[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



                    U.S. GOVERNMENT PRINTING OFFICE
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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.]


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