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



 
                        PROTECTING INVESTORS AND
                      FOSTERING EFFICIENT MARKETS:
                       A REVIEW OF THE SEC AGENDA
=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 3, 2006

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-90

                 HOUSE COMMITTEE ON FINANCIAL SERVICES




                    U.S. GOVERNMENT PRINTING OFFICE

31-036 PDF                  WASHINGTON : 2006
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                    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


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 3, 2006..................................................     1
Appendix:
    May 3, 2006..................................................    49

                               WITNESSES
                         Wednesday, May 3, 2006

Cox, Hon. Christopher, Chairman, United States Securities and 
  Exchange Commission............................................     7

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    50
    Ackerman, Hon. Gary L........................................    52
    Kanjorski, Hon. Paul E.......................................    53
    Cox, Hon. Christopher........................................    54

              Additional Material Submitted for the Record

Cox, Hon. Christopher:
    Responses to Questions from Hon. Deborah Pryce...............    67
    Responses to Questions from Hon. Emanuel Cleaver.............    70
    Responses to Questions from Hon. Vito J. Fossella............    72


                        PROTECTING INVESTORS AND



                      FOSTERING EFFICIENT MARKETS:



                       A REVIEW OF THE SEC AGENDA

                              ----------                              


                         Wednesday, May 3, 2006

             U.S. House of Representatives,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Michael Oxley 
[chairman of the committee] presiding.
    Present: Representatives Oxley, Leach, Baker, Pryce, 
Castle, Royce, Lucas, Ney, Kelly, Paul, Gillmor, Biggert, 
Shays, Fossella, Kennedy, Feeney, Hensarling, Garrett, Pearce, 
Neugebauer, Fitzpatrick, McHenry, Campbell, Frank, Kanjorski, 
Maloney, Gutierrez, Velazquez, Watt, Hooley, Sherman, Meeks, 
Lee, Moore of Kansas, Capuano, Clay, Israel, Baca, Matheson, 
Scott, Green, and Cleaver.
    The Chairman. The committee will come to order. Consistent 
with Rule 3(f)(2) of the Rules of the Committee on Financial 
Services of the 109th Congress, the Chair announces that he 
will limit recognition of opening statements to the Chair and 
ranking minority member of the Full Committee, and the Chair 
and ranking minority member of the Subcommittee on Capital 
Markets, Insurance, and Government Sponsored Enterprises, or 
their respective designees, to a period not to exceed 16 
minutes, evenly divided between the majority and minority.
    The prepared statements of all members will be included in 
the record. The Chair will make an exception for the gentleman 
from California in this case. The Chair recognizes himself for 
an opening statement.
    Good morning. We are here today to hear from a former 
colleague and good friend, Securities and Exchange Commission 
Chairman Christopher Cox. Nine months ago, Chairman Cox was 
sworn in as the 28th Chairman of the SEC, and he assumed the 
responsibility of directing the Commission in its 
responsibilities of overseeing the capital markets and 
protecting investors.
    As a former securities lawyer, Chairman Cox was a natural 
selection for that post, and an excellent one. And in making 
this appearance to discuss the priorities of the Commission, 
Chairman Cox returns to our hearing room, where he once sat as 
a member of this committee.
    Chairman Cox takes the reigns of the Commission through a 
dynamic time for our capital markets. The New York Stock 
Exchange has merged with Archipelago Holdings. The NASDAQ has 
merged with Instinet, and has taken a 15 percent stake in the 
London Stock Exchange. Retail investors are investing in a 
wider range of security products than ever before. And by 
almost all barometers, the American economy has recovered well 
from the corporate scandals that shook investor confidence 
several years ago.
    In the wake of these scandals, this committee shepherded 
through the House legislation to reform corporate governance 
and accounting oversight. One of the goals of the Sarbanes-
Oxley Act was to strengthen the financial reporting of our 
public companies. Although it is difficult to quantify the 
benefits of this legislation, it is clear that investors once 
again trust our capital markets. The Dow Jones industrial 
average hit a 6-year high just yesterday.
    I must commend the efforts of the Commission in overseeing 
the execution of the mandates contained in the Act. It is true 
that the implementation of the Act's internal control 
requirements has been more onerous than originally predicted. 
However, it is critical that we allow our regulators to rectify 
the implementation difficulties that public companies and their 
auditors face.
    In this regard, I am encouraged by the efforts that 
Chairman Cox and the Commission have made, and continue to 
make, in engaging in discussions with public companies and 
auditors about these internal control requirements.
    Following up on last year's roundtable, next week the 
Commission and the Public Company Accounting Oversight Board 
will be hosting a roundtable on internal controls to discuss 
second year experiences with these provisions. Following that 
initial roundtable, both regulators issued additional 
guidelines relating to the internal control reporting 
requirements.
    The Commission will also soon be taking into consideration 
the recommendations of its Advisory Committee on Smaller Public 
Companies, created by the Commission to assess the regulatory 
burdens smaller public companies face. Again, I am pleased by 
the proactive efforts of the Commission.
    I also want to commend Chairman Cox for his recent 
initiatives to enhance the financial reporting in our public 
companies. Realizing that the heart of our capital markets is 
timely and accurate disclosure of financial information, 
Chairman Cox decided to make this financial information more 
understandable and accessible to investors.
    This past December, Chairman Cox, along with Robert Herz, 
Chairman of the Financial Accounting Standards Board, announced 
an initiative to reduce the complexity in financial reporting. 
This effort includes revising outdated and complicated 
accounting standards, as well as working towards the 
convergence of international accounting standards.
    In addition, Chairman Cox's advocacy of the use of 
Extensible Business Reporting Language, or XBRL, has the 
potential to empower millions of investors with better 
financial analysis.
    And finally, I would like to mention one area of reform 
which this committee has championed since the corporate 
scandals a few years ago. The credit rating agency became a 
focus of Congressional interest because the dominant rating 
agencies had rated WorldCom and Enron investment grade just 
prior to their bankruptcy filings. This committee and the 
capital markets subcommittee, under the leadership of Chairman 
Baker, have held a series of hearings focused on the lack of 
competition, accountability, and transparency in the credit 
rating industry.
    Congressman Fitzpatrick has introduced legislation, H.R. 
2990, that would bring more competition, transparency, and 
oversight to this industry. I am hopeful that this committee 
can work in a bipartisan manner, and with the Commission, to 
make this reform a reality.
    We had our field hearing in Philadelphia that was, I think, 
very instrumental in moving this issue forward. I look forward 
to hearing from our distinguished witness, the Chairman of the 
SEC, on these and other Commission initiatives. And I yield to 
the gentleman from Massachusetts for an opening statement.
    Mr. Frank. Thank you, Mr. Chairman, and I am pleased to 
welcome our former colleague, and to express my admiration for 
the work he has been doing. I think that he has shown how you 
can be an effective and very admirable chairman. It is a body 
that had some fractures before, and I think he has provided a 
useful kind of continuity, and has been faithful to his mandate 
as a law enforcement officer, which is, of course, one of his 
primary jobs.
    I want to begin by expressing my agreement with you, Mr. 
Chairman, on the Sarbanes-Oxley law. I believe that it is 
appropriate that we look to the Commission for any kind of 
improvements that you would expect. No one passes a law, 
particularly a law breaking new ground, and one that deals with 
a lot of complexity, and expects it to remain unchanged.
    And I would hope that--I know that the chairman understands 
this--if there are changes that he and his fellow commissioners 
think appropriate, I think--I believe that there is now 
authority for them to make appropriate changes, in terms of the 
administration. If they wouldn't, they should obviously feel 
free to come to us, and we can work in a cooperative manner.
    I do not think we should be correcting--and I don't think 
this committee would be inclined to go in wholesale exemptions, 
but improvements in the method, taking into account the impact 
of entities of different sizes, that would seem well within the 
scope that the Commission has, and I would hope that they would 
exercise it, and I expect that they will.
    The next issue I want to get to, Mr. Chairman, is the 
question of executive compensation, and as you know, we have 
discussed this. I have a letter that has been signed by all of 
the Members of the minority, which invokes Rule 11 of the House 
Rules. Under Rule 11, when a hearing has been called on a 
particular subject, the minority, if it is not given a chance 
to have other witnesses, can invoke Rule 11, and have an 
additional day of hearings with witnesses that it wishes to 
call on a subject related to the hearing. And we are exercising 
our right to do that, specifically with one of the matters 
where the Commission is in the process of taking some very 
important steps, and that is executive compensation.
    I have written in support--as have many others--of the 
proposed rule by the Commission on executive compensation. I 
have sponsored legislation which parallels what the Commission 
does. In some respects, goes beyond what the Commission would 
do in other respects. And it's not clear that they have the 
statutory authority.
    And it is clear that we have the statutory authority, 
although under this Administration, it is not always clear that 
when we have statutory authority and exercise it, anything will 
result from that, because the President may just decide to 
ignore it. But that is probably less likely to happen where the 
SEC is involved.
    And what we have done is to say that there should be, 
published by every public corporation, all the information 
relevant to judging the compensation of the top number of 
executives--depending on the size of the corporation--including 
what happens in case of a bail-out, including what happens in 
case they get incentive pay and it turns out--as, for instance, 
happened with Fannie Mae--that the incentive pay appeared to 
have been granted inappropriately, because the targets that 
were supposed to be hit were not really hit.
    We ask about pensions. We want all that information made 
public. And that--we are very close to what the SEC is 
proposing--they haven't acted on it yet--but we also ask that 
it be put to a shareholder vote.
    We are not proposing in our legislation that any 
corporation be told by the Congress or anybody else what it can 
pay the chief executive. If the stock holders of Corporation X 
want to buy the newspapers of some billionaire in perpetuity, 
they can do that. Maybe if we get a particularly modern 
billionaire, they can pay for his or her Internet 
subscriptions, and finance his or her blogs. That's all up to 
the stockholders. We just think they should know that they are 
doing it.
    We have had problems in this country where we have seen 
buy-outs, mergers, and payments to the CEO's followed by a 
reduction in workforce. We have seen problems where CEO's get 
large amounts of money while pension funds are underfunded. I 
think those things are in grave error in a number of ways, but 
one of the things we should be very clear about--and this is 
one of the things that affects this committee--I think most of 
the people on the Financial Services Committee think that there 
is in the country today too little trust in the economic 
system, too much resistance to trade, too much suspicion about 
the implementation of information technology, and too much 
resistance to international involvement in our economy. I agree 
with some of those views, and it's gotten too far.
    But people need to understand it's not simply that this 
descended on the American people. It is a reaction to trends in 
this economy of growing inequality. And when people read that 
the economy is doing well, but their wages in real terms have 
not gone up, and their pensions have been put at risk, when 
their health care may be declining in what they get, when they 
get laid off, and then they read not only that the economy is 
doing well, but a handful of people are doing extraordinarily 
well, receiving far more money, almost in perpetuity, than 
anybody ever thought was necessary, and when this appears to 
be, as it does look like, by virtue of every metric, 
unconnected to the success of the underlying institution, then 
those fears are greater.
    So, for that reason, Mr. Chairman, we ask that we have this 
hearing, and we hope that we can proceed to action on the 
legislation that I have talked about.
    The Chairman. The gentleman's time has expired. The 
gentleman from Louisiana, Mr. Baker.
    Mr. Baker. I thank the chairman. I am delighted to welcome 
Chairman Cox back to the committee. I am very pleased to have 
someone of his abilities and philosophy exercising the 
responsibility of Chairman of the Commission. Someone might 
translate that into I think he agrees with me on a lot of 
issues. That's okay.
    But, in any event, I am delighted that he has taken on this 
responsibility, and to make the point that in the current 
environment, household wealth is at an all-time high. More than 
half of all homeowners are invested in the markets. And this is 
despite the fact that much of the rules that govern securities 
activities were written in 1933 and 1934. So, I know that the 
chairman shares the view that there is much work to do.
    And although it would appear to some that the goals are not 
necessarily cohesive, enhancing investor protection while 
enabling markets to function more efficiently are not mutually 
exclusive.
    I am very pleased to hear of the chairman's interest in the 
deployment and broad utilization of XBRL. I am confidant that, 
as we examine our general accounting system, which is now a 
retrospective rules-based system, that we can work toward a 
more principles-based forward-looking system. Because the 
current methodologies require the expenditure of significant 
resources to provide the markets with a great deal of 
information they, in fact, may not use.
    I do believe that holding those accountable for the 
opportunity to become a corporate official is important. I am 
pleased that the Commission has exercised its responsibilities, 
pursuant to creation of the fair fund in Sarbanes-Oxley. I am 
told, as of today, that the collections identified as ill-
gotten gains that the Commission personnel are now pursuing 
exceeds $7.5 billion, with approximately $5 billion already 
having been collected in those enforcement actions.
    That's a Commission activity that is, I think, 
extraordinary, and is rarely noted. But it's an instance where 
governmental officials are actually working on behalf of the 
investors by seizing ill-gotten gains, and ironically, giving 
them back to the people from whom they were taken. What a great 
idea.
    And finally, I want to speak to the need for a broad and 
ongoing continual review. It is clear that in our 
internationally competitive marketplace, that we are slipping 
in our ability to maintain our primacy. The number of IPO's 
that have chosen to move offshore is a signal, I think, that 
regulatory review is not only appropriate, but significantly 
warranted. And I do not speak specifically to Sarbanes-Oxley, 
but the general regulatory world.
    And how we can ensure that, going into the next decade, the 
United States maintains that role of primacy is something I 
look forward to working with the chairman on in the coming 
years, and believe it to be a vital role for our long-standing 
economic health within our great country. And with those 
remarks, I am pleased to be here, and to hear the chairman's 
words today. I yield back.
    The Chairman. The gentleman yields back. The gentleman from 
Pennsylvania.
    Mr. Kanjorski. Mr. Chairman, I join with my colleagues in 
welcoming the Securities and Exchange Commission Chairman 
Christopher Cox to our panel.
    While many things in this room may look familiar to him and 
to us, he is now sitting on a different side of the table, and 
serving in a different role. We should, therefore, expect him 
to have a different perspective on the issues that we once 
actively debated together.
    I want to commend Christopher Cox for his hard work during 
his first months at the Commission. Like a number of his 
predecessors, he has taken over the helm of the Commission 
during a challenging time. I have been particularly impressed 
with his desire to improve financial disclosures for investors.
    He has also, himself, faced and overcome personal 
adversity. I hope that he now continues to enjoy good health 
for many years to come.
    As I just mentioned, the Commission presently has before it 
a number of important issues. One of the key issues that 
Chairman Cox is addressing is the implementation of section 404 
of the Sarbanes-Oxley Act. I will be particularly interested in 
hearing his thoughts today about how we can improve the ability 
of companies both large and small to assess the accuracy of 
their internal controls without adding unnecessary costs.
    Another issue that I hope that we will examine today 
concerns the evolving structure of our capital markets. The 
Commission has now approved many regulatory modifications to 
our national market system and our security markets are now 
working to implement those changes.
    In addition, a number of our exchanges have gone public in 
recent months. These privatizations raise questions about the 
ability of exchanges to continue to protect investors at the 
same time as they work to maximize shareholders' profits.
    As Chairman Cox also knows, the other side of credit rating 
agencies has recently been the subject of considerable 
discussion on Capitol Hill. The Commission has before it a 
proposed rule to address these matters. It is also discussing a 
voluntary agreement that would improve transparency and 
oversight of the credit rating industry.
    Because we may soon consider a bill in this area, I would, 
therefore, like to learn more about the status of these 
actions. The successful and speedy resolution of both rule-
making and the voluntary agreement would, in my view, likely 
preclude the need for us to legislate on rating agencies.
    One final issue that has attracted my attention in recent 
weeks concerns exchange-traded funds. These funds are 
increasingly popular with investors, growing nearly 200 percent 
between the end of 2002 and the end of 2005. It seems, however, 
that the process to review and approve ETF applications has not 
kept up with investor demands.
    In fact, I have heard that some applications have remained 
unresolved for years. I thus want to know what the Commission 
is doing to address these matters, consistent with its 
investors' protection responsibilities.
    In closing, Mr. Chairman, I look forward to hearing from 
our former colleague. I also hope that he will specifically 
advise us as to what the Commission is doing about the 
oversight of the rating agencies, and the process for approving 
exchange-traded funds.
    The Chairman. I thank the gentleman. The gentleman from 
California, briefly.
    Mr. Royce. I thank you, Mr. Chairman. I would just like to 
welcome our good friend, Chris Cox, back to this chamber, my 
former Orange County colleague. And Chris, while your presence 
in this chamber is sincerely missed, your insights and 
leadership at the SEC are invaluable.
    I would just say that I think, on behalf of all of us, we 
realize that for the United States of America, our capital 
markets in this world economy are the niche that's most 
important as we compete globally, and there are probably few 
jobs as important as the regulation at the SEC over our capital 
markets, and your quest to achieve proper investor protections 
and to achieve transparency.
    And so, I think I speak for many when I say this Nation is 
very fortunate to have you at the helm of the SEC, and when I 
say we all look forward to what you have to say here today, 
Chris. Thank you very much for being with us. I yield back, Mr. 
Chairman.
    The Chairman. The gentleman yields back. We now turn to the 
distinguished chairman, and former member of this committee. 
Welcome back, and we are glad to have you back.

 STATEMENT OF THE HONORABLE CHRISTOPHER COX, CHAIRMAN, UNITED 
           STATES SECURITIES AND EXCHANGE COMMISSION

    Mr. Cox. Thank you very much, Mr. Chairman, Ranking Member 
Frank, and members of the committee. I want to thank you very 
much for your gracious words. I want you to know that, on 
leaving the Congress, the most difficult thing for me, the 
hardest part of the transition, is losing contact with the 
people with whom I interacted every day, and it's very nice to 
be back among you. Thank you for inviting me.
    As you know, this is my first formal appearance in the 
House since I became Chairman of the Securities and Exchange 
Commission. I am pleased to have the opportunity to report to 
you on the new initiatives that the SEC is taking to protect 
individual investors, and specifically to improve the financial 
disclosure that they receive.
    Of course, my brief testimony this morning is necessarily 
focused on just some of the top priorities of the Agency. I 
assure you that it does not cover the entire panoply of 
important issues that the SEC is dealing with on a day-to-day 
basis. For that reason, I am happy to be here, not only to 
answer your questions, but also to learn from you about your 
priorities.
    As a member of the House for 17 years, I was constantly 
reminded by my constituents of the real world impact of the 
decisions that you make in the Capitol here, every day. Like 
you, I learned the importance of being a good listener, and of 
remembering that the common sense of ordinary Americans is the 
essence and the strength of our democracy.
    Most of your constituents are not investment bankers. They 
are not lawyers or accountants. But most of them are investors. 
It's a stunning fact of life in the 21st Century that a 
majority of Americans now own stocks. It's chiefly to serve 
these people that the SEC exists. Our mission, to protect 
investors, promote capital formation, and maintain orderly 
markets, must always put ordinary Americans first.
    Since making the transition from the halls of Congress to 
the SEC, I have set out to rededicate the Agency's ongoing 
efforts in virtually every area to the service of the 
individual investor.
    In keeping with this important focus, I am very pleased to 
announce this morning that, thanks in major part to the efforts 
of Chairman Oxley, Representative Frank, Chairman Baker, 
Representative Kanjorski, Representative Fossella, and many 
members of this committee, the SEC is cutting fees on 
securities transactions by $1 billion, starting October 1, 
2006. That money will stay in investors' pockets, exactly as 
Congress intended.
    This is great news for investors. It means individual 
Americans will have more money for their retirement, for 
college, for medical expenses, and many other important savings 
objectives.
    As you know, the Investor and Capital Markets Fee Relief 
Act made this dramatic fee reduction possible. On behalf of the 
Commission and our Nation's investors, I would like to offer 
all of you who serve on this committee our sincere thanks and 
gratitude.
    In a well-ordered market, educated consumers can choose 
from a number of competitive products, and find what they want 
at a price that they are willing to pay. But, in order to 
educate themselves, investors need comparative facts. So, while 
investors must bear the responsibility of learning what they 
can about their investment choices, the correlative duty of 
sellers of investment products is to provide the relevant 
information, and to do so in a way that makes that information 
accessible to, and understandable by, the individual investor.
    To more closely match the theory of a well-ordered market 
with today's reality, the SEC is currently pursuing a number of 
initiatives to improve the quality and usefulness of disclosure 
for individual investors.
    These initiatives include: first, moving from long, hard-
to-read disclosure documents to easy-to-navigate Web pages that 
let investors click through to find what they want; second, 
moving from boiler plate legalese to plain English in every 
document intended for retail investment consumption; third, 
reducing the complexity of accounting rules and regulations; 
and fourth, focusing our anti-fraud efforts, in significant 
part, on scams that target older Americans.
    The first of these initiatives, making the SEC's mandated 
disclosures actually useful to individual investors, is the 
reason that we are so energized about interactive data. I know 
that interactive data is a long standing interest to many on 
this committee, including, in particular, Chairman Baker. Under 
my predecessor, Bill Donaldson, the SEC got the ball rolling by 
launching an internal effort to investigate the technology.
    Since then, we have launched the XBRL voluntary filing 
program as a first step toward getting every company to file 
its financials in an interactive format.
    Consumers of financial data, particularly individual 
investors, have a great deal at stake here. Properly 
implemented, the move to interactive data can dramatically 
improve the information available to investors about their 
investment decisions. Mechanically, it's a relatively simple 
concept. Computer codes tag each separate piece of financial 
information and tell us what it is: operating income; interest 
expense; and so forth. That way, every number in a report or a 
financial statement is individually identified, both 
quantitatively and qualitatively.
    For individual investors, the result of this innovation is 
that they will be able to quickly search for any information 
that they want, without slogging through an 80-page document. 
Investors will be able to get information fast, easily, and all 
in one place. And, instead of long, hard-to-read annual reports 
and proxy statements, investors could have easy-to-navigate Web 
pages that let them click through to find what they want.
    With today's SEC reports, an investor or analyst who is 
looking to compare data on, say, annual capital expenditures of 
two companies, has to search through hundreds of pages of the 
filings of each company, page by page. Not surprisingly, this 
time-consuming task has created a cottage industry in re-
keyboarding the information in SEC reports, which are 
essentially static; that information is tied to the page that 
it's written on.
    So, that information now is re-keyboarded by commercial 
vendors, some in this country, some overseas in India and in 
China, so that it can be downloaded into spreadsheets and 
software. And either individual investors or, more likely, 
their intermediaries have to pay in order to get the benefit of 
the mandated SEC disclosures.
    One hates to think of the human error and the data 
corruption that inevitably occurs in this process. I can tell 
you because we have examined it at the SEC, that the number is 
unacceptably high. Interactive data is a way to fix these 
problems, and to connect investors directly to the information 
in a company's filings.
    Today, the SEC has over 800 different forms. It has been 
estimated that the SEC might instead have need for no more than 
a dozen. The key to achieving that objective is looking at the 
data on the forms independently from the forms themselves. 
That's another opportunity presented by interactive data.
    The SEC is strongly committed to interactive data and has 
taken major steps to promote it. We have offered significant 
incentives for companies to file their financial information 
using interactive data, including expedited review of their 
registration statements and their annual reports.
    A number of well-known companies--the list is now 17 and 
growing--have already begun to lead the way and are filing 
their reports using interactive data. And, starting in June of 
this year, the Commission will host a series of roundtables 
focused on the move to interactive data. Revolutionizing the 
way that the world exchanges financial information is a worthy 
goal, and we intend to achieve it.
    When it comes to giving investors the protection that they 
need, information is the single most powerful tool that we 
have. It's what separates investing from roulette. But, if the 
SEC is truly to succeed in helping investors with more useful 
information, we will need one more ingredient: an all-out war 
on complexity.
    It's the SEC's job to see to it that financial data and 
qualitative information about the issuers of securities are 
fully and fairly disclosed. But we can't say that we have 
achieved that objective if the information is provided in a way 
that isn't clearly understandable to the men and women for whom 
it's intended.
    Empowering investors doesn't just mean better access to 
information. It means access to better information. Simply put, 
the question is, once that SEC-mandated information is 
available, is it understandable? The answer all too often is a 
resounding and frustrated ``No''.
    Exhibit A when it comes to convoluted disclosure is today's 
regime for reporting executive compensation. Ordinary American 
investors have a right to know what company executives are 
paid, because these investors own the companies. The executives 
work for them. But how can an investor judge whether he or she 
is getting the best executive talent at the best price?
    Too often, the most important parts of total executive 
compensation are not even disclosed at all until after the 
fact.
    Three months ago, the Commission voted unanimously to 
propose an overhaul of the executive compensation rules. The 
proposal would require better disclosure on several fronts. 
First, companies would report a total figure, one number, for 
all annual compensation, including perquisites. Companies would 
also outline retirement benefits and payments that could be 
made if an executive is terminated and would fully disclose all 
compensation to board members for the prior year.
    In addition, a new compensation discussion and analysis 
section would replace the compensation committee report, and 
the performance graph which now comprises mostly boiler plate 
and legalese.
    Finally, since the purpose here is to improve 
communications, the proposed rules require that all of this 
disclosure be in plain English, the new official language of 
the Securities and Exchange Commission.
    Just to be clear, the Commission does not propose getting 
into the business of determining what is the proper method or 
amount of compensation. It's not the job of the SEC to 
substitute our judgment for that of the board. Nor would I, 
speaking as Chairman, subscribe to the notion that all 
executive pay is excessive. Surely many executives deserve 
every penny they're paid, and more. Being a CEO requires a 
rarified collection of attributes and skills that are in all-
too-short supply, and compensation in the market for executive 
talent can be fierce.
    At the same time, I needn't cite here the several 
notoriously public cases of extravagant wastes of shareholders' 
assets by gluttonous CEO's and pliant compensation committees. 
It's a testament to the importance of this issue that we have 
received nearly 17,000 public comments on the proposed rule. 
That's one of the highest in the 72-year history of the 
Securities and Exchange Commission.
    At the SEC, we look at results from the vantage point of 
the ordinary investor, and what we're finding is that, in many 
cases, we're not getting the right results. It's not just 
public companies that have a problem using plain English. Our 
accounting rules and regulations also can be complex and 
difficult to interpret. And, when the rules are difficult to 
interpret, they may not be followed very well. And, if the 
rules aren't followed very well, then, intentionally or not, 
individual investors are going to suffer.
    Weeding out the counterproductive complexity that's crept 
into our financial reporting will require the concerted effort 
of the Securities and Exchange Commission, the Financial 
Accounting Standards Board, the Public Company Accounting 
Oversight Board, and every market participant. This can't be a 
one-time effort. We will have to commit for the long term, but 
it will be well worth it.
    Finally, let me turn to our efforts to better protect older 
Americans against financial fraud. Consider these statistics: 
An estimated 75 million Americans are due to turn 60 over the 
next 20 years. That's an average of more than 10,000 people 
retiring every day. Households led by people over 40 already 
own 91 percent of America's net worth. Very soon, the vast 
majority of our Nation's net worth will be in the hands of the 
newly retired.
    Following the Willie Sutton Principle, scam artists will 
swarm like locusts around this increasing vulnerable group, 
because that's where the money is.
    On a daily basis, our agency receives letters and phone 
calls from seniors and their caregivers who have been targeted 
by fraudsters. Often the victims have already been taken in. 
These fraudulent schemes may begin with a free lunch, but we 
want to make sure that they end with a very high cost to the 
perpetrators.
    That's why we're attacking the problem from all angles, 
from investor education, to targeted examinations, to 
aggressive enforcement efforts. And, because State securities 
regulators share our concerns, we are cooperating in this 
initiative with State regulators across the country.
    Each of the initiatives I have outlined today is part of an 
overall strategy to make the individual investor, the average 
American, the ultimate beneficiary of all that we do at the 
Securities and Exchange Commission. Our Agency has, for many 
years, proudly worn the badge of investor's advocate. In the 
months and years ahead, we pledge to rededicate ourselves to 
that mission.
    I appreciate the opportunity to be back with you today. I 
want to thank you, Mr. Chairman, Representative Frank, and 
members of this committee, for your continuing strong support 
for investor protection and for the work of the SEC. I am happy 
to answer any questions that you may have.
    [The prepared statement of Chairman Cox can be found on 
page 54 of the appendix.]
    The Chairman. Thank you, Mr. Chairman. And again, welcome 
back, and your record on a number of issues in this committee 
in the past have been extraordinary, and your knowledge. And I 
share the views of members on both sides of the aisle when I 
say that your appointment was excellent from many perspectives.
    And also, congratulations on your priorities, particularly 
the announcement of the $1 billion cut in SEC section 31 fees. 
We worked long and hard on that, and we--our colleague, Vito 
Fossella, it was his legislation, and it truly did make a 
difference in the markets, and we thank you for your leadership 
on that issue, as well as your project on interactive data, 
which has tremendous upside potential in molding the technology 
with the traditional markets. We are most appreciative of that.
    I know the gentleman from Massachusetts will have some 
questions on executive compensation, but that area as well, 
your leadership is most appreciated here in the Congress.
    Let me ask you, you were participating, were on the 
committee on the legislation that became Sarbanes-Oxley. And 
I'm just wondering what your view is from the other side of the 
divide, now that you are Chairman of the SEC, what do you think 
that the general impact has been on the individual investor?
    And secondly, what can we do, working together, to make 
this legislation work even better?
    Mr. Cox. Well, you had pointed out that not only was I a 
member of this committee when we considered that legislation, 
but I also served on the conference committee that negotiated 
the final result between the House and the Senate. And I have 
to say that one of the most interesting parts of my new job is 
that I am now in a position to implement, through regulation, 
legislation that I worked on as a Member of Congress.
    I listened very carefully to Representative Frank's 
comments on section 404 that he made during his opening 
statement, and I will say that I think, just as Mr. Frank does, 
that this legislation can work--and just as you do, Mr. 
Chairman.
    There is nothing about the legislation, the law itself, 
that is inherently onerous, that is guaranteed to cost more 
than the investor benefit--than was intended. It's a very brief 
passage. It has a very simple concept that is unobjectionable 
at its core, and that is that public companies should have 
solid internal controls. It should be a priority of management, 
and there should be a way to check on that through outside 
auditing.
    What has happened in practice is that it hasn't worked 
exactly as you all intended. It's more expensive, compared to 
the benefits that we all expect to get from that legislation, 
than it needs to be. And so, as the administrators of this law, 
the people who are bound to make it work--we at the Agency want 
to make sure that we get back to what Congress intended.
    There is a great deal of benefit to be had from this 
provision, it's a very important provision, and we aim to apply 
it in a sensible way that squeezes out the maximum amount of 
shareholder benefit and investor protection at the lowest 
possible price. We want to make sure that there is not a focus 
on the unimportant. We don't want to drive down cul-de-sacs; we 
don't want an instinct for the capillary instead of the 
jugular, but rather we want to make sure we're going after 
those things that are material to the audit, that are material 
to the investor protections that Congress was interested in 
obtaining.
    As you know, this is a particular focus for smaller public 
companies. The Commission has exempted them, temporarily, from 
compliance since the law was enacted. My predecessor, Bill 
Donaldson, appointed an advisory committee on smaller public 
companies that looked at this problem for a year and has just 
reported. I commend the authors of that report for their hard 
work over a year. I think they have done an outstanding job at 
presenting the perspective of smaller public companies, and the 
special problems that are faced there.
    Taking into account all of those recommendations and the 
many other sources of comment that, as you know, we have, what 
the SEC will next move to do is ensure that the application of 
section 404--not only by the SEC, but very importantly, by the 
PCAOB, which has written AS2, and the bulk of the specifics 
that are being followed to implement the law--will work 
together to try and get it right. I am absolutely certain that 
this can be done.
    The Chairman. That's encouraging. Do we have any idea about 
the timing of that proposal, specifically the recommendations 
from the small business committee?
    Mr. Cox. Well, yes. As I mentioned, they have just provided 
us with their 32 recommendations after 13 months of looking at 
the problem. We are now on the threshold of making a decision 
about whether to extend the current exemption, or instead, to 
move forward. You can expect a result in the next few months 
from the Commission.
    The Chairman. Thank you. The--as you know--and this is a 
bit far afield, but I think it's important because of its 
affect on the capital markets, and that is the whole CFIUS 
process. You obviously followed the uproar that occurred with 
the Dubai Ports proposal. There is now legislation in the 
Senate, and there is discussion here in this committee about 
legislation on CFIUS.
    It occurs to me that we need to be very judicious about how 
we approach this issue, because the entire issue of direct 
foreign investment and its obvious benefits sometimes are lost 
in emotional arguments.
    What kind of advice would you give the committee, going 
forward, regarding the CFIUS process?
    Mr. Cox. Well, as you know, I do not sit as a member of 
CFIUS. I do sit as a member of the President's working group on 
financial markets, which is chaired by the Treasury Secretary, 
and it includes the Chairman of the SEC, the Chairman of the 
CFTC, and the Chairman of the Fed.
    The SEC, for its part, has a good deal of international 
focus that is certainly a cognate of the issues that CFIUS is 
concerned with. In particular, because of the anticipated 
globalization of exchanges, securities markets, and perhaps the 
integration of the trading platforms themselves, we're focused 
on potential acquisitions, not only of foreign exchanges by 
U.S. markets, but also the obverse, and that is the potential 
acquisition of our now publicly owned exchanges by foreign 
interests.
    Because of the importance of those issues, before a real 
transaction is on the table, before it's clear whose ox is 
getting gored if we go one way or the other, I'm trying to lay 
out with my counterpart regulators and other nations--
particularly our major trading partners--what principles we are 
trying to achieve with our regulation.
    The national security concerns that are at the center of 
the CFIUS process are the special focus, in part, of the Office 
of Global Security in the Securities and Exchange Commission. 
That's a relatively modest office, but the mission of that 
office is shot through the review and evaluation that is 
conducted in almost every case, both for offerings and for 
periodic filings, by the Division of Corporation Finance.
    The Chairman. Well, of course, you were the first Chairman 
of the Homeland Security Committee, so you obviously have some 
interesting background, both on the foreign investment side and 
the market side, as well as the homeland security--
    Mr. Cox. I am trying to confine myself to comments that I 
am suited to give, as Chairman of the Securities and Exchange 
Commission, and not lapse into what I might tell you I think 
about CFIUS as a former Member of Congress.
    The Chairman. Even when we ask for free advice?
    Mr. Cox. I will restrain myself.
    The Chairman. The gentleman from Massachusetts?
    Mr. Frank. About section 404, I have to say I was talking 
to the chairman about this. I think this is the right time to 
act on this. I think there are dangers of going too far in--
what I think is too far--in the total exemption for other 
people, and then not doing enough to be flexible. So, I am glad 
to hear that you are going to move on that, and I think that is 
useful.
    On executive compensation, I very much agree with what you 
said. Obviously, I think we should go further and not set any 
guidelines here, but allowing--making sure the shareholders--I 
again--it's relevant to Sarbanes-Oxley, too. Sometimes we don't 
do a balance here.
    During the bad times of MCI, and Enron, etc., there was a 
lot of concern about the extent to which people would feel 
secure investing their money in the market. You know, one of 
the things that Sarbanes-Oxley has done, people forget that 
those fears once existed. We sometimes tend to kind of pocket 
the good and forget that something happened.
    And the stability of the market, the total confidence 
people feel in investing, is important for our economy, and 
it's one of the consequences of Sarbanes-Oxley. So it is 
important that we improve that some without weakening it in any 
substantial way.
    Similarly, I think we are now at a crisis where what's 
happening is an increasing number of Americans don't believe 
that they have the kind of stake that they want to have in 
progress in this country. There has been kind of a disconnect 
between the overall GDP and their sense of how they benefit.
    And if people in the financial community and the business 
community don't understand that the extraordinarily high levels 
of compensation that, in many cases, appear to be unconnected 
to any metric of success, that that's contributing to this 
problem. And when they see an over-reaction in their minds with 
regard to CFIUS, or excessive resistance to trade, they don't 
make these connections. They are missing something.
    Now, let me ask you about a couple of issues that have once 
bubbled up here, and you now preside over them. One of the 
things I think we don't do, we sometimes don't give ourselves 
credit when something good has happened, but we also don't go 
back and revisit predictions of disaster, when disaster has not 
come.
    I have shared before--it's not universally shared--that 
there are two phenomena which seem to me to be greatly related 
in one respect. That is the expensing of stock options in the 
financial statements of companies, and same sex marriage in 
Massachusetts. In both cases, we heard great predictions of 
chaos, travail, and tribulation. And I think most people are 
now pretty bored with both subjects. So, I won't ask you about 
the Massachusetts one, but--
    [Laughter]
    Mr. Frank. But I will about stock options. We have now had 
the expensing of stock options. You have had to preside over 
some questions about it. What has been the result, so far, of 
the requirement that stock options be expensed?
    Mr. Cox. Well, you are right that this requirement is just 
now being digested, both by filers, registrants on the one 
hand, and by the markets on the other hand. And I think you are 
also right that the clocks haven't stopped, and the world 
hasn't come to an end in consequence of this.
    Indeed, at the Securities and Exchange Commission, in our 
executive compensation proposal, we have decided to use the 
same approach that we're taking with stock options for 
financial statement presentation purposes, and incorporate that 
into the way that we are coming up with one number for an 
executive's compensation. This will put, I think, increasing 
pressure on the whole system to get it right.
    It is very important, I think, that we keep our eye on the 
ball. The main object here is, to the maximum extent possible, 
accuracy. We want to make sure that the number which, after 
all, is somewhat notional--it's a forecast--is as close to 
reality as possible.
    And so, the Office of Economic Analysis and the Office of 
the Chief Accountant at the Securities and Exchange Commission, 
as well as our Division of Corporation Finance, are going to be 
working very, very closely together, and interactively with the 
regulator community, to constantly review proposals to do a 
better job of getting it right.
    Mr. Frank. People who thought it was going to have a 
tremendous effect were underestimating the ability of investors 
to assimilate information. The fact that it might have been 
presented differently didn't change the information.
    The common thread in both cases is we have confidence that 
if we just give information to the people who are going to be 
investing, they will use it wisely.
    One other issue that had been an issue and may come back 
again, a couple of years ago this committee was very seized 
with the notion that it was very important to mandate that 
mutual funds separate the position of CEO from the position of 
chairman. And this was a very important issue, according to 
this committee.
    I must say I was skeptical that it was going to make much 
difference, one way or the other. I didn't see any studies that 
showed it made much difference. But the SEC then adopted it. It 
was held by the courts not to have done it right in the kind of 
midnight judge's approach. Your predecessor, on his last day in 
office, readopted it. The courts re-disadopted it, and it's now 
back before you.
    And I am wondering, because this was, at one point, a very 
hot issue for many members of this committee, who believed that 
it was essential to protect investors and the integrity of the 
industry, that we mandate this separation. It is now before 
you, before the Commission. I am wondering what the status of 
it is. Do people still think it's important? I'm wondering 
whether you will be hearing from--you know, is this committee 
still urging you to move ahead, or is that another issue that 
seems to have faded with time?
    Mr. Cox. Well, your rendition of the history lays the 
foundation for my answer very accurately. There were two parts, 
before and after the court decision, to my ability to influence 
this process as chairman.
    The first, prior to the court's decision, came when I 
announced, virtually the day I got to the SEC, that we would 
implement that rule exactly as it was written, as with all 
rules that had been previously enacted by the Securities and 
Exchange Commission.
    The second was very recently, when the court asked us to 
review, again, a particular provision of the rule that had been 
contested because of defects that they saw in our 
administrative procedure. And so we're going to do exactly what 
the court expects. The court, in its ruling, indicated it would 
withhold the issuance of its mandate for 90 days. We're due to 
report back to the court in 90 days. We will do so. The 
professional staff of the SEC and the Commissioners themselves 
are now discussing exactly how we will take the next step.
    Separate and apart from that substantive decision, I am 
also working with the Office of Economic Analysis and the 
Office of the General Counsel to examine the way that we do 
economic analysis of all of our rules.
    You mentioned that you hadn't seen studies that you were 
impressed with, contemporaneously with the consideration of 
this issue by the Commission last time around. I think what the 
court has invited us to do is to make sure we avail ourselves 
of the best evidence before we make a decision. So, instead of 
the fore-shortened process that the court objected to, we will 
have a very thorough process this time around.
    The Chairman. The gentleman's time has expired. The 
chairman of the subcommittee of jurisdiction?
    Mr. Baker. I thank the chairman. Chairman Cox, I want to 
point out in your initial offer here to lead the Commission in 
the direction of a plain English disclosure standard that, in 
your discussion of appropriate remedies to excessive executive 
compensation, you spun immediately to the work perquisites, 
which I found sort of contradictory to the plain English 
standards. You might want to think more along the lines of--
    Mr. Cox. Perhaps I could have said ``perks.''
    Mr. Baker. That's probably what would have summed it up. 
But as I understand it, that's sort of the care and feeding 
standard of an executive. So if you're doing an executive 
washroom remodel, or the corporate jet, or catered meals, or 
anything he charges to the company, that's all bundled up so 
that the shareholder can be appropriately affronted--if that is 
the proper response--to the total package, not just the 
underlying salary, which some people have difficulty in 
absorbing already, and that the remedy to many abuses in 
corporate America is simply a transparency standard to disclose 
to the affected parties that own the company, so that they 
might take whatever action they deem appropriate. And I just 
heartily commend you for the proposed rule, and the direction 
which you are taking.
    Secondly, on the XBRL project, there are two elements of 
that that I want to throw into the mix, as to possible 
benefits. As the taxonomy is more effectively described, that 
may have the tangential effect of bringing foreign capital in 
as accounting standards become more harmonized. I am told today 
that many companies contemplating registering in the United 
States choose not to do so because of the extraordinary time 
and expense of coming to our generally accepted standards, and 
that XBRL may yield that benefit.
    And then, secondly, with regard to the current practice of 
quarterly income disclosures, I have found that to be a 
contributor to many decisions made by corporate leadership to 
meet or beat the Street. And that, I think, energized, to some 
extent, some of the problems which this Congress and the 
Commission has had to address.
    By moving beyond the current 8K standard to a more real-
time material fact disclosure methodology, which is based on an 
XBRL platform, would be, I think, a terrific outcome of this 
project. So I simply want to compliment the Commission for your 
view on this subject, and encourage you to move forward as 
quickly as is practicable.
    As to the question that I principally wanted to ask before 
I got sidetracked by all this other stuff, I am--the committee 
has conducted hearings over some period of time relative to the 
designation system for the NRSRO's. It's my opinion; I can't 
speak for others on the committee, that that designation system 
has yielded us a very uncompetitive market for all those rating 
agency operations.
    Congressman Fitzpatrick has introduced legislation which, 
in essence, creates a registration system as opposed to 
designation. Have you had the opportunity to contemplate which 
methodology might be the most advisable going forward? Or, more 
particularly, if you have had the chance to even review the 
Congressman's bill, can you opine on your view of that 
legislation, if you can be that specific?
    Mr. Cox. I can do both, I think. First of all, I want to 
take the view, as a former Member of Congress, and as the 
current Chairman of the SEC, that we are going to be very 
respectful, as an agency, of the legislative process of the 
Congress. So, if the Congress is moving legislation in this 
area, we offer ourselves as a professional resource for 
technical assistance, if you seek it.
    We don't know yet--I can't know, I don't think anyone 
knows, because of our bicameral process--whether there will be 
legislation in the near term. And so, simultaneously with your 
consideration of legislation here, we are, at the SEC, 
reviewing exactly these same questions.
    We are concerned, as are you, with the achievement of the 
public policy objectives of this whole structure. We want to 
make sure that there is competition, transparency, and investor 
protection. Whether or not one or the other of the two models 
that you have described is superior is a question that I don't 
think the Commissioners or, speaking separately, the 
professional staff, have definitely answered.
    But we are very deep into this process right now. It is the 
central focus for us. And I know for the credit rating agencies 
themselves, who are working on their voluntary framework, that 
seeing a result of this process is vitally important.
    The Chairman. The gentleman's time has expired. The 
gentleman from Pennsylvania.
    Mr. Kanjorski. Following on the questions of Mr. Baker, I 
am very much interested in what the status is of the rule, 
streamlining the process for approving applications of the 
nationally recognized statistical rating agencies. Is the 
Commission moving full speed ahead, or is there some lag time?
    Because there is--it seems to me there would be no need for 
legislation, if in fact you are ready or capable of 
implementing something that is acceptable.
    Mr. Cox. Well, the question of whether there is need for 
legislation to accomplish a specific objective depends, in 
substantial part, on how ambitious you are about restructuring 
regulation of the credit rating agencies. The SEC certainly 
has, within its existing authorities, power to do something. I 
do not know that we have the power to do everything that has 
been contemplated in some legislation.
    With respect to our own rulemaking, as you know, the SEC 
actually proposed a rule in March of 2005, to define the term 
NRSRO for purposes of our own rules and regulations. We 
received 30 comment letters on that rule proposal. The 
professional staff in the division right now are formulating a 
recommendation to the Commission as to whether to take further 
action on that proposal, or instead, an alternative proposal.
    Mr. Kanjorski. Can you inform us of what the status is on 
the voluntary framework discussions that you are having with 
the credit rating agencies, is that moving forward?
    Mr. Cox. It is, indeed. And, as I just alluded to, I think 
that those agencies are, themselves, very anxious to have this 
process move as quickly as possible.
    Our Commission staff are continuing to provide technical 
assistance to them in that process, in the process of their 
development of a voluntary framework. In fact, I understand 
that there were discussions via teleconference between the 
rating agencies and the staff last week, so this is an ongoing 
matter for us.
    Mr. Kanjorski. Very good. It sounds to me like there is a 
question of whether we're going to strive for quantity or 
quality. And in a way, your expertise and the Commission's 
expertise is far greater than the committee in understanding 
that issue of quality and quantity. This, of course, is an 
ongoing pressing issue before the committee, and you're 
probably unlikely to indicate to us whether we should put our 
foot on the pedal, or put it on the brake?
    Would you give some--I mean, yes, we have 2 or 3 months 
now, potentially, left in this session. Should we move and 
devote time to this effort, or wait and cooperate with the 
Commission, see what the next 2 or 3 months produces, as a 
result?
    Mr. Cox. My predecessor testified that, in order to do 
aggressive oversight, the SEC would need greater authorities. 
What I have just told you is that I ought to be as respectful 
as I can of the separate roles that the legislative and 
executive branches play. I want to be sure that the SEC does 
not just do its level best, but does a superb job of 
implementing the intention of Congress when it comes to 
administering our statutes.
    So, I--it would be the easiest thing in the world for me, 
as a former Member, to start opining on bills, and telling you 
what I would like you to do. I understand full well the 
legislative process, and the role of this committee and of the 
Senate Banking Committee. And so I am trying to resist the 
temptation to offer that advice. We will work with you, either 
way.
    Mr. Kanjorski. Thank you. Moving to another subject, I 
mentioned in my opening remarks the ETF's applications and the 
time delay. Is it possible, without causing a great deal of 
expense and time, that we get a handle on just how many 
applications are pending, and how long they have taken with the 
idea in mind is there something we can do to assist in that 
effort?
    Because I am starting to wonder whether or not, since the 
products have been on the market for more than a decade, 
whether there is sufficient body of experience now in 
evaluating the success of ETF's mechanism to standardize the 
application process, and permit a wider variety of products, 
which seem to be in demand, but not being held back.
    Mr. Cox. Well, I think I share your premise, your implicit 
premise, that the length of time that it has taken to process 
exemptive applications is too long. And as Chairman, I am 
working to shorten it substantially.
    The investment management staff--to answer your question--
is currently working on over 215 exemptive applications. They 
range in complexity from the routine--in other words, 
applications for exemptive relief that have been previously 
issued to other applicants--to quite complex questions, such as 
people seeking authority to operate and actively manage ETFs.
    With respect to the age of this backlog, 85 of the 215 
exemptive applications--or I should say approximately 85--have 
been pending for over a year. The division, under my direction, 
is taking several steps to achieve our goal of improving the 
timeliness of our exemptive applications process.
    First, the staff is preparing recommendations that the 
Commission adopt new exemptive rules that would eliminate the 
need for filing at all, certain of these routine exemptive 
applications, including fund-of-fund applications that are 
contributing to the backlog.
    Second, we are identifying other rules that the Commission 
could adopt or amend, to further eliminate the need for filing 
other kinds of exemptive applications, such as those related to 
inter-fund lending, frequent capital gain distributions, and 
index-based ETFs.
    Third, we have spent considerable resources identifying and 
moving out in the division applications--or I should say moving 
out of the division applications--involving products such as 
ETFs, for which the applicant has legitimate concerns regarding 
timing of the markets. And we are doubling our efforts to 
reduce the current exemptive applications backlog by 
identifying those pending applications that can be processed 
promptly, and by providing more timely comments on other 
applications.
    The Acting Director of the Division, Susan Wyderko, is 
strongly committed to the steps. She has exercised a lot of 
management creativity, and I think she is having great success 
in achieving the objectives. So I hope that you will have 
tangible results to see in this area very soon.
    Mr. Kanjorski. Thank you.
    The Chairman. The gentleman's time has expired. The 
gentleman from Texas, Mr. Paul.
    Mr. Paul. Thank you, Mr. Chairman. Welcome, Chairman Cox. I 
had a question about section 404, but I think you have touched 
on that already, and I don't know whether you can add anything 
new on it. But I do want to assess the general principle of 
regulation.
    As you know, I am not a champion of regulation. As a matter 
of fact, I see Federal regulation as nothing more than moving 
us toward central economic planning, and I think we can make 
pretty strong economic and constitutional arguments against a 
lot of what we do around here.
    Also, on economic terms, we do know that large companies 
are less resistant to a lot of regulation than the small 
companies, because handling of regulations is much more 
difficult for the small company. And therefore, we have a 
greater penalty placed on the small company.
    We also know that the general rule that when Congress or 
other government bodies regulate, for every regulation, every 
law that we pass, we generally create too many problems. And I 
think the case could be made that the Sarbanes-Oxley bill has 
had some bad consequences.
    I would like to mention a few things where there has been 
some dire assessments of Sarbanes-Oxley, and I would like to 
give you a chance to refute these, and see whether or not we 
should refute these negative assessments, or move in the 
direction of reforming the legislation.
    First off, I would like to quote from a rather famous 
economist that many of us know about, and that is Milton 
Friedman. And he was commenting on Sarbanes-Oxley and he said, 
``It's terrible. It ought to be eliminated. It's costing the 
country a great deal. Sarbanes-Oxley says to every 
entrepreneur, `For God's sake, don't innovate, don't take 
chances, because down will come the hatchet, we're going to 
knock your head off.' '' Those are pretty strong terms. I would 
never use that type of language.
    And also, there has been other assessment. An economist 
writing in the Wall Street Journal not too many months ago said 
that it is very costly, it has cost public company shareholders 
$1.4 trillion, $460 for every man, woman, and child in the 
United States.
    And another important aspect of this--and we have seen 
several articles on this--the London stock exchange did a 
survey of 80 IPO's that were coming on to the market. Of those 
80, 90 percent of the 80 that contemplated American markets 
versus London, 90 percent chose to go overseas into the London 
market. So that is a consequence that we either ignore or we 
have to say these assessments are completely wrong.
    There was another study done by Foley & Lardner, a law 
firm, which said that it has increased the cost associated with 
being a publicly held company by 130 percent. These are rather 
astronomical figures.
    And what would it take for us to assess this, and decide 
that maybe we ought to back off section 404? I certainly would 
like to see the whole section repealed. But do we wait until 
problems get much worse? But if these numbers are true, this is 
very, very costly to us, and as time goes on these costs will 
increase because we're really still in the early stages of 
implementing this law.
    Do you have any comments along this line? Or what do you 
think of some of these assessments?
    Mr. Cox. Well, I think you have nicely set the table for 
discussion of the broad impact of what undoubtedly was landmark 
legislation. The significance of the events that gave rise to 
that legislation is still before us. The trial is going on in 
Houston right now. And yet, it has been a few years. And so we 
have had the opportunity to assimilate some of this significant 
change that Congress mandated.
    My considered view is that--considered, in the sense that I 
have now had three calendar quarters as Chairman of the SEC to 
look at this from that perspective--is that there is nothing 
about the law itself, the way it's written, that should prevent 
us from being wise in its administration so that the benefits 
that Congress hopes to get from it can be obtained, while the 
costs--the unnecessary costs, which are what you're talking 
about--can be wrung out.
    It's not investor protection to cause investors to pay for 
something they don't want and don't need and can do without. 
What investors do demand are protections for their money, so 
that their investment will be safer, ultimately yield a higher 
return. We've got to distinguish between, in other words, what 
is worthwhile and what isn't.
    I have a great deal of respect for Dr. Friedman. In fact, 
when I was chairman of the policy committee here in the House, 
we had a board of advisers, and he served ably on it. I have 
always been anxious to hear his perspective on things.
    When he says that Sarbanes-Oxley is terrible and ought to 
be eliminated, I believe he is referring, in a gross sense, to 
some of the pathologies that are being ascribed to the law, 
which--in as much as he is an economist and didn't serve on 
this committee when we drafted the legislation, I will allow 
him that kind of generality. But speaking with that 
generalization, I think we need to recognize the difference 
between what the legislation mandates and what's actually 
happened.
    When the climate in the board room is anti-risk, when 
people are hunkering down, they're concerned about a lot of 
things. Part of it was the climate that produced our 
legislation, and the way that everyone, from litigants to 
insurers, to the accounting firms themselves, which had been at 
the center of many of these scandals, was reacting.
    And so, I think now that things have settled down a bit, we 
have an opportunity at the SEC--and I have been there for just 
a few months, so whatever costs have been incurred heretofore, 
be they start-up costs, initial costs, capital outlays, what 
have you, that's water under the bridge. I want to make sure, 
going forward, that we do this wisely. And I absolutely believe 
that we can.
    There are some things, in terms of international 
competitiveness that you alluded to that I think we have to be 
mindful of. And that is, while Sarbanes-Oxley presents 
compliance issues and potentially disproportionate costs for 
smaller companies, if you take a look at what's going on in the 
smaller company market, in 2005, close to 100 foreign companies 
registered with the SEC for the first time. That doesn't get 
headlines; these are mostly smaller companies.
    So, that's telling us that we are still an attractive 
market for foreign listings, and we just need to make sure that 
we recognize as, simultaneously, markets in other countries are 
becoming more mature and more attractive, and more realistic 
possibilities as places to list--we didn't always have that 
competition in the past--that the United States of America 
retains its lead as the biggest, deepest, most liquid capital 
market in the world, in part because we also have the most 
predictable and safe rule of law and regulations that are 
consistent not only with investor protection, but also with 
capital formation and the maintenance of orderly markets. That 
is our mission. I hope we can do that.
    The Chairman. The gentleman's time has expired. The 
gentlelady from New York.
    Mrs. Maloney. First, I would like to welcome the chairman 
back to the Financial Services Committee, and I congratulate 
him on his appointment and his hard work.
    I appreciate your mentioning the Investors Fee Relief Act, 
which I introduced with Congressman Fossella, and I am very 
glad to see that you're continuing to cut the fees to reflect 
the reality of what is appropriate to support the regulation. 
It is very important to the investors I represent, and all 
investors.
    I would like to go back to section 404. In my district, 
small companies are really concerned about the cost and burden 
of complying. I know that you are aware of the legislation that 
has been floated by Representatives Feeney and Sessions that 
would make section 404 voluntary for companies with market 
capitalization under $700 million.
    You testified before the Senate that you want one standard, 
you don't want a different standard for large and small firms, 
but that you would be open to addressing unnecessary costs.
    One idea that was put before the House Financial Services 
Committee by Marshall Carter, chairman of the board of the New 
York Stock Exchange--last week he proposed that the SEC and the 
Public Accounting Oversight Board move to a 3-year Sarbanes-
Oxley section 404 review cycle as a way to reduce regulatory 
burdens. This could be accomplished without having to pass 
legislation to amend the law. Could this proposal help small 
companies by reducing the cost and the burden of compliance, 
which is very difficult for smaller firms? Your comments?
    Mr. Cox. I am very well aware of the proposal advanced last 
week by the chairman of the New York Stock Exchange. That 
proposal, as well as a wide range of alternatives, is, as you 
would expect, under very active consideration right now at the 
SEC, as we try to make work the discussion we have been having 
here this morning.
    We are also gathering as much data as we possibly can from 
the experience of companies that have already implemented 
section 404. And that includes a fair number of smaller public 
companies that, in most ways, are exactly like the companies 
that have heretofore been exempted. So we have ample empirical 
data that we can avail ourselves of.
    And, as you know, we have this public roundtable coming up 
at the SEC next week that is going to be focused on these very 
issues of full implementation. That's going to be an all-day 
affair. If you can put it in the context of your experience 
here as a Member of Congress, sitting on the dais at this 
hearing, we as Commissioners are going to be there all day and 
listen to 50 witnesses. We're going to get a wide variety of 
perspectives. I think we're going to get a lot of quality data 
and comment at that hearing.
    Mrs. Maloney. Chairman Cox, as you know, the securities 
industry that I represent is very, very concerned about 
reducing global market access barriers and national treatment 
barriers. The United States is a world leader in providing 
financial services.
    And although our trade deficit is over $700 billion, in the 
area of financial services our country boasts a trade surplus 
of almost $17 billion, which is very, very important. The 
industry tells me, though, that the barriers that they face 
prevent them from providing their clients with the global 
products and services that they demand. And they are hoping 
that you will do everything--and that our country, our U.S. 
trade negotiators, will do everything--to support the 
competitiveness of this very important export industry of the 
United States.
    So, I would like to ask you, do you support the goal of 
securing access to foreign markets for U.S. firms that is 
comparable to the access foreign firms enjoy in the United 
States? And this access would include the ability of our 
firms--meaning U.S. firms--to supply services from the United 
States to sophisticated investors in foreign markets on a 
cross-border basis without having to establish a commercial 
presence. I would appreciate your comments on this issue.
    Mr. Cox. Well, it's an excellent question, and it tempts me 
to give a very elaborate answer, because I'm so interested in 
so many aspects of this topic. But the way you have put the 
question, it's susceptible to a yes or no answer, and the 
answer is yes.
    Mrs. Maloney. Would you like to elaborate further?
    Mr. Cox. Sure.
    [Laughter]
    Mrs. Maloney. Can we achieve this? Is this competitiveness 
for our financial services markets a priority of our country? 
Will we fight at the table for their ability to sell these 
products without a commercial presence in the country?
    Mr. Cox. Yes. Obviously, our trade negotiations generally 
are the province of the USTR and other parts of the executive 
branch beyond the SEC. But, specifically with respect to 
securities regulation, the SEC conducts a fair amount of 
international intercourse with our trading partners.
    Just yesterday, for example, I hosted Chairman Shang of the 
CSRC, China's securities regulator, and we executed a joint 
agreement that is going to permit us to expand substantially 
the level of our cooperation and information sharing. We are 
very anxious in China, as well as in every other country on 
Earth, to make sure that our financial services have the kind 
of access that we provide here to their firms.
    And so, that principle of reciprocity is vitally important 
to us as securities regulators, as I am sure it is to our trade 
negotiators.
    Mrs. Maloney. Thank you, Mr. Chairman--
    The Chairman. The gentlelady's time has expired.
    Mrs. Maloney. My time is up. I just want to tell you how 
much I enjoyed working with you on this committee, and your 
leadership on the Anti-Terrorism Insurance Act. And I hope you 
will continue to keep your eye on making sure that vital 
program is there for the American economy.
    Mr. Cox. Thank you for your kind comments. I certainly, as 
I said at the outset, miss seeing all of you here more than 
anything else, more even than I miss the work of the Congress, 
and we will have our corner of the counter-terrorism world to 
maintain at the SEC, and I am going to continue to apply myself 
there.
    Mrs. Maloney. Thank you so much.
    The Chairman. The gentleman from Connecticut, Mr. Shays.
    Mr. Shays. Thank you, Mr. Chairman, and new Mr. Chairman. 
It's great, Chris, to have you here. I would like to ask you 
about the 202 rule involving the Investment Advisory Act, and 
also about hedge funds.
    First, with hedge funds, you are requiring, as of February, 
managers of certain hedge funds to register with the SEC and 
subject themselves to certain reporting requirements. I am 
interested to know the status of this rule--not in depth, but 
in general.
    Mr. Cox. It has just gone into effect. It is giving us the 
opportunity to gather census data, if you will, about the scope 
and scale of the issue that we face. We have nearly doubled the 
number of registrants as a result of the effectiveness of this 
rule. We believe that--at least we infer--that all of these new 
registrations are on account of the rule.
    And so, I would guess that 9 to 12 months down the road we 
should be in a position to infer something from all of this new 
data that we are gaining about whether, and if so how, 
additional regulation of the funds themselves is advisable.
    As you know, the regulation, the rule that has gone into 
effect, is focused on the advisers, and not the funds.
    Mr. Shays. No preconceptions on where you are headed, just 
totally open about the data you're going to get and then 
drawing conclusions afterwards?
    Mr. Cox. Well, I don't have any preconceptions about the 
data that we haven't seen yet. Of course we have studied the 
issue of hedge funds, generally. And so, there is at least that 
preconception, if you will. We are not without a background on 
the issue. And indeed, for a variety of reasons, including the 
potential retailization of hedge funds, the systemic risk, and 
impact on the markets themselves, not only I, but my 
counterpart regulators in other countries, are watching this 
like hawks.
    Mr. Shays. The other area I would like to get into is the 
issue of the Investment Advisors Act and the Securities 
Exchange Act.
    There is a concern among a number--I represent a huge 
number of financial institutions. And there is a concern of 
when--if the Commission intends to provide some guidance to 
financial institutions in order to clarify the potential 
problems with the new 202 rule, in terms of when are they 
advisers and when are they just, you know, dealing with 
transactions?
    And the question I am asking is do you see this as a 
problem, and are you hearing that guidance is needed?
    Mr. Cox. Well, it is, and I am also hearing that it is. We 
are very busy working on this right now. I am hosting 
collaborative discussions among the SEC and the bank regulators 
to implement Regulation B, which I take it is what you're 
asking me about.
    It has been a long time since Gramm-Leach-Bliley, since we 
worked on that in this committee, Mr. Chairman. Indeed, it was 
a different millennium than we're now in. It was 1999.
    And so, it's about time that we had rules and guidance. I 
think it's vitally important that we do so. It has obviously 
been a sticky wicket, that's why it's taken this long. But I 
have decided to rededicate the Agency to getting it done, and I 
am leading those efforts personally, getting personally 
involved in them.
    We are having a series of multi-hours-long meetings to work 
it out, step by step, very patiently. And I think that we can 
achieve a result.
    Mr. Shays. You have only been there 9 months, and I marvel 
at the things that you have to be prepared for. Do you feel 
that you are kind of caught up, or do you still feel that you 
are still in somewhat of a learning mode, in terms of 
understanding where your fellow Commissioners are, and where 
your staff is?
    Mr. Cox. Well, I have to answer that in two ways. I believe 
that, in part, because of the absolutely outstanding 
professional staff of the Securities and Exchange Commission, 
it has been possible for me to get up to speed on a number of 
issues very, very rapidly.
    But second, I have to say that you learn some humility in 
Congress, where you are required to take responsibility for 
such a broad array of different issues. We have all got to 
dedicate ourselves to lifetime learning. And I certainly am 
enjoying that opportunity at the SEC.
    Mr. Shays. Just one last point. Not a question. I was, 
frankly, surprised to learn the salary of your position. And I 
just want to state to the chairman that I, given all the people 
in the position that the chairman--this chairman here, I just 
think we need to determine why the salary, frankly, is so low 
and what can be done to raise it up a bit.
    The Chairman. The gentleman's time has expired. Does the 
chairman want to respond to that?
    [Laughter]
    Mr. Cox. No, I just want to say, Mr. Chairman, that the 
Congress, if not by design, then by accident has put me as 
Chairman of the SEC in a remarkable position of moral 
leadership to talk about executive compensation.
    [Laughter]
    The Chairman. Well said. The gentleman's time has expired. 
The gentlelady from New York.
    Ms. Velazquez. Thank you, Mr. Chairman. Welcome back, 
Chairman Cox.
    Mr. Cox. Thank you very much.
    Ms. Velazquez. Mr. Chairman, in order 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 that it is harder for small firms to go 
public today than it has been in the past?
    Mr. Cox. Well, I have no better source of information than 
what public companies, or companies on the threshold of going 
public, tell us. And there is no question what they're saying. 
They are saying that the answer to your question is yes. That 
is what we are hearing from the advisory committee that the 
Securities and Exchange Commission itself appointed. That's 
what we are also hearing from venture capitalists who nurture 
companies to the point where they might become public.
    One can argue the point and say, ``Well, this information 
is wrong,'' or, ``There is another perspective.'' And actually, 
the SEC does have a different perspective in many cases. But 
it's impossible to deny that the people who are in this 
position, who are themselves smaller public companies or 
companies on the threshold of becoming public, are telling us 
that, over time, this has become a greater burden and a greater 
expense.
    Ms. Velazquez. Is there anything that the SEC is doing to 
ease the burden?
    Mr. Cox. Yes. And I appreciate the way that you yourself 
have drawn our attention to this issue. On behalf of many of 
the smaller public companies, and the companies that are not 
yet public that I was alluding to, the SEC not only can do 
something here, but we have a very significant responsibility 
to do something here.
    I know, from firsthand experience, as a member of the 
Conference Committee, that that's what Congress intended. The 
Congress did not intend chaos, we didn't intend unnecessarily 
high costs. We didn't intend expense all out of line with the 
investor protection benefit that it purchases.
    There is nothing in section 404, which is the main focus of 
a lot of this criticism, that mandates that kind of chaos. 
Instead, I think section 404 has a very good idea expressed 
within it. I think it is expressed very economically. It's not 
a very long section.
    There are hundreds of pages, on the other hand, in AS2, 
which is published by the PCAOB. The SEC itself has the 
responsibility and opportunity to provide management guidance 
in addition to the auditing guidance that's provided in AS2. 
Between the SEC and the PCAOB, I am absolutely confident that 
we can make this work far better.
    Ms. Velazquez. Good. Thank you. The SEC permits smaller 
companies to use simplified forms for reporting on the 
Securities Act and the Exchange Act. In order to qualify as a 
small business issuer under SEC Regulation SB, the company must 
have revenues and a public float of less than $25 million. 
These requirements have not been changed since the enactment of 
Regulation SB in 1992.
    Since 1992, stock prices have increased significantly, and 
measurable inflation has occurred. Do you believe it is 
appropriate for the SEC to raise the threshold associated with 
regulation SB?
    Mr. Cox. Yes, I do. And we are preparing to consider a 
proposal at the Commission level that would do precisely that.
    Ms. Velazquez. Okay. Earlier this Congress, Mr. Chairman, 
Representative Kelly and myself introduced and passed 
legislation modernizing the business development company 
statute. As you may know, modernizing the business development 
company statute is a past recommendation from the SEC's small 
business forum, and the subject of several previous legislative 
efforts.
    These enable the SEC to meet its mission to facilitate 
capital formation. However, these regulations are outdated, 
which in turn limits the financing option for smaller 
companies, and also hurts those that have invested in BDCs 
themselves.
    With this in mind, is the SEC going to propose new rules 
this year to modernize BDC regulations?
    Mr. Cox. Yes. And, in fact, I think that the Commission 
will be ready to consider final action some time perhaps late 
this summer, or maybe even early summer. I want you to know 
that I certainly support modernizing the definition of eligible 
portfolio company.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    The Chairman. The gentlelady yields back. The gentleman 
from California, Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman. And it's good to see 
you, Chairman Cox. As the person who succeeded you--albeit it 
not replaced you--in Congress, I want to, first of all, thank 
you for leaving the California 48th Congressional District in 
such excellent shape, and to let you know I drove by your house 
the other day and it hasn't burned down or anything.
    So I just have one quick question, relative to the 
complexity in financial reporting issue. As you suggested in 
your testimony, a lot of the complexity, certainly in 
accounting, is driven by having increasingly complex financial 
instruments and increasingly complex financial transactions.
    I understand that you are working on, in the SEC, perhaps 
principles-based accounting system, and I just wanted to ask 
how is that progressing? Where are you--where is the SEC on 
that? And what is the path from here? What stands in the way, 
etc.?
    Mr. Cox. Well, the SEC, as you know, has a road map to 
convergence of what is a more principles-based system, IFRS, 
and U.S. GAAP. At the same time, we are also working very 
closely with the Financial Accounting Standards Board in this 
war on complexity that I advertised earlier. I think it's 
vitally important for individual investors in chief, but also 
for our whole system.
    And part of that project, I think, is going to open up some 
of these questions that you are raising.
    Mr. Campbell. So, as far as the principles-based--it's 
still--at this point it's just a matter of discussion and 
something you're looking at, a principles-based accounting 
system, or--
    Mr. Cox. Well, U.S. GAAP is a very rules-based system. And 
so, as we have discussions with our overseas counterparts about 
our own acceptance of IFRS, as we talk about convergence of 
those systems, it gives us an opportunity to move perhaps to a 
more principles-based system.
    Mr. Campbell. Okay. Thank you. I yield back.
    Mr. Cox. But before you yield back, I want you to know 
that, as you know, we just bought a new house in your district 
last year, before I knew that the President was going to ask me 
to do this job. So I hope that you can keep going by the 
house--
    Mr. Campbell. I will keep checking on it.
    Mr. Cox. I was there one weekend in 2006, and so--
    Mr. Campbell. I will keep checking on it. And after I have 
the parties there, I will make sure that I clean up.
    [Laughter]
    The Chairman. The gentleman yields back. The gentleman from 
Missouri, Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman, and welcome back, Mr. 
Chairman, and welcome back to the committee.
    There is an outcry among investors that executive 
compensation is too inflated, and that the disclosure of the 
compensation is too vague and confusing, at best. Will your 
plain English requirements apply to executive compensation 
reports, and do you expect that to work, if it does apply to 
it? Are there enforcement provisions with punitive measures if 
reports continue to be confusing to most investors? And could 
you elaborate?
    Mr. Cox. Yes. The answer to the first part of your question 
is absolutely yes. All of the revised executive compensation 
regulatory regime is going to demand plain English. And indeed, 
our ultimate goal--not just in the area of executive 
compensation, but in all information that is distributed to 
individual investors--is that we have plain English 
requirements.
    Second, with respect to what happens if you don't follow 
these rules, all of the enforcement authorities that the SEC 
possesses with respect to observance of its rules will apply 
equally to these executive compensation rules.
    Mr. Clay. Okay. Thank you for that. And I support Sarbanes-
Oxley, or otherwise known as SOX, and appreciate how it helped 
to stem the tide of distrust in our financial markets caused by 
the financial collapse of several large corporations. I do 
understand the prohibitive cost to some of our smaller publicly 
traded companies. Additionally, I understand that the second 
year cost will be less costly.
    However, I do recognize the need to make adjustments in SOX 
for the smaller companies. Do you think that it is wise that 
companies be exempted completely from Sarbanes-Oxley, or don't 
we still need transparency? Would not the combination of lower 
costs after the first year, and perhaps a less frequent 
reporting schedule, make the process affordable while 
maintaining these reporting requirements?
    Mr. Cox. We are considering, as you would expect, a wide 
range of alternatives on improving the implementation of 
section 404, including those that you mentioned.
    But, with respect to the question of exemption versus 
applying the law in some fashion, I think my own view as 
Chairman--and I need to hasten to add that the Commission has 
not made a formal decision on this; the Commissioners are all 
entitled to their views, and we are still working this out, so 
I am not speaking for the Commission, but for myself--I would 
like to see this law applied to public companies for, among 
other reasons, the fact that the law itself seems to 
contemplate that. The law does not have an elaborate exemption 
provision. It was the intent of Congress, I believe, that these 
provisions be applied.
    But I also think it was the intent of Congress that they be 
applied in a sensible way. And I think Congress would be the 
first to recognize, from the wide range of experiences that 
Members here have, that there is a difference between General 
Motors and Joe's Motors, and an allowance has to be made for 
that in designing systems to comply with this provision.
    Mr. Clay. So, in your opinion, it's proven to be more 
costly for some firms than others?
    Mr. Cox. I think there is no question that, 
proportionately, the costs are going to be higher for smaller 
companies than for large companies. Certainly, as expressed as 
a percent of earnings, the impact on a small company will far 
outweigh the impact on a large company.
    Now, whether it should be scaled in exactly that way is 
another question. But we need to know, going in, that 
proportionately, the impact is greater on smaller companies.
    Mr. Clay. I thank you for your responses. It is good seeing 
you again. I yield back, Mr. Chairman.
    Mr. Shays. [presiding] Thank you. And I will now go to Mrs. 
Biggert. Before recognizing her, if I am still here, I need to 
clarify the issue of broker-dealer/financial planner. I am not 
quite sure when I asked my question I did the proper follow-up, 
and I am just going to prepare you for that.
    Mr. Cox. I am sorry, I answered a Reg B question, because I 
thought that's what you were asking about.
    Mr. Shays. Yes. I was talking about the broker-dealer, not 
the financial planner.
    Mr. Cox. Yes. All right. Do you want to ask that question 
now?
    Mr. Shays. No, I think I will just go to Mrs. Biggert now, 
and make sure that, before we leave, we get that on the record.
    Mr. Cox. Okay.
    Mr. Shays. Mrs. Biggert?
    Mrs. Biggert. Thank you, Mr. Chairman, and thank you, Mr. 
Chairman, for being here. And first of all, I would like to 
thank you for making financial education your top priority for 
the SEC. I have been working on financial literacy within the 
Congress, and I particularly thank you for working with the 
NASD to help our military and their families. It's very 
important. And thank you for working to educate and protect our 
elderly investors and retirees and future retirees. You're 
doing a great job.
    My question. The securities and futures industries in 
Chicago appeared to unanimously support parity in the portfolio 
margining between single stock, futures, and options. I found 
it is rare that competing industry interests unanimously 
support a proposal, unless it's good for the market and good 
for consumers. I believe that this is an important step for the 
capital markets.
    Under rules proposed by the CBOE and the NYSE, a broad 
array of products, including equity securities, listed options, 
OTC derivatives, U.S. securities, futures, and broad-based 
futures could be included in a single account margin on a 
portfolio basis.
    But last November, I believe that the Commission committed 
to approving self-regulatory organization rules to permit the 
customer portfolio margins by June 30, 2006. And I know that 
you are currently taking comments on CBOE and the New York 
Stock Exchange rule changes.
    Do you anticipate that the Commission will be able to meet 
its commitment to Congress to act on these proposals by June 
30th?
    Mr. Cox. I do. And let me add that I am committed, in my 
capacity as a member of the President's working group on 
financial markets, to implementing portfolio margin rules in 
collaboration with the CFTC. I think it makes a great deal of 
sense, from the investor's standpoint, from the investor 
protection standpoint.
    Mrs. Biggert. Thank you. And then, in your testimony, you 
mentioned improving disclosure of financial data, and there is 
a fair disclosure from issuers of securities. And in addition, 
you mention that disclosures should be in plain English, and 
accounting complexity should be reduced.
    In 2004, this committee held a hearing on corporate 
governance in accounting for oil and gas reserves due to 
several financial restatements by the companies in these 
industries. And in recent days, the accounting method of last-
in first-out has come into question, as it relates to these 
industries.
    Are investors in the American public getting clear and 
accurate financial statements from the oil and gas companies, 
including accuracies about the oil and gas reserves? And is 
this something that the SEC is examining?
    Mr. Cox. It is, indeed. Rules, as you know, in this area 
are old. They date back to the 1970's. And one of the things 
that has happened, in the meanwhile, is that technology has 
changed. And so, the technological premise for these rules 
needs to be re-examined.
    Under our current rules, an oil and gas company is 
prohibited from disclosing any reserves, other than proved 
reserves under this definition. And so, if there is disparity 
between real life and good science, on the one hand, and what's 
in our publicly-mandated disclosures on the other hand, we need 
to address it.
    Mrs. Biggert. Are you looking at the rules to be--to see if 
you can bring them into the 21st Century? Is that something 
that you can do?
    Mr. Cox. We are looking at it. The view of the professional 
staff to date has been that they have been unable to conclude 
that the newer technologies in use since the 1970's have been 
demonstrated to be routinely reliable for the attribution of 
proved reserves in the context that we're talking about here, 
for financial reporting.
    But the Commission staff did allow the use of those new 
technologies in calculating proved reserves in the Gulf of 
Mexico, following a special project that it undertook.
    Allowing the use--I think we all understand here--of new 
technologies would likely produce reports of increased levels 
of proved reserves, and what we're weighing is whether or not 
we're going to conversely reduce the reliability of the 
estimate. And we don't want to do that, of course.
    Mrs. Biggert. Thank you. Thank you, Mr. Chairman. I yield 
back.
    Mr. Shays. I thank the gentlelady. Mr. Cleaver, thanks for 
your patience.
    Mr. Cleaver. Thank you, Mr. Chairman. Chairman Cox, thank 
you for being here. I did not have the privilege of serving on 
the committee with you, but everybody who has speaks so highly 
of you, so it's a privilege for me to have the opportunity to 
have an exchange with you.
    I have become somewhat obsessed with our national debt and 
with the investments by foreign nations in our government. Do 
you know the current size of the U.S. investments held by 
foreign entities?
    Mr. Cox. I don't have that figure to quote for you right 
now, and I would actually be surprised if I turned around and 
somebody did, but I will check.
    Yes, I mean it's a very easy figure for us to get, and in a 
very formal proceeding such as this I would hate to do it seat 
of the pants. So why don't we get you the precise figure 
following this hearing?
    Mr. Cleaver. And I am interested also, if you can, in what 
portion of that is held by China and Japan.
    Mr. Cox. We would be very happy to do that.
    Mr. Cleaver. Thank you. But is that something, though, 
under normal circumstances, that the SEC would monitor?
    Mr. Cox. Well, you know, the Securities and Exchange 
Commission is very concerned with cross-border capital flows, 
and the maintenance of healthy, transparent, open markets that 
look after the interest of our own investors. It's impossible 
to do that job these days, and restrict yourself to our 
national border or not notice which way the capital flows are 
moving, which country's regulatory regimes necessarily we are 
dealing with, because they are the preponderant trading 
partners in the capital markets, and so on.
    So, I think your question is right down the center lane of 
what we're interested in at the SEC.
    Mr. Cleaver. Is it what you consider dangerous if the 
interest of foreign--the investments of foreign entities 
reached a portion where they actually almost controlled major 
portions of our Wall Street companies?
    Mr. Cox. Well, I don't believe that we should erect 
barriers to foreign investment in our country, for the simple 
reason that we don't want foreign countries to erect barriers 
to our investment.
    I would see--and here I am going to try and restrict myself 
to the role that I am testifying in, as Chairman of the 
Securities and Exchange Commission, and not give you a 
perspective as the Chairman of the Homeland Security Committee, 
or a former Member of Congress, which, being in these 
surroundings, I am almost tempted to do.
    But what we do at the SEC is evaluate the disclosures made 
by market actors. And the transparency of market actors is 
something that we have to be able to enforce through our 
regulations. If the people that are making the investments are 
not strictly market actors, but sovereigns, that's harder to 
do.
    And so, if you're dealing with nations themselves, or their 
surrogates and their wholly controlled entities, I think it 
presents a different public policy issue than if you were 
dealing with purely market actors, private market actors from 
other countries. I think they tend to act for market reasons; 
governments act for reasons of national interest.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Shays. Thank you very much. The Chair would recognize 
Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman, and let me add my 
voice to the chorus of those welcoming Chairman Cox to our 
committee. And I am certainly just as happy as I could be that 
a man of his integrity and leadership and philosophy has been 
chosen for this position.
    Chairman, let me offer an apology here. I had to run off to 
a prior speaking engagement. So, although I heard your 
testimony, I have missed much of the question and answer 
period. So, if this is redundant, please forgive me.
    In your testimony today, you expressed concerns with 
ensuring that our public investors have access to accurate and 
useful market data. I think the Commission has now been 
reviewing possible reforms to the consolidated model of market 
data for over a decade. Even by government standards, that's a 
fairly excessive period of time.
    Recently on the Senate side, I believe, in your hearing 
there, you indicated that market data reform was something that 
was a front burner issue for the Commission.
    And so, my question is, as this issue sits on the front 
burner, is it on low, medium, or high? In other words, do you 
have a time table yet on when the Commission will address this 
issue?
    Mr. Cox. Well, it's very salient for, among other reasons, 
the reason that the pricing of market data and the revenue 
generated by market data are of exceptional relevance to the 
now-public markets in the United States.
    Back in December of 1999, the SEC issued a concept release 
dealing with the regulation of market information and fees, and 
so on. That focused primarily on the fees charged for market 
information, and the role that revenues derived from those fees 
played in funding the operation of the SRO's, and thus the 
operation of self regulation in the market.
    The majority of the commenters on that issue--and the 
concept release generated a fair amount of comment--believed 
that the SEC's cost base approach, which was expressed in that 
concept release, would be unnecessary and impractical. They 
weren't fans.
    The commenters cautioned that, for example, classification 
of common costs couldn't be done without significant 
disagreements, continual auditing, and considerable expense. 
And some of them pointed out that, historically, cost-based 
systems have encouraged cost padding, and creating 
disincentives to reduce the cost through efficient operation or 
innovation.
    So, that then took us to the appointment of an advisory 
committee in 2001. And the SEC's advisory committee on market 
information then expressly rejected this cost-based approach in 
its report to the Commission. They recommended that the SEC 
retain the consolidation and move from a single consolidator 
model towards a system of competing consolidators.
    Then we had Reg NMS, which was adopted shortly before I 
came to the SEC. That didn't take any action on the competing 
consolidator idea. And in fact, it even reaffirmed the single 
consolidator system for best-priced quotations and for last 
sale information.
    It did take some limited steps to confirm that SRO's could 
sell data other than currently consolidated data, but it left 
it to the Commission to explore whether further action was 
necessary to address concerns with the pricing of consolidated 
market data.
    Mr. Hensarling. But any time table on--
    Mr. Cox. The next step, in order to solve this problem, and 
to deal with it in a good way, is for us to understand with our 
counterpart regulators--for example, the FSA--you know, how we 
intend to deal with what we expect to be the new shape of the 
industry and the markets, now that they are for-profit 
entities.
    It is this interplay between the interest that we have in 
transparency, and the transmission of this information to the 
market in real time, on the one hand, and the role that the 
revenues play in sustaining the SRO's themselves, it's that yin 
and yang that we have got to deal with.
    So, I don't have a date that I can give you here in this 
hearing, by which all these questions will be resolved. But I 
hope it's of some comfort to you that this is a front burner, 
not a back burner item. It's something that we are very, very 
intently focused on.
    Mr. Shays. The gentleman's time is--
    Mr. Hensarling. Unfortunately, I already see the red light 
is on, so apparently you didn't want to answer my other 
question. Thank you, Mr. Chairman.
    Mr. Shays. Mr. Fitzpatrick?
    Mr. Fitzpatrick. Thank you, Mr. Chairman. Earlier today, 
there was some discussion on a bill that I introduced that's 
pending before the committee--H.R. 2990--the Credit Rating 
Agencies Duopoly Relief Act. And currently, the SEC has only 
designated five credit rating agencies as nationally recognized 
statistical rating organizations, NRSRO's, for use in SEC 
regulations.
    My view, Mr. Chairman, is that 5 is not enough. And to 
compound matters, 2 of the 5, Moody's and S&P, control about 80 
percent of the market share. I introduced H.R. 2990, which 
would eliminate the SEC's designation process in order to 
engender some competition and to protect investors.
    Congressman Kanjorski earlier asked an excellent question, 
which is given the fact that there is legislation pending, and 
at the same time SEC staff is reviewing the designation 
process, should we put our foot on the accelerator or the 
brake, he said.
    And I believe you had essentially two responses. One is 
that, given the difference between the legislative and the 
executive process, you respect the legislative process we're 
going through, and we appreciate that.
    Now, the second is that currently staff is in the process 
of defining the term ``NRSRO,'' and I think you indicated, 
through the rule-making process that started back in March of 
last year--I'm not sure what--whether or not we have actually 
gotten to the actual definition. Has that been completed? 
Because it goes to Mr. Hensarling's question as to how long is 
this reform process going to take? Has NRSRO been defined at 
this point by the SEC?
    Mr. Cox. Well, as you know, the proposal was put out in 
March of 2005. We received comments on it, the comment period 
closed. And now we have been in extended study period. I think 
the inference you can draw from that is it wasn't just right 
the way it is.
    Mr. Fitzpatrick. So, 14 months later, we still--I mean, 
defining an NRSRO is just the very beginning of the reform 
process. And 14 months later, we haven't gotten to the 
definition?
    I think my view would underscore the need for legislation 
proposing reform. So I won't ask you your specific position on 
the legislation. But I would ask, as a general matter, do you 
believe that by encouraging competition in the industry, 
ratings quality will improve? Will costs come down?
    And perhaps most importantly, will the anti-competitive 
practices such as--which is rampant in the industry today 
providing unsolicited ratings with a bill, sometimes in the 
industry referred to as the ``shake-down,'' which I find very 
offensive, would this kind of legislation improve the process?
    Mr. Cox. Well, since you--if I understand your question 
right--are not asking me to comment on the legislation, but on 
the goals of the legislation, specifically competition, 
transparency, and possibly greater Commission authority to 
provide oversight in this area--those are our goals, as well.
    I am not trying to be opaque in my answer, either to 
Representative Kanjorski or to you. So let me be very clear 
about what I mean to say there, when I say that I understand 
and appreciate the role of the Congress here.
    Many times, on many different subjects, I had the pedal to 
the metal, my foot on the accelerator, trying to pass 
legislation as urgently as it could possibly be enacted. And I 
also was frustrated, because that didn't always happen.
    So, if you ask me whether to go full speed ahead or not, 
even if I said yes, I still don't know whether or not that's 
going to result in legislation. And, if so, whether it would 
result in legislation this year or next year, or when. And I 
dare say that you might not know, either. That's the way the 
legislative process works. And that's all I meant.
    So, what the SEC is responsible for doing is what the SEC 
has control over. And that is our own process. We are not 
waiting for something to happen here legislatively. On the 
other hand, we are not suggesting to you that, because we're 
doing something, you shouldn't. But we strongly share your 
goals.
    And some of the things--I think I also alluded to this in 
my answer to Representative Kanjorski--some of the things that 
you could do legislatively, we can't do through rulemaking. So 
the two are a little bit ``apples and oranges''.
    Mr. Fitzpatrick. As a follow-up, your colleague, 
Commissioner Campos, who helped spearhead the development of 
the IOSCO voluntary code of conduct for rating agencies, has 
stated that he believes rating agencies legislation is needed, 
citing his unhappiness with voluntary agreement negotiations 
between the Commission and the SEC, designated rating agencies.
    Chairman, do you think that the Commission needs statutory 
authority in this area to properly oversee the credit rating--
the industry?
    Mr. Cox. The Commission has not taken a formal position on 
this, but I have the same position as did my predecessor, and 
that is that we would appreciate the provision by Congress of 
enhanced authorities for the SEC in this area.
    Mr. Fitzpatrick. Thank you.
    Mr. Shays. I thank the gentleman. Mr. Chairman, we have two 
remaining giants of the committee to ask questions, Mr. Gillmor 
and Mr. Leach. Mr. Gillmor?
    Mr. Gillmor. I don't feel like a giant, but thank you, Mr. 
Chairman. Mr. Chairman, congratulations on your appointment. I 
would like to welcome you back. You and I came in the freshman 
class of 1988, and I am glad that between you at the SEC and 
Porter Goss at the CIA, at least some did pretty well.
    I want to bring up two areas. One, back in the 106th 
Congress, at that time you and I were both serving on the 
Energy and Commerce Committee, in the financial services area. 
I had introduced a bill which you cosponsored, along with then-
subcommittee chairman Mike Oxley, which would have required 
publicly-traded corporations to disclose to their shareholders 
significant charitable contributions. The theory behind that 
was that that's the shareholder's money, they ought to know 
what's happening with it.
    And, in fact, a lot of public companies voluntarily 
disclose it, but some of them don't want the shareholders to 
know what they're doing. And I have reintroduced that 
legislation this year.
    I guess my question is do you still have the same view you 
did when you co-sponsored that bill, in terms of public 
disclosure, and would the SEC consider, either with or without 
that legislation, requiring public companies to disclose 
significant charitable contributions and insider-affiliated 
charitable contributions on an annual basis?
    Mr. Cox. Well, first, let me acknowledge the very generous 
compliments that you gave, and I want you to know how much I 
appreciated sitting next to you on this, and the committee 
across the hall. And I also recognize that you're being unduly 
modest in comparing a couple of your classmates to yourself. I 
think the country very much benefits from your being here, as 
well. And I appreciate the opportunity to appear before you in 
this capacity.
    I didn't realize when I was a Member of Congress, and you 
and I were working on this together, that in response to your 
request, the SEC, before I was Chairman, conducted a 
feasibility study on implementing your legislation on requiring 
public companies and mutual funds to disclose information about 
their contributions in their SEC filings. Obviously, you know 
about that, and I have learned about it in my capacity as 
Chairman.
    The result, as you know, of that study was that the 
Commission--at least at the time--believed that requiring this 
disclosure would, in fact, be feasible. And public companies, 
the Commission believed, are capable of tracking and disclosing 
this information to investors.
    So, from the standpoint of giving technical guidance on 
your legislation, I think that is still operative, and that 
should still help you as you deal with the legislative process 
here.
    Insofar as our ability to do this, or our interest in doing 
this separate from legislation, the staff noted at the time--
again, before I was Chairman--that charitable contributions 
make up a relatively small proportion of a corporation's 
financial activities. And, particularly in the case of mutual 
funds, the Commission staff found that the vast majority of 
funds didn't contribute to charitable causes.
    So, given that our disclosure regime operates fundamentally 
on a materiality premise, the question arises whether, if 
that's what is guiding us here, we would do that following our 
own lights.
    On the other hand, materiality is the floor. Everything 
that is material must be disclosed. Some things that our 
specific disclosure requirements mandate are not inherently, 
per se, material, and we require them anyway. This is true, for 
example, in the environmental area. So I think Congress would 
be well within its rights, if it decided, as a matter of public 
policy, that this kind of disclosure should be mandated, 
notwithstanding that it might not in every case otherwise be 
material under the Supreme Court standard.
    Mr. Gillmor. The other area I want to ask you about is the 
area of disclosure of taxes. One of the things that I am 
concerned about is that, in many instances, shareholders 
receive from companies information that is, in fact, 
misleading, even though it's accurate.
    And one of the areas is the reporting of income for SEC 
purposes, which goes out on the Street, and that's what people 
look at as corporate earnings, in terms of determining whether 
to buy or sell shares.
    On the other hand, there is another figure which is not 
always disclosed, and that's the income for public companies 
that is reported to the IRS.
    So, the thrust of my question is, do you think it would be 
possible to have a system where a corporation would have to 
disclose SEC-reported income and IRS-reported income, similar 
to what companies do with executive compensation?
    It seems to me that it's a rather key fact in order that 
investors can make a fair decision about whether they want to 
buy or not.
    Mr. Cox. Well, as you may know, the Commissioner of 
Internal Revenue, Mark Everson, has publicly floated this idea, 
and I have heard from him on it. We have discussed it. I 
certainly share the goal of increasing transparency of 
financial disclosure. I am not certain that publicizing tax 
returns is the best way to that result.
    Mr. Gillmor. I am not suggesting to go so far as to making 
the tax returns public, which I think you brought up. It's 
simply providing some comparable figures, so that--I may be 
wrong, but if a shareholders knows that a company reported $1 
billion to the IRS, but says to you they made $2 billion, and a 
person makes an investment on the $2 billion--so I'm not 
suggesting we make the whole return public.
    Mr. Cox. Well, your question began by noting how much of 
the information that's provided to investors right now might 
not be useful. And indeed, it might be confusing, and so on. I 
want to make sure, in all of the disclosure that the SEC 
mandates, that we are illuminating, and not making it harder 
for people to figure out what's going on.
    Mr. Gillmor. Right.
    Mr. Cox. A lot of the disclosure that the SEC requires is 
necessary for them to understand, for example, a corporation's 
tax deferral strategies. It might not be helpful to an 
investor's understanding of the overall financial condition of 
the company.
    So, I am certainly going to pay close attention to this 
discussion, work with my counterpart regulator at the IRS, and 
work with the Secretary of the Treasury in my capacity as a 
member of the President's working group, to talk about this. I 
think it will get a good deal of attention.
    But I want to be clear. This is an IRS idea that has been 
floated. It is not an SEC initiative. We are going to look at 
it, but I am certainly not pre-sold on it.
    Mr. Shays. Thanks to the gentleman.
    Mr. Gillmor. Thank you, Mr. Chairman. Good luck on the new 
job.
    Mr. Cox. Thank you.
    Mr. Shays. The Chair at this time would recognize Mr. Leach 
for whatever time you may consume.
    Mr. Leach. Well, thank you, Mr. Chairman. And I certainly 
share the earlier comments made about your service, Chris. We 
welcome you in this job. And I think your presentation today 
has been very impressive, particularly your emphasis on 
transparency and more simplified, timely disclosures.
    I want to raise an issue that is very difficult for you, 
also for those of us in Congress. And that is the remuneration 
issue. And you point out--and I think quite properly--that you 
are reluctant to enter into this issue.
    On the other hand, there are two perspectives that I think 
have to be raised at this time. One relates to the market 
itself. If the public loses confidence in public corporations 
and their mission--that is, is their mission to serve the 
shareholders or to serve insiders--you can have a real shake in 
confidence in the market. If the public loses faith in the 
market, that is not a trivial circumstance.
    You point out--I think quite properly--that remuneration is 
largely the province of the board. But what happens when a 
board and a CEO are pretty much in tandem? I mean, we have this 
example that the Wall Street Journal has laid forth of a public 
corporation over the last decade that has given a couple of 
billion dollars in stock options to a CEO, and at the same 
time, a couple of hundred million dollar stock options to the 
board. That is an extraordinary situation.
    I don't know if it's an SEC issue or not. But if it is, has 
the SEC examined this case?
    Secondly, I have the good fortune to represent the 
University of Iowa. A distinguished scholar at the university, 
a professor named Eric Lee, has done a study of stock options, 
and he has examined literally thousands of public corporations.
    He has concluded that it is rather impressive how many 
stock options were granted at low points, just before shares 
had risen. And he has concluded that the odds of such a happy 
coincidence for the recipients is so high that it is about 
twice as high as winning a Powerball with a dollar ticket, 
which implies that it is conceivable that some of these grants 
of options were done retroactively, which implies, as I 
understand it, a possible violation of law.
    And so, my query: is the SEC looking at this particular 
circumstance at this time, and is there a market confidence 
type of dilemma that occurs with these remuneration issues?
    Mr. Cox. Well, particularly with the pathology that you 
just described, there is a market confidence issue, I mean, 
because that either is or borders on fraud in its most extreme 
forms.
    When I said earlier that the SEC doesn't want to second 
guess the board, make judgments in place of the board about the 
methodology or the levels at which executives are compensated, 
what I mean, of course, is that we don't want to substitute our 
own judgment for the honest judgment, the business judgment, of 
the board of directors.
    Mr. Leach. Fair enough.
    Mr. Cox. But if an individual executive or confederates on 
the comp committee or on the board are in any way violating the 
trust of the shareholders, that's an entirely different matter. 
And our enforcement division is very interested in that.
    Mr. Leach. Well, I appreciate that. And I just think we 
would be shirking our duty if we didn't raise this kind of 
issue. And your institution is the singular one in our society 
that can look at these things. And so I appreciate your 
attention. Thank you.
    Mrs. Kelly. [presiding] Thank you. Mr. Sherman?
    Mr. Sherman. Thank you, Madam Chairwoman. Chairman Cox, 
it's good to see you again. I don't see you on the plane as 
often; I guess your new job doesn't involve trips to Newport 
Beach. Other than that, I hope you like it. I have quite a 
number of questions that I will pose. Maybe you will have a 
chance to respond, or maybe you can respond for the record.
    The first is that the accounting statements that are 
audited contain the same information that accountants have been 
providing for about 100 years. A few decades ago we went beyond 
the income statement, the balance sheet, to a funds flow 
statement that is really the same information presented in a 
different format.
    Yet the markets are much more interested in other 
information, and are willing to act on it, even though it comes 
to them in unaudited form. For example, if you are dealing with 
Boeing, you want to know what they have in the way of back 
orders. If you're dealing with a retail store, what is its 
revenue per square foot? All this information tends to get 
reported. None of it is audited on a quarterly basis, or even 
on an annual basis.
    And so, I hope that the SEC would move beyond the 100-year-
old income statement and balance sheet to at least a system 
where companies would be encouraged to provide information 
relevant to their industry that is audited, so that it can be 
relied upon, and so that even if you are producing weekly or 
monthly reports that are unaudited, the management knows that, 
by the end of the year, there is going to be an audit of what 
they have been presenting, just as we get unaudited quarterly, 
and sometimes even more frequent information about the income 
statement, and eventually it is audited.
    The second area I would like you to focus on is that of the 
SEC as an enforcement agency. And here, my information may be a 
little stale. But most of this hearing has focused on those 
investors who are making investments in something that a 
securities professional would say, ``Looks like a legitimate 
investment.'' They are buying a publicly registered stock on a 
stock exchange, comes with a prospectus. Even Enron came with a 
prospectus.
    But then there is a whole group of absolutely phony 
investments that you or I would look at and say, ``My God, this 
is a violation of every securities law,'' being hawked on the 
Internet. And I am told that the SEC is prevented by law from 
even having its people pose as potential buyers on the 
Internet. You can't even have your people surf the Net to find 
the apparently bogus investments.
    And I hope that, in addition to protecting the reasonable 
investor who is buying stocks in companies on stock exchanges, 
etc., that the SEC would devote some resources and get whatever 
legislative authority it needs to at least pose some risk to 
these charlatans selling investments on the Internet and in 
other ways.
    The third issue I would like to bring up is the issue of 
minority shareholder rights. One that we know you have talked 
about, executive compensation. One way to deal with that is to 
have a group of shareholders dispossess the current board and 
install a board more responsive to shareholder interests.
    And yet, we have a system in which companies go to the 
State with the lowest possible minority shareholder rights 
standards. And I hope that you would present this Congress with 
some ideas of setting minimum rights for minority shareholders 
of all publicly-traded corporations, rather than have Delaware 
and Nevada and others fight to provide the most possible 
protection for entrenched management. I would like you to 
respond, time permitting.
    Mr. Cox. Well, first, I want to thank you for your generous 
comments, and let you know that while my current occupation 
doesn't permit me to be on the plane with you as much, I 
certainly intend, as a Californian Chairman of the SEC, to make 
sure that the portion of America west of the Mississippi has 
just as much representation in our regulatory system as does 
the East Coast.
    Mr. Sherman. Does that mean you're volunteering to speak in 
the San Fernando Valley?
    Mr. Cox. Well, we can talk about that.
    Mr. Sherman. Okay.
    Mr. Cox. It's--you know, particularly we should talk about 
that for around January or February I think.
    Moving directly to your questions. First, you're certainly 
one of the few CPA's I know in the Congress, if not the only 
one. And I think, having looked at these issues from the 
vantage point of a Member of Congress with that background for 
such a long time, you're more keenly aware than most of the 
anachronism that you pointed out in your question, the mismatch 
between a system that relies on snapshots taken at year-end, on 
the one hand, and the fast moving economy that we live in 
today, where information moves 24/7--
    Mr. Sherman. And if I can interject, it's also just a 
snapshot of the things that accountants decided over 100 years 
ago should be photographed, and does not include such things as 
employee turnover rates, which, to me as an investor, might be 
more important than just quarterly sales.
    Mr. Cox. And I think you're absolutely right, first of all. 
I agree with the entire premise of your question. And second, 
you're absolutely right that the kinds of other things that 
investors are interested in and could benefit from, were they 
available, are not only are things that are off balance sheet, 
off income statement, or off funds flow statement, but they may 
be only quasi-quantitative. They may be qualitative. In the 
information economy, with services being such an important part 
these days, the manufacturing model may not always fit.
    And so, as we take a look at the overhaul of accounting and 
all of its complexity, one of the things that we have to keep 
uppermost in mind is that, to serve investors, we need to give 
them real information that they can use. That means, as I 
pointed out earlier also, that it should not be confusing; it 
should be in plain English.
    Interactive data, which is one of the big initiatives of 
the SEC, as you know, is very well suited to helping us move in 
this direction, because it's real time, because it applies to 
all data, potentially. It doesn't even need to be a number; it 
can be text. Being able to move this information around 
immediately in real time is going to help the preparers. It's 
going to help management from an internal control standpoint, 
from a management control standpoint. And ultimately, I hope, 
therefore, it helps us to come up with better numbers, and in 
some cases, audited numbers that today we just can't have 
access to.
    With respect to the SEC posing as potential buyers, the 
SEC--I have just consulted with general counsel--I don't 
believe is legally inhibited, but we can check on this. But 
rather, it is by long standing practice that the Commission, in 
our enforcement activities and in our inspection activities, 
foreswears any deceptive conduct.
    Mr. Sherman. Mr. Chairman, if that's the case, I would urge 
that your employees get practice in using the Internet, and 
seeing the investments that are being put forward there, and 
that the tradition of ``not being deceptive'' should not 
override an efficient effort to protect Americans from the 
investments that you and I would laugh at, but that others are 
putting their money into.
    Mr. Cox. Yes, I assure you that--because that's where I was 
headed next--that we are doing so. And you would expect from an 
agency that is focused on interactive data, that we are very 
keen on exploring investor protection for those investors that 
are already on the Web. The SEC has very recently set up scam 
Web sites so that investors that think that something looks too 
good to be true, and are about to buy it on the Internet, can 
click all the way through and then find out at the end that 
it's really the SEC.
    So, we have sort of threaded that needle. We have been able 
to do what you're describing. But then in the end, you know, we 
tell them, ``This could have been real. And if it had''--and it 
serves as investor education.
    We also have a portion of our enforcement that is focused 
on Internet enforcement, as you would expect. So we are very 
much working this area.
    Mrs. Kelly. Thank you very much, Mr. Sherman. Mr. Scott, I 
am going to ask if you are prepared to go now. I have not yet 
asked my own questions, but since you--barring the advent of 
another one of our colleagues, since you are the last man 
standing on this committee at this point, I will do the mop up, 
and you go ahead, if you're ready to--are you ready for your 
questions?
    Mr. Scott. I certainly am, and thank you for referencing 
Bruce Willis's great movie, ``Last Man Standing.'' Those of you 
who haven't seen that, I am sure you will enjoy that amazing 
shoot-out.
    Let me just commend you, Chairman Cox, on the excellent job 
you are doing. You certainly distinguished yourself in a very 
short period of time, bringing tremendous leadership and some 
very good, positive changes to the Securities and Exchange 
Commission, and I want to commend you for your leadership and 
the work you are doing there.
    Let me ask you about regulation B in my first question. Can 
you provide us with some sort of report on the status of the 
proposed regulation B, and any efforts that the Commission has 
made to work with banking regulators to propose a regulation 
that merits the legislative intent of Gramm-Leach-Bliley?
    Mr. Cox. Well, in fairness, since I was asked earlier about 
the definition of investment advisor and broker, and I answered 
by giving the status of Regulation B, I should answer your 
question now by describing where we are in--
    [Laughter]
    Mr. Cox. But I won't. I will tell you that because Gramm-
Leach-Bliley is, at this point, not a new law, it was passed in 
1999, I think it's high time that we have rules implementing 
the statute. And so, I am committed to promulgating Regulation 
B as early as is humanly possible. I have convened meetings of 
the banking regulators and the SEC to go over this 
collaboratively to come up with a solution that makes sense for 
all of the regulated community, and I think we can do it. I 
would hope that we have a result, even this year.
    Mr. Scott. Good. All right. Thank you very much. Let's go 
very quickly to Sarbanes-Oxley. I don't know if this question 
may have been asked prior to me, but I would be very interested 
in getting your take on the application of section 404, and 
where you stand on the recommendations vis a vis the smaller 
cap companies and the exemptions applicable to those.
    Mr. Cox. First, I am very appreciative of the work that our 
smaller public company advisory committee did for the 
Securities and Exchange Commission, and for the benefit of 
America's investors. They worked for 13 months and produced a 
report very recently. As you know, I think it well reflects the 
concerns from smaller companies, including smaller public 
companies.
    Their recommendations are going to be taken to heart at the 
SEC. They are one of several sources of information and input.
    With respect specifically to that portion of their report, 
the 1 of their 32 recommendations that suggested that we exempt 
certain smaller public companies, I will say as 1 of 5 
commissioners in this capacity--because this is going to be a 
Commission decision, and so I'm speaking now for myself--that I 
am hopeful that we could achieve the objective that they 
sought, not by the blunt instrument of an exemption, but rather 
by the tailored application of the statute with full mind of 
the Congressional intent to smaller public companies in their 
different circumstances.
    I think that should be possible, and I think that, even in 
their recommendations, the advisory committee contemplated 
that, if there was a suitable framework for management of 
smaller public companies, that they wouldn't need an exemption.
    Mr. Scott. Okay. My other question I would like to ask is 
your take on another very topical issue, the committee on 
investments by foreign countries directly in the United States.
    We have had some very serious hearings on that issue, as a 
result of the Dubai Ports deal. And we're looking at how we can 
certainly protect our security, and make sure we are secure 
there. Do you have any words of concern, in terms of the level 
of overreach that we might do that could perhaps put a damper 
on our ability to attract much desired foreign investment in 
this country? And what advice would you give our committee and 
the Congress, as we look at reform of CFIUS?
    Mr. Cox. Well, I am going to constrain myself to answer the 
portion of your question that I am qualified to answer as 
Chairman of the SEC, and not stray off into the more general of 
national security and public policy questions that you 
necessarily have to take into account, and any restructure of 
CFIUS.
    From the SEC's standpoint, obviously, we are concerned 
about investor protection and about maintaining the United 
States capital markets as the largest, deepest, and most liquid 
markets in the world, and we want to continue, as I think you 
do--I infer that from your question--the attractiveness of the 
United States market for foreign investors. We want to make it 
clear to everyone that we welcome foreign investment in this 
country.
    At the same time, I think we want to distinguish, at least 
for disclosure purposes, between state actors, sovereigns, who, 
as one might imagine, the SEC would have a great deal of 
difficulty exercising its enforcement regime against, on the 
one hand, and market actors on the other hand. And that's a 
distinction that I think Congress and policy makers need to 
keep in mind, as well.
    Mr. Scott. Thank you very much, Chairman.
    Mrs. Kelly. Thank you, Mr. Scott. Chairman Cox, it's really 
a pleasure to have you here in this capacity. Having been one 
of our colleagues, and having served with you, I have to say I 
am very interested and appreciative of the effort that you have 
put in to make the SEC look and be responsive to some of the 
issues that have been troubling for me personally, and others 
who have been involved with the market.
    Perhaps these questions that you have been asked indicate 
that--I don't want you to feel that this means that people, all 
of us sitting here, are not appreciative of the efforts that 
you have made.
    That being said, I understand that your testimony doesn't 
explicitly refer to the needs of smaller public companies. They 
are disproportionately affected by over-regulation. The 
accounting industry has been working hard to try to lower the 
costs of audits for smaller companies, and according to the CRA 
report on the 404 costs, smaller public companies' costs for 
404 audits and compliance have declined by approximately 30 
percent from the first year of the 404 review to the second, as 
companies begin to learn to work within the system.
    But the industry doesn't have the authority to change the 
law. And it seems clear that the law really needs to be 
changed, especially for smaller companies. Recently, the 
advisory committee of the SEC, on this issue, suggested that 
smaller public companies needed to be excluded from portions of 
section 404.
    You said that--in your Senate testimony--that the question 
is not whether to apply 404 to all companies, but how. I am 
concerned that this answer to the other House conflicts with 
your advisory committee, and also sends the message that any 
company unwilling to pay a tax of $1 million a year in 
compliance costs should not look to sell shares to the public.
    The advisory committee recommended that companies with less 
than $10 million in revenue be excluded from section 404 below 
a market cap of $750 million, because the costs of compliance 
were disproportionate to their revenues. I am afraid that this 
benefits biotech companies, but it doesn't benefit the small 
manufacturing companies.
    For instance, a firm could have higher revenues, but 
require the devotion of scarce personnel resources for their 
compliance.
    I would be interested in your thoughts on exempting from 
404 review companies with less than $1 million in revenue per 
employee, or a similar number.
    Mr. Cox. First of all, thank you very much for your 
compliments, and I want you to know how much I appreciate 
seeing you in the chair.
    Section 404, and more generally, the regulatory burdens 
placed on smaller companies, are a very, very important focus 
for the SEC necessarily, because one of our missions is 
facilitating capital formation.
    We are well known as the investor's advocate, but our 
tripartite mission includes maintaining orderly markets and 
facilitating capital formation, as well. And all of these 
things, properly viewed, are complementary. We can't say that 
we are doing our job of protecting investors if, in fact, 
companies that are offering their securities are effectively 
prevented from doing so by our regulation, and the products and 
the investments are, therefore, unavailable to the investing 
public.
    The advisory committee's recommendation, which I have now 
had the opportunity to read very carefully, premises its 
recommendation on exemption of some smaller public companies on 
the lack of an available framework that is tailored to smaller 
public companies. I think that that is the essence of their 
recommendation, that if you're going to have a 404, you've got 
to make sure that it applies in a tailored way across the 
board, and that you don't take the standard that works for 
Exxon and apply it to a small business.
    The same applies, it strikes me, when it comes to the 
disporportionality of audit fees. Necessarily, the same level 
of expenditure is going to much more dramatically impact a 
company with smaller revenues and smaller earnings than it will 
a large company. And so, to the extent that the audit of 
internal controls necessitates a certain base level of 
activity, there is no escaping the fact that it's going to be 
more significant for smaller companies. The SEC needs to take 
all of this into account.
    My hope is that we can implement 404 in a way that you all 
intended--and that I intended, because I was here and worked on 
the development of that legislation as well. I don't think any 
of us had in mind, when we voted for Sarbanes-Oxley and its 
included section 404, that this provision would produce 
anomalous results, or outlandish costs, or inhibit risk-taking 
by companies, or keep products off the market, or in any other 
way distort our investor protection regime.
    And so, I am taking it as my charge to make sure that we 
can make 404 effective, and see to it that it achieves 
Congress's objectives at the same time that we lower the cost 
and make sure that there is a regime that specifically fits 
smaller companies.
    Mrs. Kelly. I am glad to hear you say that. When you talk 
about facilitating capital formation, there is a small-cap, 
mid-cap people, these people that have revenue of less than $1 
million per employee sometimes, and people who do generate this 
economy capital--do increase with capital formation. So that is 
a good stance.
    We have been joined by Mr. Fossella, my colleague, and I 
would like to come back to pursue that line of questioning a 
little bit further, but let me turn to Mr. Fossella.
    Mr. Fossella. Thank you, Madam Chairwoman. Mr. Chairman, 
thank you. Thank you for your patience. And more importantly, 
thank you for the strong leadership you have brought to the 
Commission. Your consensus-building approach I think is 
admirable, and I can't tell you enough how I appreciate the 
fact that the President made the right choice in selecting you.
    Having said that, I know you have answered a wide array, 
and you have been very patient. Let me just jump into one 
specific issue regarding legislation that I introduced 
regarding procedural reforms, and looking at ways to 
restructure the Commission.
    In regards to procedural reforms, it included provisions 
aimed at increasing communication between registrants and the 
Commission in regards to the status and/or closure of 
inspections and investigations, and requiring Commission 
approval prior to the initiation of sweep examinations. 
Structurally, the legislation would restore the Commission's 
inspections and examinations authority to the divisions of 
market regulation and investment management, to insure 
examination staff are working alongside the division staff 
responsible for creating and interpreting the rules.
    I think you have tried to establish and strike the right 
balance of protecting investors, facilitating capital 
formation, but also recognize that the most effective tool we 
have in ensuring the integrity of these markets, is to have an 
effective and strong and vibrant SEC, especially in the 
inspections and examinations.
    So, I know--or so I have been told--that the Commission has 
begun to implement aspects, or at least evaluate some of the 
aspects of some of the reforms that are included in the 
legislation. Can you please tell us what, if any, have been 
made, or are in the process of being made? And prospectively, 
what, if anything, we can anticipate?
    Mr. Cox. I would be pleased to do so, and I want to thank 
you for your interest in this area, and your active 
involvement, because it is in response to comments and 
feedback, including those that you provided to the Commission, 
that the Commission has recently changed in several respects 
the way the Commission itself oversees these SEC examinations. 
And let me just go through some of these changes for you.
    First, it is now the policy of the Office of Compliance 
Inspections and Examinations, OCIE by acronym, to provide 
advance notice to the Chairman and to the Commission of any 
proposed sweep examination. That didn't use to occur. In 
addition, the Office has beefed up the pre-exam process, to 
ensure that exams aren't duplicative, and that they are as 
minimally disruptive as necessary to accomplish the objective.
    Second, OCIE is promulgating a new policy that, if an 
examination hasn't been closed within 120 days after the 
completion of the fieldwork portion of the review, the 
registrant then is provided with notice that the examination is 
still in progress. So it is no longer the case that the subject 
of the examination is in the dark.
    Third, at the conclusion of an examination, the registrant 
is provided with a letter, either setting forth the 
deficiencies identified by the staff, or informing the 
registrant that the examination is being closed without 
findings. We have also been working to provide greater 
transparency to the firms under examination in other ways.
    For example, OCIE is amending the informational brochure 
that it provides to firms at the outset of every examination, 
so that they understand clearly, up front: first, that most 
examinations are going to be over within 120 days, after the 
end of the field work; second, that they are invited, as 
registrants under examination, to communicate with the exam 
staff about any questions that they might have regarding the 
structure of the examination; and third, they are given a phone 
number to call if any issues arise they feel more comfortable 
discussing through the SEC's examination hotline.
    Staff at the SEC are also updating our public Web site so 
that, if you are a registrant being examined, you have 
immediate access to the names and phone numbers of the 
supervisory staff in each SEC field office.
    Mr. Fossella. Thank you for those initiatives and changes. 
I'm just curious, is there any--do you see any more changes 
coming down the pike, or any more formal--a ratification of 
some of the other questions that have been raised in the 
underlying legislation, or is the system a more fluid dynamic 
process that we can anticipate?
    Mr. Cox. Well, what has been accomplished has been 
accomplished in a relatively short period of time, as you are 
aware.
    Mr. Fossella. Yes.
    Mr. Cox. I am comfortable, as Chairman, that I have a good 
deal of organizational authority at the Commission. I am also 
absolutely convinced that the leadership of that office wants 
this process to work with as much transparency as possible, and 
wants to be sure that while, as you would imagine, these 
examiners aren't always going to be the most popular people in 
the world, that the function that we are performing is fully 
understood, and that, in a larger sense, it is appreciated, if 
not by the subject of the examination at the moment, then by 
the investing public.
    And so, I think all of the Commissioners, who share this 
objective, and I, and the leadership of the office are going to 
be in a position to continually improve this process. The 
Office itself, as you know, is not the oldest part of the 72-
year-old SEC. It's a relatively recent addition.
    And I think that the additional resources that we have been 
able to deploy in the post-Enron world, with the additional 
funding that's been provided by the Congress, mean that the way 
we do our work in this area is becoming more salient. It will 
give us more feedback and an opportunity to be more responsive 
to the market.
    Mr. Fossella. Thank you very much, Mr. Chairman. Thank you.
    Mrs. Kelly. Thank you, Mr. Fossella. Chairman Cox, I have 
two questions left. One is not mine, one is a follow-up that I 
have been asked by my colleague, Chris Shays, to ask. This is 
the question he asked me about.
    He says that the Commission currently is exempting broker-
dealers from the Investment Advisors Act if they give financial 
planning only incidental to their activities. And he is 
concerned about that, and wondered if you could speak about 
that.
    Mr. Cox. I am happy to speak about that, and I am very 
sorry that I gave him an excellent answer to the wrong 
question. And I am sorry he is not here to hear it, but thank 
you for asking it, and letting me respond to it on the record.
    As you know, our broker-dealer investment adviser rule is 
currently the subject of litigation. There is a lawsuit 
challenging the rule by the Financial Planning Association. The 
SEC is going to be filing a brief in the next few weeks. The 
staff have provided some interpretive guidance that's of a few-
months-old vintage, and we are going to continue to consider 
additional guidance on this subject in the meanwhile.
    We are in the cauldron of this lawsuit right now, and I 
think that things rather rapidly should become clear on that 
front.
    Mrs. Kelly. Thank you. I am sure Chris will get that 
answer. So thank you very much.
    The final question I have is that companies in my district 
are increasingly coming to me with a concern about naked short-
selling in their stocks. This is a practice that is sometimes 
used to hold down the valuations of companies, particularly 
manufacturers, retailers, and it leaves them vulnerable. While 
we know it's technically illegal, it seems that the practice is 
common. And not only that, there seems to be growing evidence 
that it may be deliberately taking place.
    I understand that reg SHO has shown the need for more 
information from the markets about shorting and failed trade, 
and I wonder if you are willing today to speak about this, 
what's being done. I think the SEC has--with the--I think that 
reg SHO has shown this need, and I think perhaps you might have 
something that you would be willing to share with the committee 
on it.
    Mr. Cox. Well, first of all, I think you are absolutely 
right, that this is an important issue, and reg SHO, as 
written, may not be the final answer. The Commission adopted 
this regulation in 2004, in June. It didn't become effective 
until last year. And so, we are just now in a position to begin 
to assess whether or not the rule is working as it was 
intended.
    Since the adoption of the rule, the data that we have 
assimilated thus far has told us that about 99 percent of all 
trades, by dollar value, settle on time without incident. So 
that's certainly part of the good news. And the overwhelming 
majority of these fails are closed in less than 5 days, even 
within the 1 percent.
    So, on an average day, approximately 1 percent, by dollar 
value, of all trades including equity, debt, and municipal 
securities, fail to settle. And that's where we're focused 
here. Those failed positions, we are learning, are, in the 
main, getting closed out more quickly, now that the rule is in 
effect.
    But, like you, I am very concerned about what's in the 1 
percent, because it's 1 percent of a very big number. The staff 
are developing rule amendments to further reduce the 
continuation of large fails to deliver position. In the 
meantime, the Commission has extended our existing pilot 
program through August of 2007, so that we can ensure that the 
progress that we have already made isn't lost.
    Mrs. Kelly. Are you aware that publicly-traded companies 
and State regulators aren't allowed to see the records of the 
failed trades from the Depository Trust and Clearing 
Corporation? Don't you think that maybe State regulators should 
know if the amount of shares trading in a state-chartered 
corporation exceeds what is allowed under the State rules?
    Mr. Cox. We are certainly interested in working very 
closely with our counterpart State regulators for a number of 
reasons, including the preponderance of the most egregious 
problems in this area, with thinly traded, smaller companies 
that are the normal domain of the blue sky regulators. And so 
there is ample opportunity to do better in this area.
    Mrs. Kelly. Thank you very much.
    Mr. Cox. May I say also for Congressman Shays, who isn't 
here--because I neglected to do so--that when the Commission, 
before I was Chairman, last looked at the issue of investment 
advisers and broker-dealers, they charged the staff with 
proposing a study of this issue. The staff have now given me 
enough information so that I can make a decision whether to go 
forward with that study, and how, and I very recently did so.
    So, among the other bits of news on that topic is that 
there will be an effort, in a very serious way, to infer from 
marketplace data what we should do by way of distinguishing 
between the roles of investment advisers, on the one hand, and 
broker-dealers, on the other hand.
    Mrs. Kelly. Thank you. You have been very patient with us 
on a very busy day, which is why so many people have come in 
and out of the committee. We are very grateful for the time 
that you have spent here, Mr. Chairman.
    The Chair notes that some members may have additional 
questions for this panel, so without objection, the hearing 
record will remain open for 30 days for Members to submit 
written questions to these witnesses, and to place their 
responses in the record. This hearing is adjourned.
    [Whereupon, at 12:58 p.m., the committee was adjourned.]
                            A P P E N D I X



                              May 3, 2006
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