is an important topic, and it's one worth--certainly worth 
pursuing.
    Chairman Baker. The gentleman's time is expired. And let me 
express appreciation to you, Mr. Speaker, for your time and 
appreciation here today. It has been most helpful. And we will 
be calling on you as we go forward. Thank you very much, sir. 
Mr. Lynch?
    Mr. Lynch. Thank you, Mr. Chairman. I want to thank the 
ranking member as well, for holding this hearing.
    One of the hats that I wear on another subcommittee is on 
the Committee on Government Reform, Subcommittee on Regulatory 
Affairs. And while this committee is looking at a whole set of 
issues, that subcommittee is looking specifically at 404. And I 
appreciate the Secretary and also Mr. Carter, with their 
suggestions earlier in the hearing.
    It seems like we're in general agreement on the fact that 
the effect of 404, generally, is negative upon small and 
medium-sized businesses, which are principally the source of 
our innovation and competitive edge.
    However, being mindful of what the Speaker said earlier 
about the pendulum of scandal, and then the pendulum of reform, 
it comes back the other way. And sometimes it overswings, if 
you will.
    I would like to talk about what our subcommittee thinks 
might be a consensus view. We're concerned about exemption, and 
that the idea of exempting companies from filing under 404 may 
be overswinging the pendulum a little bit. And we are also 
concerned about what might happen on the voluntary compliance, 
or random auditing scenarios, not that those have been 
dismissed--I think we have an open mind toward it--it's just 
that there is some concern that we may be eliminating some of 
the benefits of Sarbanes-Oxley, and eliminating some of the 
transparency and the accountability, by going that route.
    But one thing that I think we are hearing from both the 
panel and some members up here is that, first of all, the idea 
that right-sizing this section 404 so that we perhaps go to the 
materiality standard, and we're not asking for a full-blown--
what I call the full employment act for accountants approach, 
which we have right now. If we went to a materiality standard, 
and went to a biannual compliance, rather than every year--and 
I know, Mr. Carter, you suggested every third year; I'm a 
little worried about that, about having 36 months go. Would we 
be losing some of the accountability and some of the 
transparency that we're getting right now from Sarbanes-Oxley 
by moving the reporting out 3 years?
    But if you take those two initiatives in conjunction, one, 
adopting a materiality standard, instead of the everything out 
of the sun standard, and you make it every other year, it would 
seem that that step alone would reduce the cost by 50 percent, 
roughly speaking. Would those two steps, in your mind, be 
enough to have a significant impact on the cost right now, and 
the burdens on small and medium-sized businesses?
    Mr. Carter. Well, we would not support exemptions, nor 
would we support voluntary compliance. I think the--don't be 
confused about the biannual nature and the third year. In each 
of the years, if the materiality criteria were met, you would 
not have to do the in-depth 404 audit. If they weren't met, you 
would. And these materiality criteria would be the ones that 
would impact more than, say, 5 percent of the revenue.
    So you certainly could start it on a biannual basis. You 
get a free year, and then you do the 404. I don't think that 
would relieve the burden as much as the third year approach 
would.
    Mr. Lynch. And what about your concerns regarding 
transparency or accountability? You think it's still there 
with--
    Mr. Carter. Well, it would still be there for those 
material items. We're talking about material items that are 
going to significantly impact investor confidence, because they 
would impact the expenses and the revenue.
    Mr. Lynch. I guess what we're concerned about is that if 
something were to slip through the cracks on the materiality 
standard--something is at 4 percent, not 5 percent, it falls 
through, and then over 3 years it balloons into something that, 
a couple of years ago, would have been material but you don't 
catch it because you're waiting every third year. We're 
concerned about things percolating up over that 3-year interim, 
I guess.
    Mr. Carter. Well, if they didn't meet the materiality 
criteria in the intervening years, you would, of course, do the 
full 404 audit. This is why a pilot program would be nice, to 
look at--you could sort of crank that up in 6 or 8 months.
    Mr. Lynch. Yes, okay. Mr. Secretary, your thoughts?
    Mr. Evans. Well, I don't have a lot of the facts as to how 
much it would save or wouldn't save. But let me just say this. 
I mean, the benefits of Sarbanes-Oxley, to me, have been 
enormous. And they have been enormous because the one thing 
that was lost in 2001 was trust in the markets.
    Mr. Lynch. Right.
    Mr. Evans. I mean, as I travel around the world, people ask 
me all the time, ``How has America been so successful?'' And I 
always tell them, ``Well, it's our freedoms, it's our 
democratic, capitalistic system that creates this incredible 
environment for competition, it leads to innovation, our 
productivity, and all of that.''
    And third, I tell them, it's ``the American people are good 
people. They're honest people, they're decent people, they tell 
the truth.'' And so, when that last tenet is violated, it hurts 
the character of the country, and it shakes the trust and 
confidence of the investors. And that's what happened.
    And so, Sarbanes-Oxley stepped in, and however many pages 
it is, and however many items it is, the main thing it did is 
it restored trust in the markets. And so, now what we have to 
do--but it also, at the same time, created a lot of 
uncertainty. And that's what I am sure caused a lot of other 
companies angst as to, ``Do I want to really get into the 
middle of that, not knowing really what it means to me yet,'' 
as a company or as a CEO? ``So maybe I will just go to some 
other exchange until I more clearly understand the impact of 
Sarbanes-Oxley on my company if I wind up listing there.''
    So, you have to--you know, you have the trust that I think 
it restored, and I think that's evidenced by the remarkable 
results of the stock market over the last 3 or 4 years since 
then--not all attributable, of course, to Sarbanes-Oxley. We 
have a strong economy, but the market is up about $5 trillion 
in value.
    But at the same time, it created some uncertainty, and we 
have got to work through these various areas of it that seem to 
be somewhat troublesome, like 404. And I don't have enough of 
the facts to tell you, Congressman, you know, how I would do 
it, whether I would have, you know, every other year review, or 
make it voluntary, or what I would do with it, but it seems to 
me that is an area that is stifling innovation, it's stifling 
entrepreneurs, it's draining energy away from where we ought to 
be directing energy in this country for innovation, and 
creativity, et cetera.
    So, you know, without the facts, I have a hard time, you 
know, telling you exactly what I would do with it. But I would 
look at it hard, and probably do something with it. But don't, 
by any means, underestimate the power of Sarbanes-Oxley and 
what it did to restore trust in our markets at a very, very 
important time.
    Chairman Baker. The gentleman's time is expired.
    Mr. Lynch. I just want to thank both of the gentleman for 
helping the committee out with its work. Thank you.
    Chairman Baker. I thank the gentleman. And Mr. Scott is 
going to be recognized now on his own time for other members. 
He was yielded time by Mr. Israel, so he is entitled to his own 
time. Mr. Scott?
    Mr. Scott. Thank you very much, Mr. Chairman. I appreciate 
your courtesies. I would like to ask both of you a question. 
First, let me start with you, Mr. Carter, in terms of the 
health of the New York Stock Exchange.
    Have any New York Stock Exchange-listed companies left the 
Exchange this year? And if so, what were the reasons that the 
cited for leaving?
    Mr. Carter. There have been a number of foreign countries, 
non-U.S. companies, companies like Vivendi and Kohl, a company 
in Australia, who left. And they left because of those four 
reasons: the litigation; atmosphere; 404; the depth of their 
own markets allowed them to raise plenty of capital.
    Mr. Scott. How would you describe this problem? Do you see 
this as a trend? Do you see this as just a blip on the radar, 
or do you see this as presenting some serious problems for the 
future of the Stock Exchange?
    Mr. Carter. We don't view it as an anomaly just for 1 year, 
we view it as a trend, starting in 2000, where we had 9 out of 
10 IPO's registered here in the United States, and last year we 
had 1 out of 25. This year I think we need a few more months in 
the year before we see what's going to happen.
    Mr. Scott. Now, have any New York Stock Exchange-qualified 
companies that might, in the past, have listed on the market 
decided to list elsewhere?
    Mr. Carter. Yes, they have. I think the most significant is 
the fact that about--almost 200 offerings, raising about $80 
million, listed--raised the money here, but did not list on a 
U.S. Stock Exchange. They raised the money through the so-
called 144A offerings, which are not available to the average 
investor. So this is all part of a trend.
    Mr. Scott. What were the reasons that they decided for that 
decision, for their decision?
    Mr. Carter. It was the same--
    Mr. Scott. The same?
    Mr. Carter. Yes.
    Mr. Scott. Going to our tax code, outside of the 
regulations and the four reasons you've cited, do you believe 
that our current tax code is too complex and cumbersome for 
foreign companies to navigate? And did the President's 
commission on tax reform provide any helpful ideas on improving 
the system? And do you have any ideas on how to have a more 
fair tax decision? One, is it a factor in making it more 
difficult for foreign companies--
    Mr. Carter. The complexity is a factor, but it doesn't 
measure up to the top four that we have talked about here 
today.
    Mr. Scott. Okay. Mr. Evans, let me turn to you, please. You 
recommend that we evaluate whether rules and regulations are 
effective and appropriate. Can you evaluate the current 
regulatory structure, including Sarbanes-Oxley, on whether they 
are achieving their intended objectives?
    Mr. Evans. Well, Congressman, I think probably some are, 
many are, and probably many are not. Much of the regulatory 
structure was put in place in the 1930's. Our economy, 
obviously, has changed dramatically since the 1930's. So I 
think there is a variety of regulations that do need to be 
reviewed and thought through.
    We have a tremendous amount of duplication, in terms of 
jurisdiction, a lot of jurisdictional overlap that I know a 
number of our members have to deal with. We have members that--
in the financial services forum--that would have to deal with 
the OCC and the FDIC and the Federal Reserve Board, and the 
SEC. Others would have to deal with the Federal Reserve and the 
SEC, and then State regulatory bodies.
    And so, there can be a tremendous amount of overlap. And in 
some instances, just conflicting regulations. So, you know, I 
just--I think it is a regulatory structure that was, as I said, 
put in place back in the 1930's, and there are elements of it 
that probably need some serious review. Do we need four or five 
different agencies regulating the same institution?
    Mr. Scott. Do you feel that they impose unnecessarily high 
cost burdens on the regulated firms?
    Mr. Evans. Indeed I do. Now, I can't tell you--you know, I 
don't have any specific studies. I can just tell you that, 
indeed, they create inefficiencies in the marketplace.
    Mr. Scott. And you would agree especially on smaller 
businesses?
    Mr. Evans. Indeed I would.
    Chairman Baker. And the gentleman's time has expired, if I 
may, Mr. Scott.
    Mr. Scott. All right, thank you, Mr. Chairman.
    Chairman Baker. I thank the gentleman. Ms. Velazquez?
    Ms. Velazquez. Thank you, Mr. Chairman. Mr. Carter, I heard 
your answer to the question raised by Mr. Meeks and Mr. 
Hinojosa regarding the merger of the New York Stock Exchange 
with Archipelago, and how you feel that you are in a better 
position today to compete in the ever changing global capital 
markets.
    The second part of that question is, do you believe, giving 
as an example, the bid that was put out by NASDAQ to purchase 
the London Exchange, do you believe that for U.S. exchanges to 
remain competitive globally, it is necessary to pursue mergers 
with foreign exchanges?
    Mr. Carter. Well, a merger applies--two companies come 
together, and a single company is the result. It could very 
well be that some of the strategic advantage could be done by a 
minority participation. And we certainly want to participate in 
that on a global basis.
    Many of the markets in Asia are owned by the government, so 
they are probably not going to allow a merger. But we still 
have plenty of opportunity in this country, too.
    Ms. Velazquez. Okay. In order, Mr. Carter, to go public 
today, small companies must be more sophisticated and more 
mature than ever before, and they must employ a sizable 
administrative work force to comply with the many regulations 
they face.
    In addition, other factors have increased the challenges 
that these firms face in accessing the public markets, such as 
the liquidity demands of institutional investors, as well as 
consolidation within the underwriting industry. Do you believe 
it is harder for small firms to go public today than it has 
been in the past?
    Mr. Carter. It certainly is harder, administratively. But 
any increased difficulty that causes smaller companies to not 
go public has been more than replaced by the large amount of 
cash available through private equity, hedge funds, and venture 
capital that will allow our smaller company to develop the 
capital resources they need in order to expand.
    So, we do see, though, a reluctance of the venture capital 
people to take a company public, and sometimes there is no need 
for it, because they can generate plenty of capital for that 
company to expand.
    Ms. Velazquez. Okay. Thank you, Mr. Chairman.
    Chairman Baker. The gentlelady yields back. Mr. Davis?
    Mr. Davis. Thank you, Mr. Chairman. Let me thank the 
gentleman for being so indulgent with us. Mr. Secretary, as you 
recall from your days in the cabinet, the way these hearings 
typically work is that the people you're really responding to 
have long left by the time you get to ask your questions.
    So I regret the Speaker is not here, the former Speaker, 
and that Mr. Feeney is not here. And in a sense, my questions 
would probably be better directed to them. But I do want to get 
your response.
    Mr. Gingrich and Mr. Feeney talked a good deal about the 
litigation climate and the securities world in the past several 
years, and they painted a rather dire picture of companies 
having to spend enormous amounts of money on legal resources. 
They painted a rather dire picture of our competitiveness being 
diminished because of rising lawsuit and tort presence in the 
world of securities.
    Every now and then I think it's always helpful to let facts 
sometimes get in the way of a good rhetorical argument. If I 
understand the data correctly, we had fewer lawsuits last year 
for securities-related claims than we did in the average in 
1996 to 2004, around 190-some suits a year to as many, in some 
years, as 215 or 216, down to apparently 175 last year.
    As I think both of you are aware, the Supreme Court issued 
a ruling, I think several years ago, which made it dramatically 
harder, if not impossible, for litigants to go into State court 
in securities fraud cases. The Supreme Court recently issued a 
ruling tightening the standard of proof in a fraud case by 
strengthening the causality requirement.
    As I understand it, empirically, the damages awarded in 
these cases are less than they were during the period 1996 to 
2000. And of course all of you are aware of the Securities 
Litigation Reform Act, or something similar to that, was passed 
in 1995, which made its own substantive changes limiting 
executive liability, and limiting large accountant liability.
    So, the facts do seem to get in the way of an argument. I 
have no doubt whatsoever that every company in America spends a 
lot of its resources on litigation. I practice plaintiff side 
and civil defense side, so I am certain of that.
    But let me--I should just ask you, Mr. Carter. As you 
talked to investors in the market, as you talked to large 
companies in the market, what's your response to what I just 
said, the fact that, in many ways, the litigation climate has 
dramatically improved in the last several years?
    Mr. Carter. I think most people would not agree with you on 
that. They would not feel that the litigation climate has 
improved. The statistics I see show that more institutional 
investors are suing, as opposed to individuals, and second, 
that the settlements have been larger over the last few years. 
But I would say the average investor would not necessarily 
agree that the litigation situation has gotten better.
    Mr. Davis. Put it in some perspective for me, though, 
because I'm trying to get a sense of exactly what those 
individuals would have Congress do, and what they would have 
the courts do.
    Congress and the courts have made it harder to bring these 
kinds of cases, from a substantive standpoint and from an 
interpretive standpoint, by the court. So, what dramatic 
acceptable direction is there for Congress and the courts to 
go, given all the things I have described earlier, and all the 
reductions in the scope of liability?
    Mr. Carter. Well, I would say two things. I think the 
chairman's idea about loser pays will certainly decrease the 
number of individual lawsuits. I go back about 20 years to when 
Senator Dole and Senator Kassebaum got tort reform for aircraft 
manufacturers that put a 19-year limit on the fact that you 
could sue somebody that made an airplane that you crashed in. 
And they tied that litigation reform to jobs. I--
    Mr. Davis. Let me ask you--and I cut you off simply because 
I'm last, and my time is limited. The only problem I have with 
that, Mr. Carter, those of us who have been in the litigation 
world, there are meritorious cases that sometimes lose. And I 
assume you would agree with me, that there are meritorious 
cases that, for whatever reason, still sometimes are not 
successful. Do you agree with that, Mr. Secretary?
    Mr. Evans. I do--to a certain degree I agree with that. I 
think--
    Mr. Davis. Mr. Carter, I assume you also would agree there 
are certainly meritorious cases that sometimes end up being 
unsuccessful.
    The reason that I make that point is the notion of losers 
pay sounds attractive to people. But that presumes that a 
losing claim is a frivolous claim and a non-meritorious claim. 
We know that's not always the case. And we know that a losers 
pay scenario makes it very, very difficult for all but the most 
well-heeled investors.
    And Mr. Carter, I think you made this point. Claims arising 
by large classes of investors, but smaller classes of 
investors, the ones who would be particularly deterred, it 
would seem, would be the real victims of this losers claim 
scenario.
    Mr. Evans. Yes, but the other side of that, Congressman, is 
many, many, many suits are filed that companies are obliged to 
go ahead and settle before they really go through the process, 
because they can't afford to destroy their image--
    Mr. Davis. I agree, it's a balancing act, and I am just 
trying to--
    Mr. Evans. And that's the other side of it.
    Mr. Davis. Right.
    Mr. Evans. I mean, there are many who say, ``Look, I can 
win this case, there is no question about it.''
    Mr. Davis. Right.
    Mr. Evans. ``But I can't afford to have my company's name 
on the front page of the New York Times.''
    Mr. Davis. Yes. I make my last 5 seconds' observation. I 
don't dispute that the other side exists, I am simply making 
that point, in the interest of balance. The job of this 
institution is to realize that there is no perfect world, there 
are legitimate interests on both sides of that argument. Mr. 
Chairman, I think my time is up.
    Chairman Baker. The defense counsel's arguments have been 
most educational, but I hesitate to admit that they were not 
totally persuasive as of the moment. I thank the gentleman for 
yielding.
    Let me express to each of you the committee's appreciation 
for your participation. I have not had occasion to visit with 
Mr. Kanjorski, but it comes clearly into view that over the 
coming months we would be well served by a task force of folks 
of your stature, working with the committee on identifying the 
top 8, 10, 12 items on which we might be able to reach 
agreement--as, for example, pursuit of the pilot program that 
you have suggested here today.
    And so, at a later time, subject to consultation with Mr. 
Kanjorski, we may get a letter out to you indicating a desire 
to meet more informally. We have done this on the subject of 
insurance reform in the nature of roundtables, and we found 
them very helpful for our members to be able to get thoroughly 
engaged in understanding the need and justification for some of 
the things you have suggested doing here, with an eye toward 
perhaps some sort of legislative program for perhaps early next 
year.
    But we look forward to working with you, we appreciate your 
contributions, and thank you for your time. And when 
appropriate, we will get our second panel of witnesses forward.
    Let me welcome you, and express appreciation for your 
patience. Our hearing has gone much longer than we had 
anticipated. As you know, we will make your full statement part 
of the official record. We ask that you try to keep your 
remarks to the 5 minutes customary.
    And with that, I would call on Ms. Maria Pinelli, 
representing the Americas Strategic Growth Markets Leader of 
Ernst & Young. Welcome.

 STATEMENT OF MARIA PINELLI, AMERICAS STRATEGIC GROWTH MARKETS 
                   LEADER, ERNST & YOUNG, LLP

    Ms. Pinelli. Good afternoon, Mr. Chairman. My name is Maria 
Pinelli, and I am the Americas Strategic Growth Market leader 
for Ernst & Young. I am here today to present the key findings 
from Ernst & Young's third annual global IPO report. I have 
submitted our full report, along with my written testimony.
    Today, I will highlight the major global IPO trends that we 
found. Trend number one: globalization of the capital markets 
continues. 2005 was a very strong year for the global IPO 
markets. The total capital raised increased by over one-third, 
from $124 billion in 2004, to $167 billion in 2005, the largest 
amount raised since 2000.
    Although the United States is the dominant player in the 
global capital markets, there are over 50 exchanges competing 
for $46.8 trillion of capital around the world. Six exchanges 
dominate the exchange market: The New York Stock Exchange; 
NASDAQ; London; Euronext; Tokyo; and Hong Kong. But the United 
States maintains the lead in both the amount raised, and number 
of IPO's.
    The New York Stock Exchange and NASDAQ alone represent 38 
percent of the total global market cap. For the 10-year period 
1995 to 2005, the New York Stock Exchange grew almost 200 
percent, and NASDAQ grew almost 250 percent. In spite of this 
U.S. growth, there is legitimate attention focused on the 
growth of other exchanges, such as the Hong Kong stock 
exchange, which increased 135 percent in the same 10-year 
period.
    There are many reasons for the recent growth of non-U.S. 
exchanges. For one thing, many exchanges are engaging in highly 
aggressive marketing campaigns to attract new listings. We have 
to remember that these exchanges are businesses, competing for 
a share of a $46.8 trillion market.
    Trend number two: state-owned enterprises tend to list on 
local exchanges. Only one of the top 10 global IPO's of 2005 
listed in the United States. The five largest IPO's were state-
owned enterprises from China and France. They listed on 
regional exchanges close to their home markets. We predict this 
trend will continue in the future, driven by emerging capital 
markets such as China and Russia.
    The largest global IPO in 2005--and ever--was China 
Construction Bank's $9.2 billion offering on the Hong Kong 
stock exchange. A large investment by Bank of America for $3 
billion represents the largest single foreign investment into a 
Chinese company. This demonstrates that global and U.S. 
investors are comfortable investing on less regulated foreign 
stock exchange, which is an emerging trend in the global 
capital markets.
    Trend number three: America's reputation as a safe, 
transparent economy results in a higher valuation premium for 
listed companies. Issuers and investors recognize that U.S. 
capital markets demand compliance with a gold standard of 
corporate governance regulations, which result in higher 
valuations than on foreign markets.
    The New York Stock Exchange states in our report that 
motivation for most companies listing in the United States is 
the valuation premium. On average, 30 percent. That accrues as 
a result of adhering to high standards of governance. Foreign 
companies will continue to list in the United States due to 
this valuation premium, and also because of unparalleled 
investor sophistication.
    This is one of our strategic competitive advantages over 
other capital markets. And any temptation to lower these 
standards in competition with foreign exchanges needs careful 
consideration.
    Let me give you an example that says it all. Baidu.com, a 
Chinese search engine company much like Google, cited market 
maturity, investor understanding of their business, regulation 
requirements, and the ability to achieve a corporate identity 
as an international company as the most notable criteria in 
deciding to list in the United States.
    Our future reports will continue to monitor the trends and 
activities of IPO's around the world, and Ernst & Young will 
share these reports with the committee in the future. Thank you 
for this opportunity to testify, and I look forward to your 
questions.
    [The prepared statement of Ms. Pinelli can be found on page 
130 of the appendix.]
    Chairman Baker. Thank you, Ms. Pinelli. Mr. James R. 
Copland, Director, Center for Legal Policy, The Manhattan 
Institute. Welcome, sir.

   STATEMENT OF JAMES R. COPLAND, DIRECTOR, CENTER FOR LEGAL 
                POLICY, THE MANHATTAN INSTITUTE

    Mr. Copland. Thank you, Chairman Baker. And it's my 
pleasure to speak before your committee today. It's an honor 
for me to follow the distinguished panel we just heard from. 
And I would like to say that I would echo many of the 
sentiments expressed by all three of the panelists, and the 
suggestions that were there raised, in terms of litigation 
reform being a priority by Secretary Evans, the schema for 
obstacles that were raised by Mr. Carter, and the multitude of 
ideas suggested by Speaker Gingrich for improving our 
litigation system. I would, with one or two slight exceptions, 
I would agree with every one that was raised.
    I direct the Center for Legal Policy at the Manhattan 
Institute. We have been working on civil litigation reform for 
about 30 years now. And last night we had our annual Hamilton 
Awards dinner, where we honor people who are--who have made a 
long, significant, lasting contribution to New York. It's named 
after our first Treasury Secretary. So I think it's 
appropriate, in the spirit of Alexander Hamilton, to consider 
what's going on with the U.S. capital markets today.
    And we definitely see some disturbing trends. I certainly 
would say that the United States has been and probably, for the 
immediate future, will continue to be the leader in this area. 
But in terms of initial public offerings, as has been alluded 
to, there has been a precipitous decline in recent times, in 
terms of overseas offerings here in the United States.
    In Europe last year, the IPO's were double those of the 
United States, in terms of float, three times those of the 
United Staes, in terms of total offerings, and five times those 
of the United Staes, in terms of the number of overseas 
offerings, i.e. offerings out of the area actually being listed 
there. So this is a disturbing trend.
    And I think a number of the points made by Mr. Carter are 
valid in looking at the reasons here, particularly new 
reporting standards here in the United States under Sarbanes-
Oxley, and especially the prosecutorial environment involving 
many of the State attorneys general offices.
    But I also don't want us to neglect the area of litigation. 
It has been highlighted consistently today as an important 
area. Specifically, from the bankers' perspective, if you look 
at figure three on page eight of my written testimony, you will 
see the long-term trend lines of filings in securities class 
actions. There is a large uptick in 2001, with the collapse of 
the dot-com bubble. What is driving that is a lot of IPO 
allocation suits. So bankers themselves are finding themselves 
much more in the hook in the U.S. market than they used to be.
    And then, secondly, the so-called litigation time bomb that 
Speaker Gingrich alluded to was referenced in the report by 
Henry Butler and Larry Ribstein that was entered into the 
evidence by Mr. Feeney. There certainly are a lot of new 
avenues for suit that have been entered into the risk factor 
for being listed on an American exchange in the last year.
    I would like to just briefly run over some of the broad 
tort statistics and securities statistics before I run into the 
few specific ideas I raise in my written comments for 
consideration by the committee.
    The tort tax in the United States is $260 billion, 
annually. That's 2.2 percent of GDP. You can see the trend 
lines on figure one on page three of my written testimony. And 
basically, you see that since 1950, there has been a four-fold 
increase relative to GDP, and the percentage of our economy 
consumed by tort from 0.6 percent to 2.22 percent. And this is 
the equivalent of a 5 percent wage tax on the economy, bigger 
than the entire corporate income tax. So it's a very sizable 
tax burden that we place on businesses and individuals in our 
society.
    Internationally, if you look at the comparison on page four 
of my written testimony, figure two, Germany, we have about 
twice the tort tax of Germany, three times that of France or 
the UK. So it's a serious competitive disadvantage.
    Now, in terms of securities filings, as was raised in the 
previous panel, there has been an effort--many of you were, 
doubtless, involved. If you were here in 1995 in the Private 
Securities Litigation Reform Act, it's been partly successful, 
but it certainly hasn't lived up to its full promise for 
reasons I will explain as I go into the ideas, I think, that we 
could really focus on, particularly in the securities area, in 
getting ourselves improved, in terms of our competitive 
environment.
    First of all, I would reiterate the notion that a loser 
pays system could be a useful reform. I think many of the 
concerns raised about that system, in terms of access to the 
courts, are simply not applicable in the securities context, 
because these involve large litigation industry shops that 
Speaker Gingrich was alluding to that are well financed and 
diversified.
    I would also add that I think it would be even more useful 
in a mass torts context than in a securities context. I know 
that's outside the scope of this committee, but that's where 
you really see the proliferation of large numbers of individual 
weak claims overwhelming defendants' ability to defend against 
those claims.
    The second thing I wanted to bring up is the failure of the 
lead plaintiff provision of the PSLRA to control abuse. In 
particular, I focus in my comments on the potential that we 
have seen for public State employee pension funds to use those 
provisions and act as lead plaintiffs.
    And because these are often controlled by political actors 
who are influenced by or receiving money from the trial bar, 
the potential for mischief that I outline in my report is 
great. We have seen it in New York. The Louisiana Fund that I 
mention in my report has been notorious, as has been CalPERS, 
and several others.
    So, I think we need to look at keeping employee pension 
funds out of the lead plaintiff business and/or secondly, doing 
what Speaker Gingrich alluded to. This is the practice formerly 
employed by Vaughn Walker, district judge in San Francisco, and 
that is having auctions for class counsel in securities class 
action cases.
    I can discuss this more under questioning, but I think it's 
an idea that deserves a lot of attention. It was ruled not in 
compliance with the PSLRA by the ninth circuit. Judge Alice 
Kazinsky wrote that opinion. So I think he has probably got a 
pretty good case, in terms of the language of the statute of 
the PSLRA, but I think an auction process deserves serious 
scrutiny.
    And then, finally, the pleading standard that was 
heightened under the PSLRA has been adopted inconsistently 
across the circuits. We have seen the higher standard that was 
used in the ninth circuit being effective in weeding out 
frivolous suits, and conversely--and adding a higher percentage 
of strong suits.
    Unfortunately, a lot of the securities cases have started 
moving into other jurisdictions, as you would expect. So 
adopting that heightened pleading standard specifically in the 
statute could go a long way, I think, to deterring some of the 
weaker securities suits. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Copland can be found on page 
77 of the appendix.]
    Chairman Baker. Thank you very much, sir. I appreciate your 
comment. Our next witness is Mr. Lawrence G. Franko, professor 
of finance, University of Massachusetts, Boston College of 
Management. Welcome, sir.

    STATEMENT OF LAWRENCE G. FRANKO, PROFESSOR OF FINANCE, 
   UNIVERSITY OF MASSACHUSETTS-BOSTON, COLLEGE OF MANAGEMENT

    Mr. Franko. Thank you very much, Chairman Baker and 
committee members, for the opportunity to testify. My name is 
Lawrence Franko. I am the author of a recent study on U.S. 
competitiveness in the global financial services industry, 
which is referenced in my written testimony, and is available 
on the worldwide web under that title.
    We have heard today discussion of many threats and concerns 
about U.S. competitiveness in global financial services. I 
don't think we should forget about these threats and concerns, 
but my view is that we should also not forget our strengths, 
and the remarkable position from which we start.
    As Representative Kanjorski mentioned earlier, the 
importance of American firms in the world financial services 
industry is really quite remarkable. Indeed, the U.S. position 
in the most dynamic and rapidly growing segments of the 
industry is even more so.
    There have been many references to IPO's, and how some of 
those--many of those recent ones--have taken place outside of 
the United States. But it is worth noting that U.S. investment 
banks and brokerage houses dominate not just U.S., but 
international capital market transactions, globally. U.S. 
investment banks easily account for two-thirds of the worldwide 
underwriting of these IPO's.
    Our money management institutions and mutual funds manage 
well over half of the world's pension fund and personal 
financial assets. Far more than half of the world's hedge 
fund--indeed, 85 percent or so of the world's hedge fund, 
venture capital, private equity, derivatives, and risk 
management activities are conducted by American-owned and 
managed firms.
    And again, even when these activities occur overseas, as in 
London, frequently they are conducted by American enterprise.
    The numbers would be even greater were one to count not 
just U.S.-owned institutions, but the major U.S. activities, 
some of which are of global scope in their own right, owned by 
foreign, predominantly European, banks and insurance companies. 
The United States has global leaders in traditional banking and 
insurance, but it is noteworthy that U.S. global dominance and 
capital markets has arisen and accelerated as a result of the 
move toward new modes of financial intermediation, asset 
gathering, and risk management in our domestic markets.
    I list a number of driving forces of this development in my 
testimony. Let me just highlight a few of them. First, we 
should not forget the post-World War II development of the 
prominence of the U.S. dollar in international transactions. 
Part of the development of trust in the United States and U.S. 
capital markets is the brand, the U.S. dollar, and the fact 
that people have confidence in the U.S. dollar that they do not 
have in other currencies.
    Is it not somewhat ironic that when Saddam Hussein was 
pulled out of his spider hole, he was carrying a briefcase 
filled with pieces of paper that had the picture of Benjamin 
Franklin on them? Franklin is probably the most viewed American 
of all time, well ahead of even Colonel Sanders, even in places 
like Japan and China.
    Second, I think we should note the early U.S. encouragement 
given to funded pension plans, as opposed to relying primarily 
on government pay-as-you-go transfers. There was much mention 
of U.S. debt earlier. But by far the largest elements of U.S. 
debt are the unfunded liabilities of programs like social 
security and Medicare. And I would hope that, at some point 
before my children and grandchildren have to start paying much 
higher taxes, that Congress would revisit how private pension 
plans might be given even more encouragement.
    Third, we had an early development of the securities 
culture here, where regulation and competition interacted to 
produce a large domestic market in which publicly quoted, 
professionally-governed, transparency-oriented firms are the 
norm, rather than the exception.
    I have lived and worked in many countries around the world. 
And one of the major differences between the United States and 
many other countries is that we do not have large numbers of 
family firms, State firms, who are entrenched and secretive, 
and who do not provide the kind of transparency that our 
markets do. I think it makes a big difference, in terms of why 
we have been so successful as an economy, as opposed to other 
countries.
    I will mention the public policy implications, the 
regulatory implications. Other people have stressed this. We 
should do nothing that moves us back and away from the 
confidence of the publicly quoted transparent, professionally 
governed business model, which we have more than any other 
country in the world.
    I might also mention the declining protection given to 
incumbent banks and insurance companies from capital markets 
competition, compared to other countries, another element of 
our business environment that makes us rather distinctive. And 
I also want to mention skills, knowledge, which has been 
mentioned earlier.
    There is a good deal of talk about people training for 
science and engineering and mathematics. As a professor of 
finance who is all too aware that some of my brighter 
colleagues came out of much more mathematically-rigorous 
traditions and training than I did, just because one has 
studied physics doesn't mean one can't make a contribution to 
risk management. Quite the contrary. And that matters a lot for 
our position.
    The United States has often been the first market for 
financial innovations ranging from mutual funds, to hedge 
funds, to big bangs, to public security offerings on a large 
scale, to providing rights for minority shareholders and many 
others. Other countries gradually realized that they needed 
those capital markets, and their capital markets developed in a 
way that was similar to a pattern that the United States had 
experienced earlier. One of the reasons for the dominance of 
U.S. investment banks and securities firms is that by the time 
other countries realized they needed a capital markets culture, 
our companies had already developed unassailable strengths.
    What does this mean for regulation? Well, I would echo many 
of the conclusions and recommendations that have been made 
earlier today. We should not get bogged down by the complaints 
about Sarbanes-Oxley. Perhaps there are parts that need to be 
refined, but we should remember goals, even when we are 
preoccupied by details.
    Congress makes laws, and many laws are highly detailed and 
complex. Ultimately, however, maintaining and strengthening the 
U.S. global capital market position means maintaining our 
reputation. Our brand is not just transactions, efficiency, 
knowledge, and skill, it is also honesty, transparency, and 
good corporate and capital market governance. We cannot gain 
the benefits of this reputation without incurring some costs.
    Secondly, though this item hasn't been mentioned explicitly 
today so far, I would argue that regulations should look out 
for the interests of consumers and share and bond stakeholders, 
not for those of managers and firms who may wish to entrench 
themselves against competition.
    Had our big bang not occurred first, or had our banks been 
able to continue to shut out out-of-State or non-bank 
competition, we would not have the thriving capital market 
actors we do today. Firms hone their global competitive skills 
by first competing at home. Regulation that protects today 
weakens firms in the long run. We should promote the future, 
not the past. Thank you for your interest and attention.
    [The prepared statement of Mr. Franko can be found on page 
98 of the appendix.]
    Chairman Baker. Thank you very much for each of your 
testimonies. I want to start with you, Mr. Franko, relative to 
your closing comment, and that is the competition is what 
breeds a domestic company's skills to compete internationally.
    I come at this issue believing that much of our regulatory 
constraints preclude that type of head-up competitiveness, and 
to some extent, discourages entry into the market by smaller 
and start-up companies.
    Now, I am not expressing the view--an outright repeal of 
Sarbanes-Oxley. That's not where I am going. What I am 
suggesting is that the government should never be the 
determinant of winners and losers. That has to come from 
market-driven forces. Where we can identify areas where 
government rule is, to a great extent, precluding that 
competitive opportunity, we need to get out of the way.
    Not on this topic, but on a related matter, insurance 
sales. There is no reason on earth why a life insurance policy 
sold in Florida can't be sold in Maine without going through 50 
different State approval processes. A clear case where 
regulatory barriers preclude product development which 
precludes competition, and the result is very abhorrently high 
insurance rates in some States because of their local 
jurisdictional constrictions.
    I think the same can be said of our securities environment. 
Much of the body of law that governs activities was written in 
the 1930's. I don't care how bright they were. They couldn't 
possibly have predicted a derivatives transaction, or 
understood counterparty risk in 1934.
    Going forward, what I am hopeful for is an ability to have 
an arms-length examination of every component of market 
function, determining what regulatory aspect is perhaps not 
working as intended, or worse yet, a regulation which only adds 
to cost, therefore taking it out of the shareholder pocket, 
ultimately, and serves no public benefit.
    Am I in territory that you agree with, or is that a view 
that you find inconsistent with what you have testified to here 
today?
    Mr. Franko. You are more than in territory that I agree 
with. I completely agree with your sentiments. I empathize with 
Members of Congress who wish to maintain our competitive system 
in the face of lobbying for privileges and exemptions. Many 
people in the banking and insurance world are surely eagerly 
lobbying to use regulation as a means of maintaining or raising 
barriers to entry. I think the more that we can promote 
competition, the better.
    Speaker Gingrich mentioned work by Peter Wallison. Peter 
and I were college classmates, and I keep track of Peter's 
articles and comments regularly. In an op ed about 2 days ago 
in the Wall Street Journal, in which he argued that Wal-mart 
should not be prevented from offering banking services, he came 
up with the wonderful sentence, ``People who think they are 
building walls are, in the long run, building coffins.''
    One of the reasons I think we do not have more major 
leaders in global banking and global insurance is that for far 
too long our banks and insurance companies were much more 
interested in building walls than they were in innovation and 
dynamism, and I think it has come back to haunt them, because 
they have lost major ground, both to domestic capital market 
firms and to foreign competitors.
    Chairman Baker. Well, it seems to me rather rudimentary 
capital markets philosophy that if you have money and you wish 
to deploy it and create a product or a service and sell it at 
whatever price you may choose, your success is determined by 
the consumer's willingness to pay that price for that product 
or service. And if they don't, you are not going to prevail 
very successfully. And if somebody figures out a better way to 
make your product at a lower price, you are still in trouble.
    Anything that skews that market function from occurring is 
not ultimately healthy for your long-term economy. And Ms. 
Pinelli, in your prepared statement, I was noting that you 
indicate that the U.S. markets represent about 30 percent of 
market cap, while Asia Pacific is at 28 and Europe is at 27. I 
don't find great comfort in that lead. That's--in polling terms 
in a political world, that's within the margin of error.
    I was taken by--the tone of your testimony seems to 
indicate that things aren't really that bad, that if you take 
out the state-owned enterprises that were made private, and 
take that out of the IPO offerings, that really it's not that 
big a deal, and that you place great value in the regulatory 
seal of approval on U.S. businesses that you believe enables 
the flow of capital to come into our marketplace. Is that a 
correct characterization of your testimony?
    Ms. Pinelli. Mr. Chairman, I think, if I can summarize what 
you're trying to ask me, is we are seeing growth in foreign 
capital markets. That is of concern to us. Yes, it is.
    Keep in mind, the United States, we have capitalized the 
financial services industry: resources, utilities, and 
transport industries. These organizations in China: the banking 
system, the energy system, they are coming to market for the 
very first time. If you take out the state-owned enterprises in 
China in the last year, their IPO activity is not as compelling 
as we might think.
    And I believe the question that you are asking is what 
about the traditional businesses, non-state-owned products and 
services that a willing consumer would pay for, how do we stand 
competitively in that area, in that market segment?
    I can tell you that Suntech, for example, the largest 
entrepreneurial Chinese company, chose to list on the New York 
Stock Exchange this past year, in 2005, with a $500 million 
offering. I gave you the example of Baidu.
    And I support your comments that that area does need 
further examination, and it's a trend that we continue to 
monitor.
    Chairman Baker. So your--to wrap up your summary of my 
question, that although we should be concerned about market 
dominance, that we are not in a death fight quite yet, that if 
we're attentive, maintaining appropriate regulatory oversight, 
do this examination and reduce those things which don't have 
public value, enabling the free flow of capital to where it can 
be most efficiently deployed, those outside U.S. markets will 
list in U.S. markets principally because that gives them 
credibility in the worldwide market that they are able to meet 
our listing standards.
    Ms. Pinelli. And, of course, there is valuation premium.
    Chairman Baker. Yes.
    Ms. Pinelli. They will come to market and immediately--if, 
you know, we understand the New York Stock Exchange--have a 30 
percent premium.
    But I don't have the answers, and I share your concerns, 
and I congratulate you on this special committee. The question 
for me is how many more state-owned enterprises, how large will 
they be? Bank of China is coming to market in 2006. It will be 
massive. It will be bigger than the $9.2 billion China 
Construction Bank. The Hong Kong Stock Exchange will then have 
a large pool of capital. They will strengthen their capital 
market.
    Then the question becomes will traditional businesses 
outpace--will that growth outpace that of the United States, 
and when they choose to go to market in the public arena, will 
they choose the United States? Well, today we do have a 
valuation premium standard. We are seeing signs of very good 
companies coming to the United States because of our investor 
sophistication, valuation premium, very good corporate 
governance--
    Chairman Baker. So the observation would then be as the 
Asia Pacific exchanges grow, and they become perhaps even 
larger than the U.S. capital markets, does an individual need 
to come to the United States to get the valuation premium, or 
can they list in their own marketplace and achieve the same 
end?
    Ms. Pinelli. Well said.
    Chairman Baker. Thanks. Last thing, Mr. Copland. I don't 
want to ignore the observations about litigation reform. I 
share your view, so I don't necessarily want to replow that 
ground.
    I want to perhaps discuss with you just a little bit 
accounting generally, and the concerns about the foreign-owned 
company coming to the United States, and in order to become 
GAAP-compliant, having to spend an inordinate amount of time 
and resources--and that's another weight in making the decision 
not to come.
    I am an advocate of Extensible Business Reporting Language, 
XBRL, which has now undergone a pilot at the FDIC, and has been 
a successful pilot, and hope to encourage the deployment of 
that to all insured depositories in the near term.
    Assuming we can develop the appropriate taxonomy for 
private operating companies to utilize this--and I understand 
the SEC has encouraged data tagging in its reporting 
methodologies--that that could be a very good way to slide into 
an international standard where you have more real time 
disclosure of things which are not required now by the SEC to 
be disclosed, but which are of value to the investor.
    And secondly, it enables the Mom and Pop investor to be 
able to do comparisons so we don't get Mr. Campbell's 14 pages 
of documents, 14 feet of documents, but rather what you wish to 
get to compare with another entity you wish to compare it with.
    So, it's, I think, a very helpful tool, not only for the 
knowledge of the investor, but also, ultimately, to enable us 
to do away with quarterly reporting so that you don't have this 
internal pressure on management to beat the Street every 90 
days, which I think has been an insidious force in why we got 
into all these accounting manipulations in the first place.
    Do you have a view of that set of issues? And how do you 
feel we can move, as a committee, in going forward, not 
necessarily just to reach a single international standard, but 
to enable that capital to flow more freely to us, by reducing 
the accounting concerns?
    Mr. Copland. I agree with you, Mr. Chairman. I think the 
accounting compliance issues are very important, and the 
ability to--you know, the extra cost of following the different 
accounting standards is high.
    I also agree with you that the artificiality of the 10Q, 
10K sort of process is--creates perverse incentives for 
management that aren't necessarily aligned with shareholders. 
And--
    Chairman Baker. Well, for my purposes, we now have a rules-
based retrospective system. And as long as you play by the 
rule, you're going to be okay.
    Mr. Copland. Right.
    Chairman Baker. I learned that a telecommunications company 
booked its revenue in a current operating quarter the sale of 
broadband capacity on a broadband system which had not yet been 
built. And that was legal. And I knew we were in deep trouble.
    At the same time, if I knew that a company was selling 
widgets, and 9 out of 10 were being returned, or customer 
satisfactions surveys said I would never walk in your door 
again, I know which information I would rather have about a 
company's performance. The old rules-based retrospective, or 
the customer satisfaction survey?
    I think getting that kind of disclosure to the markets--we 
seem to requite disclosure of an inordinate amount of detail 
which the market has no interest in reading. And I don't know 
how we got mismatched so badly, but--
    Mr. Copland. Yes. I agree with you. I think, frankly, the 
litigation climate is a large reason why the--this kind of 
information comes out there for protective reasons, as well as 
just excessive regulatory compliance.
    In terms of Mom and Pop Investor, I think it's very 
difficult for the mom and pop investor. You know, I have 
investments as well. I get the piles of statements. You can't 
read them, you can't make anything of them, you just try to 
have a diversified portfolio, and hope that the system itself 
is sound.
    I do think that, you know, that big hedge fund managers, 
mutual fund managers, etc., do read these. And I do think that, 
therefore, you know, there is definitely value there. There is 
informational value, and you want to maximize the ability to 
get that out on the market at the minimal cost.
    And you know, I don't think we have the equation quite 
right yet, so I think, you know, some of these substantial 
reforms, over time, the real-time ability to disclose 
information could be very useful. You know, I think we do have 
to have concerns about what the litigation implications might 
be for companies that are doing that, and that's something I 
think that we always ought to keep in mind in this environment.
    But I do think that, you know, a lot of what you're saying 
makes a lot of sense to explore further--
    Chairman Baker. Well, we don't want to encourage forward-
looking statements that encourage litigation. We need to have 
disclosure without liability.
    Mr. Copland. Right.
    Chairman Baker. For making what is intended to be a good 
faith projection of business direction. But as we go forward, I 
indicated earlier that--to the other panel--that it is my 
intention, over the next several months, to investigate what 
the agenda ought to be, to identify those half-dozen or dozen 
issues that really need to be focused on that would make a 
significant difference in our future competitiveness, because I 
do have concerns that, despite the fact that we are still at 30 
percent, we need to be widening the gap, not watching it 
shrink.
    And to that end, we certainly are going to be calling on 
you for your professional insights to help create that agenda. 
It's not something that--you know, I'm not going to run out and 
suggest repealing Sarbanes-Oxley, I don't want to get folks all 
excited, but we need to look at every aspect, and make an 
informed judgement about, you know, what is warranted and what 
is justified, in light of our current market conditions.
    Mr. Campbell, I didn't mean to exclude you from our 
discussion, but I want to express appreciation to each of you 
for your contribution. We will be back to you in writing over 
the coming weeks. And thank you for your participation here 
today. Our meeting is adjourned.
    [Whereupon, at 1:08 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                             April 26, 2006


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