    [Senate Hearing 109-563]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 109-563

     WHO'S WATCHING THE WATCHDOG? EXAMINING FINANCIAL MANAGEMENT AT THE SEC

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

                                    HEARING

                                   before the

                    FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                         INFORMATION, AND INTERNATIONAL
                             SECURITY SUBCOMMITTEE

                                     of the

                                  COMMITTEE ON
                             HOMELAND SECURITY AND
                              GOVERNMENTAL AFFAIRS
                              UNITED STATES SENATE

                           ONE HUNDRED NINTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JULY 27, 2005

                                   __________

           Printed for the use of the Committee on Homeland Security
                            and Governmental Affairs

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    23-166                      WASHINGTON : 2006
    _____________________________________________________________________________
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            COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                       SUSAN M. COLLINS, Maine, Chairman
    TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
    GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
    NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
    TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
    LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
    ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
    PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
    JOHN W. WARNER, Virginia

               Michael D. Bopp, Staff Director and Chief Counsel
       Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
                      Trina Driessnack Tyrer, Chief Clerk

    FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL
                             SECURITY SUBCOMMITTEE

                         TOM COBURN, Oklahoma, Chairman
    TED STEVENS, Alaska                  THOMAS CARPER, Delaware
    GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
    LINCOLN D. CHAFEE, Rhode Island      DANIEL K. AKAKA, Hawaii
    ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
    PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
    JOHN W. WARNER, Virginia

                          Katy French, Staff Director
                     Sheila Murphy, Minority Staff Director
                John Kilvington, Minority Deputy Staff Director
                           Liz Scranton, Chief Clerk

                                C O N T E N T S

                                     ------
    Opening statements:
                                                                       Page
        Senator Coburn...............................................     1
        Senator Carper...............................................    10

                                   WITNESSES
                            Wednesday, July 27, 2005

    Hon. David M. Walker, Comptroller General of the United States,
      U.S. Government Accountability Office..........................     3
    James M. McConnell, Executive Director, U.S. Securities and
      Exchange Commission............................................     5

                         Alphabetical List of Witnesses

    McConnell, James M.:
        Testimony....................................................     5
        Prepared statement...........................................    43
        Questions and responses for the Record.......................    54
    Walker, Hon. David M.:
        Testimony....................................................     3
        Prepared statement...........................................    25
        Questions and responses for the Record.......................    59

                                    APPENDIX

    Charts submitted by Senator Coburn:
        ``SEC Building Costs''.......................................    23
        ``Vision''...................................................    24

                          WHO'S WATCHING THE WATCHDOG?
                         EXAMINING FINANCIAL MANAGEMENT
                                   AT THE SEC

                                  ----------

                            WEDNESDAY, JULY 27, 2005

                                           U.S. Senate,
                Subcommittee on Federal Financial Management,
            Government Information, and International Security,
                                       Committee on Homeland Security
                                              and Governmental Affairs,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 2:32 p.m., in
    room 562, Dirksen Senate Office Building, Hon. Tom Coburn,
    Chairman of the Subcommittee, presiding.
        Present: Senators Coburn, and Carper.

                  OPENING STATEMENT OF CHAIRMAN COBURN

        Senator Coburn. The hearing will come to order. This is a
    hearing of the Federal Financial Management Oversight
    Subcommittee of the Homeland Security and Governmental Affairs
    Committee.
        The Securities and Exchange Commission (SEC) plays a
    crucial role in ensuring the continued health of the U.S.
    capital markets by administering the Federal laws that govern
    U.S. securities markets. In 2004, the Commission took an
    aggressive agenda, with the implementation of rulemaking
    projects under the Sarbanes-Oxley Act, including supervision of
    the Public Company Accounting Oversight Board and its
    regulation of auditors of public companies, such as the former
    Arthur Anderson, PricewaterhouseCoopers, and other auditing
    firms.
        The Commission is expanding its role. For instance, we have
    seen increased promulgation of regulation to identify abuses in
    the mutual fund industry and requiring hedge funds to register.
    These rules have shown the agency's commitment to maintaining
    integrity in the U.S. markets and, more importantly, investor
    confidence within the United States. Without a doubt, the
    Securities and Exchange Commission has a difficult job, but
    also a very vital role in the U.S. economy.
        I would reference a poster which is their vision statement.
    It would read and note that, in its own words, the Commission
    ``aims to be the standard against which Federal agencies are
    measured.'' If this is the vision, we have a long way to go.
        Similarly, its rigorous reform agenda, coupled with its
    ability to continue expanding its regulatory role, raises the
    question of SEC's ability to maintain effective examination and
    enforcement of the securities industry while making necessary
    internal control changes. These goals deserve candid
    discussion.
        The Accountability for Tax Dollars Act of 2002 expanded the
    requirement to conduct annual audits of agencies' finances from
    the original 24 CFO Act agencies to all Executive Branch
    agencies in the Federal Government. Since then, the SEC has
    been required to prepare and submit to Congress and the Office
    of Management and Budget (OMB) audited financial statements.
    Fiscal year 2004 was the first year SEC prepared its first
    complete set of financial statements.
        GAO performed this initial audit, and though the SEC
    received a clean audit opinion on its financial statements, GAO
    found three very significant material weaknesses in the areas
    of appropriately preparing financial statements, keeping track
    of penalties owed to the government and to harmed investors,
    and finally, an insecure information system which makes
    sensitive data vulnerable. Such disturbing audit results are
    inexcusable for the financial watchdog of corporate America.
        I am reminded of the unique indignation you feel when you
    are passed on the highway by a trooper or policeman who doesn't
    have his lights on and is just going home, or the outrage that
    America felt when a longtime Federal forest ranger started a
    forest fire that destroyed 30 homes and 100,000 acres in
    Colorado. What I am getting at here is that those most
    entrusted with enforcement authority cannot be above their own
    standards. Americans will not and should not tolerate that sort
    of hypocrisy.
        In addition, due to poor budgeting, the Commission
    understated by $50 million the cost for new buildings in New
    York City, Boston, and Washington, DC. The original cost
    estimate for these three new buildings, which was estimated in
    fiscal year 2005, was approximately $22 million. In fewer than
    3 years, the cost has more than tripled. I am also aware that
    rather than absorbing the cost of this budgeting problem, in
    fiscal year 2006, SEC plans to heap the financing burden on
    these buildings on generations down the road.
        Four years ago, the Global Research Analysts Settlement
    required the firms involved to pay $875 million in penalties
    and disgorgement, including $80 million dedicated to investor
    education. Fifty-two-point-five million of this was supposed to
    establish an investor education fund to develop and support
    programs designed to equip investors. While $27.5 million of
    these monies were directed to State securities regulators for
    investor education, the transfer of $52.5 million to the NASD
    Foundation has raised legal questions and I anticipate solid
    explanations for this decision.
        I look forward in this hearing to find the progress that
    the SEC has already made with regard to strengthening internal
    controls this year. I also look forward to discussing their
    intent for reform of an agency that must maintain shining
    standards of financial reporting, given the important role that
    it plays in regulating public companies and the U.S. securities
    market.
        I want to thank our witnesses, the Hon. David Walker,
    Comptroller General of the United States, and James McConnell,
    for being with us.
        David M. Walker has been Comptroller General of the United
    States since November 1998. He serves as the Nation's chief
    accountability officer and head of the U.S. Government
    Accountability Office. Mr. Walker has extensive executive-level
    experience in both government and private industry. He is a
    Certified Public Accountant, has a degree in accounting from
    Jacksonville University and a Senior Management in Government
    Certificate in Public Policy from the John F. Kennedy School of
    Government at Harvard University, as well as honorary degrees
    in both business and public service.
        Jim McConnell, Executive Director of the Securities and
    Exchange Commission, is our second witness. Mr. McConnell was
    appointed Executive Director of the U.S. Securities and
    Exchange Commission in October 1990. Prior to his role as
    Executive Director, Mr. McConnell served as the Commission's
    Chief Management Analyst, where he was primarily responsible
    for preparation of the agency's budget and authorization
    request, as well as the agency's internal control program.
    Today, as Executive Director, he is responsible for achieving
    efficiency and economy in the Commission's operations as well
    as for developing and executing overall management policies
    within the policy framework established by the Chairman. In
    1991, Mr. McConnell received the Chairman's Award of
    Excellence, recognizing his performance in improving the
    management and budget operations of the SEC. Prior to joining
    the Commission, Mr. McConnell worked at the Department of
    Labor, where he received a Distinguished Career Service Award,
    that agency's highest honor. He holds a B.S. in business
    administration from Virginia Tech.
        I would like to thank each of you for being here. General
    Walker, if you would start. Your written testimony will be made
    a part of the record and we won't have any time limits.

     TESTIMONY OF HON. DAVID M. WALKER,\1\ COMPTROLLER GENERAL OF
        THE UNITED STATES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

        Mr. Walker. Thank you, Mr. Chairman. It is good to be back
    before this Subcommittee today to talk about the results of our
    first audit of the Securities and Exchange Commission for the
    fiscal year ended 2004.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Walker appears in the Appendix on
    page 25.
    ---------------------------------------------------------------------------
        As you noted in your opening statement, this was the first
    ever audit of the Securities and Exchange Commission, which
    resulted from recent legislation that expanded the audit
    requirements that previously applied to most major Federal
    Government agencies. I think it is important to note that our
    report was issued on May 26, 2005. It has been made available
    to you as well as to the public.
        There were mixed results from that initial audit. First,
    the SEC did earn a clean opinion on its financial statements.
    That is quite an accomplishment. The fact of the matter is that
    most of the agencies in the Federal Government who undertook
    their first audit did not earn a clean opinion the first time
    out.
        At the same point in time, as you properly pointed out, the
    SEC plays a critically important role with regard to the
    securities markets and also with regard to overseeing the
    public accounting profession through the Public Company
    Accounting Oversight Board (PCAOB). Therefore, it is important
    that the SEC lead by example with regard to its own financial
    management activities.
        While the SEC received a clean opinion on its financial
    statements, it received an adverse opinion on internal control.
    There were three material control weaknesses which we
    highlighted, the first dealing with preparing financial
    statements and related disclosures; the second dealing with
    recording and reporting of disgorgements and civil penalties;
    and the third dealing with information security.
        It is important to note that these weaknesses were as of
    the date of our opinion. SEC management and leadership has
    agreed with the vast majority of our recommendations, and they
    have taken a number of steps to try to address these
    recommendations. Furthermore, it is also important to note that
    there are a number of other Federal agencies that have similar
    material control weaknesses, especially with regard to
    information security.
        But as you pointed out in your opening statement, the SEC
    has a very visible and prominent role in promoting and
    enforcing accountability for corporations whose equity and debt
    instruments are traded on our securities markets, and
    therefore, it is critically important that it lead by example.
        In its 2004 Performance and Accountability Report, SEC
    leadership noted its intention to do so and to try to serve as
    a model for other Federal agencies. I believe that they were
    sincere when they made that commitment. I know that they are
    taking steps to try to deliver on that. But that is not going
    to be accomplished overnight.
        Mr. Chairman, it is important for the SEC to lead by
    example for a variety of reasons, not just to make sure that we
    have proper accountability over these funds, but also to
    maintain the credibility of the agency, given its mission, and
    to make sure that its regulatory enforcement activities have
    full force and effect not only in law, but also in substance
    and as they are viewed by those that they regulate to.
        Last thing, there are two issues that I would like to raise
    for your attention that I think are noteworthy, one of which is
    the fact that if you look at the SEC's financial statements,
    which I am sure you have, you will see there is about a $4
    billion balance with the Treasury. Of that $4 billion balance
    with the Treasury, about $3 billion of that represents the
    accumulated positive results of operations for the SEC
    throughout its history. This is shown as a restricted asset on
    the balance sheet of the SEC. It is eliminated in consolidation
    when you come up with the consolidated financial statements of
    the U.S. Government, but as you probably noted, Mr. Chairman,
    those funds are not available for use by the SEC unless the
    Congress appropriates such funds. It has done so on occasion in
    the past. I believe at least once in the past. This amount also
    serves to note that these has been a self-sustaining
    organization over many years. However, there are ongoing
    discussions and debate about whether and to what extent the
    current accounting treatment should be continued in the future.
        Second, I would also note that of the roughly $4 billion
    that was held by the Treasury as of the end of last fiscal
    year, that $863 million represented two fiduciary funds from
    disgorgements that were being held for the benefit of others.
    Up until November 2004, those funds were not earning any
    interest. They were not invested actively. They were just in an
    account of the Treasury. While reasonable people can debate
    about who should invest it and how they should be invested, I
    believe that since these are fiduciary funds, it is important
    that they be invested for the benefit of those who would
    ultimately receive payment.
        I thank you, Mr. Chairman. I look forward to hearing from
    my colleague here today at the panel and answering your
    questions thereafter.
        Senator Coburn. Thank you, General Walker. Mr. McConnell.

     TESTIMONY OF JAMES M. McCONNELL,\1\ EXECUTIVE DIRECTOR, U.S.
                   SECURITIES AND EXCHANGE COMMISSION

        Mr. McConnell. Thank you, Chairman Coburn. My name is Jim
    McConnell. I am the Executive Director of the SEC. The views I
    express today are my individual views and do not necessarily
    reflect the views of the Commission or the commissioners,
    including the acting chairman.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. McConnell appears in the Appendix
    on page 43.
    ---------------------------------------------------------------------------
        I appreciate the opportunity to testify today about the
    SEC's audited financial statements and facilities budget
    estimates. Given the SEC's regulatory responsibilities, it is
    critical that the agency maintain strong financial management
    practices and that we use our funds efficiently and
    effectively.
        Like many private companies, the SEC has invested
    tremendous time and energy on our financial management
    practices and internal controls. As the regulator overseeing
    the financial markets and the accounting industry, it is
    entirely appropriate that we do so. As you know, these efforts
    have uncovered some weaknesses that we are working aggressively
    to resolve.
        Although the audit and internal controls program have
    presented challenges, we believe that the process will pay
    dividends in the form of stronger and more effective financial
    management at the SEC and as an important government-wide
    initiative.
        I would like to begin by discussing the first ever audit of
    the SEC's financial statements. The release of our fiscal year
    2004 Performance and Accountability Report in May was the
    culmination of 2 years of hard work by Commission staff and our
    GAO auditors. I want to thank them all for their efforts.
        The good news is that the GAO found that our financial
    statements were presented fairly in all material respects, in
    conformance with U.S. Generally Accepted Accounting Principles.
    Clean financial statements are quite an achievement for a
    first-time audit. When the 24 major Federal agencies began
    issuing audited financial statements in 1996, only six received
    unqualified opinions on their first audit and many agencies
    still have not achieved unqualified opinions.
        The GAO also performed an audit of the SEC's internal
    controls over financial reporting and the report concluded that
    our controls in three areas were not fully effective.
    Specifically, the report identified material weaknesses in the
    areas of recording and reporting of disgorgements and
    penalties, preparing financial statements, and information
    technology security. Two of these weaknesses, IT security and
    disgorgements and penalties, are weaknesses that the agency has
    been working on for some time and that have been reported
    previously under the Federal Managers Financial Integrity Act.
        The first material weakness relates to the controls over
    our accounting for disgorgements and penalties ordered by
    courts as a result of SEC enforcement actions. While the
    judgments awarded by the courts are for specific amounts, the
    collection is frequently uncertain and requires efforts over a
    period of years. Let me emphasize that all fines and penalties
    are accounted for and no payments have been lost. Instead, the
    GAO found that the SEC did not have a sufficiently
    comprehensive policy governing the accounting for these amounts
    and found inadequate internal controls in the procedures and
    systems for recording of judgments and the allowance for
    uncollectible accounts.
        The GAO found a second material weakness related to the
    SEC's internal controls over the process for preparation of
    financial statements. This was the SEC's first audit and the
    procedures used to prepare our statements involved significant
    manual effort by SEC staff. As a result, the policies,
    practices, and procedures had not been fully documented and
    integrated into the agency's operations.
        Finally, GAO's audit confirmed weaknesses in the SEC's
    information technology security that had been reported in prior
    years through our FMFIA program. These weaknesses include
    insufficient access controls, network security, and monitoring
    of security-related events. However, I should also note that
    GAO found we had taken the right set of initial steps to
    address the weaknesses, including hiring a new Chief
    Information Security Officer and establishing a centralized
    security management program.
        Because of the SEC's regulatory role, we believe the agency
    must lead by example through handling of internal control
    weaknesses. Just as with private companies, we believe it is
    critical to forthrightly disclose our weaknesses and work to
    mitigate them as completely and quickly as possible. Full
    disclosure is entirely appropriate for the Federal sector as it
    is for the private sector.
        With respect to our facilities budget estimates, and as you
    know, the SEC recently discovered it had underestimated tenant
    build-out costs for new agency facilities in Washington, New
    York, and Boston by about $48 million over the next 3 years.
    These areas are serious and reveal the need to improve our
    facilities management and budget planning functions. However, I
    should note that there have been no cost overruns on existing
    contracts. These mistakes pertain to estimates of future cost.
    Also, the SEC will be able to deal with these costs within
    existing funding levels and has submitted a reprogramming
    request that will correct our budget allocations. As you know,
    Representative Wolf has asked the GAO to review the actions
    that led to this change in estimates and the actions the SEC
    has taken in response and we welcome their involvement.
        The SEC has taken action to rectify the conditions that led
    to these project management and budget planning failures and
    ensure they do not recur. The agency has removed several staff
    from these projects, added new project staff, and is working to
    strengthen our budgetary formulation, internal controls, and
    oversight capabilities. Among other improvements, the SEC
    recently created several new budgeting and project oversight
    positions in administrative services and added budget
    formulation staff in our Office of Financial Management. The
    SEC is also planning a new budget formulation activity-based
    costing system that will greatly enhance the quality and
    timeliness of the data related to our administrative and
    operational costs.
        We believe that strengthening our internal controls and
    financial management practices will have significant benefits
    for the SEC and will allow us to be more effective in
    fulfilling our mission to protect investors.
        I would like to thank the Subcommittee for your interest in
    and commitment to these important topics. I would be happy to
    answer any questions.
        Senator Coburn. Thank you very much for your testimony.
        General Walker, are there specifics outside what Mr.
    McConnell mentioned in terms of the recording and reporting
    disgorgements? I mean, how is it that you don't account for
    those? How is it possible that you don't have a system to
    properly account for that?
        Mr. Walker. I think what is fair to say, Mr. Chairman, is
    that the amount of disgorgements has increased dramatically in
    the recent years because of some of the failures in the private
    sector. One of the things that we found in this and a couple of
    the other areas which resulted in material control weaknesses
    was that there was a lack of comprehensive and documented
    policies and procedures with regard to how to handle these
    matters.
        There were also issues with regard to our dated and non-
    integrated information systems that need to be addressed, and
    part of this was exacerbated by the fact that, due to the
    increased activity with regard to disgorgements in the last
    several years, it was quite a challenge for the SEC staff to
    deal with that increased volume----
        Senator Coburn. But what you are really saying is they
    didn't have good systems and control to begin with, because had
    they had the systems in, even with increased volume, if you
    have a system in, you are going to be able to handle it.
        Mr. Walker. That is correct, and they are taking steps to
    document their policies and procedures, deal with the staffing
    issues, and provide for enhanced responsibility and
    accountability. Ultimately, they are going to have to do some
    more on the systems side, but that is going to take more time.
        Senator Coburn. In your testimony, you listed 13 actions
    that the SEC could take in order to improve controls over the
    financial reporting process. In their response to your
    statement, the SEC stated they plan to increase their financial
    reporting staff and formalize policies and procedures, much as
    what you had recommended. Are you aware of the progress the SEC
    has made on any of these recommendations?
        Mr. Walker. They have made some progress. I think one of
    the SEC's biggest challenges right now, is the agency is in a
    time of transition. As you know, Chairman Donaldson has now
    left the SEC. We have the pending confirmation of Congressman
    Cox as the President's nominee to serve as Chairman. I think
    one of the biggest challenges with regard to a number of these
    recommendations is to make sure that the SEC's leadership
    continues to be committed to these types of changes and
    continues to hold people responsible and accountable for making
    progress on these various recommendations. So yes, they are
    making progress, but it is this transition in leadership that
    is probably the biggest risk at the present point in time.
        Senator Coburn. Should the SEC, given the onus of their
    responsibility in terms of all the other markets, all the other
    people whose debt and equity trade in this country who have to
    have outside audited financial statements, should they be
    subjected to the same groups that audit their customers? In
    other words, why wouldn't we want a PricewaterhouseCoopers
    doing the audit at SEC?
        Mr. Walker. With all due respect, Mr. Chairman, I would
    suggest several things. First, we do as good or better of an
    audit than one might be able to obtain from one of the private
    sector firms.
        Second, there are certain potential conflicts that would
    exist if one of the major private sector firms were to do the
    audit for the Securities and Exchange Commission. As you know,
    the SEC has to oversee the PCAOB, the Public Company Accounting
    Oversight Board, which has the responsibility to oversee the
    major accounting firms, and so the SEC was rightly concerned
    about a potential conflict of interest.
        I also would note, Mr. Chairman, that to the SEC's credit,
    while they are not required under current law to obtain an
    opinion on their internal accounting control system dealing
    with financial reporting, that is a standard practice we
    perform for the entities we audit, even though it is not
    required by law. We conferred with SEC management and they
    agreed that would be an appropriate thing to do for the SEC.
    Frankly, not just because it passes a cost-benefit test, but
    because of the issue that you talked about before, to lead by
    example and to demonstrate that they are subjecting themselves
    to the same type of audit procedures that those they oversee
    and regulate are subjected to.
        Senator Coburn. Mr. Walker, are you aware of a time
    estimate that SEC has given to implement a new system as far as
    the disgorgements and the control of those? In the meantime,
    what can SEC senior management do to mitigate the risks related
    to the systems and data and penalties for payments and
    disgorgements?
        Mr. Walker. We have made a number of specific
    recommendations, Mr. Chairman, as to things that we think they
    should do, many of which are outlined in my detailed testimony.
    Several relate to interim steps recognizing that building this
    new integrated system is going to take some time. Therefore,
    there are interim steps that need to be taken to provide for
    enhanced controls in the interim.
        Mr. McConnell may have a better answer on when they expect
    to be done.
        Mr. McConnell. We expect to have each of these internal
    control weaknesses fixed in 2006, for that audit.
        Senator Coburn. So that is the audit for fiscal year 2006?
        Mr. McConnell. That is the audit for fiscal year 2006.
        Senator Coburn. So it won't be fixed when you are audited
    this year?
        Mr. McConnell. That is correct.
        Senator Coburn. OK. I think you should be congratulated for
    the accomplishment of getting a clean audit as far as your
    numbers. That is a hard thing to do.
        Describe for me the sources of SEC's funding and what
    happens to the surplus. General Walker talked about the $4
    billion surplus that you paid into the Treasury, of which 25
    percent is roughly money waiting to go back out in terms of
    penalties or disgorgement. What is the source of the funds?
        Mr. McConnell. We are an appropriated agency. Our
    appropriation, however, is entirely offset by the fees that we
    collect. Let me give you an example, for fiscal year 2006, the
    budget that we are working on now, we estimate that we will
    collect $2.1 billion in fees. Those fees go to the general fund
    of the Treasury and are accumulated in an account in our name.
    We are then appropriated through the regular, normal
    appropriations process, and our appropriations for 2006 is
    right now intended to be $888 million.
        Senator Coburn. Eight-hundred-and-eighty-eight million.
        Mr. McConnell. So the remainder of that $2.1 billion is
    then available for--it offsets the entire CJS appropriation and
    is available, then, to use elsewhere. But the money that we get
    is actually subtracted from the amount and the remainder is
    held in that account.
        Senator Coburn. Right.
        Mr. Walker. They reduced the deficit, Mr. Chairman.
        Mr. McConnell. Yes.
        Mr. Walker. Last year, they reduced the consolidated
    deficit of the U.S. Government by, on an accrual basis, by
    about $575 million.
        Senator Coburn. And if they are more transparent, more
    results oriented, more competitive oriented, more priority
    setting oriented, more responsive and more spending discipline,
    they can increase that. That is what I am after. It is great
    that they are there, but they are in a position with which they
    collect a lot of money based on the fact that people aren't
    doing the right things.
        The interesting thing would be is what would your budget be
    net of appropriations if we had 100 percent compliance and we
    didn't see the fines and penalties that were coming.
        Mr. McConnell. What would our budget be in----
        Senator Coburn. In other words, there wouldn't be any net
    difference. In other words, you would be appropriated what you
    needed if there, in fact, were not compliance fines and
    penalties.
        Mr. McConnell. I think maybe I have confused things here.
    The fees that we collect I am talking about are transaction
    fees on exchanges and the registration of securities. That $2.1
    billion has nothing to do with fines and disgorgements. That is
    a total separate amount.
        Senator Coburn. Right. But there are penalties, though,
    that go into that, is that not correct?
        Mr. McConnell. Well, yes. Those are the result of
    enforcement actions. None of those monies are available to the
    SEC or to the Federal Government at all for the purpose of
    appropriations.
        Senator Coburn. So when we talk about you are going to
    collect through fines, penalties, assessments, and fees in
    excess of $2.1 billion----
        Mr. McConnell. It is actually more than that.
        Senator Coburn. OK.
        Mr. McConnell. The $2.1 billion is strictly the amount we
    collect in fees placed upon transactions on exchanges or public
    companies registering securities.
        Senator Coburn. OK. The penalties and fines----
        Mr. McConnell. The fines, penalties, and disgorgements, you
    can't anticipate exactly what they are going to be, but $800
    million, let us say, is a number that I think is currently in
    the Treasury accounts. So that is a totally separate amount.
    They are not additive for purposes of appropriation----
        Senator Coburn. Right, and they are set aside.
        Mr. McConnell. Yes.
        Senator Coburn. All right.
        Mr. Walker. Basically, Mr. Chairman, just to reiterate, the
    fines and penalties go directly to the Treasury and, therefore,
    they don't affect the appropriated amounts for the SEC. These
    amounts serve to directly reduce the Federal deficit and
    related public debt needs.
        Senator Coburn. Transaction fees, the tax on every time I
    buy a stock----
        Mr. Walker. That is exactly right.
        Senator Coburn [continuing]. Comes in at $2.1 billion.
        Mr. Walker. When you get your confirmation statement, you
    oftentimes see a little SEC----
        Senator Coburn. I have seen it. I have seen it. [Laughter.]
        Senator Coburn. Let me defer to Senator Carper, our Ranking
    Member, for a statement and I will let you ask questions.

                  OPENING STATEMENT OF SENATOR CARPER

        Senator Carper. Thanks very much. Gentlemen, welcome. How
    are you?
        Mr. Walker. It is good to see you, Senator.
        Senator Carper. It is good to be here. First, I will just
    start with a short statement.
        In addition to the responsibilities that I share here with
    Dr. Coburn, I also serve on the Senate Banking Committee and I
    know fairly well, then, that we have given the SEC a big job, a
    couple of big jobs to do in the last several years in trying to
    make sure that firms in the private sector are more accountable
    and live up to the standards that we have established in a wide
    variety of areas.
        I am really pleased that given that role--and the hearing
    today is to hold the SEC accountable--but also to recognize
    that you are holding yourselves accountable, and GAO's audit of
    you would seem to suggest that is the case.
        Based on what I have been able to learn so far, it appears
    that the SEC is doing about as well as could be expected at
    this point in time. I think we passed the law in 2002 that
    added the SEC to the list of agencies that had to be audited
    and I think you went through your first one in 2004 and came
    away with a qualified audit. I think you are to be commended
    for that. I think I heard Dr. Coburn commending you all
    already.
        I would just note that I think that some other agencies--
    every now and then, you hold a hearing and the idea is to put a
    spotlight on folks that aren't doing their job very well and
    that could do a whole lot better. In this case, this hearing is
    really more akin to putting a spotlight on folks who have done
    a good thing and to, rather than to say, get on the stick, just
    to say we are glad that you are providing a good model for
    others. Everything we do, we can always do better, but I think
    what you have done is certainly commendable.
        We have actually had some discussion on the issue of
    improper payments at an earlier hearing. I think General Walker
    was here for the discussion on one of those. I think it is
    about $45 million, is the number that we have heard, mostly in
    overpayments, in some cases underpayments, but that is what we
    are told at least is the magnitude of the problem. I would like
    to learn, maybe before we leave today, from the SEC about how
    you feel you have benefited from GAO's audit of your internal
    controls and, if possible, to explore whether other agencies
    might benefit from a similar kind of audit.
        Agencies need to have the internal capability to detect and
    to prevent improper payments before they happen, but it is my
    understanding that most don't receive audited opinions of their
    internal controls, and as a result, they don't have maybe as
    good a sense of how well they are doing on that score.
        As far as I can tell, the SEC doesn't have a problem with
    respect to improper payments, but I would just note for the
    record again that every dollar that is spent unwisely, whether
    it is accidentally or fraudulently misspent, is one more dollar
    that is taken away from a worthwhile program or that could go
    back to our taxpayers.
        With that having been said, let me just ask a couple of
    questions, maybe one or two for General Walker and then maybe a
    question or two for you, Mr. McConnell.
        Let us talk about the scope of the audit that was done at
    the SEC, if we could. The scope of the audit included internal
    controls, and as I said earlier, as far as I know, neither the
    SEC nor other agencies are required under the law to have an
    independent audit of their internal controls. In fact, I think
    the only major problem that you found at the SEC may have
    centered on internal controls.
        How could the kind of internal control audits that you
    conducted at the SEC help other agencies to detect and to
    prevent improper payments?
        Mr. Walker. Senator, you are correct in noting that the SEC
    is not required by law to have an audit dealing with its system
    of internal accounting control and to have an opinion expressed
    by its external auditor. In our case, we do that on every
    entity that we audit. We proposed that when the SEC approached
    us about doing their audit. We helped them understand what we
    felt the benefit was, including reducing the possibility of
    improper payments, but in addition to that, to provide
    reasonable but not absolute assurance to help facilitate
    economy, efficiency, and effectiveness as well as the fair
    reporting of financial information. The SEC agreed.
        My personal view is that requiring an audit on the system
    of internal accounting control is not something that makes
    sense for every government audit. However, I think there are
    circumstances based upon value and risk, and one of the factors
    that might be considered is the possibility of improper
    payments where it does make sense to have an audit of the
    system internal accounting controls. But I believe that should
    be something that should be done on a facts and circumstances
    basis rather than saying every government agency should
    automatically have to do that.
        Senator Carper. I think you said on the basis of facts and
    risks? Talk a little bit about that----
        Mr. Walker. Value and risk.
        Senator Carper. Value and risk?
        Mr. Walker. In other words, how much money is involved?
    What is the potential for abuse? To what extent has work been
    done to ascertain the likelihood of improper payments or other
    types of activities that one could seek to effectively avoid
    through having a stronger system of internal accounting
    controls?
        This is an element that needs to be more directly
    considered, and one of the things that I have asked for the
    Joint Financial Management Improvement Program Principals to
    address, namely the Secretary of the Treasury, that Director of
    OMB, myself, and the head of OPM. Specifically, that group will
    discuss whether and under what circumstances Federal Government
    agencies should be required to have an opinion on their system
    of internal accounting controls. This is an active topic and I
    hope that we can gain some consensus among that group.
        It could be done, arguably, without legislation if OMB
    decided that it was something that should be done. We can
    report back to you on what the progress is on that if you would
    like.
        Senator Carper. Give me some idea what the time line might
    be for doing that.
        Mr. Walker. I have asked for a meeting of the principals to
    be held within the next 2 months. I don't know if it has been
    scheduled or not yet. From a practical standpoint, if this was
    going to be required, it would be for next year's audit, not
    this year's audit, if a consensus can be reached.
        Senator Carper. Sure.
        Senator Coburn. Are the firms that the SEC oversees, are
    they not required to have in their audit opinion their internal
    controls?
        Mr. Walker. Sarbanes-Oxley requires public companies to
    undergo an audit of their system of internal accounting
    controls relating to their financial reporting requirements,
    and so, yes, public companies are required to obtain such an
    opinion. However, private companies are not, not-for-profit
    entities are not, and government agencies are not at the
    present point in time.
        Senator Carper. A follow up to this issue of internal
    controls. With respect to the recommendations and your findings
    at the SEC and any recommendations that you may have made, how
    were they received by the SEC, and I would ask both of you to
    answer.
        Mr. Walker. I would echo the comments that were made
    earlier. Specifically, there was a serious and sustained
    undertaking for 2 years to achieve the results for this first
    audit by the SEC staff as well as the GAO staff. Top management
    at the SEC took this very seriously, and that goes right up to
    former Chairman Donaldson. He understood that this was an
    important issue and there was a need for the SEC to lead by
    example in this regard. I believe he took it very seriously.
        The SEC's response to our recommendations has generally
    been very positive. The key now is to make sure that continues
    through the transition in leadership. As you know, there is a
    pending transition in leadership at the SEC. My understanding
    is, under the statute, it is the chairman who has the
    responsibility and authority for these types of matters. So the
    chairman's commitment is key to continued progress in this
    area.
        Senator Carper. Mr. McConnell, do you want to add anything
    to that?
        Mr. McConnell. Yes. It is really part of the fiber of the
    SEC to have undertaken an internal control audit. We would
    never have considered doing otherwise. In speaking with GAO at
    the outset of this undertaking, it sounds trite, but we really
    do want to be the gold standard. We want to have all these
    boxes checked and we expected their audit to treat us as if we
    should be the gold standard and we wanted them to give us
    everything. We view the findings that they submitted to the SEC
    as a way in which we can achieve that and we intend to do so.
        We think it has been an incredibly valuable experience.
    Personally, I have just been very pleased with the response
    throughout the agency to a recognition that these material
    weaknesses and the financial audit that we undertook is among
    the highest priorities the agency has.
        Senator Carper. One last question, if I could, for you, Mr.
    McConnell, and the question is about your budgeting related to
    the construction of your new headquarters. If you all have
    already gotten into this, just tell me, but I appreciate your
    honesty about it and your efforts to address the cause of these
    concerns.
        It seems to me that the problem is related to what may be a
    communications breakdown almost. What I am told is that may
    have occurred. Let me just ask, what steps have been taken to
    ensure that the lines of communication between folks on your
    staff, the SEC staff who are working on projects like this, and
    those in your budget office, to make sure that those lines of
    communication are open?
        Mr. McConnell. We have done a number of things already and
    additional items are planned. Basically--and communications is
    a good way to put it. It is absolutely essential that the needs
    that we provide funds for throughout the agency, the
    administrative needs, the support and management needs, start
    with good communications from the programs so that we know
    exactly--and we are working in that area--what the programs
    need, so that in enforcement, in market regulation, in
    investment management, we have dedicated people--and we are
    dedicating those people now--to identifying their needs. And
    then they come to administrative services and we have the
    people there that will understand their needs, work with them,
    and turn them into budget estimates for supplies, materials,
    buildings, whatever it is they need.
        Then the administrative services people have to have the
    ability to analyze budgets. They haven't had that in the past
    and they are going to have that now. We have put a branch
    together that will. So it is not just an accumulation function
    of everybody's wants and needs. It is communication and
    gathering information, but then it is analyzing and
    understanding it.
        And we also intend to have our Financial Management office
    beefed up to have similar oversight capabilities. So it is an
    iterative process of asking questions about budget estimates,
    what they need, and are these meeting their needs.
        And then when it comes to the top of the agency, we will
    have the ability to really see the record, know who did what,
    who was responsible, and that they, in fact, did the job and
    will understand fully the entire process from beginning to end
    for how those budget estimates were developed.
        Senator Carper. Could I ask maybe one more?
        Senator Coburn. Sure.
        Senator Carper. Thanks. I understand that the Secretary has
    known for some time about some of the information security
    problems at the agency that GAO has, I believe, now
    highlighted. I also understand that you hired someone fairly
    high-ranking with the responsibility of tackling those problems
    and developing some, I guess, agency-wide security guidelines.
    What I would like to ask is, why has the problem been such a
    difficult one to tackle and can you just give us some idea what
    this new person, this new official is supposed to do to assure
    that the secure financial information is protected from
    tampering or from some other kind of potential problems?
        Mr. McConnell. Information system security is, I think as
    Mr. Walker indicated, a government-wide problem. Every agency
    is grappling with how to make sure its systems meet the test
    that has currently been established for information security.
    That is part of the issue. This has been a developing area. It
    is not a science, but it is a developing sort of a regimen for
    how security ought to be employed in each agency.
        So each year, it has improved. We understand better how to
    make things secure, what level of security you ought to
    achieve. So it has been very hard to keep up with that. I think
    that now we have had a maturation of sort of the security
    posture that agencies ought to be and we really know very well
    what we have to achieve and how to get there.
        The new person we have brought in, we are very enthusiastic
    about. She knows how to do it. She has done it in the private
    sector and we are very enthusiastic that we have both the
    people now, we have the resources. As a member of the Banking
    Committee, you know fully well that we have had substantial
    funding increases, in large part due to Sarbanes-Oxley. So we
    have had the resources to apply to this problem and I think we
    have the right kind of plans in place to get there. We are
    confident that in 2006, we can achieve eliminating this as a
    material weakness.
        Senator Carper. Mr. Walker, do you want to add anything?
        Mr. Walker. Yes, if I can, Senator, just to reinforce, this
    is a government-wide high-risk area. It is an area that we
    believe the SEC is taking seriously. I would note that there
    are a number of major departments and agencies that have a
    similar challenge, including some of the largest ones in
    government, like the Department of Defense, the Department of
    Homeland Security, etc. But I believe that they are on the
    case.
        Senator Carper. Great. Gentlemen, thank you very much.
        Senator Coburn. Mr. McConnell, I want to go back for a
    minute to a couple of things. I am trying to figure out the
    relationship between your office and the Chairman. You have
    been there since 1990, 15 years. You have had administrative
    responsibility for this agency that entire time. How is it that
    you can have a $50 million overrun on buildings and you not be
    aware it has happened? How does that happen? Chairman Donaldson
    had his performance dashboards in there. Are they not working?
    They don't work? Is somebody not talking to anybody?
        Either this system was gamed or somebody is totally
    incompetent. It is one of those two. You can't be $29 million
    off on a $5 million building. You can't be $17 million off on a
    $14 million building. And you can't be $8 million off on a $2
    million building. How does something like that happen?
        Mr. McConnell. Well, first, maybe I should deal with the
    numbers first. We have been interacting with your staff on
    these and it is a fairly complicated situation. We are talking
    about four different sites over multi-year periods. It actually
    started in 2002 and extends out to 2007. The costs that you are
    identifying here are actually those that are mostly associated
    with what we are trying to achieve with respect to our
    reprogramming in 2005 and some of the actions we need to take
    in 2006 to finish up these projects.
        Senator Coburn. Well, but reprogramming is another word for
    taking money from somewhere else to use in a different
    direction. Is that true, that the original 2005 estimate on the
    New York City building was $5 million?
        Mr. McConnell. That is not correct.
        Senator Coburn. What was the original estimate?
        Mr. McConnell. Well, there actually was no original
    estimate for the New York City build-out.
        Senator Coburn. So we built a building without an estimate?
        Mr. McConnell. We obtained a new leasehold in New York that
    was going to require a build-out, but there was a mistake made,
    and competency is clearly an issue here.
        Senator Coburn. What was the mistake?
        Mr. McConnell. A mistake was made that--it was an omission
    in developing estimates for how much money we needed to build
    out new leaseholds in New York City. We were moving from one
    building to another. During that transition, that cost was not
    estimated. The $5 million cost is, in fact, what was needed to
    repay our former tenant for build-out work that we were going
    to be doing there.
        Senator Coburn. So what was the 2005 true estimate for the
    New York City building?
        Mr. McConnell. At the time that the 2005 budget submission
    was made, there was no estimate for the build-out----
        Senator Coburn. When you all made the decision to go ahead
    and said, we are going to do this, what was the estimate?
        Mr. McConnell. Well, that is the point. The decisions were
    made to go ahead, but the lease wasn't actually signed until
    March and these budget estimates were done in February. At the
    time these budget estimates were done in December--excuse me--
    no number was put in for tenant improvement work for the new
    lease for our new space in New York. It was an omission.
        Senator Coburn. OK. Did somebody know a number at some time
    before now?
        Mr. McConnell. We only this spring have developed numbers,
    and those numbers are what is reflected in our reprogramming
    request and the budget estimates we are currently working on.
        Senator Coburn. Would you tolerate that from somebody you
    regulate?
        Mr. McConnell. I am not tolerating it from the SEC at all.
        Senator Coburn. Let me ask you about the reprogramming,
    because you are financing this at 9 percent?
        Mr. McConnell. Well, there are two items here. Any time you
    do tenant improvement work for your leaseholds, you have a
    build-out, you can do that either of two ways. You can amortize
    it with your rent, which is the common practice, or you can pay
    for it up front in a one-time payment.
        The SEC generally tries to do a combination because it does
    lower your out-year costs and it is somewhat more efficient.
    You do borrow that money essentially at 9 percent from a
    building owner to have that tenant improvement allowance as
    part of your lease. You also borrow it from the government when
    you initially make an up-front payment. That is right now about
    5.5 percent. So it is somewhat more expensive to extend those
    costs out. That is the common practice----
        Senator Coburn. But why would we spend more money to do
    that, especially when you all have reserve funds that you could
    come to the Congress and say, we would like to use these--you
    are talking 3.5 percent on $69 million in total, which over the
    life of the lease is a lot of money. Why would we not opt to
    save that money for the American taxpayer?
        Mr. McConnell. Well, it is two questions. We did approach
    our appropriations staff about the possibility of adding monies
    for our 2005 budget. That was not possible at the time. In the
    reprogramming, we clearly identified two different options,
    either do it up front or we can do it through an amortization,
    which is the normal way of doing it. It is a standard practice
    to have as part of your lease the costs of tenant improvement,
    because then you pay for those tenant improvements over the
    course of the life of the lease.
        Senator Coburn. Is that standard practice in GSA?
        Mr. McConnell. It is. In fact, GSA has the clauses for
    these types of----
        Senator Coburn. So it is standard practice when we have
    money sitting in the Treasury or we can borrow from ourselves
    at, right now, 30-year notes under 6 percent--it is five-point-
    some-odd percent----
        Mr. McConnell. Correct.
        Senator Coburn [continuing]. For a 30-year note. So we
    would go and pay 9 percent rather than borrow at 5 percent what
    we can borrow, and that difference, that 3.75 percent, we are
    just going to let the American taxpayer pay, and that is
    standard practice. That is what you are telling me, government-
    wide----
        Mr. McConnell. It is entirely normal practice for us to use
    in leases, and it is throughout government and in the
    commercial sector.
        Senator Coburn. Let me go back. Mr. Walker, do you find
    anything wrong with that picture?
        Mr. Walker. Mr. Chairman, part of the issue is how the
    government keeps score. You are correct in noting that to the
    extent that the government ends up financing it, the cost of
    capital is less. We can borrow from the public at much less
    than 9+ percent.
        What ends up happening is when the government ends up
    spending the money up front, and therefore de facto financing
    it through the cost of capital for the Federal Government, it
    means that the Federal deficit goes up. In addition, the amount
    of money that is at the Treasury in the X account for the SEC
    is not readily available to the Securities and Exchange
    Commission. What would have to happen is they would have to
    make a business case, which I think is what you are saying they
    should make----
        Senator Coburn. It wouldn't have to come to that, because
    they are going to have an excess this year. It would be just a
    difference in their allocation from the appropriations bill.
        Mr. Walker. Well, there are two ways you could do it, Mr.
    Chairman. One way you could do it is to seek a reprogramming
    request from the appropriators to be able to use funds that
    otherwise would be excess funds. If you did not have enough
    money in your current year appropriation, then theoretically
    you could seek authority from the appropriators to be able to
    tap into that X account, which is the accumulated surplus, to
    be able to use that in lieu of building it into the lease.
        Candidly, I believe this is symptomatic and symbolic of a
    bigger problem that government has. The Federal Government
    makes decisions based upon cash flows rather than discounted
    present values on sound economic concepts. We need to rethink
    that.
        Senator Coburn. Yes, because borrowing that money at 5
    percent and paying it back 30 years from now, the real value of
    the cost to you is actually going to go down, versus a 9
    percent loan. You are going to lose some of that time value of
    money advantage by paying it ahead of time. In other words,
    financing at the lower rate, borrowing from ourselves, is
    cheaper than financing it through your lender at 9 percent.
        Mr. Walker. There are many decisions that the Federal
    Government makes that do not make economic sense. They are made
    primarily because of the way we keep score. For budget
    purposes, it is largely a cash basis rather than an accrual
    basis.
        Senator Coburn. I wonder if you might be willing to look at
    that government-wide for us in terms of the cost of financing
    when we are doing it this way and what that total cost is to
    the Federal Government in terms of build-out leases and
    everything else where we are financing through a landlord
    building improvements.
        Mr. Walker. I would be happy to talk to our staff about
    whether or not we are doing anything and what might make sense
    there.
        Senator Coburn. OK. I want to go back to, did we sign a
    lease without knowing what the cost was going to be?
        Mr. McConnell. We signed a lease in March, and then
    subsequent to that, you work on how much you are going to spend
    and how much the budget will be for the actual tenant
    improvement work associated with that lease.
        Senator Coburn. Why would we not wait to sign a lease until
    we knew what something was going to cost?
        Mr. McConnell. Well, that would be the much preferred way
    of doing it.
        Senator Coburn. Well, I am saying, why wouldn't we? I would
    never sign a lease until I knew what it was going to cost me.
    Why would the government sign a lease when it doesn't know what
    it is going to cost them?
        Mr. McConnell. We know what the lease is going to cost in
    terms of the rental payment.
        Senator Coburn. I am talking the cost. There is no
    difference. Our grandchildren are going to pay for this one way
    or the other. The total cost, what is it going to cost in terms
    of financing the leasehold improvements, which we are going to
    pay for, the landlord is going to get the benefit. Why would we
    sign a lease if we didn't know what it was going to cost?
        Mr. McConnell. We generally do know what it is going to
    cost, or we have very good estimates as to what it is going to
    cost. You don't really know finally what it is going to cost
    until you execute the lease, you select your build-out, you do
    the construction drawings, you bid it out to the trades, and
    then you get the final cost.
        Senator Coburn. Well, I want to tell you, I do a lot of
    commercial real estate and I am the owner of the buildings and
    I never will sign a lease until I have presented to them what
    it is going to cost and what my return is. And I can't believe
    that we think it is common practice, nor financially sound, to
    sign a lease without knowing what the cost is. I mean, where
    was the time pressure to sign leases on this without knowing
    what it is going to cost?
        Maybe somebody made a mistake in terms of the follow-
    through on this. That can happen. I am not critical of that. I
    am critical that we didn't know it was happening because the
    dashboard obviously--this is happening and nobody knows it is
    happening until it has already ballooned on you. You have a
    degree in accounting. I have a degree in accounting. If you
    look at cost accounting, or financial controls, you would never
    do it. Why is that standard policy in the SEC?
        Mr. McConnell. This issue is not standard policy. This was
    a failure on our part, and I readily admit that. We had a
    serious breakdown in our budget estimating process for tenant
    improvement work. That is what this is.
        Senator Coburn. Do we have the option on these leases to
    prepay that leasehold improvement?
        Mr. McConnell. We do. When we exercise our lease, we have
    the ability to either take that tenant improvement work from it
    or pay it up front. We still have that option.
        Senator Coburn. Do you know what the difference in cost is
    going to be if we pay it up front, and based on these numbers?
        Mr. McConnell. I would have to----
        Senator Coburn. Can you give that to us?
        Mr. McConnell. Yes, we could.
        Senator Coburn. If you take $50 million versus, let us say
    $45 million, and the difference is 3.75 percent over 30 years
    on $45 million, that is $50 million. That is the difference in
    cost that we are going to ask our grandchildren to pay back.
    That is the difference just on the interest rate differential.
    So if you can take a 30-year note and borrow the money from the
    public and pay them at 5 percent and pay this thing off, why
    would we not want to save that $50 million over the next 30
    years?
        Mr. McConnell. I would much prefer to have these payments
    paid for up front. It is much efficient. It is a better way of
    doing business.
        Senator Coburn. Do you have to do this process through GSA?
        Mr. McConnell. We have independent leasing authority, but
    we work in coordination with GSA, usually through a Memorandum
    of Understanding.
        Senator Coburn. You would have had an interesting time at
    our hearing yesterday with the GSA.
        Mr. McConnell. Is that right?
        Senator Coburn. Yes. The same problems.
        Let us go back to the money that you have for the
    disgorgement accounts. Why is it not earning interest?
        Mr. McConnell. I actually believe that you are not well
    served, Mr. Chairman, by me answering that because it is really
    an issue that the Enforcement Program is leading, but my
    understanding is that we have moved that over to interest-
    bearing accounts.
        Senator Coburn. OK. That is great news.
        Mr. Walker. Mr. Chairman, it is my understanding that as of
    the financial statement date, which was September 30, 2004,
    that it was part of the X account at the Treasury. It was not
    earning interest. However, it is also my understanding that
    subsequent to that date, that General Counsel within the SEC
    determined that the SEC had the authority to invest those funds
    and now has moved those funds out of Treasury and, I think, are
    now actively investing them in some way.
        Mr. McConnell. That is my understanding, as well.
        Mr. Walker. I am trying to follow up on that. I do believe
    that since those funds are held in a fiduciary capacity, that
    it is important that they be invested.
        Mr. McConnell. There is a fiduciary obligation that goes
    along with that.
        Mr. Walker. Correct. It is one thing to not give credit to
    the X fund that deals with the accumulated results of
    operations of the SEC because that is part of the consolidated
    government and ultimately, the taxpayers are going to bear the
    related cost. But in this particular case, it is somebody
    else's money.
        Senator Coburn. Let me go back to Mr. McConnell for a
    minute. I want to understand the relationship between your
    position and the SEC Chairman, and you tell me if I am wrong.
    You are the hands-on management guy for the SEC, is that
    correct?
        Mr. McConnell. That is correct.
        Senator Coburn. And so the leadership role is in terms of
    true leading to make sure the direction is the direction that
    the chairman and the Commission want the SEC to go, and you are
    submissive to their direction, is that correct?
        Mr. McConnell. I work for the chairman. The chairman is
    effectively the CEO of the agency. I am essentially the
    principal management official.
        Senator Coburn. So with an acting chairman now, without a
    permanent chairman, you have the ability to continue all these
    reforms that you are wanting to put forward even if we don't
    have another chairman for another year, is that correct?
        Mr. McConnell. That is correct.
        Senator Coburn. And that is in process.
        Mr. McConnell. That is correct.
        Senator Coburn. And is that going to happen?
        Mr. McConnell. I intend for it to happen, yes.
        Senator Coburn. I know you intend to. I am asking you, is
    it going to happen? If you are sitting in the board room of a
    corporation and you give that answer, nobody is going to accept
    it. They are going to say, are you going to get it done or are
    you not going to get it done? And what I want to know for
    everybody's grandchildren in this country, is it going to
    happen?
        Mr. McConnell. Well, I fully expect it to happen. Again, we
    are in a transition period and I have every reason to believe
    that a new chairman will follow through on these. They make
    sense. They are the right thing for the SEC and government to
    do. They are the right thing for the agency. I believe very
    strongly that we will continue this aggressively.
        Senator Coburn. With a $1.3 billion excess this year, or
    close to excess in fees over costs, are the fees and charges,
    too high? I mean, it is a tax, right? The fee is a tax.
        Mr. McConnell. Well, the best way for me to answer that is
    there has been lots of discussion both within the SEC and on
    the Hill with respect to making the fees more closely
    associated directly with the amount of money the SEC needs. So
    that is being discussed. It has been discussed. And I fully
    expect that issue will be dealt with in the 2007 budget
    discussions. It is an issue, I think, that is important, and I
    think it makes a lot of sense to try and move in the direction
    of making sure the SEC presents a budget that is sound, is
    exactly what it needs, and that then the Congress would fund it
    with fees that are matched to those needs.
        Senator Coburn. And that is as it should be, right?
        Mr. McConnell. I think that is a good way to go.
        Senator Coburn. When was the last time a committee of
    Congress had a true oversight hearing on the SEC? Was that
    associated with the Sarbanes-Oxley reform or----
        Mr. McConnell. I can't directly answer that.
        Senator Coburn. Does any of your staff know that? Does
    anybody know?
        Mr. McConnell. Because I really don't deal with the
    oversight committees that much. I deal with the appropriators
    personally, but----
        Senator Coburn. I have some questions I am going to send
    you, I am going to give to your staff, and it has to do with
    the Global Research Analysts settlement. I know that is in
    litigation, but I would appreciate very much if you would
    answer those the best you can for us to look at that.
        The only question I have is how did we ever let it get to
    where a court had to tell you to do that?
        Mr. McConnell. That is a good thing to put in the letter,
    Mr. Chairman.
        Senator Coburn. All right. Fair enough.
        I want to thank each of you for being here. There isn't one
    area of the government in the next 6 years, if I am Chairman of
    this Subcommittee, that we are not going to look at, and we are
    going to be back talking about this in 6 to 9 months, after the
    first of the year to see where we are, after we get this next
    report from General Walker. You are well intentioned, we know
    you are, we want to help you get there, and transparency is a
    very key thing. I want people to be able to get on a computer
    and find out where you spend your money, any citizen in this
    country, and you ought to want that, too.
        Mr. McConnell. We do.
        Senator Coburn. All right. General Walker and Mr.
    McConnell, thank you very much.
        Mr. Walker. Thank you, Mr. Chairman.
        Mr. McConnell. Thank you, Mr. Chairman.
        Senator Coburn. The Subcommittee is adjourned.
        [Whereupon, at 3:34 p.m., the Subcommittee adjourned.]

                                A P P E N D I X

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