[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



                     REVIEW OF INVESTOR PROTECTION
                     AND MARKET OVERSIGHT WITH THE
                       FIVE COMMISSIONERS OF THE
                   SECURITIES AND EXCHANGE COMMISSION

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 26, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-46







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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West 
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             RICK RENZI, Arizona
ALBIO SIRES, New Jersey              JIM GERLACH, Pennsylvania
PAUL W. HODES, New Hampshire         STEVAN PEARCE, New Mexico
KEITH ELLISON, Minnesota             RANDY NEUGEBAUER, Texas
RON KLEIN, Florida                   TOM PRICE, Georgia
TIM MAHONEY, Florida                 GEOFF DAVIS, Kentucky
CHARLES WILSON, Ohio                 PATRICK T. McHENRY, North Carolina
ED PERLMUTTER, Colorado              JOHN CAMPBELL, California
CHRISTOPHER S. MURPHY, Connecticut   ADAM PUTNAM, Florida
JOE DONNELLY, Indiana                MICHELE BACHMANN, Minnesota
ROBERT WEXLER, Florida               PETER J. ROSKAM, Illinois
JIM MARSHALL, Georgia                KENNY MARCHANT, Texas
DAN BOREN, Oklahoma                  THADDEUS G. McCOTTER, Michigan

        Jeanne M. Roslanowick, Staff Director and Chief Counsel





















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 26, 2007................................................     1
Appendix:
    June 26, 2007................................................    67

                               WITNESSES
                         Tuesday, June 26, 2007

Cox, Hon. Christopher, Chairman, United States Securities and 
  Exchange Commission............................................    10

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    68
    U.S. Securities and Exchange Commission......................    70

              Additional Material Submitted for the Record

U.S. Securities and Exchange Commission:
    Written responses to questions from Chairman Frank...........    81
    Written responses to questions from Hon. Paul E. Kanjorski...    91
    Written responses to questions from Hon. Al Green............   101
    Written responses to questions from Hon. Ed Royce............   109
    Written responses to questions from Hon. Walter Jones........   111
    Written responses to questions from Hon. Scott Garrett.......   114
    Written responses to questions from Hon. Kenny Marchant......   121
    Joint response by Commissioners Roel C. Campos and Annette L. 
      Nazareth to questions from Hon. Al Green...................   130








 
                     REVIEW OF INVESTOR PROTECTION
                     AND MARKET OVERSIGHT WITH THE
                       FIVE COMMISSIONERS OF THE
                   SECURITIES AND EXCHANGE COMMISSION

                              ----------                              


                         Tuesday, June 26, 2007

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 2:04 p.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Present: Representatives Frank, Kanjorski, Maloney, 
Velazquez, Watt, Sherman, Meeks, Moore of Kansas, Capuano, 
Hinojosa, Clay, McCarthy, Baca, Miller of North Carolina, 
Scott, Green, Cleaver, Bean, Davis of Tennessee, Hodes, Klein, 
Mahoney, Perlmutter, Murphy; Bachus, Baker, Pryce, Castle, 
Royce, Biggert, Shays, Feeney, Hensarling, Garrett, Neugebauer, 
Price, Campbell, Bachmann, Roskam, and Marchant.
    The Chairman. This hearing of the Committee on Financial 
Services will come to order. I am very pleased, along with the 
ranking member and the other members of the committee, to 
welcome all five Commissioners of the United States Securities 
and Exchange Commission.
    For some reason, some people seem to think it was very 
unusual for us to listen to all five Commissioners. I want to 
say at the beginning, someone asked me why I was asking all 
five Commissioners to come now, rather than over the past 10 or 
20 years, and the answer is very simple: I wasn't the chairman 
over the past 10 or 20 years.
    I say that because the fact that we have asked all five 
Commissioners to appear before us is not a sign that there is 
great turmoil or trouble or anger. There are five 
Commissioners. They are all presidentially appointed and Senate 
confirmed. They all have decision-making power, and frankly I 
would have thought the relevant question would be how come you 
never talk to all five Commissioners, and this is a very 
important opportunity for us to do that.
    But I really just want to dispel the notion that the fact 
that we have asked all five Commissioners means that somebody 
has a sense of impending doom. That is not the case.
    We have a series of very important issues that are being 
dealt with by the Commission. And let me say first, on the 
subject of it being all five Commissioners, one or two of the 
issues we will get into today we will be asking--I will be 
asking what the progress is. And I understand that trying to 
get a consensus among the Commission is a factor. That's a 
legitimate one.
    The SEC is, to a very great extent, a law enforcement 
agency. And no law enforcement in a free society will succeed 
if there is not a significant degree of acceptance of the 
fairness of the rules by those against whom they are being 
enforced. We are not ever going to create in this country a 
core of enforcers sufficient to watch everybody all the time: 
We don't want it; we can't afford it; and it would not be the 
society we want to live in.
    That means, as I said, there has to be some degree of a 
buy-in by those who have to abide by the rules. Three to two 
votes of a Commission enforcing rules undercuts our ability to 
do that over time. If you think a rule is a bad idea and it is 
voted by all five members of the Commission, it seems to me you 
are likelier to acclimate yourself to that than if it's three 
to two and you just wait for somebody to die, get appointed to 
something else, or get bored and go off and do something else.
    So I want to acknowledge that it is a relevant factor to 
try to get the kind of vote that will help us have these things 
enforced. On the other hand you do come to a point where 
decisions have to be made, and I guess I would say if there 
were never any three-two decisions, I would think that there 
was a problem, and that we were shying away from dealing with 
some tough issues, but if there were a lot of three-two 
decisions, that would not be a good sign either.
    And in my judgment, the Commission, as currently 
constituted, has hit the right kind of balance. I do think that 
we need to press forward in a couple of areas, but I do 
understand, as I said, the importance of the consensus.
    Secondly, I want to begin by talking about a couple of 
things for which I think the Commission deserves a great deal 
of credit and for which it has not gotten enough credit, not 
surprising in today's world. First is the revisions that you 
have put forward, along with the PCAOB in Sarbanes-Oxley.
    Now I can speak about Sarbanes-Oxley without any kind of 
pride of authorship or defensiveness. While I was on the 
committee when it was adopted, I was not the ranking member. It 
was not one of the things in which I was very active. I think 
it was a very important piece of legislation, and I think it 
has done a great deal of good.
    There is a problem in our society and in our controversies 
in which when we do something good, we tend to pocket the 
benefit, ignore it, and then focus on those things with which 
people aren't fully satisfied. I think anyone who compares 
what's gone on in the markets, the attitude towards investing 
today, compared to what we had during the height of the Enron 
and MCI situations, will understand the importance of Sarbanes-
Oxley.
    I was pleased recently to get a letter from the Chamber of 
Commerce saying that the quality and performance of boards of 
directors has significantly improved in substantial part 
because of Sarbanes-Oxley. Now they sent that letter in the 
context of telling me we didn't have to do anything about 
executive compensation, but the fact is that they still gave 
full credit to Sarbanes-Oxley.
    There was one area where I think there was a consensus, 
that we needed to make some changes. In implementing section 
404 it does appear that we went a little too far, those who did 
it. That's not surprising; this is a new enterprise and people 
don't always get things perfectly the first time.
    I believe that the Commission along with the PCAOB in a 
collaborative fashion has responded appropriately and I am 
struck by a number of people who still ask me, well, when are 
you going to make these changes in Sarbanes-Oxley when in fact 
they are well underway.
    Now there may be some who would like to go further. I do 
note that Secretary Paulson, when he testified before us last 
week, disagreed with the notion that legislative change was 
necessary. Secretary Paulson strongly asserted his view that he 
thought that what the Commission was doing now was appropriate 
and in fact responded to the need, and I'd be interested in the 
Commission's view.
    Secondly, and the Commission's statement does refer to one 
of the great issues we will be dealing with soon, which is the 
question of harmonization, cooperation, internationally--we 
have had, for all of our time, securities regulation that was 
nationally based. Increasingly we have securities transactions 
that are not nationally based, that are transnational and 
trying to make that work is important.
    The policy that the Commission has embarked on, mutual 
recognition, for instance, in the accounting area, I think is a 
very appropriate response. And it does look to me like we're 
making real progress there. The concept of mutual recognition 
obviously has application elsewhere, so those are two areas 
where I am very supportive of what the Commission is doing.
    There were a couple of other areas I will get to in my 
questions. I'm just going to touch on them now so I can get to 
the other statements. One is, that I have had increasing 
concerns expressed to me about the problem of naked short 
selling. And some of our former colleagues who have been 
engaged in this work have talked to me about it, and it does 
appear to me to violate some fundamental rules. I have spoken 
to the Chairman about it and I hope that we can get some 
conversation about that.
    And the other area, the one area where I would hope we 
would pretty soon be able to get some resolution, is the 
question of proxy access. It does seem to me that this is an 
area where there's a lot to be said for getting a decision. 
Obviously I hope it is a decision that will improve proxy 
access. I continue to be bemused by the fear of shareholders 
that exists among some in the corporate world.
    I don't know what phobia that will be. I guess we should 
have a contest: what phobia is it when you are afraid of your 
own shareholders? But it does seem to me that fear is 
excessive, and I hope we can touch on that.
    With that, I will recognize the gentleman from Alabama.
    Mr. Bachus. I thank the chairman. And Chairman Cox and the 
Commission, I want to welcome you on behalf of the minority on 
the committee. I think you've done an excellent job. I think 
the Commission has worked well together.
    The subcommittee ranking member Ms. Pryce and I are going 
to yield our time to six members for opening statements, but 
please know that she and I both think you've done an 
outstanding job and we compliment you.
    At this time, I will yield 2 minutes to the gentleman from 
Louisiana.
    Mr. Baker. I thank the ranking member for yielding time. I 
think it's important in this brief period to recognize the 
problem currently engaged in our U.S. securities markets, which 
is an overriding prevalence of securities class action 
litigation. The result is that Fortune 500 companies in this 
country pay 6 times as much in insurance as they do in Europe.
    But the cost is not just to companies; it is to investors 
as well. Typical settlements to avert expensive litigation 
result in awards averaging from 2.3 to 2.9 percent per loss 
claimant, rarely giving defrauded investors any real financial 
return. And it is the smallest investor which is most 
disproportionately adversely impacted, having the most limited 
resources to pursue relief and also having the least 
diversification in portfolio, resulting in concentration of 
loss risk.
    The 2007 Bloomberg/Schumer report states the prevalence of 
meritless securities lawsuits and settlements in the United 
States has driven up the apparent and actual costs of business 
and driven away potential investors. The Chairman of the 
President's council of economic advisors states that the size 
and frequency of damage settlements and securities class action 
suits sets the United States apart from other major financial 
centers and is an important factor in the declining competitive 
position of our markets.
    So in an arena where it is clear that relief is obvious and 
necessary to stem frivolous suits in a period when global 
markets are gathering momentum, the announced plan to pursue 
recovery is the now new scheme liability approach. This seems 
incredibly out of touch with market function and necessity. 
This clear and present danger, the current proposed remedy, 
flies under the flag of this creative scheme liability 
assignment. This would extend the actionable causes for 
plantiffs' financial claims to parties which did not make 
fraudulent representation to the defrauded investors.
    The facts of the Stoneridge case would, based on precedent 
of all other Federal appeals holdings, be set aside without 
merit. So it should be, save for a single appellate court 
holding. Dramatic expansion of causes of action will have an 
untenable market consequence which will expand beyond all 
reason filings without merit already facing significant adverse 
market conditions, would make our markets clearly less 
competitive and deter outside investment in the United States, 
and result without doubt in a debilitated U.S. marketplace.
    I cannot conceive in a world where anyone who has a claim 
ready to be filed there is more than one firm ready to 
fabricate the cause of action, go to court and for a limited 
fee pursue those with deep pockets for whatever reason that 
might yield a claim through the class attorney.
    It strikes me as odd that where our class action system 
results in an average payment of pennies on the dollar to the 
claimant and yet the trial bar is making a very substantial 
income we continue to focus on expanding the reasons and 
opportunities for people to file such frivolous suit.
    I yield back.
    The Chairman. The gentleman from Pennsylvania, the chairman 
of the Subcommittee on Capital Markets.
    Mr. Kanjorski. Thank you, Mr. Chairman. I just wanted to 
congratulate you for assembling this tremendous panel that we 
are going to get an opportunity to hear from. So with no 
further ado, and intending to listen to the panel, I thank you 
for the calling of this hearing.
    The Chairman. The gentleman from Delaware is recognized for 
2 minutes.
    Mr. Castle. Thank you, Chairman Frank, and Ranking Member 
Bachus, for holding this hearing before the Financial Services 
Committee today, and I thank all of the Commissioners for being 
here today.
    I look forward to hearing from each of you regarding the 
Commission's investor protection initiatives and efforts to 
maintain the virtue of our markets. I commend the chairman and 
the Commissioners for their hard work over the years and 
realize that creating the rules and regulations that govern our 
Nation's securities industry is a difficult and enduring 
process.
    With that being said, I have some ongoing concerns, 
particularly regarding pension fund investments in hedge funds, 
stock option manipulation, and 12b-1 fees, which I would 
encourage the Commission to examine.
    The New York Federal Reserve president Timothy Geithner has 
repeatedly warned that hedge funds pose the largest risk since 
the long-term capital management crisis and Treasury officials 
have cautioned that a hedge fund collapse has the potential to 
affect the overall financial markets. While I understand that 
there are risks associated with investments, I want to make 
sure we are not ignoring these warnings and perhaps end up with 
an overreaction from Congress in the event of another LTCM.
    Increased disclosure of the industry, which has grown more 
than 400 percent since 1999, is necessary and will further 
enhance market discipline and investor confidence. I also have 
concerns that certain manipulation of stock options may still 
persist, but I was pleased to hear that the Commission has made 
their investigations of backdating options a top priority.
    I have been monitoring this issue, especially with regards 
to the timing of stock options grants to ensure the new 
disclosure rules are effectively detecting further 
manipulation. These practices are a violation of insider 
trading rules and place shareholders at a serious disadvantage.
    Lastly, the 12b-1 rule, which was issued in the 1980's to 
assist struggling funds in getting their materials out to 
investors needs to be fully reformed. Funds are not struggling 
today with the same advertising dilemmas as they were in the 
1980's and fees are now being used to compensate broker-
dealers. The use of the 12b-1 fee is unclear to investors and 
if the intent of the fee has evolved from the 1980 intent of 
advertising a distribution to now compensate brokers it should 
be reevaluated and dealt with as such.
    Reform of this rule is long overdue and I strongly 
encourage the Commission to make this fee more transparent so 
that investors are not being misled by certain mutual fund 
fees.
    Mr. Chairman, I thank you for holding this hearing today, I 
look forward to hearing from the witnesses, and I yield back 
the balance of my time.
    The Chairman. The gentleman from New Hampshire is 
recognized for 4 minutes.
    Mr. Hodes. Thank you, Chairman Frank, for holding this 
important hearing on the SEC's role in investor protection and 
market oversight, and I welcome the panel, including the 
Chairman and the distinguished Commissioners.
    According to the SEC's Web site, the mission of the SEC is 
to protect investors, to maintain fair, orderly, and efficient 
markets, and to facilitate capital formation. I have a number 
of significant concerns about the structure of the recent 
initial public offering or IPO of the Blackstone Group LP. This 
offering is essentially not regulated by the SEC.
    According to the Investment Company Act of 1940, in a 
recent court decision, I believe that it should be. Under the 
Investment Company Act of 1940, if more than 40 percent of a 
company's assets are ``investment securities,'' the company 
must register as an investment company before offering shares 
to the general public.
    When Blackstone was only dealing with millionaires who 
invest in hedge funds they weren't subject to SEC regulation, 
however, in my judgment, the day Blackstone issued an IPO and 
Main Street investors were able to purchase stock in their 
company they should have registered with the SEC under the 1940 
Act like other public investment companies.
    Once a company goes public it has a fiduciary duty to its 
investors. This is one of the largest IPOs in recent years and 
it is unacceptable to this Congressman that the process has not 
been more transparent for investors.
    I believe the SEC has an obligation to ensure that the 1940 
Act is not violated and that investors are protected. I am 
concerned that this offering sets a precedent for other hedge 
funds, private equity funds, to go public without complying 
with applicable law.
    I look forward to hearing from the panel on compliance with 
the Investment Company Act, fiduciary duty, and national 
security implications, which I think are inherent in this IPO 
because China has bought a major stake in this company.
    Thank you, and I yield back, Mr. Chairman.
    The Chairman. The gentleman from California.
    Mr. Royce. Chairman Frank, I thank you for holding this 
hearing. I thank you also for having all five SEC Commissioners 
here, and I just wanted to personally welcome my good friend 
and former colleague Chairman Cox, who represented a 
neighboring district in Orange County prior to his appointment 
as head of the Securities and Exchange Commission, and I 
believe, Mr. Chairman, who attended law school with you as 
well.
    And there has been a lot of attention recently on flight of 
capital out of the United States into London, into Hong Kong, 
and into Dubai. And the fact that only 2 of the top 20 IPOs 
that went public in the United States last year--what's that, 
that's about 10 percent compared to 12 of 20 in 2001--reflects 
an aversion of our public markets by corporations around the 
world. That's something we should address today.
    The three major studies on U.S. competitiveness released in 
the last year focus attention on two great hindrances 
afflicting our public companies. The first is the regulatory 
environment within the United States, most notably, Sarbanes-
Oxley, and the burdensome requirements it places on such 
companies. We had this remark from the former chairman of the 
Federal Reserve, Alan Greenspan. He said, ``most of Sarbanes-
Oxley is a cost creator with no benefit I'm aware of; 
regulatory and statutory changes need to be made as well if 
we're going to move forward; I hope it happens before the whole 
financial system walks off to London.''
    And then second, the bipartisan Bloomberg/Schumer Report 
says that the prevalence of meritless securities lawsuits and 
settlements in the United States has driven up the apparent and 
actual cost of business and driven away potential investors. So 
these studies show that when companies are allocating millions 
of dollars funding overly burdensome reporting requirements and 
protecting against frivolous lawsuits they respond by becoming 
more risk averse or by looking at alterative markets at home or 
abroad.
    If we are to remain the market of choice for the world's 
public companies, we must implement legislative and regulatory 
changes to properly address the problems facing these companies 
as recommended by former chairman Alan Greenspan. I look 
forward to hearing from the Commission, from the SEC, on these 
and other important matters this afternoon.
    Thank you again, Mr. Chairman.
    The Chairman. The gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman. I, too, want to 
add my voice to welcome our Commissioners, especially our 
former colleague Chairman Chris Cox. I do believe, although 
there are many important matters that will be discussed in 
today's hearing, clearly few will be as important as this 
expansion of a private right of action for secondary liability.
    Many call it the great new consumer protection. I fear that 
nothing could be further from the truth. Recently there was an 
editorial in the Wall Street Journal, the June 9th edition, 
that I would like to quote from that I think encapsulates this 
challenge well: ``What the SEC should be explaining is the 
damage that secondary liability will do to investors. Tort 
lawyers want to establish a breathtaking new legal standard, to 
wit, that any business partner or supplier,'' a bank, say, or a 
law firm, ``of a corporate offender either should have known of 
the fraud or was reckless in not knowing and thus is guilty of 
aiding and abetting fraud. Under such a standard, this 
newspaper could be sued for running an advertisement in which a 
company misreports its earnings.''
    Companies should be held liable for the culpability of 
their actions not their proximity to a fraudster much less the 
size of their bank account, and I fear, unfortunately, this has 
less to do with consumer protection and more about expanding a 
target rich environment for the tort bar.
    We've had many, many hearings about capital fleeing our 
country, avoiding our country, companies going private. And as 
we've heard from the gentleman from Louisiana and the gentleman 
from California, much of it has to do with an environment in 
which we find many frivolous securities class action lawsuits.
    And even when these lawsuits are justified, we have to 
remember that more often than not it's one set of innocent 
investors having to pay off another set of innocent investors. 
So we should look very, very carefully as we approach this 
area.
    With that, I yield back the balance of my time.
    The Chairman. Next, the gentleman from New Jersey, Mr. 
Garrett.
    Mr. Garrett. Thank you, Mr. Chairman. Thank you, Mr. Cox, 
and all the members of the Commission. Today's hearing is 
stated to be a review of investor protection and market 
oversight. I would like to just focus here on something that's 
equally as important as that, and that's America global 
economic competitiveness.
    As Mr. Royce has already indicated, Secretary Paulson and 
others have testified about the two biggest problems that we're 
facing in our Nation's global competitiveness: excess 
litigation and regulation. But there are two recent decisions 
by this Commission that greatly concern me indicating that 
we're going in the wrong direction on both of these fronts.
    Recently, there was a case of Stoneridge versus Scientific-
Atlanta, where the Commission recommended that the solicitor 
general file a brief in support of the trial lawyers that would 
expand legal liability further and add to the heavy legal 
burden that's already being borne by our public companies.
    A spokesman for the Department of Treasury noted in 
response that, ``Treasury believes uncertainty related to 
primary liability for third parties could adversely affect the 
competitiveness of American financial markets by posing unknown 
risks for entities that do a broad range of business with 
public companies.''
    So if excess litigation is harmful, I don't see how 
expanding legal liability to third parties in instances like 
this will help to lessen that burden and encourage more 
listings on our markets.
    The other decision by the Commission recently that has me 
concerned and troubled is the decision not to extend the 
exemption for small U.S. companies in complying with section 
404; U.S. companies, small ones, will bear a disproportionately 
large share of the Sarbanes-Oxley burden.
    This exemption, as you know, was extended last year through 
the end of 2007 so that the SEC and the PCOB could finalize 
their revised guidance to management and new standards by the 
auditors. And so while I commend the SEC for trying to improve 
these recommendations and implementations it remains unclear 
whether these revisions make it possible for small businesses 
to comply without still suffering severe economic consequences.
    Furthermore, it is unfair I think to make our small 
businesses comply with these new regs that are just still now 
being finalized and adopted halfway through this year. So in 
light of that, 2 weeks ago I offered a bipartisan, small 
business SOX compliance extension act that would extend it for 
another year, the current exemption, and I would appreciate 
your comments on that in light of the fact that NASDAQ says as 
a percentage of revenue basis, it's 11 times greater for small 
businesses to have to comply.
    And with that, Mr. Chairman, I yield back.
    The Chairman. The gentleman from Georgia.
    Mr. Price. Thank you, Mr. Chairman. I want to thank you and 
Ranking Member Bachus for having this hearing. I also want to 
thank Mr. Bachus for graciously yielding his time to allow 
these statements.
    The two biggest problems facing our capital markets today 
are excessive securities litigation and overly burdensome 
regulation. Treasury Secretary Henry Paulson has called 
securities litigation the Achilles heel of our economy, 
threatening the ability of American financial markets to 
compete in today's increasingly international marketplace. In 
essence, we're trying to compete with one hand tied behind our 
back, while allowing our competitors to pass us by because of 
our failure to adapt.
    We're all familiar with the Stoneridge case. Not only is it 
an over-the-top attempt by trial lawyers to extend the 
liability to third parties uninvolved in fraud but it should 
make shareholders and all Americans cringe due to the 
uncertainty and cost it would add to our system. Any verdict or 
settlement against a company ends up coming out of the pockets 
of shareholders and of the American people.
    It's been said that Congress does two things well: 
overreact and nothing. And with the benefit of hindsight we can 
see that Congress dramatically overreacted with the Sarbanes-
Oxley legislation. Our companies in our capital markets are now 
paying the price, which means that Americans are paying the 
price.
    Since its passage, compliance costs for companies doing 
business in the United States have grown far beyond anything 
even the harshest critique anticipated. We must never limit our 
ability to detect corporate fraud and protect investors but 
congressional action is often a blunt instrument and the 
unintended consequences of this legislation have forced both 
corporate leaders and auditors to focus far too much of their 
time on compliance minutiae, diminishing the opportunities left 
for innovative strategies and growth due to their fear of 
facing harsh personal financial penalties. Reexamination 
dictates that reform is needed to ensure our capital markets 
remain competitive.
    Let me briefly touch on one topic on which I intend to 
submit questions for the record. As exchanges have become for-
profit entities, their for-profit status could create new 
conflicts of interest. I don't believe that the exchanges 
should have been prevented from seeking a change in their 
status or that fee increases are inherently inappropriate but 
the Commission must ensure its due diligence to ensure fairness 
in the process.
    I thank Chairman Cox and the panel for coming and I look 
forward to the question and answer time. And I thank the 
chairman.
    The Chairman. All requests and time having been 
accommodated, we will now begin the testimony, and as I 
understand it, we have a joint statement that was submitted by 
all five Commissioners which will go into the record.
    My understanding is that the Chairman will be making an 
oral presentation, as well as a visual one. After that, we will 
go into the normal questioning, and questions may obviously be 
addressed to any of the five Commissioners.
    I would urge members--we have obviously a lot of interest 
and it's a big committee--I will try not to cut people off, but 
I will advise members that the longer the preface, the shorter 
the answer is going to be that we can fit in, so members will 
be able to submit statements but I would urge members--let me 
just say at this point, in the interest of time, I'm taking on 
more time now, let me, on behalf of all the members, thank you 
all for coming.
    [Laughter]
    The Chairman. That may not sound like much, but if 37 
people don't say, ``I thank you very, very much for coming,'' 
we'll save a couple of minutes. So why don't you get right to 
your questions. They're nice people. They don't expect you to 
be excessively polite.
    Mr. Cox, please go ahead.

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

    Mr. Cox. Thank you, Mr. Chairman, Ranking Member Bachus, 
and members of the committee. I will say just once at the 
outset, thank you all very much for inviting us. We are all 
five of us very pleased to be here. As a former member of this 
committee, I have enormous respect for each of you and for the 
work that the committee does. We are all of us, all five 
Commissioners of the Securities and Exchange Commission, 
pleased to be here today to discuss the important work that the 
SEC is doing to protect investors, to strengthen our markets, 
and to promote capital formation.
    The initiatives that we have underway at the Commission all 
have a common theme. They are aimed at benefiting investors who 
depend on healthy and well-functioning markets. This is the 
SEC's traditional responsibility. Back in Joseph Kennedy's day, 
our first Chairman, he was amazed that one in every ten 
Americans owned stocks. But today, over half of all American 
households own securities. In fact, when one considers the 
staggering growth in Americans' participation in markets, the 
enormity of the SEC's task today becomes apparent.
    About 3,600 staff at the SEC are responsible for overseeing 
over 10,000 publicly traded companies; over 10,000 investment 
advisers who manage over $37 trillion in assets; nearly 1,000 
fund complexes; 6,000 broker-dealers with 172,000 branches; and 
the $44 trillion worth of trading that's conducted each year on 
America's stock and options exchanges.
    Perhaps the most striking development underway in our 
markets is that they are becoming increasingly interconnected 
with other markets around the world at an accelerating pace. 
This is challenging the United States and securities regulators 
around the world to collaborate more closely than ever before. 
Over the past year, a number of reports have been published 
which advised the SEC and the Congress on how to deal with our 
increasingly global capital markets. They've offered the 
Commission and policymakers in the Congress and the Executive 
Branch many recommendations, and undoubtedly more such 
recommendations are on the way.
    While each of us may not agree with all of the 
recommendations and conclusions of these reports, we take 
seriously the detailed study that's gone into each of them, as 
we do the constant and varied advice that's offered to the 
Commission from a host of financial services providers and 
consumers.
    Mr. Chairman, many of the issues that we face are sometimes 
trivialized as disputes between business and investors. The 
truth is, only if the business succeeds will its investors 
prosper. That's why the SEC's first Chairman described the 
SEC's role and our relationship to business as a partnership. 
But anyone who seeks to drive a wedge between the interests of 
the business and the interest of investors in that business 
will find themselves confronted by a relentless and powerful 
adversary in the Securities and Exchange Commission.
    Today, the SEC's Enforcement Division is substantially 
larger than it was 5 years ago. Our staff are engaged in 
combating a full range of abuses. We've created special working 
groups within our Enforcement Division to deal with emerging 
risks, such as hedge fund insider trading, stock options 
backdating, and micro cap fraud. Earlier this year, we filed 
the largest insider trading case against Wall Street 
professionals since the days of Ivan Boesky and Dennis Levine 
involving major Wall Street firms as well as hedge funds.
    We've also devoted special attention to combating internet 
fraud, such as e-mails that tell investors, ``This stock's 
Ready to Explode.'' And we'll have well over 100 investigations 
of backdating underway with the results of those cases coming 
forward very soon.
    Seventeen years ago, in 1990, this Congress gave the SEC 
the power to levy penalties against individuals and against 
companies. But throughout the 1990's, that power was almost 
never used to sanction companies. It was only in 2002 that the 
Commission began to use its authority with any frequency. After 
extensive study within the Commission of the legislative 
language, the history, and the purpose of the Remedies Act, the 
Commissioners in early 2006 voted unanimously to publish a set 
of principals for a penalties policy and practice going 
forward.
    Already this year, the Commission has imposed nearly as 
many penalties against companies as in any full year in the 
Commission's history. And the second highest SEC penalty ever 
imposed on a company, $400 million, came after the Commission 
unanimously approved its penalty guidelines. The Commission is 
continuing to work with our staff across the country to ensure, 
that as new cases are initiated and resolved, the guidelines 
are being implemented as intended.
    To that end, the staff are beginning to present their 
recommendations for penalties to the Commission before 
negotiating penalties with the issuer. When we recover a 
penalty against an issuer or an individual, our efforts don't 
end at the courthouse door. We're increasingly using the new 
authority that you gave us in the Sarbanes-Oxley Act to use 
``fair funds'' to ensure that those dollars are returned to 
investors as quickly as possible.
    Since 2005, we have returned over $1 billion to injured 
investors through fair funds and will be announcing several 
additional large disbursements shortly. All of these 
enforcement initiatives undergird the integrity of the U.S. 
capital markets and the confidence that investors can place in 
them. Beyond the SEC's law enforcement function, we are 
pursuing a number of important regulatory initiatives as well 
that are designed to put investors first.
    With over 10,000 baby boomers each day turning 60, an 
estimated 75 million over the next 20 years, nowhere is there 
greater need for the SEC's attention than fighting fraud 
against senior citizens. Very soon, the vast majority of our 
Nation's net worth will be in the hands of our Nation's 
seniors. Following the Willie Sutton principle, scam artists 
will swarm like locusts over this increasingly vulnerable 
population because that's where the money is. We're attacking 
this problem from all angles, from aggressive enforcement 
efforts to targeted examinations and rules and investor 
education.
    Both the SEC and the Congress have also identified the men 
and women of our military as an at-risk group who are 
vulnerable to unscrupulous sales practices for financial and 
investment products. We've directed our enforcement, our 
examinations, and our investor education resources to 
protecting against these abuses, and we've initiated a 
coordinated approach with other regulators. And we have worked 
with you in the Congress to enact the Military Personnel 
Financial Services Protection Act last year to outlaw the sale 
of potentially abusive insurance and investment products to 
military personnel.
    Yet another of our important initiatives to benefit 
individual investors is our drive to improve disclosure for 
mutual fund and 401(k) investors; 47 million Americans now have 
401(k) accounts through their employers. Together with defined 
contribution plans, these accounts now represent over $3 
trillion in assets. But the disclosure that the individual 
investor receives about what's in the 401(k) is typically 
inadequate. It offers nothing, in many cases, more than a one-
page chart that contains extremely limited information. What's 
needed is clearly presented information that makes it far 
easier for busy Americans to understand the expenses that 
they're being charged in connection with their investments and 
the returns that they're actually getting. This sort of 
simplified disclosure should be readily available, and so we're 
hard at work on a simplified, plain English disclosure for 
mutual funds that gives investors what they need to know in a 
form they can use it.
    We're also busy on our own regulations concerning mutual 
fund fees and expenses, and the disclosure of these costs to 
investors, including the $12 billion that investors pay each 
year in the form of 12b-1 fees. With the same objectives in 
mind, the SEC has intensified our focus on soft dollars, the 
moneys that brokers receive from mutual funds to pay for things 
other than executing brokerage transactions. Recently, the 
Commission acted unanimously to publish interpretive guidance 
that clarifies that money managers may only use soft dollars to 
pay for eligible brokerage and research services, and not for 
such extraneous expenses as office rent, carpeting, and even 
entertainment and travel expenses.
    When it comes to giving ordinary investors the information 
that they need in a timely, useful way, nothing holds more 
promise than interactive data. It simply takes too much time 
and effort for investors to separately look up each SEC filing 
for every single company or fund that they own or might be 
interested in. Interactive data is changing that. It will allow 
any investor to quickly find, for example, the mutual fund with 
the lowest expense ratio, or the companies within an industry 
that have the highest net income, or the overall trend in a 
particular company's earnings.
    To ensure that shareholders have the opportunity to exploit 
this new informational power and SEC filings such as proxy 
statements, the Commission is updating our rules to permit the 
use of the Internet to improve communications between a company 
and its shareholders. For example, our recently adopted E-proxy 
rules will allow shareholders to choose whether to access their 
proxy materials in paper or electronically.
    And, in connection with the Commission's review of our 
proxy rules governing shareholder proposals, we've just 
completed a series of roundtables that considered among other 
rules, the future role of technology in improving 
communications not only between shareholders and their company, 
but among shareholders themselves. As we prepare to put the new 
proxy rules in place in time for the next proxy season, to 
address the Court's decision in AFSCME against AIG, the 
Commission is also considering ways to make it easier for 
shareholders to interact online by removing any obstacles in 
the current rules. As a result of a Commission action just last 
week, interactive data will soon allow mutual fund owners to 
make instant comparisons of the ``risk/return summary'' 
provided by each fund and will soon showcase the potential of 
interactive data to help investors in yet another area, the 
disclosure of executive compensation under the Commission's new 
rules that have taken effect this year.
    These new executive compensation disclosures represent a 
sea change. Instead of bits and pieces of information scattered 
about the proxy statement, buried in footnotes, or not properly 
disclosed at all, there is now one number that clearly totals 
all compensation from all sources. And that one number is 
clearly broken down into its parts, so that anyone who wants to 
compute the totals differently can do so. That's where 
interactive data comes in. Once all companies report their 
information this way using interactive data, it will be a cinch 
to reconfigure the numbers any way you please and to make 
instant comparisons across companies and across industries.
    To demonstrate the power of interactive data to make the 
investor's job easier, the SEC will soon go live with a new 
tool on our Web site that will make the executive pay data 
interactive. Rather than tell you about it, let me offer you a 
brief example of how this will work. We can pull it up on the 
screen. Let me click into the first slide. This is what you 
will find on the SEC's Web site. It is our new Executive 
Compensation disclosure tool that will include data for the S&P 
500. Here's how it works. Since we're here in the Financial 
Services Committee, we hit the ``Industry'' drop-down arrow. 
Let's look up banks and depositary institutions. Let's say you 
are focused on the largest bank. So you'd look up companies 
with the largest public float and the greatest revenue. And 
then we'll click ``search'' to bring up the companies that meet 
these criteria and scroll down to see the whole list.
    Now we've gone from hundreds of companies to a manageable 
list of three banks. For the sake of protecting the innocent, 
this demonstration uses notional data from fictitious banks, 
but rest assured that this works equally well with real ones.
    The Chairman. As opposed to fictitious data from banks.
    [Laughter]
    Mr. Cox. With interactive data, Mr. Chairman, you could do 
it both ways. So now, let's go to the CEOs who run these banks. 
Click on the scroll bar to see the whole table and using the 
``tools'' on our site, we've now narrowed the field from more 
than 2,500 reporting executives to three CEOs at the three 
largest banks. Their summary compensation data is lined up next 
to each other for easy comparison. Before our new executive 
compensation rules and before interactive data, just coming up 
with this information would have required plowing through 
hundreds of documents, and it would have been a challenge for 
even the most proficient user of the SEC's EDGAR system.
    But soon anyone is going to be able to find data like this 
in a matter of seconds. As you can see, the CEO compensation 
for the three banks that we chose ranges from about $26 million 
to about $39 million. But, using interactive data, we can 
generate much more useful information. For example, by clicking 
this button, ``estimated potential value at grant date,'' you 
can see various executives' compensation using a different 
system to value their stock and their options.
    The first table showed the value of total compensation 
using stock and option grants valued according to U.S. 
generally accepted accounting principles. In other words, it 
showed the expenses of the executives' compensation to the 
company. The second table shows compensation using an estimate 
of the potential value of the grants to the executives in the 
future. The range here, as you can see, is slightly larger than 
it was using GAAP, from about in this case $25 million to $41 
million.
    The beauty of interactive data is that investors can use 
whatever method they want. And, if you prefer, look at the 
``Graph'' button. Scroll to see the full graph. Here's the 
``grant date fair value method.'' You can look at the data in 
graphical format using either method as well. Scroll over 
again, and use the ``U.S. GAAP'' button until you see that full 
table.
    You may have noticed that the CEO of two of the fictional 
companies appear to make slightly more if you use the GAAP 
expense for stock compensation to the company. And the CEO of 
the third made slightly more if you use the potential value to 
him of stock options in grants. From the real world executive 
compensation data that we've tagged so far, we found that 62 
percent of the CEOs at the 100 largest companies show equal or 
higher compensation using the generally accepted accounting 
principles method. And 38 percent showed higher compensation 
using the potential value method.
    This tells us that, for those companies, more often than 
not, the one number that the SEC requires them to report for 
total compensation is showing a higher figure than if we use 
the full grant date, fair value method. But obviously the new 
rules require that all of this information be reported so 
investors can customize the figure any way they like. And 
that's what many people are already doing in a way that was 
never before possible.
    It's important to recognize that interactive data is a 
truly international standard that revolutionizes the way that 
financial information is being exchanged across the planet. 
Technology is also driving the rapidly accelerating 
globalization of capital markets. We're confronting the 
challenges and opportunities of more foreign listings here in 
the United States in a number of ways, not least of which is 
the growing prevalence of international financial reporting 
standards.
    The SEC now reviews IFRS financial statements from foreign 
issuers, right alongside U.S. GAAP financial statements from 
domestic issuers. And, just last week, the Commission proposed 
to eliminate the U.S. GAAP reconciliation report for foreign 
issuers.
    Another matter of great importance in the international 
realm is rationalizing the implementation of the Sarbanes-Oxley 
Act. Because, while many countries, including the United 
Kingdom, have adopted requirements similar to our internal 
controls assessment in Section 404 of the Sarbanes-Oxley Act, 
ours is the only country that requires an independent auditor's 
report and attestation on those controls. And that fact has 
been a source of friction, not only with other markets, but 
also with other national regulators and international bodies.
    The Congress has charged the SEC with making 404 work 
effectively and efficiently. And we're doing just that, 
recognizing that it will benefit not only U.S. investors, but 
also the competitiveness of U.S. companies and financial 
services providers throughout our global capital markets. The 
SEC has just finished over 2 years worth of work towards 
improving the implementation of 404 for all companies. Our new 
guidance will allow management to focus on what matters most, 
and a significantly improved 404 audit standard will enable 
auditors to deliver more cost effective services.
    To ensure that we actually gain the efficiencies in 404 
compliance that we intend, the PCAOB's inspection program will 
monitor whether audit firms and the SEC will monitor whether 
the PCAOBs are striving toward efficiency. No discussion of the 
work that the SEC is doing today would be complete without a 
reference to our role as the consolidated supervisor for the 
Nation's largest investment banks. In our role as the 
functional regulator of United States broker-dealers, we have 
long been concerned that a broker-dealer could fail due to the 
insolvency of its holding company or an affiliate. Our CSE 
program enables the Commission to monitor these major 
securities firms, which is of growing importance given their 
possible systemic implications.
    Mr. Chairman, since we have the opportunity to appear 
before you today as a group, as a full Commission, let me offer 
a word in conclusion about the way we function as a body. This 
particular group of Commissioners has worked hard together to 
achieve our common goals of investor protection, efficient 
markets, and healthy capital formation. During my tenure as 
Chairman, 98 percent of the Commission's decisions have been 
the result of unanimous votes. That's not because the issues 
that we've just discussed are easy or because we always agree. 
Rather, it's because the capital markets of the United States 
and now the world depend upon clarity and consistency from the 
SEC. The Agency's non-partisanship has underscored that it's 
the rule of law and not one's political point of view that 
should determine our actions. It's in this spirit that we 
continue to tackle the significant challenges that lie ahead.
    So I thank you now as I did at the beginning for the 
opportunity to appear before this committee, and I look forward 
to working with you to meet the needs of America's investors. 
We look forward to taking your questions.
    [The joint prepared statement of Chairman Cox and the other 
Commissioners can be found on page 70 of the appendix.]
    The Chairman. Thank you, Mr. Cox. Some specific questions 
I'm going to be submitting--there is a great deal of concern 
about naked short-selling. I know this is something you've had 
under consideration. I'll ask it in writing. You give us a 
sense of where we are and there is a frustration on the part of 
some that in the face of Reg SHO and others the total seems to 
be going up, and this is the cause of some concern. So we would 
be interested in your view on that.
    Secondly, I notice you say you are--did I read this 
correctly--you are close to a decision on proxy access?
    Mr. Cox. That is correct, Mr. Chairman.
    The Chairman. What's the timetable?
    Mr. Cox. We intend to have proxy rules in place for the 
next proxy season, which will be late in the fall.
    The Chairman. So you'll be promulgating that and it will be 
open for comment, I assume?
    Mr. Cox. Yes, the APA requires that.
    The Chairman. Well, let me say this. Rather than take up 
your time now, this is an issue of great significance. Many of 
us are supportive of increased proxy access. There are some who 
would be concerned about it and that might well be something in 
which we might have a future hearing. So, I'm glad to know that 
by the Fall, we will be able to deal with this.
    One other question from my Secretary of the Commonwealth of 
Massachusetts, Mr. Galpin, who is a very energetic securities 
regulator, because that's where the jurisdiction is up there. 
He's been concerned on the potential for pre-emption, and his 
question is whether there could be a pre-emption of State 
``blue sky'' securities laws by Commission rulemaking. Is 
anything like that contemplated?
    Mr. Cox. When the question is put that broadly, I'm not 
sure, Mr. Chairman. Obviously, pursuant to statute, our 
rulemaking in many cases pre-empts blue sky regulations.
    The Chairman. Right. Is there anything that's currently 
pending that you think might be?
    Mr. Cox. I don't know from the general way that the 
question was put what he might have in mind.
    The Chairman. I guess the question is whether anything the 
Commission is currently considering might be preemptive of 
current State securities regulation.
    Mr. Cox. I don't believe so, and particularly with respect 
to proxy access, for example. We just had a series of 
roundtables focused on the pre-eminent role of State law in 
establishing shareholder rights and the importance of the 
Federal proxy regime in vindicating those rights. So we have, I 
think, a very healthy view among all five Commissioners.
    The Chairman. Let me then turn to the--
    Mr. Cox. We have an amicable relation between Federal and 
State regulation associations.
    The Chairman. Some of my colleagues expressed very critical 
views about Sarbanes-Oxley. I feel once again called in the 
spirit of bipartisanship to come to the defense of the 
Republican Congress and the Republican President who passed 
it--although there was a temporarily democratic effort. And I 
share the view of Secretary of the Treasury Paulson last week, 
that he thought that with the efforts that you and the PCAOB 
are undertaking, we are making the improvements that preserve 
the purposes of Sarbanes-Oxley without it being unduly 
burdensome.
    Is it your view, and I would ask all five Commissioners, 
that any action is required by the Congress. Would you believe 
you now have the sufficient statutory authority among you, 
obviously to do what you're doing, but to do anything else. Do 
you feel the need for any congressional action to amend 
Sarbanes-Oxley?
    Let me begin with Commissioner Nazareth.
    Ms. Nazareth. No. I don't. I believe that the steps that we 
took to address 404 were sufficient. That really was just about 
the only area of Sarbanes-Oxley for which we understood there 
were implementation difficulties. And I think that we had all 
the authority that we needed to address those issues and I 
believe that we have addressed them appropriately.
    Mr. Atkins. Well, as Commissioner Nazareth said, Section 
404 was the problematic section. Right now, we have out for 
comment Audit Standard Five, which was passed by the PCAOB and 
sent over to us. Since it is now out for comment, I'm waiting 
anxiously to see what the comments will be, and I think after 
that we can then assess the situation.
    The Chairman. Mr. Chairman?
    Mr. Cox. There is no question that Section 404 has been the 
flash point, the most expensive, compared to other sections, 
and particularly in relation to the benefits that it provides. 
So we have proceeded, all of us, on the premise that the cost 
benefit ratio has to be adjusted so investors actually get 
something.
    The Chairman. And that was a five-to-nothing vote, I 
assume, to put that out for comment?
    Mr. Cox. It was indeed. It was indeed.
    The Chairman. Commissioner Campos?
    Mr. Campos. I concur with the comments of my colleagues 
about 404. I believe that what we have done is essentially fix 
the problems with 404. We'll see. We'll look at the comments 
carefully. We'll see how it works. But I think, most 
importantly, Sarbanes-Oxley is a great asset for this 
particular economy, and I think that Congress needs to be very 
careful before any changes are looked at.
    I work in the international arena and what I see is every 
jurisdiction copying Sarbanes-Oxley and looking in its own way 
to emulate what we have here in the United States. And I hear 
foreign investors tell me that they believe their capital is 
best protected in the United States by Sarbanes-Oxley and the 
protections that are offered here. So therefore Sarbanes-Oxley 
is not driving capital away. In fact, it is attracting capital. 
It is a magnet for capital.
    The Chairman. Thank you. Commissioner Casey.
    Ms. Casey. I also agree with the comments of my colleagues 
about the fact that there's no need for legislation at this 
time. I believe that the changes that we've made in our 
management guidance and in the proposed auditing standard, 
which we do have out for comment and we'll closely look at the 
comments, encourage great cost savings and efficiencies and 
hopefully scalability for smaller companies.
    But I would note that what will be crucial to whether or 
not we achieve them will be the implementation. And so I think 
that it will be very important as the Commission and the PCAOB 
look at the filing schedule for the larger filers whether or 
not we're achieving those savings, and then take a decision on 
whether or not we're getting the savings that we anticipated.
    The Chairman. We've been trying to do that the way that 
would be sequenced.
    Ms. Casey. Absolutely, sir.
    The Chairman. The gentleman from Alabama.
    Mr. Bachus. Thank you. I would ask Commissioner Casey if it 
feels different. A year ago, you were preparing tough questions 
for panelists.
    Ms. Casey. It's warmer down here, much warmer.
    [Laughter]
    Mr. Bachus. My first question, after the slide show, I 
tried to prepare a quick question on ``XYZ'' corporation and 
the compensation of Richard Roe and John Doe, but I think I'll 
pass on that one. And my first question, Chairman Cox, I'm 
concerned over municipalities engaging in complex swap 
transactions without adequate technical expertise. Do you have 
concerns over the quality of disclosure and transparency when 
it comes to a municipal securities market?
    Mr. Cox. Yes, I do. It's an enormous market. It's in a 
market that is dominated by retail investors, traditionally 
thought to be safe, and yet we have seen significant examples 
to the contrary. Most recently, our enforcement division was 
involved in the City of San Diego because of securities fraud 
issues there. We have, on the other hand, only enforcement 
jurisdiction when it comes to municipal securities and limited 
to no jurisdiction with respect to preventing these problems 
before they happen.
    Mr. Bachus. Is there any practical reason why investors in 
municipal bonds should not be given or shouldn't receive the 
same information that investors in corporate debt receive? And 
would the markets benefit from more disclosures in this regard?
    Mr. Cox. I don't think there's any question that we can 
make significant improvements in the quality of disclosure. 
It's very complicated. You've heard me complain about the 
complexity of disclosure when it comes to corporate issuers. I 
think, if anything, it is even more complex, more prolix when 
it comes to municipal disclosure. It's not very user friendly, 
and there really doesn't seem to be much prospect for change on 
the horizon, absent some supervening force.
    Mr. Bachus. Thank you. Other Commissioners might want to 
add something. If not, I will move to my second question. My 
second question, for almost 30 years, we have had a regulatory 
system that divides financial products into securities and 
futures and regulates them quite differently. No other country 
has the distinctions in how they regulate basically equivalent 
products. Should the United States have one agency to regulate 
both securities and futures and would you support modernizing 
the rule filing process so that the equities and the options 
markets could have self-executing rules similar to those that 
govern U.S. commodities and futures market filings?
    Mr. Cox. Well, you have asked me two very distinct 
questions.
    Mr. Bachus. Yes.
    Mr. Cox. Let me take them in order. With respect to the 
balkanization, if you will, of financial services regulation 
and the Federal Government, particularly as compared to other 
nations, I do not think there is any question that, as our 
markets continue to integrate globally, this is going to 
present increasing difficulties for us. On the other hand, we 
have historical reasons for the system that we have. And as a 
former of Member of Congress, I recognize fully how difficult 
it is to contend with those historical differences. But I think 
being respectful of that, speaking now only for myself, I can 
say that anything that the Congress can do to rationalize the 
regulation of products that increasingly are competing against 
one another or ought to compete against one another, that are 
similar in many respects but are regulated very differently, 
would be much better for the markets and investors.
    Mr. Bachus. All right, thank you. I guess I have time for 
one more question. In a speech last July regarding the 
Commission's soft dollar initiative, you stated that the 
initiative was designed to remove some of the uncertainties 
about how the 30-year-old law authorizing soft dollar 
arrangements applies in the current environment. What has 
happened in the year since you made that comment to warrant a 
call for the complete repeal of the safe harbor provision?
    Mr. Cox. What the Commission has done is work as well as we 
can within the statutory safe harbor for soft dollars. Section 
28(e), because it is a statute, is something that the 
Commission cannot mess with. And so, to the extent that 
anything more is to be done to make it clearer to investors how 
these monies are spent, to permit competition and transparency, 
it will have to be done in the Congress. I should add that, to 
the extent that I, as Chairman, have expressed concerns and 
made recommendations about this, they are my own, and the 
Commission as a group is focused on rationalizing to the 
maximum extent that we can the statutory scheme that we are 
administering. So I think we have done a great deal. And to 
specifically answer your question, I think that life is better 
now. There is more clarity than there was before. We hope that 
our guidance is going to continue to have that effect, a 
salutary effect.
    Mr. Bachus. Do you believe there are any further steps, 
short of full repeal, that could be taken?
    Mr. Cox. There is no question. In fact, in the letter that 
I wrote to this committee, I counseled either repeal or 
revision, and I hope that you would at least consider all of 
those options.
    The Chairman. The gentleman from Pennsylvania?
    Mr. Kanjorski. Thank you, Mr. Chairman. Mr. Chairman, I 
have eight questions that I would like submitted for the 
record, and responded to in writing, rather than trying to read 
them and get some explanation today. One thing that conflicts 
me a little bit, Mr. Chairman, and members of the Commission, 
is in response to some of the questions today, particularly the 
chairman's questions, is there anything that the Congress can 
do to move you along and help you in your process? I think I 
heard that everybody is satisfied that you have all the 
jurisdiction in the world that you need on Sarbanes-Oxley. That 
being the case, I am constantly bombarded by studies indicating 
that we are not a very competitive society or financial market 
anymore. Furthermore, I constantly hear that 19 of the 20 
largest IPOs were handled in Europe or elsewhere and not in New 
York. As a result, the skies over New York are falling. Does 
the Commission have an answer for this? Have you responded to 
some of these studies? Should we respond as the Congress and 
not expect you to respond? In reality, are these merely ``the 
sky is falling'' scenarios that should be ignored? Mr. 
Chairman?
    Mr. Cox. Well, I do not think, first of all, that the sky 
is falling. And, second, to the extent that anyone is telling 
us that the sky is falling, I think they are, at a minimum, 
overstating things. There have been a number of studies from a 
number of corners and sources that have counseled steps that 
Congress can take, the Executive Branch can take, and the SEC 
can take. Many of those studies have been very carefully 
considered, and I think they contain a number of useful facts 
and useful recommendations. So we are actually quite busy 
trying to do what we can as regulators to keep capital markets 
in the United States competitive. But, as I say, I do not think 
the sky is falling; I think rather what is happening is that 
all around us there is more competition. There is more 
opportunity to raise money and deeper, more varied pools of 
capital than ever before. And so, while the United States has 
the leading position in the world and the biggest markets and 
the deepest markets and the most liquid markets, that is not a 
birth right. We have to constantly earn it. That is true for 
our private sector, and it is true for our regulatory system. 
So we will work constantly to sharpen our competitive edge as 
regulators as well.
    Mr. Kanjorski. Comparatively, do you see any relationship 
between the number of IPOs that have been done over in London 
and the lack thereof in New York or is that situation just an 
anomaly?
    Mr. Cox. Well, there has been a great deal said and written 
about this. Those data have been taken apart and put back 
together front ways and sideways, and I do not know that I can 
add anything original to it today other than to point out that 
it is useful to look at each of the offerings to see where they 
came from, where their home markets are, what were the 
circumstances, and what would have been their prospects of 
listing in the United States. While we are surely feeling the 
effects of competition in this country, there is a steady 
stream of foreign companies that are continuing to tap the U.S. 
markets. This year, we are on pace to have the most foreign 
listings on U.S. exchanges since 1997 and, in fact, the second 
highest year in American history. Only that peak in the middle 
of the 1990's is yet to be surpassed. It was also recently 
reported that foreign companies accounted for 23 percent of IPO 
proceeds last year, the highest amount again since the mid-
1990's.
    Mr. Kanjorski. So, the final conclusion I should come to is 
that there is no ``sky is falling'' scenario out there. In 
reality, we are very competitive, and Congress needs to do 
nothing to make the United States any more competitive?
    Mr. Cox. Well, just as I would observe that the sky is not 
falling, I would also observe that doing nothing is a very 
dangerous course. What we need to recognize is that it is a 
very dynamic, competitive world, that our capital markets are 
changing at an accelerating pace, and that we have to do a 
great deal if we are to maintain our traditional standards and 
are to maintain America's leadership for the benefit of our own 
investors. This is not just wanting America to be first; it is 
also a fact that we have the highest standards of regulation 
and investor protection in the world. And so, to the extent 
that more activity takes place on U.S. exchanges and in U.S. 
markets, investors are better protected.
    Mr. Kanjorski. Very good. I cannot quite get you to say, 
Mr. Chairman, that we are just the greatest and the best and 
the most competitive, but I will be satisfied.
    Mr. Cox. I will sign on to that statement forthwith because 
I believe that, but I also believe we need to work to earn it 
each day.
    Mr. Kanjorski. I appreciate that. One last question. After 
some 70 to 75 years of overall regulation of our equity 
markets, do you think it would be wise for the Congress to look 
at the overall regulatory scheme in the United States and 
compare it to other countries like the U.K.?
    Mr. Cox. I do, and I think that is a cognate of the 
question that Mr. Bachus was raising. I think to the extent 
that Congress can do that, particularly to the extent you can 
do it multi-jurisdictionally, across committees, and House and 
Senate, bicamerally, that would be a very good thing.
    The Chairman. The gentlewoman from Ohio?
    Ms. Pryce. Thank you very much, Mr. Chairman. Following up 
on Mr. Kanjorski's discussion of competitiveness, I have three 
basic questions, all of them somewhat related. First off, 
Commissioner Atkins gave a recent speech and encouraged 
companies to look closely at the quarterly earning statements. 
The U.S. Chamber, and the Aspen Institute have recommended that 
companies move away from these statements toward more long-term 
planning, although you, I think, also stated that there is not 
a whole lot you can do rulemaking-wise, I often equate that 
same scenario to Congress, if we did not have elections every 2 
years, we could do a lot more long-term planning too. So do you 
have any suggestions of what we could do or how we could help 
business to move away from this standard? That is my first 
question.
    Second, there is a lot of talk on Capitol Hill now about 
raising taxes on private equity, some to the tune of a 133 
percent increase. What impact do you believe that would have on 
our economy and competitiveness?
    And the last question, Chairman Cox, when you were with us 
last May, you mentioned that market data was a front-burner 
issue for the Commission. You have several pending market data 
fee filings before the Commission. Do you have a long-term plan 
to resolve the approval of market data filings and what is the 
Commission's timing on those that are pending? And I just 
thought I would encapsulate all three and let you have at them. 
Thank you.
    Mr. Atkins. Okay, thank you, Madam Congresswoman. With 
respect to long-term planning by corporations, that is a theme 
that has come out of at least three reports that have been 
published in the last half year or more. And I think it is one 
thing that a lot of people identify as something that the 
public companies suffer from--that because they are trapped by 
the quarterly earnings statement, they shoot for the short 
term. I have heard that from a lot of folks in the private 
equity world as well. So, clearly one thing, along with what 
the chairman was talking about, that Congress can do is to 
study the marketplace. Do I have a clear answer to that? No, 
because it has to do with disclosure obviously to the 
shareholders and how that folds into the bigger picture.
    Mr. Cox. And I guess I can clean up and take the other two 
points that you raised. With respect to taxes, obviously, the 
Securities and Exchange Commission implements our securities 
laws, and we do not make tax policy. So I will make a more 
general observation that taxes on investment and taxes on 
public companies, as compared to private companies, can have an 
effect on capital formation. Our statutory mission includes the 
promotion of capital formation, so we have concerns about this. 
And I would encourage the Congress, as you consider tax 
legislation, to take capital formation and the impacts that the 
legislation might have on capital formation into account, 
particularly if the legislation is drafted in such a fashion as 
to discriminate between public companies and private companies, 
thereby discouraging companies from going public.
    With respect to market data, we are considering market data 
as part of our broad review of the SRO structure, as you know. 
The review is intended to ensure that the regulatory structure 
for market data remains up to date and reflects such important 
developments as for-profit SROs and the expanding types of data 
that are needed by investors. Very recently, in December of 
last year, the Commission granted a petition from the Net 
Coalition to review the staff's approval by delegated authority 
of an NYSE ARCA proposal to begin charging a fee for its depth 
of book data. The staff is currently preparing a new order for 
the Commission to consider that would approve the fee primarily 
because NYSE ARCA was subject to significant competitive forces 
in setting the fee. In addition, the NYSE and NASDAQ since have 
filed proposals for innovative reference data products that 
make economic sense for advertiser Internet-supported 
companies, like Google, Yahoo, and CNBC.
    Ms. Pryce. And is there a timeframe you would like to 
discuss?
    Mr. Cox. Well, these are ongoing, and so I think you can 
expect developments in real time.
    Ms. Pryce. Real time, all right. Thank you. Would you like 
to comment at all--in some of the opening statements we heard 
mention of the amicus brief filed by the SEC.
    [Gavel]
    Ms. Pryce. My time is expired?
    The Chairman. Yes, but make it the last question and get a 
quick answer.
    Ms. Pryce. This is the last question. Do you want to 
comment on that now or would you rather have a more pointed 
question?
    Mr. Cox. Well, I need a more pointed question just to know 
which amicus brief you are talking about.
    The Chairman. Go ahead and point.
    [Laughter]
    Ms. Pryce. All right, the Stoneridge case, amicus brief, 
thank you.
    Mr. Cox. All right, the Stoneridge case, and you can get a 
variety of opinions here because, as you know, that was a three 
to two vote, but the Stoneridge case was very similar to a 
prior case that the SEC had considered in 2004 called 
Homestore. It was my view--and it is my view generally with 
respect to decisions that are recently taken by the SEC in 
precedent matters--that, because Homestore and Stoneridge were 
very much on all fours with another, I thought it important for 
the SEC to be consistent and be clear on these points. As I 
mentioned in my opening statement, I do not believe that SEC 
rules, our policies and so on, should be so effervescent as to 
change with one or two people coming on board. It would be 
awfully nice if the regulatory process were sufficiently 
transparent that people would know what to expect, and I think 
this is doubly so when what we are doing is trying to interpret 
law, what law means. Law has to have some objective meaning; it 
cannot be just a question of how we all feel about it. And so 
the SEC, having voted in 2004, just one year before I arrived, 
on this very point, I thought it important for us to be 
consistent. And I should point out that that 2004 vote was not 
a three to two vote, it was an unanimous vote of the SEC.
    Ms. Pryce. Thank you. Thank you, Mr. Chairman.
    The Chairman. The gentlewoman from New York?
    Mrs. Maloney. Thank you. I would like to be associated with 
some of the many of the issues raised by Representatives Pryce 
and Frank and Kanjorski, but I would like to ask you, Mr. 
Chairman, about the front page today of the Wall Street 
Journal. It highlighted the growing risk from collateralized 
loan obligations, a product whose volume has doubled in the 
past year. And the Wall Street Journal calls them volatile and 
risky and the loan standards have loosened and lowered, and I 
wonder if you share that concern? More specifically, because 
there are no disclosure requirements for CLOs, investors do not 
know their value or the quality of the loans they represent. 
And up until now, the SEC has not regulated CLOs but it is my 
understanding that the Commission does have the authority under 
the law to require more disclosures and greater transparency 
for investors, and is it correct that the Commission has 
authority to regulate CLOs under the 1933 Act or other 
securities law?
    Mr. Cox. Well, the answer to your last question would be 
yes, if they were registered under the 1933 Act but, in fact, 
most of them are not.
    Mrs. Maloney. Well, if we had them registered, do you think 
greater transparency in these products would be desirable and 
important to safety and soundness?
    Mr. Cox. Well, there is no question that there is now a 
commonality of interest between the banking regulators and the 
securities regulators when it comes to issues such as safety 
and soundness, when it comes to overall issues of systemic 
risks throughout our economy and the health of our economy, the 
securitization of--
    Mrs. Maloney. How does the situation with the CLOs compare 
with the secondary subprime market, the CDOs, which are facing 
a challenge in our economy now? And do you think the same risks 
are present? Do you think that that market should be more 
transparent and regulated?
    Mr. Cox. Well, as I was about to say, I think that there 
are great commonalities because obviously the underlying risks 
stem from the same source. We come at these problems in many 
cases through our Division of Enforcement because of the 
overlapping regulatory jurisdiction. Our Enforcement Division 
currently has open about 12 investigations focused on issues 
such as this.
    Mrs. Maloney. Okay. I would like to follow up on the 
questioning of Deborah Pryce on the data information. And the 
SEC, in my opinion, took a bold step with regulation by opening 
market data up to competition and allowing exchanges for the 
first time to sell their own data. Three exchanges in New York, 
the New York Stock Exchange, AMEX and NASDAQ, and I would say 
many others, have innovative data products on hold and waiting 
for the approval from the Commission. And it seems to me that 
this delay deprives investors of innovative data products and 
deprives exchanges of their ability to compete with foreign 
markets. When does the Commission plan to rule on these pending 
proposals? You testified that you did not know when but could 
you give us a generalization, in the next year, in the next 6 
months? And if not very soon, what additional steps are 
required by the Commission rules, what could we do to move this 
along? Competition between our markets and foreign markets are 
very, very important to our economy.
    Mr. Cox. I completely agree with that. What I said to 
Congresswoman Pryce was ``real time'' but to answer your 
question in precisely the terms you put it, months.
    Mrs. Maloney. Months. Is there anything else, any 
additional information you need in order to move this forward?
    Mr. Cox. Well, we are in the midst of a review that is 
inductive, we are learning as much as we can from marketplace 
sources. We have a good deal of public input, and we are 
constantly getting more. But I do not think other than that 
process we need more, no.
    Mrs. Maloney. Has my time--I would also like to talk about 
mutual fund disclosures. More than 90 million Americans are 
invested in mutual funds, and I think the Commission could do 
more to make it easier for individual investors to make 
comparisons among them. Last week, the SEC voted to expand its 
XBRL business reporting language, a pilot program, which will 
allow investors to use computer data tagging to make 
comparisons among funds, but it is very technical and difficult 
I would say for most individual investors. I would like to know 
what you are doing in this area. I know that at the last week's 
meeting, Commissioner Campos--
    The Chairman. The time has expired, so please wrap up the 
question.
    Mrs. Maloney.--mentioned the need for the SEC to move 
forward with short-term innovative IPOs prospectus proposals 
that would be easier to understand and where do you stand on 
that?
    Mr. Cox. Well, I will let Commissioner Campos add to what I 
am about to say, but I think the whole Commission is very, very 
enthused about the prospect of improving mutual fund 
disclosure. We are focused on getting a simpler presentation 
for investors that focuses on decisions that they really need 
to make and the information they need to make those decisions. 
This is an area that is infused with retail participation, busy 
Americans with real jobs who have other things to do than look 
through big books of data. And so it is a very high priority 
for us, and I think that the industry is very much willing to 
participate in these initiatives.
    Mrs. Maloney. My time has expired.
    The Chairman. Yes, it has.
    Mrs. Maloney. Thank you. Good to see you again.
    The Chairman. And the gentleman from Louisiana is now 
recognized.
    Mr. Baker. Thank you, Mr. Chairman. Mr. Chairman, members 
of the Commission, I am appreciative of your work in the world 
of XBRL data tagging. I very much appreciated the demonstration 
of how it would work. As a long time advocate of that 
particular approach, however, I am anxious to see it more fully 
deployed in the world of public reporting. As you know, 
financial institutions insured depositories now report in that 
fashion. And I believe the taxonomy development is the 
limitation on more full deployment for XBRL for public 
operating companies. But as to another long-term interest, and 
that is elimination of quarterly earnings statements, I suggest 
to you upon further examination, as XBRL becomes more 
transparent and easily deployed, that that methodology would 
enhance the ease with which investors could get access to real 
time data as opposed to paper-based retrospective reporting, 
which is outdated by the time of its submission. And so I see 
the two very carefully married to one another and the outcome 
could be a very good benefit to investors.
    Secondly, I am appreciative for the work on the Fair Fund, 
having some small paternal interest in that matter. I was 
pleased to see $1 billion had been distributed out of the $8 
billion collected. And you note in your written statement that 
there are more significant announcements to be made. I hope 
those are statistically significant in relation to the $1 
billion already deployed.
    And to the principal reason for my questions today, 
although Ms. Pryce made indirect reference to it, as to your 
own view, perhaps not prejudicing the views of all 
Commissioners, that it must be a violation of a law or 
regulation that would precede an action by the Commission or an 
appropriate action in a court of law against that person who is 
presumed to have violated the rule or regulation or law that 
leads to a regulatory enforcement action or a financial award 
of some remedy at an appropriate time. The triggering device 
that leads to a regulatory or civil action against an 
individual, as a matter of legal judgment, do you believe that 
person should be at least be found guilty in the correct terms 
as the primary violator in order to sustain such penalties or a 
regulatory enforcement action?
    Mr. Cox. Yes, I believe that you are talking about the 
scheme liability case.
    Mr. Baker. I am.
    Mr. Cox. Yes. And I think it is very important to know that 
the liability that is being discussed in that context is 
knowing liability, intentional; it is fraudulent conduct, it 
goes beyond aiding and abetting. It is meant to be primary 
liability. In other words, the person can be charged themselves 
with the fraud, not in loose terms as an accessory.
    Mr. Baker. For example, if I am a vendor of a product to a 
customer, and I provide financial terms for the repayment of 
that benefit, and that underlying recipient of my product and 
financing arrangement inappropriately books that transaction in 
his accounting reporting and is found to have violated proper 
accounting standards, generally accepted principles, then it 
would not be a likely extension of liability to go to the 
provider of the product, who in good faith sold the product, 
enabled the financing to occur, and because the underlying 
management of the recipient financial transaction mis-reported, 
there should not be an extension of liability in that case 
because there was no willful intent to violate law, rule or 
regulation?
    Mr. Cox. That is exactly right. And a key point that you 
made in your hypothetical example is that the person is acting 
in good faith. They shouldn't at all, if those are the facts, 
be charged with securities fraud.
    Mr. Baker. I am going to surrender. As long as I get yes 
for an answer, I am very happy. Thank you very much, sir. I 
yield back.
    The Chairman. The gentlewoman from New York, Ms. Velazquez?
    Ms. Velazquez. Thank you, Mr. Chairman. Commissioner Cox, 
after you testified before the Committee on Small Business, I 
sent a letter requesting detailed information about the efforts 
that the SEC has made to quantify the cost of SOX for 
implementation under the proposed revised auditing standards 
and the new management guidance. As of today, we have not 
received a reply to my letter, so I am giving you an 
opportunity to share with us or I will ask any of the 
Commissioners if they are able to provide a specific estimate 
of the cost of SOX 404 for implementation under the new 
regulations on small companies?
    Mr. Cox. Thank you, Madam Congresswoman. The cost benefit 
analysis that we discussed in the Small Business Committee was 
published last week in the Federal Register. We are going to 
provide to you and your office a more expansive discussion of 
the specific questions that you had about that. The reason that 
there is not a dollar amount estimate for management guidance 
is that we will have the opportunity going forward to use the 
management guidance experience that we have with people already 
in compliance with SOX as a touchstone for making more solid 
estimates when it comes to people, smaller public companies who 
have not yet complied. I think it is also very important to 
distinguish between the costs--and there are very real costs 
that will be occasioned for smaller companies, when eventually 
they comply with Sarbanes-Oxley--that flow from having to 
comply with Section 404 as against those that are related to 
management guidance. Because the statute, Section 404, is the 
source of the cost. The management guidance, on the other hand, 
is meant to mitigate that cost and reduce it. And so, to the 
extent that what we are doing with our OMB cost benefit 
analysis--
    Ms. Velazquez. Commissioner, my understanding is that there 
is no estimate--
    Mr. Cox.--of the management guidance diminishes the cost, 
which is not estimated. The reason that is not estimated is 
that it is an act of Congress and Congress does not do that. 
When Congress passed SOX 404, it just passed it with no 
estimate.
    Ms. Velazquez. You mentioned that it was published in the 
Federal Register last week?
    Mr. Cox. Yes.
    Ms. Velazquez. And does it have an estimate on it?
    Mr. Cox. As I say, if you are talking about smaller 
companies--
    Ms. Velazquez. Yes.
    Mr. Cox.--and the impact on smaller companies, because they 
will not come into compliance with SOX 404 until the following 
year, the experiential base that we will have with companies 
already complying with management guidance will give us a 
better touchstone for measuring and estimating the impact on 
smaller public companies.
    Ms. Velazquez. Do you think it would be helpful for small 
companies to have a number, to know a number?
    Mr. Cox. Well, I think the number that you are looking for 
is the cost of complying with 404, and 404 is an act of 
Congress, it is not a regulation. It did not contain any 
exemption for smaller companies. All we can do is try and 
mitigate that cost, but we are not imposing any additional cost 
beyond the cost of the statute.
    Ms. Velazquez. The final rule regarding the management 
report on Internet controls refers to a CRA international 
estimate that early compliance costs incurred by companies 
implementing SOX 404 range from $160,000 to $5.4 million per 
company. The SEC final rule goes on to declare that companies 
could experience a substantial benefit in terms of lower costs 
of compliance. So, for the record, I would like to ask each of 
you, one by one, to tell me how much these new regulations will 
lower costs of compliance for small companies?
    Mr. Cox. With whom would you like to begin?
    Ms. Velazquez. With Ms. Nazareth?
    Ms. Nazareth. Well, I agree with what Chairman Cox said, 
that I do not think it would be appropriate for us to guess at 
this point how effective the mitigation will be under the 
management guidance. We obviously believe that it will reduce 
the cost, but it would be a better estimate if we waited until 
what the experience was with the management guidance in the 
next year in order to give you a better assessment of what the 
actual cost would be.
    Ms. Velazquez. Yes, Mr. Atkins?
    Mr. Atkins. Well, there is no question that the costs of 
404 implementation have been too high. Originally, back in 2003 
I think it was, the SEC estimated about $94,000 per company, it 
is something like 20 times that for the rules as they were 
implemented. Hopefully, the new rules will be better but there 
is no question that the costs have been too high.
    Ms. Velazquez. You do not think--
    The Chairman. Well, I am sorry, we do not have time for 
further--we only have time for the answer.
    Ms. Velazquez. Thank you.
    The Chairman. We are over time.
    Mr. Cox. If your question is, do I think a number would be 
better, the answer is yes. And we want to base our estimate on 
real world data, which we are going to acquire in the coming 
year.
    Ms. Velazquez. Mr. Campos?
    Mr. Campos. I think what we have done will bring costs 
down, but I agree with my colleagues that we need to have the 
experience base to come up with the number that you are looking 
for.
    Ms. Casey. And I would reiterate again that I think 
implementation will be key and our experience and whether or 
not we are going to get the cost savings that we anticipate 
will be very necessary to take decisions about how that will 
benefit smaller companies.
    The Chairman. The gentleman from Delaware?
    Mr. Castle. Thank you, Mr. Chairman. Going back a little to 
the earlier questions from the gentleman from Pennsylvania, 
with respect to the whole issue of recent IPOs and how many of 
them are not taking place in the United States, and a couple of 
the members in their opening statements blamed some of this on 
excess litigation and regulation, which I guess even 
incorporating would not overcome in some cases. But my question 
is, Mr. Chairman, do you consider that to be a factor, this 
whole business of excess litigation and regulation in terms of 
corporate activity in the United States?
    Mr. Cox. I do. Regulation has costs, so does litigation. 
Regulation--nobody thinks regulation is free. So the challenge 
is always to make sure that you are getting benefits that 
exceed the cost. Since we are administering a relatively stable 
but, in terms of the 21st century, ancient statutory system, as 
rulemakers, we have to constantly provide the grease in the 
wheels, if you will, to make sure that some of those ancient 
statutory concepts have some meaning in a high-tech global 
world in the 21st century. So we constantly need to sharpen our 
competitive edge as regulators in tune with the market and keep 
track of what is going on. Otherwise, our regulations are going 
to be excessively expensive.
    The litigation aspect of this is to a lesser extent within 
our control, but we have to be very cognizant of it because 
what we do influences the climate. One of the things that the 
SEC has to be particularly attentive to is the degree to which 
conflicts of interest among people bringing litigation produce 
results that neither we as the regulator nor you as Congress 
would want in carrying out the statutory scheme. As regulators, 
we of course have one object, and that is to improve the lot of 
investors. We do it as public servants. We have no other 
motive. People who have a financial stake in the outcome--
sometimes very, very significant--can act for other reasons; 
and yet they have the same power, through discovery and 
otherwise, to create a great deal of cost and expense. And we 
have to always be attentive to those risks in the system. That 
is one of the reasons that the Private Securities Litigation 
Reform Act was so important--because it made it very much more 
likely that private system, which was meant to extend the reach 
of the SEC in important ways, patterns itself after the 
policies that Congress, and the regulator applying the will of 
Congress, seeks to obtain.
    Mr. Castle. Thank you, Mr. Chairman. Let me change subjects 
for a minute, I want to go to mutual fund fees, which is a way 
many, many people in America are investing now. And I mentioned 
in my opening statement the 12b-1 fee sort of conundrum, as I 
look at it, which was once a methodology, as I understood it, 
to help mutual funds to be able to advertise themselves and 
then became sort of a broker compensation mechanism over some 
period of time, which is the way it is defended now, but that 
has not been changed as far as the way the law was originally 
written in the 1980's is concerned. Are you looking at that, 
and are you looking at any other fee aspects of mutual funds? 
You did mention interactive data, etc., that kind of thing, 
which I think would be helpful. But the whole business of 
understanding what it is that you are dealing with and what is 
out there with respect to mutual funds to me seems important.
    Mr. Cox. Well, I think probably most members of this 
committee, probably most of us Commissioners and everyone else 
in this room, owns a mutual fund or indirectly has some 
connection with mutual funds. It is a very retail space. We are 
all very concerned about understanding our choices and making 
sure we have our money wisely invested for all sorts of 
important future needs. So, as the regulator of mutual fund 
disclosure and to a certain extent promulgator of rules that 
govern what kinds of things can be charged from fund assets in 
the first place, we want to make sure investors are being 
treated right. There is a great deal more that we can do to 
make the purpose of fund expenses clear. There is more that we 
can do to make returns in mutual funds clear and to obtain the 
general disclosure that investors are looking for. So that has 
been the main subject of attention.
    With respect particularly to 12b-1 fees, we just had a 
roundtable on this subject to consider from top to bottom what 
they are good for, what they are not good for, and what their 
future should be. And I think we got a great deal of very 
useful information, both substantively with respect to the 
purposes of 12b-1 fees and on the disclosure side.
    The Chairman. The gentleman from North Carolina?
    Mr. Watt. Thank you, Mr. Chairman. Welcome back, Mr. Cox, 
to the committee. Last year, the SEC proposed eliminating 
broker voting in all director elections by changing Rule 452. 
And you got some feedback and amended or resubmitted that to 
exempt mutual funds, which was understandable. However, we have 
not gotten any indication of what has happened with that since 
then. And our State treasurer in North Carolina--and we have 
had an experience in North Carolina where broker voting 
apparently or appears to, although we have not been able to get 
the full facts, have influenced or been decisive in who got 
elected to a board in a way that a lot of people are concerned 
with because CVS and Caremark merged.
    So, I guess I have been trying to figure out some analogy 
to this. This strikes me at some level as being tantamount--
allowing broker voting--to basically saying whoever does not 
vote in an election, their votes will be cast for the sitting 
incumbent, which might be beneficial to us as incumbents, but 
does not seem to me to be all that democratic a process. Can 
you give me some estimate of the timetable on which this new 
proposal will be vetted and whether we will have a new standard 
by the next proxy season, can you just talk to me about that a 
little bit?
    Mr. Cox. Yes, I can. And you are right, this is connected 
to our proxy rulemaking for the next proxy season because it is 
bound up with the whole issue of how votes are cast and in what 
way shareholders participate in the proxy process. The New York 
Stock Exchange amendment that they have filed to their proposal 
to exempt registered investment companies from the proposed new 
prohibition on broker discretionary voting was filed with us on 
May 23rd of this year, relatively recently. But the overall 
question of not just broker voting, but also over-voting, empty 
voting and so on, was the subject of a roundtable that we held 
recently. And each of us here as Commissioners are very, very 
focused on the mechanics of the proxy system in the context of 
our pending rule proposal. The timetable is probably going to 
have us proposing next month, the end of next month, on the 
proxy rules generally. Whether we put questions out with that 
release or whether we do a separate release or just publish the 
NYSE rule proposal then remains to be seen.
    Mr. Watt. Mr. Cox and members of the Commission, we had a 
markup this morning of a bill, a resolution I guess, that 
encouraged diversity in the financial services industry and 
this is an issue that I personally am very concerned about, 
diversity at all levels of the industry. What can the SEC do to 
encourage--what is the SEC doing first and then what can it do 
that it is not already doing to encourage greater diversity in 
the financial services industry and in other registered 
corporations?
    Mr. Cox. Our investor education mission at the SEC gets us 
out to a lot of places around the country. Commissioner Atkins, 
as a matter of fact, has probably logged more miles on behalf 
of that office than any of us, but all of us are very 
profoundly interested in that. We have a very aggressive 
diversity program at the SEC itself, which models and leads in 
this respect, but we also participate in private sector efforts 
to lead on diversity. And we think it is very, very important.
    Mr. Watt. My time has expired.
    The Chairman. Do any other Commissioners wish to comment on 
that?
    Mr. Campos. Congressman, I think all of us need to directly 
encourage Wall Street to look at the great resources in America 
in its diverse communities and in the diverse makeup of 
individuals. I think to the extent Wall Street does not have 
minorities and people of color in their ranks, they are missing 
out on a great resource. I think it is pretty clear, from all 
studies that are done today, that if you have a diverse group 
of individuals making decisions, you get better decisions, so 
it is a competitive item, it is not a charitable thing. And, 
moreover, capital needs to be allocated to the inner cities. 
Capital needs to be allocated in America where there are Third 
World returns available under our rule of law and for some 
reason Wall Street still does not hear that message. I think it 
is incumbent on us to make that message loud and clear.
    The Chairman. The gentleman from California, Mr. Royce?
    Mr. Royce. Thank you. Chairman Cox, I am increasingly 
concerned about the growing number of investor class action 
lawsuits and their impact on the U.S. capital markets. As I 
stated, in one of the studies I saw was Professor John C. 
Coffee of Columbia Law School, and he wrote that securities 
class actions essentially impose costs on public shareholders 
in order to compensate public shareholders. But on each such 
transfer, a significant percentage of the transfer payment goes 
to lawyers and other agents. It can run up to 40 percent. And 
he has suggested changes to securities class actions.
    Now, I along with 15 other Members, have sent a letter to 
the SEC requesting that they examine several questions about 
the effect of these lawsuits. First, we urge the Commission to 
examine the costs and the benefits to the average individual 
investor of private class action litigation under the Federal 
securities laws.
    Second, we urge the Commission to examine the cost of the 
benefits of class action settlements to the average 
shareholder, not only in terms of settlement payments but also 
transaction costs, including fees paid to attorneys, as well as 
a potential decrease in the value of innocent shareholders' 
investments as a result of the litigation.
    And we urge the Commission to examine whether existing 
protection against professional plaintiffs are sufficient and 
whether the apparent link between political contributions and 
selection of counsel by public pension funds warrants a 
prohibition like the Pay-to-Play ban that was adopted in the 
context of municipal bond underwriting.
    And, lastly, we urge the Commission to examine various 
means to adequately coordinate Fair Funds payments with related 
private class action lawsuits and make recommendations to 
Congress regarding appropriate legislative action on that 
front.
    And I wondered if you would comment, Chairman Cox, on the 
possibility of the SEC undertaking such a study and reporting 
back to Congress maybe by the end of the year; it is just 
recently that we sent the letter.
    Lastly, I had a question for Mr. Atkins. I was going to ask 
him--Mayor Michael Bloomberg and Senator Schumer combined 
forces there to put together that Committee on Capital Markets 
Regulation, and they released a report highlighting the need to 
do more if the United States is to remain the world leader in 
the financial services industry. And I was going to ask you, 
Mr. Atkins, if you believe that the SEC could do more to assist 
us in this objective and, if so, what do you think that would 
be? And maybe if you agreed with your colleague Mr. Campos' 
observation that Sarbanes-Oxley actually is attracting capital 
because when I was in London, I saw those signs that said, or 
that advertisement that said, ``London is a Sarbanes-Oxley Free 
Zone.'' They were actually marketing the idea to investors 
because of the purported costs under Sarbanes-Oxley, so I was 
going to ask you, after Mr. Cox responds, if you would give me 
your perception on that? Thank you very much.
    Mr. Cox. Well, I guess I will start. Since you have used 
Professor Coffee as the foundation for the statements that you 
are making, let me say that he is greatly respected around the 
SEC, and his views are always worthy of serious consideration. 
One of the reasons that the Commission is so aggressively using 
our Fair Funds authority is that we are very cognizant of the 
transaction costs that are built into private litigation. There 
is nothing anyone can do about those costs other than to the 
extent that fees might be more competitive or what have you, 
but there are big costs that are just built into private 
litigation. When the SEC is recovering and can distribute those 
monies directly to shareholders and cut out the middle man, 
those transaction costs are washed out, and the recovery to 
investors is greater. So the over $1 billion that we have been 
able to get back to investors since you gave us that authority, 
I think, is a signal victory for the policy that the Congress 
established and for the SEC in administering it.
    We look forward to answering very formally the questions 
that you and other Members of Congress have put to us about the 
effect of lawsuits on investors, private class action 
settlements, transaction costs, the effect on innocent 
shareholders, and so on. And we will do, I hope, a very 
thorough job of it.
    Finally, I think the Pay-to-Play rules in place are 
exceptionally important. That principle is a worthy one, and we 
will be happy to consider the suggestion that you have made.
    Mr. Atkins. Well, thank you, Congressman Royce, for your 
question. I read with interest the report that Mayor Bloomberg 
and Senator Schumer sponsored that was done by McKinsey and 
they have a lot of suggestions by which not just the SEC but 
also you in Congress can turn your attention to the costs of 
regulation here in the United States. And there is no doubt 
that litigation costs and regulatory costs do discourage 
issuers from coming here to the United States. You just have to 
look back to the Kennedy Administration, back in the early 
1960's, to the so-called interest equalization tax that was 
imposed on securities transactions. That really helped create 
the Euro dollar market as people went to try to get away from 
that tax. So once you open that Pandora's Box, it is hard to 
get capital raising back here. So people do look at costs when 
they try to make decisions of where to issue their securities.
    No doubt, as Commissioner Campos said, U.S. legal 
protections do attract investors from around the world, but 
they can also, if they are not in balance, work to repel people 
from coming here. I used to live and work in Paris, France, and 
I heard so many stories over there, similar to what went on 
here in Washington recently with the lawsuit against the dry 
cleaner, but also similar things that have people concerned 
about our litigation system. And I have heard the same 
sentiment recently from government officials, from public 
company officials and officers, people like that. U.S. 
investors over the last 40 or 50 years have had really the best 
of all worlds. We had a deep liquid market; we still do. 
Issuers from around the world came to issue their securities in 
the United States on our terms, under our laws, and with our 
protections. Now, as things have become more competitive, U.S. 
investors with a click of a mouse can invest directly abroad. 
We have to make sure that we have things in balance so that we 
continue to attract people to issue their securities here.
    The Chairman. Thank you. The gentleman from California?
    Mr. Sherman. Thank you. I have an awful lot of questions, 
and I would like responses for the record. I will go through 
those quickly, and then focus on some that deserve an oral 
response. Looking at Sarbanes-Oxley, we have in effect two 
kinds of securities in this country. We have those that are 
publicly traded with all the maximum disclosure, legal costs 
and ``Sarbanes-Oxley-ization,'' and then we have Regulation D, 
those securities not eligible for private invest--for public 
trading with limited numbers of investors and limited 
liquidity. I wonder whether you would work with us to explore 
the possibility of creating an intermediate level of security, 
one in which you did not have Sarbanes-Oxley in its full-blown 
form and in which there would be a public market but only 
eligible to or available to qualified investors? So that 
somewhere in between saying you have no liquidity on one hand 
or that your security was eligible to have the full repository 
of all the assets of widows and orphans on the other, that we 
would have an intermediate level that would be excluded from 
the more onerous parts of our Sarbanes-Oxley system?
    Second, as to Stoneridge, I hope that you would provide for 
the record what you would like to put in an amicus brief if you 
were allowed to file such a brief, and also whether you think 
that statute should be adopted so that you can file an amicus 
brief on your own regardless of whether the Solicitor General 
agrees with or disagrees with it. As to that issue, I hope that 
you would focus on the interesting argument of the President, 
that it is the SEC that should pursue redress for injured 
investors. How would you do that if scheme liability were not 
available? And how would that affect your ability to enforce 
10b-5? If we are going to take a whole group of wrongdoers and 
say that they are not liable for damages because they did not 
actually make a statement, are we going to be in a position 
where neither SEC nor private tort action can provide relief?
    Finally, as to corporate law, this has traditionally been a 
matter for the States. Delaware falls over Nevada, which falls 
over Delaware, in an effort to race to the bottom and provide 
the least possible rights for shareholders and the most 
protection for entrenched management and to tell corporations 
they do not have to have cumulative voting. Should we have a 
corporation's code for publicly-traded corporations in this 
country and/or should we at least mandate that there be 
cumulative voting so that a minority group of shareholders 
would at least have one representative on the board?
    Now, turning to proxy access, under the AFSCME v. AIG case, 
you have for a while suspended your no-action letters and in 
doing so, the world has not caved in, and I wonder whether you 
would want to continue this approach of allowing proxy access 
to those, especially those who want to change the bylaws so 
that they are then able to propose a slate of directors? 
Chairman Cox?
    Mr. Cox. Now, you said that you would like answers to many 
of those for the record?
    Mr. Sherman. Yes.
    Mr. Cox. Which ones would you like me to address?
    Mr. Sherman. I would like you to address that last question 
about proxy access.
    Mr. Cox. What we are going to do is put a rule in place 
because right now we have a decision from one Circuit Court of 
Appeals that has a different rule functionally in place than 
was in place in the rest of the country. We need to make sure 
that there is one rule for the whole country, that everybody 
understands it, and that we have it in time for the next proxy 
season. I do not think that the relatively quiescent 
environment that we had for one year is going to last forever, 
we should not expect it to. Shareholders have every right to 
bring their proposals in whatever ways the law allows, and we 
just need to make clear what the rules are, so we intend to do 
that.
    Mr. Sherman. Well, one last question, the Wall Street 
Journal reported that you are considering a proposal to allow 
corporations to mandate arbitration in securities class 
actions. Is this proposal under active consideration by the 
SEC?
    Mr. Cox. No, we do not have pending any proposed or other 
more mature rule or procedure governing this.
    The Chairman. The gentleman from California?
    Mr. Campbell. Thank you, Mr. Chairman. And as the CPA in 
the room, I will ask an accounting question first.
    Mr. Cox. Did you not just follow a CPA?
    Mr. Campbell. As one of the two CPAs. As the only CPA in 
the room with an active certificate, how is that?
    Okay, I will start with an accounting question. Chairman 
Cox, in your remarks, you talked about your proposal, the 
Commission's proposal last week regarding international 
companies or foreign-based companies that are listing on U.S. 
markets and the ability perhaps to use foreign financial 
statements. Obviously, what that is going to do, international 
accounting rules, is potentially create two different companies 
that are global companies that are competing with one another 
whose financial statements are both listed on U.S. markets or 
traded on U.S. markets, whose financial statements will be 
computed under different rules. Would it be desirable for us to 
move to a principles-based accounting system here? And, if so, 
what should we do to look at that? And, secondly, can we do it 
given our litigation structure, which we have just been talking 
a lot about and has been one of the problems that has migrated 
accounting rules from principles-based, which they were some 
years ago, into this very much rule-based accounting that we 
have today?
    Mr. Cox. Well, this whole debate about principles-based 
versus rule-based is very much at the center of attention 
around the world among global regulators and among market 
participants. The Congress has directed the SEC on multiple 
occasions, most recently in the Sarbanes-Oxley Act, to explore 
whether we cannot move to a principles-based system and how 
fast. So we know, in the wake of Enron, for example, that there 
was a great deal of attention paid to whether or not the 
complexity of accounting might not have been one of the 
contributing factors to people's ability to get away with fraud 
because they could technically purport to comply with all sorts 
of detailed rules; but, if you took a few steps back and looked 
at the whole picture, it was fraudulent. If you had a 
principles-based system, perhaps that might be a better way to 
get after the problem, and that is why, in SOX, that direction 
was given to the SEC.
    Meanwhile, around the rest of the world, there has not only 
been movement on this front but rather decisive action taken so 
that in 2005, for example, the entire European Union mandated 
the use of international financial reporting standards, which 
have gone from a standing start to very mature in record time. 
The United States has been an active participant in this. Paul 
Volcker was the head of the IASB initially. And now we have 
foreign companies filing, as you point out, in the United 
States on our exchanges with U.S. listings using IFRS. So at 
the SEC we are now getting experience looking at IFRS right 
alongside U.S. GAAP. This summer, the Commission expects to put 
out a Concept Release asking the very questions that you put 
and putting them out for public comment, and we are going to 
see what the marketplace participants, investors, consumer 
advocates, everyone else has to say about it.
    Mr. Campbell. Can we do it with our litigation--we have 
talked about this Schumer/Bloomberg report and that litigation 
is already a barrier to capital formation in the United States 
but if you go to principles-based, does that not become an even 
more ripe target for second guessing afterwards?
    Mr. Cox. Not necessarily. I infer, however, from the way 
you put the question that your concern is that people would 
like to be able to point, in the event of litigation, to a very 
specific rule that they adhered to in order to protect 
themselves.
    Mr. Campbell. Yes.
    Mr. Cox. And there is no question that is part of the yin 
and yang of all of this. On the other hand, as regulators, as 
policymakers here in Congress, we want a system that prevents 
fraud, not that cleans up the mess after it happens. And so we 
should do everything within our power to make sure that the 
system really achieves the objectives that we intend. And I 
think we have to constantly look at this and constantly strive 
to make ourselves better. Private litigation is a very 
important adjunct to SEC enforcement. We want it. It needs to 
be there. But I think every shareholder that gets involved in 
litigation would much rather not have the problem in the first 
place.
    Mr. Campbell. Right. Okay, one last real quick question.
    The Chairman. Quickly.
    Mr. Campbell. Sorry?
    The Chairman. Quickly.
    Mr. Campbell. Okay, just one very quick question, I believe 
you are looking at--there are all kinds of financial 
instruments that did not exist when the 1940 Act was put 
together, frankly there are some coming up that we did not 
think about 3 months ago, I know you are reviewing whether 
commodity index swaps are securities under the 1940 Act. Can 
you advise us as to the status of that and/or how you are going 
to deal in the future with all these new financial products 
that are coming up as to whether--which somebody is thinking up 
something right now that none of us are anticipating as to 
whether--
    The Chairman. Why don't we get the answer now.
    Mr. Campbell. Sorry, thank you. Thank you, Mr. Chairman.
    Mr. Cox. Well, I think where you were headed was to the 
much longer list of cross-jurisdictional issues with the CFTC, 
all of these products that are coming up either on the futures 
or options market and what we're going to do about that. 
Because of the jurisdictional balkanization, if you will, that 
is based in statute, the best that we can do is work together. 
And so I have spent a great deal of time with the Chairman of 
CFTC and our Commission with their Commission, trying to work 
these things out one at a time. And our staffs are very much 
rolling up their sleeves trying to solve these problems 
together.
    There are very real markets and marketplace competitors 
that care a lot about these issues and for whom a great deal 
turns on whether something is or is not a security and whether 
it trades on one exchange or another. The margining is 
different. A lot hangs on this. And so we are under scrutiny 
and pressure when we make these decisions. But we want to make 
them as honestly and straightforwardly as we can.
    The Chairman. The gentleman from New York.
    Mr. Meeks. Thank you, Mr. Chairman. I'm going to ask four 
questions and then just--they're quick questions, and hopefully 
you can answer them before the gavel. One of course deals with, 
you know, Mr. Feeney and I have sponsored a bill dealing with 
Sarbanes-Oxley. One of the concerns that the bill addresses is 
the communication between management or management's outside 
consultants and management's auditors in relation to management 
conducting its assessment of its internal controls. Question: 
How will the rules and guidance you just released affect that 
relationship so that management's assessment and the audit are 
more efficient and hopefully less costly? That's one question.
    I also introduced--my second question is, I also introduced 
a bill with Mr. Tiberi on money market fund parity--H.R. 1171. 
This bill basically gives the ability of broker-dealers to use 
money market funds to meet their cash management obligations 
under the SEC rules. Shortly afterward, the SEC proposed rules 
to address the use of money market funds by broker-dealers, but 
it only addresses the 2 percent haircut, and not to use the 
money market funds for special reserve accounts, collateral, or 
escrows. Clearly, AAA rated money market funds have a spotless 
track record.
    So my question is, don't you think it would be preferable 
to allow broker-dealers to use AAA rated money market funds 
that provide greater safety and better yields than Treasury-
only money market funds, and are you prepared to go further and 
consider revising the proposed rule changes to incorporate the 
provisions of H.R. 1171?
    The next question I had is basically, as I understand it, 
there's another rule change. What impact will changing the NASD 
bylaws have on small to regional broker-dealers after losing 
their ability to be fully represented on the NASD's board, were 
43 percent of the--of almost all broker-dealers audited by the 
NASD within one year after signing a petition asking for an 
NASD investigation about threats against members? So that is my 
third question.
    And finally, if you get a chance to answer it, I also 
understand that mutual fund sale charges have declined 
significantly since 12b-1 was adopted at that 12b-1 fees helped 
finance most of the administrative and other shareholder 
support functions that were previously performed by funds and 
are now performed by broker-dealers, and the other 
intermediaries who receive these fees. In light of this, what, 
if any, modification to Rule 12b-1 are necessary?
    Mr. Cox. Thank you for those four questions. If it's all 
right with you, I'm going to answer 1 and 4, and Commissioner 
Nazareth can answer 2 and 3, and we'll mix it up here a little 
bit.
    You asked what impact our management guidance and the 
PCAOB's new audit standard under SOX 404 is going to have on 
the efficiency of audits and the relationship between 
management and auditors. It's a very important question and I'm 
very pleased to give the answer. The guidance and the new audit 
standards are going to make that process more efficient. That's 
what we intend. We're going to follow up to make sure that 
happens, and it's intended to occur in two ways.
    First, the management guidance is coming from the SEC to 
the company concerning the company's obligation under the first 
half of 404, 404(a), to do its own assessment of its own 
internal controls. Absent that guidance, before we had it, all 
there was, was the standard for the auditors, and it made it 
much more expensive. It also put the auditors in the driver's 
seat when it came to that first part of 404, even though that's 
not the way the statute is written.
    The second reason that it's going to be more efficient is 
that the audit standard itself is more efficient. And so the 
auditors aren't going to be forced to ask management to do 
things that aren't material to the ultimate financial 
statements that the internal controls are supposed to support. 
They're going to have an instinct for what truly matters, I 
like to say an instinct for the jugular rather than an instinct 
for the capillary. There will be a top-down approach, 
materiality-focused, risk-based and scalable for companies of 
all sizes.
    We also want to encourage management and auditors to talk 
to one another, and there is no reason in what we're doing--
    The Chairman. To get all four answered, we're going to have 
move a little quickly.
    Mr. Cox. All right. The second, just very quickly, with 
respect to 12b-1 fees, we just had a roundtable on these very 
questions to learn from the marketplace and all the 
participants, investors and others, what are the uses, positive 
and otherwise, that 12b-1 fees are put to, whether disclosure 
is adequate and where we should go. So we're right in the 
middle of that process, and we will have more to report to you 
on that very soon.
    I will yield at this point to Commissioner Nazareth.
    Ms. Nazareth. I'll try to be very brief. I'll answer the 
third question first. You know, the NASD bylaws for the newly 
constituted organization were filed with the Commission. The 
Commission will need to consider whether they are fair in that 
they have representatives on the board for all types of broker-
dealers. My understanding is that small broker-dealers are well 
represented on the board, but there's not one firm, one vote. 
It's done on a sort of stratified basis, so that firms of 
different types are equally represented. So I actually think 
that small broker-dealers are well represented, but they're not 
the only voice on the NASD board.
    As to the money market fund parity that you discussed, it's 
an issue that the Commission is well aware of, and we put out 
for public comment a question on whether it's something we 
should address. We know that there have been requests for us to 
let money market funds be used in these ways, but we take these 
issues very seriously, because the provision of the regulations 
in which this comes up relates to the protection of customer 
funds by broker-dealers, and there's nothing that really has 
quite the same protection for customer funds as Treasury 
securities. There are no specific rules distinguishing among 
money markets funds or identifying which funds could be used 
for regulatory purposes. There could be issues in certain money 
market funds that should disqualify a fund from being used for 
regulatory purposes.
    So, we're aware of the issue. The proposed rules are out 
for public comment, and we look forward to what we get back in 
the public comment.
    The Chairman. The gentleman from Texas.
    Mr. Marchant. Thank you, Mr. Chairman. Commissioner Cox, 
recently a Federal appellate court held against the Commission 
concerning the rule that exempts brokers from giving investment 
advice. I understand you did not file an appeal but went ahead 
and asked for some time for the compliance by the brokers. How 
is that process going, and will it be done by October?
    Mr. Cox. The reason that we didn't appeal was simply the 
legal determination that we made, and I believe in which the 
SG's office concurred, that the case would probably not be 
considered cert worthy by the U.S. Supreme Court. It was on 
that basis, not a policy basis, that the decision was made. And 
by the way, that's the way we always handle those decisions.
    Going forward, because of the fact that this has now been 
dealt to us by the Court, we are moving as quickly as we can to 
deal with the real world situation. I'm trying to view this as 
an opportunity to revisit these issues and make sure that we 
have the most modern approach that most reflects today's 
marketplace as we do it. To give ourselves some time to do 
that, we asked the Court of Appeals for a stay of 120 days of 
its decision so that the status quo can prevail in the 
marketplace, and the Court has just recently granted that stay.
    Mr. Marchant. Okay. On another subject, oftentimes the 
volatility in hedge funds is a result not so much of the long 
positions they hold, but the short positions that they hold. 
And my question is does this--is there any contemplation on the 
Commission's part to require the listing of these entities on 
their disclosures to ask them to disclose their short positions 
as well as their long positions?
    Mr. Cox. To the extent that you are speaking of hedge 
funds, I think our ability to require that kind of disclosure 
is exceptionally limited because they tend not to be publicly 
registered entities. And, to that extent, their disclosure that 
they make to their investors is a matter of marketplace 
negotiation rather than Federal mandate.
    Mr. Marchant. What about the entities that file under 
13(f), (d), and (g)? The entities that are currently filing 
their positions?
    Mr. Bachus. I think Commissioner Nazareth was prepared to 
answer the question.
    Ms. Nazareth. Well, I was just going to--
    Mr. Cox. Why don't you answer.
    Ms. Nazareth. Okay. As you know, we require the reporting 
of long positions because of concerns about change of control, 
and so we require the reporting of 5 percent ownership. We 
don't require reporting on short positions, partly because that 
information could be used by manipulators, that is, used 
against the people who are holding the short positions.
    One thing that we did, I believe, was recommend and vote to 
put out for comment recently with respect to the concerns about 
naked short selling was the idea of disclosing on a lagged 
basis information on fails--fail positions, so that investors 
could see what were the securities for which there excessive 
fails to deliver. But we don't have parity between short 
reporting and long reporting.
    Mr. Cox. And I just confirmed that under 13(d), those who 
are filing under 13(d), the reporting is the same for long and 
short.
    Mr. Marchant. Okay. Thank you very much, Mr. Chairman.
    The Chairman. Thank you. Mr. Moore?
    Mr. Moore of Kansas. Thank you, Mr. Chairman, and thanks to 
the Commissioners for being here. Chairman Frank and Mr. 
Sherman asked questions about the issue of proxy access. I've 
heard the SEC might be considering either a threshold amount of 
company holdings or a holding period as a way of conditioning 
proxy access, and I understand the interest in discouraging 
frivolous proposals by small or short-term holders, but I 
would--it would concern me if the SEC promulgated restrictions 
that would prohibit most shareholders from accessing the proxy.
    Chairman Cox and Ms. Nazareth, would you care to share your 
thoughts on this issue?
    Mr. Cox. Yes. Just to remind you of the schedule, we expect 
to propose a rule for public comment, start it on a process 
that will take several months, probably at the end of next 
month. The Commission is still very much actively engaged in 
discussing what that proposal will look like. I think, just 
speaking for myself, that I would share your concerns about the 
Federal Government coming up with very particularized rules 
about how things ought to operate when fundamentally they are 
matters of State law. So a national bylaw, as it were, is not 
the kind of approach that I would favor.
    Mr. Moore of Kansas. Ms. Nazareth, do you have any thoughts 
you'd like to share?
    Ms. Nazareth. Well, I would agree that a rule that would 
allow shareholders more meaningful participation would foster 
more responsible behavior by boards and bolster investor 
confidence in the integrity of our markets, and so I also 
support the notion of addressing the proxy access issue as soon 
as we can.
    Mr. Moore of Kansas. Thank you. Thank you, Mr. Chairman.
    Mr. Price. Thank you, Mr. Chairman.
    The Chairman. Sorry. Did we not get the gentleman from New 
Jersey? The gentleman from New Jersey first.
    Mr. Garrett. Thank you. And thank you again. This week, as 
I made reference to in my opening comments, I made reference to 
a bill that I had. But this week I will be offering an 
amendment to the Financial Services appropriations bill. And 
what that amendment will do is what my other legislation would 
do, and that extend the current exemption for small businesses 
to comply with Section 404 of Sarbanes-Oxley. The amendment 
would in essence prohibit the SEC from forcing the small 
businesses to comply with 404(a) for the fiscal year 2008.
    If any or all of you would just comment on the fact that in 
light of the fact that we're here in this year with the change 
in the rules and sort of you might say in the middle of the 
game, why we should not be extending this exemption and giving 
the smaller companies who are not--don't have the wherewithal 
as the large companies do to deal with this issue right at this 
point in time. Why shouldn't we be extending it at this point?
    Mr. Cox. I think we should. I think we need to give smaller 
companies more time. That's why the SEC for the fourth time has 
extended it now all the way into 2009. We've broken up the 
requirement for smaller companies to comply with 404 into two 
phases. In the first phase, they will do only the management 
assessment part--
    Mr. Garrett. Let me rephrase my question.
    Mr. Cox. Yes.
    Mr. Garrett. Then why shouldn't we have the continuous 
extension for the entire element of 404 and not the broken up 
point as far as you've done?
    Mr. Cox. Well, I think that the expense, as we have judged 
it, comes from the auditor's attestation to the management's 
assessment. As I mentioned earlier, many other countries, 
including the U.K., have the 404(a) piece, but we're the only 
nation on earth that has 404(b). That's where the friction has 
been, and that's where we're trying to focus our remedial 
efforts.
    Mr. Garrett. Any other Commissioners want to--okay. Then 
picking up on your one comment with regard to the expense, 
apparently--and I apologize for not being able--the chairman 
knows we can't be at two places at one time on these things.
    Someone else I guess from the committee asked the question 
as far as whether any or all of you are able to pinpoint or 
within a range the actual cost savings that we could 
potentially see from the new rules that are coming down. And 
correct me if I'm wrong, the testimony was that you were not 
able to give a range for that. Is that--
    Mr. Cox. I think what we said was with respect to smaller 
public companies, that we have not made a specific dollar 
estimate, but that instead what we hope to do is to base an 
estimate going forward on the real life experience that we'll 
have over the next year when the new management guidance and 
the new audit standard, AS5, are actually put in place.
    Mr. Garrett. And if--first of all, if during that period of 
time and the real life experience comes out but you're really 
not seeing the savings that you anticipated, then will there be 
a rollback as far as implementation of those rules on the 
smaller companies? And if there is, what would be the threshold 
that you'd be looking at as far as cost savings for these 
companies?
    Mr. Cox. Well, first let me say, that's not our plan. But, 
second, we have to be open always to the real world evidence 
that comes before our eyes. So we will be very attentive. We're 
extremely interested in whether or not we have achieved the 
intended objective here of significantly reducing costs.
    I will say that I've gotten some episodic information about 
companies renegotiating their audit contracts with their 
auditors using the new AS5, even though it's not in force yet; 
the SEC hasn't yet finally voted on it, but the PCAOB has, and 
it's out. The public knows what it looks like, and they have 
reported that they have been able to reduce their 404 costs by 
50 percent in one case for a large company.
    If we get enough evidence like this that we're successful, 
then I think we would stay on the schedule that we have 
announced.
    Mr. Garrett. Well, in your report, you cite a study by CRA 
International that states that the average cost of compliance 
for a small company with market cap between $75 and $100 
million--$700 million is costing $860,000 a year, and of course 
that's broken down into the second year as opposed to--
essentially the second year after the first year of 
implementation.
    Is it also your understanding that you are not required, 
because this is a rule from Congress as opposed to a 
regulation, to comply with SBRFA then as far as if the amount 
of savings is under 1 percent as opposed to over 1 percent 
reporting back?
    Mr. Cox. No. I think that earlier, I was simply trying to 
parse what it is that we're accounting for and what we will 
always estimate is the effect of our rules, the costs and 
benefits of them, the cost, if you will, of management guidance 
we expect is negative. We expect it's ameliorative. It's going 
to reduce the cost of compliance, so that the costs that are 
being imposed are not from the incremental decisionmaking of 
the SEC to have management guidance or the PCAOB to have a new 
audit standard. Rather, those costs are imposed by Section 404 
of Sarbanes-Oxley itself. And by changing the way that it's 
applied and reducing that expense, we hope to have--
    Mr. Garrett. Does it--
    The Chairman. I'm sorry. We have too limited time for 
another question. The time has expired. I'm now going to go to, 
because the gentlewoman from New York has been here very 
faithfully, but she had previously agreed to give up her time 
to the gentleman from New Hampshire. She has graciously agreed 
to give up her time, so I will now go to the gentleman from New 
Hampshire, then we'll resume the regular rotation.
    Mr. Hodes. Thank you, Mr. Chairman, and I thank the 
gentlewoman for yielding me the time. In looking at the 
Blackstone deal in the IPO, I found some things that were quite 
confusing. Blackstone seems to be made up of direct and 
indirect interests in hedge funds, private equity funds, and 
real estate funds. And under this arrangement, they claim that 
their holding company is made up of only 22 percent of assets. 
However, through indirect holdings, this appears not to be the 
case. In fact, it looks as though, as defined in the 1940 Act, 
interests in investment securities constitute 85 percent of 
their assets.
    And we put up a chart which I've called Chart 1, which is 
taken off the SEC Web site and was in the Blackstone filings. 
And it appears that Blackstone is a loose association of 
companies. Investors are buying pieces of a limited partnership 
whose cashflow is derived from pools, which are at the bottom 
of that chart. And regardless of how it registers with the IRS, 
it seems to me this is an investment company.
    Now it's important because of issues of transparency, 
accountability, and fiduciary duty. Because the 1940 Act 
requires companies to adhere to fiduciary duties to their 
public investors. I went into the offering documents and looked 
at Form S-1 filed with the SEC at pages 179 and then 182 to 
185. In those documents, Blackstone explicitly disclaims any 
fiduciary duties to investors in the IPO that it might 
otherwise owe under the State law of Delaware.
    Now let's take a look at Chart 2, which is actually, 
frankly, a simplified version of Chart 1. And I apologize to 
those to my left who are blocked by the chart. Now the cloud in 
the middle are the holding companies, and it's a cloud which in 
my view needs to be more transparent. I think investors need 
more information on where their money is going.
    I'm also extremely concerned about the potential national 
security risks of this deal, because the 1940 Act requires 
companies to adopt key investor protections, including 
mandatory disclosures about the nature of their assets, and 
Blackstone has not disclosed what the underlying assets of this 
entity are in any meaningful detail. In looking at the deal, I 
was surprised to learn in press reports that the Chinese 
government has bought a 44 percent stake of what Blackstone has 
offered to the public, owning $3 billion worth of nonvoting 
shares at a preferred rate, while Blackstone's S-1 forms 
submitted to the SEC simply talk about a State investment 
company, never mentioning the word ``China.'' So I have serious 
concerns about China's ownership of Blackstone's holdings, 
because the holdings include companies that provide software 
and applications for use by the military and satellite 
technology, and I consider the lack of disclosure unacceptable.
    So, given the precedent that this private equity going 
public filing has, and we expect to see a lot more of these 
kinds of filings, and given the increasing number of Americans 
who are investing in securities, as you point out, the 
structure of Blackstone looks like an investment company, whose 
disclosures are incomprehensible, and it owes no duty to its 
investors. The message that emerges is, as long as you create a 
complex enough corporate structure, you can evade the 
Investment Company Act of 1940.
    Now I hope you agree that this is not how that Act should 
be interpreted and enforced. I'd like to know what steps the 
Commission is taking to ensure the integrity of the Investment 
Company Act of 1940 in the context of this offering, whether 
you believe the Investment Act of 1940 is adequate for you to 
regulate, and if it is inadequate, to impose fiduciary duties 
on Blackstone, do you agree that legislative action is 
necessary? Do you want to wait for the lawsuits that would be 
inevitable that my colleagues on the other side of the aisle 
seem to feel so bitterly about? Or are there other remedies 
available to the SEC to deal with the issue? And the crux of it 
is the fiduciary duties.
    Thank you, Mr. Chairman.
    Mr. Cox. Thank you, and I think you've elaborately laid out 
a great many questions. Let me try and address as many of them 
as I can get at here. First, I am advised that the Chinese 
stake was in fact explicitly disclosed, and that China does 
appear in the S-1. It may not have appeared at the portion that 
you focused on, but it is, I am told, plainly disclosed.
    Second, the role of the SEC in doing all of its review of 
the S-1 was not to evaluate the merits of the transaction, the 
propriety or advisability of the structure of the transaction, 
but rather determine whether the company's filing met SEC 
requirements for disclosure. Those requirements are designed, 
as you know, to make sure that all material information, 
positive or negative, is presented to investors. When the staff 
made the decision to grant Blackstone's request to declare the 
registration statement effective, the SEC had no reason to 
believe that Blackstone's disclosures were not in full 
compliance with the Federal securities laws or that the public 
was not fully advised about the potential for, for example, a 
different tax treatment or about the Chinese ownership stake, 
which you mentioned.
    In the process of the Division of Corporation Finance's 
review of the S-1, we referred it to the Division of Investment 
Management to consider the Investment Company Act questions 
that you raise. They determined under the Investment Company 
Act that Blackstone doesn't meet either of the two most 
relevant tests for determining whether it is an investment 
company. Specifically, it is not, they determined, and does not 
hold itself out as, primarily engaged in the business of 
investing in securities with its own assets. The funds that 
Blackstone manages are indeed investment companies, but the 
fund manager is not under the law.
    The second test was whether the issuer was engaged in the 
business of investing in securities and owns investment 
securities exceeding in value 40 percent of its total assets. 
Based on the information in Blackstone's registration statement 
and additional information that was provided by Blackstone at 
the Commission's request, Commission staff determined that the 
value of Blackstone's investment securities was less than 40 
percent of its total assets.
    Mr. Hodes. Thank you.
    The Chairman. The gentleman from Georgia.
    Mr. Price. Thank you, Mr. Chairman. I appreciate that. I 
don't have any charts, so my questions may not be as clear. 
However, I want to talk a bit about settlement extortion and 
the consequences thereof.
    My understanding that over 75 percent of the IPOs that are 
started now are offshore or not in the United States worldwide, 
and there's a reason for this. There are a lot of reasons for 
this. One of them I believe to be the threat of liability. 
Settlement figures and security class lawsuits are clearly on 
the rise. The amount of money that was agreed to in settlement 
over the last 10 years, my understanding is, was greater than 
$43 billion. That's in settlements. If you exclude Enron and 
four other mammoth settlements in excess of a billion dollars, 
the average settlement in 2006 was $45 million, which is twice 
the average in 2005.
    Multiple analyses have looked at this. A recent NERA study 
showed that settlements increased with the depth of defendant's 
pockets, with big claims in deep pockets seemed to be leading 
to larger and larger settlements regardless of the merits of 
the underlying claims. So my question would be, what do you 
believe can be done, if anything, to ensure that securities 
class actions provide fair compensation to the injured 
investors rather than simply a tool for extortion by 
plaintiff's lawyers?
    Mr. Cox. Well, it's a very broad question, and it 
highlights the negative aspect of what also has a lot of 
positive aspects. Obviously, every shareholder deserves 
redress, and we want to make sure we always have a system in 
which people can bring their claims, have them adjudicated and 
get what the law says they are entitled to.
    There is so much money involved in many of these lawsuits 
that, as in all things in which a great deal of money is 
involved, as we find out to our chagrin every day at the SEC, 
there is always fraud at the margin. We want to make sure that 
when that occurs, we have ways to deal with it. So it starts 
obviously with the Article 3 branch. Judges have to be very 
attentive to this. Congress has played a role in this with the 
Securities Litigation Reform Act, which gave judges new tools. 
We want to make sure always that those precepts are followed so 
that the interests of investors are put first.
    Mr. Price. Do you believe any action is needed by Congress 
or by the SEC at this point in this area?
    Mr. Cox. Well, you know, the SEC did in fact file an amicus 
brief with the Supreme Court in a case that involved the 
Securities Litigation Reform Act to make sure that the yang of 
the yin and yang here is also always kept uppermost in mind. 
And we will continue to do that. We've filed over two dozen 
briefs since the Securities Litigation Reform Act was enacted. 
That's part of our charter, because under the securities laws, 
private litigation is meant to carry out the public purposes 
that the SEC itself is charged with enforcing.
    Mr. Price. You would agree that the public purposes are 
carried out when the awards or the monetary settlements reach 
the investors that have been harmed to the greatest degree, 
would you not?
    Mr. Cox. Precisely.
    Mr. Price. Let me move to executive compensation if I may. 
We've moved a bill through this committee to address that 
issue. It's my belief that the SEC's new disclosure 
requirements, which are being implemented, are a major step in 
the right direction, and I wonder if you might offer an opinion 
as to whether or not you believe any act by Congress is needed 
at this time until we see the results of the disclosure 
requirements that the SEC has put in place.
    Mr. Cox. We are, of course, very, very busy ourselves being 
inductive about what's going on in the real world with this new 
disclosure, how are people handling it, is it exactly what we 
hoped it would be, and so on. We don't know the answers to 
those questions yet, but we're going to make a full report 
very, very soon.
    I'm very acutely aware of the difference between my role 
now as one who administers the laws rather than one who makes 
them, and we will be very respectful of any guidance that 
Congress gives us on these subjects.
    Mr. Price. I want to quickly move to--and I appreciate 
that. I think it's important that Congress not act until we see 
the results of the work that the SEC has done. I want to move 
very quickly to the issue of regulation. Dual regulator, we 
divide our regulation into two categories, securities and 
futures. And I wondered if you might have any opinion regarding 
the ease of efficiency for the SEC or elsewhere that might be 
benefitted by a single regulatory scheme.
    Mr. Cox. Well, such a scheme exists in other countries. I 
don't know if Commissioner Campos wants to comment on his 
extensive international experience, but it sometimes produces 
puzzlement when we deal abroad, when people have to understand 
how we do it somewhat uniquely in the United States of America. 
We have, on the other hand, very understandable historic 
reasons for our setup, and there are also some very realistic 
things we have to take into account about how difficult it 
might be even for the Congress to try to undertake a 
revisitation of that jurisdictional allocation. So--
    Mr. Price. Efficiencies might be gained, though. Would 
you--
    Mr. Cox. I don't think there's any question that anything 
that you can do to rationalize the treatment of what should be 
competitive products across the different markets would be a 
good thing for capital markets and a good thing for investors.
    Mr. Price. Thank you. I yield back.
    The Chairman. The gentleman from Texas, who graciously 
filled in for me.
    Mr. Hinojosa. Thank you, Mr. Chairman. I wish to address my 
question to Commissioner Campos. I am delighted to see you here 
as a panelist. I happen to represent Harlingen, your home town, 
and I am delighted to see you here as one of our presenters.
    I understand there is a pilot program underway allowing 
options to be priced in the penny increments rather than in 
nickels.
    I also understand that the results so far have been 
promising and have narrowed spreads for investors, thus, saving 
money.
    Please share with us your thoughts on expanding the pilot 
program to additional issues given the savings to investors.
    Mr. Campos. First of all, I know that Harlingen is in good 
hands, Congressman.
    That particular program, that pilot, is going well. I think 
our staff is very busy studying the results. We believe that 
there will be opportunities to expand that pilot further, and 
we want to do it carefully and in a way that is appropriate 
given the costs, given the broadband that is necessary in this 
particular area.
    Mr. Hinojosa. Does your budget have enough money to expand 
it, double it possibly, in the future?
    Mr. Campos. I would assume we have enough for that. If not, 
our Chairman is very capable of coming to you and asking for 
more.
    Mr. Hinojosa. As many of you may be aware, Congresswoman 
Judy Biggert and I co-founded and currently co-chair the 
Financial and Economic Literacy Caucus. Its goal is to improve 
financial literacy rates for individuals across the United 
States during all stages of life, and the SEC is a member of 
that 20 agency strong financial literacy education commission.
    As such, I have heard many good things about your financial 
literacy program as well as those of the Federal Reserve.
    My question then would be to Chairman Cox, what programs do 
you currently have operating financial literacy across the 
United States?
    Mr. Cox. It is a pleasure to be able to talk about them and 
brag about them. Our Office of Investor Education and 
Assistance is really the front door to the SEC for many 
individual investors. Besides handling all of our retail 
interaction, positive and negative investor complaints and 
suggestions and so on, we have investor education initiatives 
that we take on the road.
    We have almost weekly, certainly monthly programs that we 
are sponsoring or participating in around the country. We have 
11 offices, of course. We also go to places where we have no 
offices at all to participate in investor education and 
financial literacy initiatives.
    We partner not only with other levels of government, but 
with private sector organizations in seminars devoted to adult 
education and school age education when it comes to financial 
literacy. We work with public libraries and schools to put out 
brochures and the sorts of things you can also get directly on 
our Web site.
    We have a very expansive SEC Web site devoted to financial 
literacy and beyond the information it contains, it links to 
still more places where investors can get information.
    Mr. Hinojosa. Chairman, that is a good answer, but let me 
tell you where it is not working. The savings percent 
throughout the country has dropped from a positive 3 percent to 
a negative 1.5 percent.
    If we are going to be able to measure how this program is 
doing, it would get a very negative or at least an ``F.'' We 
are going to need the partners to work with us to see how we 
can turn this around and get back up into the positive.
    Seeing that my time is almost up, Mr. Chairman, I am going 
to yield back.
    The Chairman. I thank the gentleman. The gentleman from 
Florida is now recognized.
    Mr. Feeney. Thank you, Mr. Chairman. Welcome to all the 
Commissioners. I share the concerns that have been expressed by 
a number of my colleagues about American international 
competitiveness. I have had a good deal to say about it, as 
Congressman Meeks said, we have a bill that would fundamentally 
and radically change the way Section 404 is applied.
    I am concerned that perhaps the lack of willingness to let 
smaller companies--I have defined that in our bill as $750 
million in capitalization or less, for example, are under the 
gun. I think that has a lot of unintended consequences.
    Chairman Cox, I know you have concerns as well. I have a 
lot less patience probably than you with respect to what I 
perceive to be the loss of American capital leadership, which 
is pretty dramatic.
    Before SOX was imposed, something like 90 cents of every 
foreign IPO that raised money was doing it in the United States 
capital markets. Just last year, there were 557 non-U.S. 
company IPOs in the London Stock Exchange, and just 28 non-U.S. 
company IPOs in the New York Stock Exchange.
    By a 95 to 5 ratio in that specific instance, we totally 
flipped the odds from nine to one to in some cases nine to one. 
It is not just the--by the way, I talked to Chief Financial 
Officer Tong in Hong Kong, and asked him whether or not a Hong 
Kong capitalist going public would consider listing on the U.S. 
markets as opposed to Hong Kong, and he laughed at me. He said 
that after Sarbanes-Oxley, they would not even dream of such a 
thing.
    The evidence is anecdotal. It is significant.
    Chairman Cox, as I understood it earlier, you said during 
the extensive debate on Section 404, that there were no 
specific estimates given about the cost of 404 compliance.
    In fact, and I was not here at the time, but I have gone 
through the record, and there was no debate about 404 in this 
committee; 404 was added in the Senate. We did not have 
hearings over here.
    The SEC actually filed a document in the Senate proceedings 
saying that they estimated the aggregate amount of costs to 
implement 404(a) of SOX would be around $1.24 billion; in fact, 
it has been on the order of 20 to 30 times that.
    Even by government standards, being off by a factor of 20 
or 30 is not really good work. With all due respect to the 
Commissioners, you have now said that you are going to decline 
to give an estimate of what the compliance costs are likely to 
be, although finally, we are at least looking at costs versus 
advantages.
    I have a huge concern if we have no idea now what costs are 
going to be that we still have these smaller companies under 
the gun. I have concerns about other aspects.
    Given the Committee's testimony that we have this brand new 
auditing standard to streamline and improve the audit of a 
company's internal controls, brand new, we do not know what the 
costs are going to be imposed, and yet we are insisting that as 
of 2009, we are going to require all these companies--I think 
you are going to continue to see companies by and large flee 
U.S. markets for overseas markets.
    You are going to continue to see companies de-list. The 
thing you do not see is the potential companies that might go 
public, to their advantage and to the advantage of investors. 
We do not know how to quantify that loss to the American 
economy.
    One study published, not conducted but published, by the 
American Enterprise and The Brookings Institute says that the 
indirect costs on the U.S. economy for loss of opportunity is 
on the order of $1.1 trillion a year.
    If 100 economists do that study, we will get 100 different 
answers. If they are even close to correct, it is about a 5, or 
in that case 10, percent tax on the American economy merely 
because of Section 404, which was never even debated in this 
committee.
    I guess I would like to have your response to that. By the 
way, I want to weigh in on Stoneridge. I am really upset given 
the universal understanding that litigation burdens in the 
United States is another detriment. That is another matter.
    I will let you respond to my rant and rave on the lack of 
aggressive reform of 404.
    Mr. Cox. I cannot take, as Chairman of the SEC, 
responsibility for the infamous estimate, the cost of 404, 
because I was in another place responsible for Sarbanes-Oxley 
itself as a member of the conference committee in the House and 
the Senate, as were many of the colleagues here on the 
committee.
    You are absolutely right that none of us expected that 404, 
the language of which had been borrowed from the FDIC 
Improvement Act, would have dramatically different consequences 
when applied generally to corporate America than it did when it 
was applied to banks.
    My diagnosis--and I think this is something that my 
colleagues would probably agree with--is that the big 
difference was that we had a very elaborate audit standard put 
in place to implement 404 that did not exist with FDICIA.
    The audit standard itself was not only used for the 
auditors, but it was also used as a proxy by management because 
there was no separate guidance for management on how they 
should do their part under 404. And that made what was already 
an expensive audit standard even more expensive.
    What we have done, including 2 years of work, is for the 
first time provide guidance directly to management that is very 
simple and straightforward and easy for them to understand, 
that does not involve them in having to reverse engineer the 
long audit standard that was meant not for them but for 
auditors all along.
    Second, the Public Company Accounting Oversight Board, a 
SOX creation, as you know, which promulgated the original audit 
standard, has completely repealed it and replaced it with 
something that is much shorter, half the length, written in 
plain English, top down, risk based, materiality focused, and 
scaleable for companies of all sizes.
    We expect that the combination of this management guidance 
and the new audit standard from the PCAOB will dramatically 
improve the ability of companies of all sizes to comply with 
SOX 404 in a cost efficient way.
    You are absolutely right that was not the case previously, 
and that is why we needed to do all this work.
    The Chairman. The gentleman from Missouri.
    Mr. Clay. Thank you, Mr. Chairman. I thank the Commission 
for appearing before the committee today. It is good to see the 
Chairman back in this room where he had done so much work.
    Let me first ask Ms. Casey a question. I understand that 
industry-wide, there are over one million client accounts that 
will have to be transferred. That means one million client 
contacts, one million clients consenting to changes, and one 
million headaches.
    Do you believe that October 1st provides a sufficient 
amount of time for affected entities to make contact to their 
clients, receive the necessary consent, and deal with the 
paperwork and technical challenges that are involved in 
transitioning accounts?
    Ms. Casey. I appreciate the question, Congressman. As 
earlier mentioned by the Chairman, the Commission is actively 
working to try to address the impact of the Court's decision 
and minimize what will definitely be a significant dislocation 
for as you note, a million account holders.
    I think that as we noted, the Commission had also 
anticipated some of the broader issues that we would have to 
contemplate by seeking a study by Rand on some of the 
considerations that we should take into account as we look to 
the changing nature of the marketplace as far as investment 
advisors and broker-dealers.
    In the short term, however, I think that we are very keenly 
focused on trying to address the issues of dislocation and work 
with the industry to ensure that we are able to adjust to the 
decision effectively, and again, I think the grant of the stay 
will significantly help us do that.
    Mr. Clay. Thank you for that response. Chairman Cox, you 
stated in a speech last July regarding the Commission's soft 
dollar initiative that, ``Today's interpretative release brings 
our guidance up to date and removes some of the uncertainties 
about how this 30 year old law applies in the current 
environment.''
    You also noted that, ``The release clarifies the rules that 
apply to Commission sharing arrangements among money managers, 
brokers and third party research providers.
    It gives the industry needed flexibility to structure a 
variety of arrangements consistent with the purposes of the 
statute. This flexibility will contribute to improved 
efficiencies in the marketplace for research, which will 
directly benefit investors.''
    What has happened in the year since the interpretative 
release to warrant a call for fully repealing the safe harbor 
provision, and are you indicating that there are no further 
steps the Commission can take to add clarity to the provision, 
or are further changes currently under discussion at the 
Commission?
    Mr. Cox. Thank you. Further changes and further 
clarifications are possible from the Commission, for example, 
in the disclosure area.
    At the same time, what the Commission can do in overall 
flexibility and freedom of action here is limited by very 
specific statutory provisions of Section 28(e); and, to the 
extent that we are going to address the fundamental issues of 
conflicts of interest, potential for higher brokerage costs, 
difficulties in administration, and hindrances generally to the 
development of efficient markets, Congress is going to have to 
look at that.
    What we do is we administer the laws as we find them in 
28(e), which as we all know relates back to the situation 30 
years ago when we unfixed brokerage commissions and is a 
fixture unless Congress addresses it.
    Mr. Clay. Thank you for that response. I may have time for 
one more question. I am aware that the Commission recently held 
a roundtable discussion on the issue of Rule 12b-1. I 
understand that the rule has proven an extremely effective 
method of increasing mutual fund investor choice and paying for 
mutual fund distribution.
    Can you tell me what prompted the Commission to hold the 
roundtable?
    Mr. Cox. Yes. Since the rule was put in place, a great deal 
has changed. The original context in which Rule 12b-1 was 
adopted was one in which the mutual fund industry was in its 
infancy. It was in fact a period of net redemptions. There was 
some concern that the industry might suffer crib death.
    It was thought important--because mutual funds were thought 
to be a good thing--that there be an allowance made, 
particularly to deal with temporary imbalances, to use fund 
assets in order to promote the sale of shares in the fund to 
other investors.
    Things are very different now. The industry is very, very 
mature. At a minimum, it is high time that we take a top to 
bottom look of the original purposes of the rule, the way it 
has morphed into something very different, and whether or not 
we have it right.
    Mr. Clay. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Illinois.
    Let me just say to the Commission, we are very grateful. I 
know we have been here for 3 hours. We only have a few members 
who have been very faithful, and I think we can clean this up 
in about half an hour or so, if that is possible, we very much 
appreciate your indulgence. We want to be respectful to the 
members who stayed.
    The gentleman from Illinois. Thank you.
    Mr. Roskam. Thank you, Mr. Chairman. Long time listener, 
first time caller, this afternoon.
    Mr. Chairman, this past week, I have been to two baseball 
games out at RFK. I saw the Nationals lose to the Detroit 
Tigers. Last night, a far more exciting game, the congressional 
game. I paid a lot of attention to the umpires when they were 
there. It strikes me that your demeanor today transitioning 
from your role as a policymaker to your role now is, really, 
you are calling balls and strikes.
    I noticed in the earlier conversation that you had with Mr. 
Kanjorski from Pennsylvania, your careful use of language. I 
mean that respectfully, not parsing use of language, but 
careful use of language. How you characterized the American 
economy as robust and dynamic and so forth, and that you would 
sign onto that characterization, but you also said hey, there 
is more opportunity for us to improve.
    You also used that same admonition to the Congress about 
well, let's make sure there is a sense of equity between public 
company taxation and private company taxation or private equity 
taxation.
    Of course, people like me, we all tend to hear in your 
words what we want to hear and I think you will probably see 
quotations later on about how we have interpreted what you have 
said in different debates, and in the months to come, we will 
all recollect, well, we had Chairman Cox here, and he said, and 
we will have different recollections of that.
    One of the things that is interesting to me is your high 
view of what you did not say but what I think is the doctrine 
of stare decisis, and your decision to move forward with a 
request in the Stoneridge case, to move forward with the amicus 
brief request and so forth.
    Can you just give me your thinking on that? Was that a 
decision that was look, I have this new role, and stability is 
very, very important here, and I understand that thinking, or 
alternatively, do you believe first and foremost that animating 
the plaintiff's bar in this class action type of environment 
helps the SEC to do its enforcement, or is there some rationale 
in between there?
    Mr. Cox. First, thank you for your compliments. I think 
your interpretation of what I have been attempting to get 
across here today is fairly accurate, including the priority 
that I place on predictability in rulemaking and enforcement 
from the Securities and Exchange Commission.
    I think it is absolutely vitally important that our actions 
be knowable in advance. Otherwise, there is not law, but 
something else, a lot of government power being exercised 
arbitrarily.
    I do not think there is anywhere where it could be more 
important for there to be predictability and clarity in 
rulemaking than when it comes to our capital markets because so 
much is at stake. People have to make big bets whether or not 
what they are doing is the right thing to do and they need 
assurance that they have it lined up the right way.
    I think we do a great disservice when we do anything but 
clear and predictable rules based and law based.
    That is not to say this was an easy case or there was an 
automatic outcome. I think you also put your finger on the fact 
that sometimes getting it right means undoing what you have 
done once before.
    I did not reflexively follow the unanimous decision of 
2004, but rather looked carefully at what was before me.
    The staff recommended that the Commission request the 
Solicitor General's Office to file an amicus curiae brief, as 
you know, in support of the plaintiffs in Stoneridge. On May 
29th and 30th--because we have a seriatim process, it occurred 
over 2 days--the Commission voted to approve that 
recommendation.
    I think it is probably not well known that there were two 
parts to that recommendation in support of the plaintiffs, and, 
on one point, the Commission was unanimous.
    I think all of us paid a great deal of attention to, as you 
put it, STARE decisis, and all of us paid a good deal of 
attention to whether or not we had it exactly right. We came 
out slightly different as Commissioners, well, exactly opposite 
in the end, although these are closer calls, as you know, then 
when you push the red button and green button, you are 
completely one way, and that does not mean it is always easy.
    I think everyone here, whichever way they decided that 
case, and they are all here, so you can ask them, but I think 
everyone here is concerned that litigation be used to proper 
ends, and that we not open a Pandora's Box and so on.
    What is going on in that case is that we are focused on 
when conduct is fraudulent and whether conduct can be 
fraudulent. I think the Commissioners believe it can be, and 
they also focused on the circumstances of the particular case 
and whether or not that case should go forward.
    I hope that provides a little bit more context.
    The Chairman. I would just add that we can tell you there 
is nothing new about his being very precise in his language. We 
remember a similar position when he was here. Probably because 
when he was here, precision in language stood out by contrast.
    The gentleman from North Carolina.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    Chairman Cox, one of the great frustrations in dealing with 
corporate governance issues is the inability of shareholders to 
hold corporate management accountable, the inability of 
shareholders to elect directors who will be truly independent 
and will look after the interest of shareholders and not simply 
follow the cues of management.
    That is certainly true in executive compensation, but it is 
true on a lot of issues.
    You said in the beginning of your testimony that one of the 
great accomplishments of our economy is that more than half of 
Americans own stock now, but broker-dealers are the nominal 
holders of 70 to 80 percent of stock. It is in their name. It 
is not in the name of the person whose money paid for the 
stock, the beneficial owner, and under the current law, they 
can vote those shares as long as they do not have in advance of 
a shareholder meeting specific instructions from the beneficial 
owner, the person whose money bought the stock. The beneficial 
owners never provide instructions in advance.
    Shareholder democracy advocates say that creates a mismatch 
when there is a shareholder challenge to management like the 
single protestor standing in front of the tank in Tiananmen 
Square.
    I know you answered earlier in response to Mr. Watt's 
questions that the SEC is now reviewing the New York Stock 
Exchange proposed rule that would change and no longer allow 
broker-dealers as nominal holders of the stock to vote in 
director elections.
    Apparently, it changed the result in the CVS-Caremark case 
where advocates, shareholder democracy advocates, were trying 
to depose Roger Hedrick.
    I have two questions. One is, do you see a problem that 
broker-dealers as nominal holders of stock are changing the 
results of important votes over what the beneficial voters 
voting their own stocks would have decided? Second, should it 
be transparent?
    The shareholders who tried to depose Roger Hedrick, 
including pension fund managers, including the Treasurer of 
North Carolina, Richard Moore, had been trying to find out how 
the votes were cast and they had been stiff armed.
    If broker-dealers as the nominal holders of stocks are 
voting on directors and if we pass the legislation to require a 
vote on executive compensation, should we be able to see how 
broker-dealers are voting different from those beneficial 
holders are voting their own interest?
    Mr. Cox. Apparently, you heard the response to the earlier 
question, so I will not go over that old ground with respect to 
the New York Stock Exchange proposal and so on.
    To take your question or the questions in order, first, the 
propriety of the whole idea of broker voting. As you know, it 
comes about because: First, shareholders decide to hold not in 
their name but in street name; and second, they provide no 
voting instructions.
    In the case particularly of mutual funds and smaller 
companies--by the way, this phenomenon tends to be most 
prominent with retail investors and they tend to be more 
numerous among investors in mutual funds and medium and small 
companies. They have special problems in reaching a quorum.
    To really simplify the analogy, if you have a homeowners 
association and the neighbors do not send their ballots in, 
then you cannot ever do anything. The proxy solicitation costs 
go up. That is now a shareholder cost.
    There are countervailing reasons that also weigh in the 
balance against the idea that it should be only people who own 
the shares and not their nominees who vote.
    There is some voluntariness in the process, too, because 
these people, as I say, have not provided voting instructions.
    The question then separately of private/secret ballot 
voting on the one hand or public voting on the other hand also 
has two edges to it. People can be very passionate--investors 
from all quarters, large and small--about making sure that 
their privacy is respected, making sure there is a secret 
ballot.
    Other people from exactly the same quarters can make the 
argument just as strongly that we ought to know, particularly 
when somebody is purporting to vote for someone else, what they 
are doing. I think you have made reference to that argument 
well here just now.
    This is all in the mix of what we are considering as we 
consider not only broker voting but these related questions of 
empty voting and under voting and over voting and so on, all of 
it relates to the proxy mechanism.
    As we come up with new proxy rules this year, we are trying 
to make sure we have a good handle on all of this.
    Mr. Miller of North Carolina. ``Maybe'' is the answer to 
both of my questions?
    Mr. Cox. I think because it is a work in progress, it has 
to be that. That is the true and faithful answer.
    The Chairman. There is a lot of interest in this and the 
question of third party voting and public disclosure, we took 
that step with the mutual funds, your successor in Congress, 
Mr. Campbell, has been interested in that.
    I can just say now when that rule is promulgated, the 
combined proxy access broker voting, we will have a full 
hearing on that. There is a great deal of interest.
    Mr. Cox. We are considering all of these issues in the 
context of our proxy rules, and we will probably ask questions 
in the release when we put out our proxy rules. I do not know 
they will be the same rule.
    The Chairman. I appreciate it. We will have a hearing and 
we will address it and answer your questions.
    The gentleman from Georgia.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Cox, tell me what your definition of ``non-binding 
shareholder proposal'' is.
    Mr. Cox. We are talking, I think, now about State law, and 
the question would be resolved under State law. Do the 
shareholders have the power under the law, the law of the 
jurisdiction of the company in which they have invested, to do 
something or not? If they do not, then the proposal is purely 
precatory. Otherwise, it can bind the company.
    Mr. Scott. How do you personally feel about non-binding 
shareholder proposals?
    Mr. Cox. I am not sure I understand your question. Do I 
like them or not?
    Mr. Scott. Yes. I want to try to start by getting a feel, 
and according to my information, at a recent Securities and 
Exchange Commission Proxy Roundtable meetings, there have been 
discussions about making amendments to your rules to restrict 
non-binding shareholder proposals.
    That is why I want to get your understanding of them, what 
they are, so that we have a standard of what it is that at 
these proxy meetings that folks are thinking about changing and 
amending the rules to.
    First of all, I want to make sure we get an understanding 
of what they are and then we can better understand why you 
would want to amend the rules regarding them.
    Mr. Cox. During this roundtable, in fact, a series of 
roundtables, to which you allude, we received a good deal of 
healthy contribution to our knowledge and understanding of 
precatory proposals, non-binding proposals, and shareholder 
resolutions in the current environment.
    Many of the investor representatives whom we heard from 
said that this is a useful way, and these resolutions are a 
useful way of communicating with management. We want to make 
sure that we have at the SEC a healthy communication at all 
times between management and companies, and, indeed, we are 
looking for ways to enhance that.
    One of the things that we talked about was the opportunity 
for an electronic shareholder form, whether or not more could 
be done with the Internet, and whether or not our proxy rules 
might stand in the way of any of that.
    I think there is concern coming the other way that 
precatory proposals can be a distraction or a nuisance or 
sometimes can tread on the authority or the sovereignty of the 
directors or the executives who run the company under State 
law, and that tolerating them is negative. We heard a little 
bit of that as well.
    Mr. Scott. Could you give me an example of that? Could you 
give me an example of how they would be harmful to management?
    Mr. Cox. I think the argument goes that management has to 
respond to these, that the general dichotomy in State law is 
that shareholders get to elect directors. They get certain 
financial rights, but they do not get to run the company. It is 
not a democracy in that sense. It is much more a republic.
    When shareholders reach into responsibilities that belong 
under law to directors or management, there are costs and 
consequences that are illegitimate. I think that is the 
argument.
    Mr. Scott. But they are non-binding?
    Mr. Cox. Yes, indeed.
    Mr. Scott. If they are non-binding--
    Mr. Cox. They are non-binding and therefore there is a 
limit. I certainly agree with the implication of your question. 
There is a limit to the distraction and the costs that can be 
involved.
    That is in any case another argument that we heard at the 
Roundtable.
    You asked me how I feel about these things. My view is, as 
with everything else, we want to keep the costs down; and, in 
this case, we want to get all the benefit we possibly can from 
shareholder communication with investors. We want directors to 
be exceptionally attentive to the wishes of the investors 
because that is who elected them. Their job is to look after 
the company for the investors.
    The more communication, the better. We are looking for cost 
effective ways to facilitate that that do not interfere with 
the running of the company.
    The Chairman. A quick comment from the gentleman from 
Texas.
    Mr. Green. Thank you, Mr. Chairman. Mr. Chairman, because 
so much has been said about lawyers today, I feel compelled to 
say this: This is the greatest country in the world.
    One of the things that makes it great is the civil justice 
system, a system wherein persons will respect the rulings of 
courts and decisions accorded.
    My suspicion is that if we could get the system that we 
have here, in Iraq, it would be a day of great celebration.
    I do not in any way demean hedge fund managers for the 
enormous amount of money that they make. I do not demean CEOs 
who make more before noon than a minimum wage worker might make 
all year. I just think that the workers ought to make more. I 
think we ought to increase the minimum wage.
    I mention this because I think that we ought to be careful 
how we demean this great system that we have as it relates to 
the role of the trial lawyer.
    Having said that, I would like to talk to you very briefly 
about what I call pre-screening dubiety. Commissioner Campos, 
if I may, I would like to address you for just a moment.
    You have expressed some consternation about this pre-
screening process as it relates to the lawyers for the 
Commission having to receive some indication from the 
Commission as to how they should proceed with settlement 
negotiations.
    My first question to you, Mr. Campos, is this: Do you have 
any tangible evidence of a public hue and cry for this new 
policy? Was there any public demand for a change in the policy 
that you are aware of?
    Mr. Campos. I am not aware of any public demand, but that 
is not something we would normally look for. The enforcement 
process within the SEC is something that we as a Commission and 
through the auspices of the Chairman and the Enforcement group 
have worked out systems and programs.
    Mr. Green. Absolutely.
    Mr. Campos. That work well to protect--
    Mr. Green. If I may just ask one more question, did the 
lawyers, the lawyers who are there involved and engaged in the 
process, did they ask for this change in policy?
    Mr. Campos. No, but again, that is not normally something 
that the staff would ask for.
    Mr. Green. Is there any indication that there has been some 
abuse of the old policy?
    Mr. Campos. Again, no. You should know, and I think you do, 
that this is a pilot situation, and the Chairman is very well 
aware of the concerns that I have.
    Mr. Green. May I ask a question about that? With this 
pilot, and perhaps Mr. Chairman, I would ask you this question, 
with the pilot program, could you give me the end date of the 
pilot program? When will it end?
    Mr. Cox. It will be permanent if it works. The pilot aspect 
of it indicates that we are going to be completely empirical 
about it and make sure it works as intended.
    Mr. Green. With your empirical data, do you have 
measurements in place such that you will have an acid test to 
ascertain what the performance of the program is or has been?
    Mr. Cox. I can state clearly the objectives, and then what 
we will do is assess whether or not those objectives have been 
achieved. I think it will be fairly clear to each of us as 
Commissioners and to the Enforcement staff as well.
    The object is to make sure that we have clarity and 
consistency across a national program in implementing penalty 
guidance that unanimously was agreed to by the Commission 
relatively recently, and that, when the staff negotiate 
penalties, they are doing so with the wind at their back 
because they have the support from the Commission for what they 
are going to do.
    The alternative, of course, is to come back to the 
Commission after a settlement is negotiated and hope for the 
best. But what that does in the private sector is put people in 
a situation where they are negotiating with a negotiating 
partner who may or may not have authority to do what they are 
entering into.
    We are trying to make sure that finally this process moves 
quickly, and, if all those objectives are met, then I think the 
program will have achieved--
    Mr. Green. One final question. My time is almost up. With 
reference to the position that you put the lawyers in, does 
this put them in a position such that they are strengthened or 
are they weakened or is this really negotiation that they are 
now engaged in or is it more a dictation from the Commissioners 
as opposed to giving the lawyers an opportunity to negotiate a 
settlement as opposed to one being dictated by the 
Commissioners who are appointed?
    The Chairman. I think we can get to the answer now.
    Mr. Green. Thank you, Mr. Chairman. I yield back.
    The Chairman. We will get the answer.
    Mr. Cox. This is meant to strengthen the hand of the 
negotiators because they know they have the backing of the 
Commission for what they are doing. It is not meant to 
hamstring them or to deprive the Commission of good settlement 
opportunities because what generally we will be doing is 
authorizing a range of outcomes.
    No settlement can be approved under long-standing 
Commission rule and practice except by vote of the Commission 
itself. The same is true for the instigation of litigation or 
even the instigation of an investigation.
    In that sense, the Commission is the client and the normal 
communication between lawyer and client here would include at 
least a range of acceptable settlement outcomes.
    I think this process is very consistent with all of those 
objectives.
    The Chairman. The gentleman from Colorado.
    Mr. Perlmutter. Thanks, Mr. Chairman. Mr. Cox, I guess in 
my litigation career, often we liked not to have the client's 
okay so we could always say to the other side, I have to go 
talk to my client before actually being authorized.
    You might put that as one of your little points to check, 
does it work better for your staff having pre-authorization 
obviously as opposed to them having to say, I have to go to my 
client, I have to go to the Commission and get their authority. 
That is not my subject, but I am just giving you that.
    Mr. Cox. Just to quickly respond, I think the difference in 
that example that you gave is this: That might be a lawyer's 
tactic, but there would also be hell to pay if the lawyer went 
and settled the case and forgot to tell the client first.
    Mr. Perlmutter. Right. Obviously, you want to get your 
client's blessing at the end of the day. I agree with you.
    I did want to compliment all of you for your stamina and 
your fortitude. By the time you get to this, it means the panel 
has been sitting there for a long time. Thank you for putting 
up with us.
    Just a couple of comments and then my main question. We 
have heard a little bit, whether it is Blackstone or some of 
the other conversations, about there does not seem to be as 
much activity with IPOs, etc., it is going offshore, it is 
going to London, this or that.
    Really, what I see, and it was in the article today in the 
Wall Street Journal, is there is a lot of debt financing going 
on with respect to corporations. Obviously, that has also 
happened with the subprime lending market, that Wall Street has 
gotten involved in a big way in debt financing. It may be 
easier for a smaller company or whatever to be borrowing money 
than to be going public.
    I do not know what the Commission has seen or if you have 
any concerns, quite frankly, about sort of this debt financing 
that is then participated out in a big way to various people 
and pensions and everything else.
    Just a comment, if you would, on the debt financing that 
seems to be going on.
    Mr. Cox. As you would expect, the Commission is monitoring 
the impact of the subprime lending problems on CSE firms. That 
is our front line responsibility.
    We are not a front line regulator on the other hand with 
respect to subprime lending generally. Our Division of 
Enforcement, however, is actively on the lookout for possible 
securities fraud involving the securitized packages of these 
loans. And we recently formed a working group in the Division 
of Enforcement to focus in specific on problems in the subprime 
securities market.
    Mr. Perlmutter. I guess I would say also that would apply 
to the purchase of corporations, whatever they called it in 
this article, CLOs or collateralized loan obligations. Again, 
there is a lot of money out there, whether it is coming from 
China and Saudi Arabia and being repatriated into the United 
States or whatever, but a lot of money is chasing what appear 
to be, in some instances, lousy loans.
    There will ultimately, if they are securitized, there will 
be a lot of work for your Commission to do, number one.
    Number two, we did not talk about it very much but there is 
this rumor that has been circulating that the Commission is 
thinking about a rule to allow mandatory arbitration of what 
would be probably 10b-5 or fraud kinds of cases.
    I would ask all of the Commissioners, and particularly you, 
Mr. Chairman, is that rumor true or if not--if it is, I would 
like to talk about it for a second.
    Mr. Cox. I think first the rumor got started because there 
was a front page story that said it was so. I had the 
opportunity to talk to a reporter before the story was written 
to say it was not the case. I have said on multiple occasions, 
including earlier here today, that we do not have any pending 
proposal to do that.
    Mr. Perlmutter. I would like to then compliment you on your 
focus on seniors. I would suggest to you and recommend to you 
because we have had a number of panels come before us, but to 
also be talking to the FTC and to the bank regulators because 
as we grow older, baby boomers sort of go into retirement, 
there is this vulnerability/susceptibility to seniors.
    There is so much changing going on, whether it is 
technology, and we each get a different statement. You have 
your interactive proposal up there, a new way to share with 
people.
    Everything keeps changing. It gets more difficult as you 
get older to keep up with that change. We see both on the 
banking side as well as really with securities lots of things 
changing.
    I just wanted to compliment you on that. One more 
statement, Mr. Chairman, since I have such stamina myself.
    The Chairman. Quickly.
    Mr. Perlmutter. I wanted to talk about the third party 
liability or bringing in third parties. Generally, I would 
agree with what was said, that you do not want to bring in 
third parties, but there is also a dram shop kind of element, 
with the third party knowing there is something going on or 
should have known something is going on with respect to bad 
financial information, but still trying to turn a blind eye and 
going ahead and assisting.
    The Chairman. The gentleman's time has expired. Now because 
he has been here, the gentleman from Florida. We want to try to 
move quickly. I will tell all the people that we are going to 
be held to very, very strict time standards.
    The gentleman from Florida.
    Mr. Wexler. Thank you, Mr. Chairman. Thank you, Chairman 
Cox, and the rest of the Commissioners for being here today.
    Six months ago, prior to having this great opportunity to 
serve in the House of Representatives for the State of Florida, 
I was an owner of an investment bank engaged in assisting 
companies raising capital.
    One of the issues facing the American economy since the 
last market corruption is the difficulty small companies are 
now facing in raising venture capital.
    There are several reasons for this, but one of the major 
contributors has been the weakness in the IPO market that has 
made it more difficult for venture capital to be invested in 
small companies because the investors in these kinds of funds 
are not getting the expected returns.
    What we have seen is, we have seen an explosion of activity 
where small companies that probably should not be public have 
been finding ways of getting public with 15c-2-11s, reverse 
mergers, and they have been engaging in a transaction that the 
industry calls a ``pipe'' transaction, which is basically 
selling stock at a discount to investors.
    Last year, and I do not have the number, but I know 
billions of dollars have been invested through this 
transaction.
    The question I have is, I understand that in January, the 
SEC announced a re-interpretation of the Securities Act Rule 
415, which limits the percentage of a company's outstanding 
public float that can be registered for re-sell at one time, 
following a private placement fund raising to 30 percent of the 
public float.
    The problem that this has is this change, in effect, really 
impairs small companies' ability to raise capital, thereby 
endangering the movement of billions of dollars to small 
entrepreneurial companies here in the United States.
    What I would like to know is what is your view of Rule 415? 
Is anybody paying attention to what is happening to the plight 
of small companies here in the United States in terms of their 
problems and being able to raise capital, and what can the SEC 
do to improve the IPO market and/or change Rule 415 to 
encourage the movement of private equity to small companies?
    Mr. Cox. If I may, let me just consult quickly with the 
Director of the Division of Corporation Finance, who is seated 
right behind me.
    [Pause]
    The Chairman. While the gentleman is engaged, no further 
questions will be entertained except by those who were here, 
and we will move very quickly with them. If you are not here, 
do not come.
    [Laughter]
    Mr. Wexler. Thank you, Mr. Chairman.
    The Chairman. This will not come out of the gentleman's 
time.
    Mr. Cox. I want to be very precise in response to this 
question because we are dealing with a former investment 
banker. I think you will be pleased to know that our proposal 
that we have out will permit up to 20 percent of the public 
float to be used for an S-3 going forward.
    There is also, I think, some concern with some kinds of 
PIPE transactions which are thought to be abusive, but the 
normal PIPE transactions would be eligible for that treatment.
    Mr. Wexler. Just to follow up, it is a big issue. The 
underlying problem is the fact that we do not have--our IPO 
market is not operating in a way that is efficiently allowing 
private companies to stay private, which is what they should be 
doing, as opposed to trying to figure out how to get public.
    I would encourage you and the rest of the Commissioners to 
analyze what we may need to do here to encourage private equity 
going to small companies. It is a crisis, and we as a country 
need to take care of that.
    I appreciate your time.
    Mr. Cox. I think our hearts are all in that place.
    The Chairman. Thank you. We have four left. The gentleman 
from California, the gentleman from Connecticut, the gentleman 
from Missouri, and the gentlewoman from Illinois, and we are 
going to move very quickly.
    The gentleman from California.
    Mr. Baca. Thank you very much, Mr. Chairman.
    The first question is in reference to executive 
compensation. Last July, the SEC unanimously adopted a new 
executive compensation disclosure rule. In addition to 
requiring the disclosure of the total annual compensation for 
senior corporate officers and directors, the rule requires that 
each company file a compensation discussion and analysis.
    I would like you to comment on your reaction to the first 
disclosure and how you would rate the usefulness of the initial 
CD&A filing.
    Mr. Cox. I have had the opportunity to personally read 
through several proxy statements, and what I have found is that 
a good deal of the new CD&A is exceptional. It is really good.
    I have also read some really horrid examples. It is not 
just the CD&A in those cases but tends to be that the whole 
presentation does not have the kind of clarity that we hoped 
for.
    Mr. Baca. What do you do in those cases?
    Mr. Cox. What we are trying to do is be very public in our 
comments. John White, who is sitting behind me, the Director of 
the Division of Corporation Finance, has been speaking publicly 
about this and engaging, as has the rest of his Division, with 
the private sector.
    I think all of us as Commissioners have been out talking 
about this. We have the very best opportunity to get this right 
now this year.
    CD&A is new. There is no boilerplate to copy. To the extent 
that we are trying to get away from boilerplate and we are 
trying to have an honest conversation between management and 
their shareholders, let them tell their compensation story in a 
meaningful way. If we start doing it that way in the first 
year, then we will have a lot better opportunity to do that 
going forward.
    If we get into a rut, if we develop some bad habits, then 
of course, it will be a tough bell to un-ring.
    We are viewing right now hundreds of companies, and we are 
going to make a report in the Fall and make that publicly 
available so that we can use some very, very good examples.
    Mr. Baca. You are saying we have not gotten into bad habits 
yet?
    Mr. Cox. There has not been time yet to develop these bad 
habits, and we hope that we never do.
    Mr. Baca. Thank you. The next question goes to all the 
Commissioners on the PCAOB. I think it is important that we 
maintain our commitment to corporate accountability and 
transparency. I think the independence of the PCAOB is 
important in that effort.
    The PCAOB's members are appointed by the SEC and I commend 
you for working with them and addressing critical issues 
regarding the ongoing implementation of the Sarbanes-Oxley 
reform. However, I am concerned that future Commissioners could 
use the current oversight authority over the Board's budget, 
for example, to influence a decision making.
    I would welcome your comments on the independence of the 
PCAOB and on the SEC's authority to influence the Board's 
decision-making process.
    Mr. Cox. How would you like us to proceed in terms of order 
here?
    Mr. Baca. Whichever one you feel needs to answer the 
question or who you think will articulate it a little bit 
better, and if someone wants to articulate it a little bit 
differently, I would like to hear that as well.
    Mr. Cox. I think anyone can jump in here. I will just say 
that Congress has given us very explicit responsibilities under 
Sarbanes-Oxley. One of them is not just budget oversight of the 
PCAOB, but overall supervision of the PCAOB. We are taking that 
very, very seriously. We have developed a very collegial 
relationship with the Board. We have a great deal of respect 
for the Board members and the professional staff at the PCAOB.
    I think the working relationship that we have developed, if 
you had the PCAOB here, would be thought to be a very sound one 
that gives them a great deal of space in which to operate.
    Our operating philosophy is that we do not wish to breathe 
down their necks. We want to let them do their job and 
supervise it. At the same time, on important things--there is 
nothing more important than Sarbanes-Oxley Section 404 
compliance, for example--we just rolled up our sleeves and 
worked with them.
    Mr. Baca. Micro-managing?
    Mr. Cox. It is really unique to 404, and, with respect to 
virtually everything else going forward, we have 
responsibilities to inspect them, for example, which we will 
do, but it is a supervisory relationship, and we do not want to 
micro-manage them. That is absolutely right.
    Mr. Baca. Anyone else?
    Mr. Atkins. Yes, sir. I just wanted to add that you have to 
remember that under Sarbanes-Oxley, we are the people who are 
supposed to oversee them. They are not confirmed by the Senate. 
They are accountable to us. Unlike other independent agencies, 
they are under our supervision.
    Their actions have to be approved by us, and then also 
people can appeal actions that they take.
    Mr. Baca. Mr. Chairman, do you mind if I hear from some of 
the female commissioners? Because of the lateness of the hour, 
I did not want them to be intimidated by the males and not 
respond.
    Mr. Green. [presiding] I understand that. We will now go to 
Mr. Murphy for 5 minutes.
    Mr. Murphy. Thank you very much, Mr. Chairman. I will be 
brief. I wanted to return for a moment to the issue--I know we 
covered it in part earlier--I wanted to just present a piece 
that I hope has not been covered.
    I certainly join the chorus of members and members of the 
public who would like to see the exemptions removed. I wanted 
to also talk about the issue of transparency for a moment, in 
that right now, it is my understanding that although there are 
lists published of those different companies where they have 
short sales and failures to deliver, that right now investors 
and consumers are having a hard time actually getting their 
hands on the actual numbers of those short sales and failures 
to deliver.
    Right now, I think they have to submit basically a Freedom 
of Information Request to the SEC in order to get that.
    I wanted to sort of ask that general question. I know you 
are looking at the remaining exemptions regarding naked 
shorting, but I wanted to also talk about the transparency 
issue and to what extent you think there might be some room to 
talk about some greater transparency and greater ability of 
investors and consumers to get information related to the 
actual volume of short sales and failures to deliver.
    Mr. Cox. I am sure that you know that just a few days ago, 
we voted to eliminate the grandfather provision. We are trying 
to make sure that we actually achieve the intended results.
    We are also interested in all the transparency that we can 
get. To the extent that is possible going forward, I think we 
will be in favor of that as well.
    I will let Commissioner Nazareth, who has spent a good deal 
of time with this add to that.
    Ms. Nazareth. We are, I think, considering--I cannot 
remember whether we proposed it or asked it as a question, but 
in our deliberations just a few days ago, we discussed adding 
transparency with respect to the sales. We talked about having 
fail information made public on a delayed basis. We are very 
cognizant of the need for greater transparency.
    Mr. Murphy. I do appreciate your attention to that issue. I 
wanted to just ask a second question on a much broader basis to 
bring us back a little bit to the issue of fee-based versus 
commission-based, also some of the issues that have been 
discussed around some of the restrictions now regarding 
principal trading transactions.
    It seems to me we are sort of spending a lot of time trying 
to work around the Exchange Act and the Advisors Act, and we 
are having some push back from the judicial system on some of 
the regulatory actions that are being attempted to try to 
update those two acts.
    I guess as a very general question, not that this committee 
needs to put anything more on its plate, given the fairly large 
burden of work that stands before us now, but do you think it 
makes sense in the near future for Congress to take a look at 
some more general and comprehensive reform of both the Exchange 
Act and the Advisors Act to take into account some of the 
updates in the market that maybe you cannot take care of on 
your own?
    Mr. Cox. Again, being very respectful of our different 
roles, you have invited this comment, and I am going to make it 
because of the invitation.
    Yes. I do think that would be an useful examination, 
assuming that Congress worked in its normal way. You would take 
the time to learn as much as you could before deciding whether 
or not you needed to act. I think it would be very, very 
healthy.
    After all, these are relatively old statutory enactments, 
and a lot has happened in the marketplace. Things are changing. 
A good part of our job at the SEC is trying to use our 
regulatory authority to stretch onto a procrustean bed things 
that do not really want to be stretched like that.
    Mr. Murphy. It goes without saying that the market is very 
different than it was in 1934 and 1940, and although there have 
been updates made, it certainly seems to me it makes sense to 
take a look at that from a legislative standpoint.
    Mr. Chairman, I yield back the balance of my time.
    Mr. Green. The gentleman yields back. Mr. Cleaver, for 5 
minutes.
    Mr. Cleaver. I will not take 5 minutes, Mr. Chairman. Thank 
you.
    I have a hedge fund question but I need to ask Mr. Cox one 
question with regard to Stoneridge. Do you disagree with 
President Bush's decision to intervene with the Solicitor 
General and effectively veto your recommendation regarding your 
regulations?
    Mr. Cox. I think those who perceive this as ``our 
decision'' misunderstand a little bit the way the process 
works. The Solicitor General of the United States files with 
the Supreme Court on behalf of the United States, not on behalf 
of the Securities and Exchange Commission.
    It is not uncommon in that process for there to be 
different agency views expressed for a variety of reasons, 
including the fact that different agencies have different 
charters.
    Banking regulators looked at this case through a slightly 
different lens. Our lens is primarily investor protection. 
Theirs is primarily safety and soundness of the banking system. 
I think the SG properly takes all of these things into account.
    Mr. Cleaver. You stand with the decision that the 
Commission made and--
    Mr. Cox. Yes, given our charter and our responsibility, we 
were certainly within our rights to make a recommendation which 
we made.
    Mr. Cleaver. Hedge funds. Warren Buffet thinks that the fee 
schedule or the way the managers' fees are constructed is just 
obscene. I do, too. Somebody buys a house and then becomes a 
billionaire in a couple of years as a manager of these funds. 
That is an issue that probably needs to be dealt with at 
another time.
    What I am concerned about is the Bear Stearns' issue from 2 
weeks ago. They almost ended up and still may be very shaky as 
a result of the subprime market.
    Are we on the verge of a cataclysm as a result of seeing 
some additional Bear Stearns' kinds of situations coming up 
with the subprime market?
    Mr. Cox. Let me speak first to the four corners of the Bear 
Stearns' issue itself. With respect to those two funds, we see 
little systemic risk arising from liquidity issues there.
    On an ongoing basis, we are involved in the prudential 
supervision of all of the CSEs, the five major U.S. securities 
firms. We are regularly in contact with officials at these 
firms, and they provide us with real time reports of not only 
what is going on but particularly emerging financial 
weaknesses, if there are any.
    We also, in addition to that ongoing process, are going to 
further review, using our SEC staff, other issues that 
investment managers for these funds have.
    I do not believe that reporting mechanism thus far has 
brought us any information that would cause us to think that 
the circumstances you are worried about have materialized.
    Mr. Cleaver. Thank you, Mr. Chairman. I do appreciate the 
fact that you, God bless all of you with strong kidneys, it has 
been amazing.
    Mr. Cox. I have been nursing this one bottle of water here 
for about 4 hours.
    Mr. Green. The Chair now recognizes Congresswoman Bean for 
5 minutes. Thank you.
    Ms. Bean. Thank you, Mr. Chairman. I will be brief, with 
just some quick follow-up questions. I think we have asked you 
most of what we wanted to ask you. It is an honor to have you 
here, Chairman Cox, and all of the SEC Commissioners. We do not 
often have access to your cumulative experience and intellect. 
We have a lot to ask.
    In follow-up to when I was here earlier, Congressman Baker 
asked about the precedent of scheme liability. My question is, 
if it were to be set, do you expect to see a major increase in 
the amount of securities class actions?
    I would address that to Chairman Cox and also to those who 
dissented, Commissioners Atkins and Casey.
    Mr. Cox. I actually do not know the answer to your 
question. I think it would depend a great deal upon how the 
court annunciated the rule, the basis for liability, and 
certainly from the SEC's standpoint, our thought would be that 
liability would be essentially what it is today. And that is 
for principal violators who are committing fraud.
    If it is understood in that way, not as something that 
occurs on the margin but someone who is a primary actor, a 
principal violator, then that is the kind of fraud that our 
laws should always have encompassed.
    Ms. Bean. Thank you. Mr. Atkins?
    Mr. Atkins. Thank you. Basically, I think it is important 
to have a test that draws a clear line. That is why I dissented 
from our brief. Based on experience with what was annunciated 
in the Homestore.com brief, I did not think our test works. 
That is through experience at the SEC and then also seeing what 
the various Circuits came up with.
    I do think, to answer your question, there is a real danger 
in chilling ongoing transactions. Companies will be entering 
into transactions up front worried about what they might be 
getting involved with later on, things that they have no idea 
about. I think that goes to the competitiveness of our economy.
    Ms. Bean. Thank you. Ms. Casey?
    Ms. Casey. I would largely agree with that as well. I think 
the question turns on the issue of clarity and just how clear 
the standard was that we put forth. I think in my view, I 
thought the brief before us was overly vague and broad in terms 
of the sweep of conduct that would be included, potentially 
including conduct that would normally be charged as aiding and 
abetting.
    Again, I think it turns on clarity and that would be my 
answer on that. Thank you.
    Ms. Bean. Thank you. I have one other question and this is 
to the group, just an easy affirmative if you think so.
    I know you were already asked as a Commission about the 
Court's order regarding broker-dealers offering fee based 
brokerage until October 1st. My question, and I believe you 
were already asked by some other members today whether you 
thought there was enough time for those affected entities to 
deal with all their customer accounts and make those proper 
transitions, and I believe--
    The Chairman. It was asked, and it is late. Unless it is 
something new, let's not spend too much time.
    Ms. Bean. My follow-up question is, are any of you open to 
consideration of a further stay should it appear they are 
really not able to do that and be compliant? That is the 
question.
    Mr. Cox. We asked the Court for the amount of time that we 
thought we needed. I think from the Court's standpoint, they 
would like us to be very clear on what it is that we think we 
need. At this point, we think we have asked for what we need.
    Ms. Bean. Thank you. I yield back.
    The Chairman. The final one, and let me say tomorrow we are 
going to be voting on the Appropriations bill that includes the 
budget, and if you were eligible for overtime, I promise you we 
would have taken care of you tomorrow, but we will certainly be 
very well disposed tomorrow if any question comes up involving 
your budget.
    The gentlewoman from California is recognized for 3 minutes 
to close out the hearing.
    Ms. Waters. Thank you very much, Mr. Chairman. Thank you 
for your patience. I am sorry I could not be here earlier.
    I just wanted to get here for a minute to say thank you to 
the Commissioners. This is a historic hearing and I am very 
pleased that the chairman organized this hearing so we have an 
opportunity to see all of you and very seldom, this may be the 
first time that I thank a panel for coming to participate, and 
I want to tell you why I am thanking you.
    I thank you for the vote that you did on scheme liability 
and the vote to recommend the Solicitor General file an Amicus 
Curiae in support of scheme liability. I think that is 
extremely important.
    I would just like to say that the victims of Enron and the 
other scandals have all but been forgotten by many people who 
swore to do everything they could do to help folks who had been 
defrauded by Enron and WorldCom and the other corporations that 
were involved in hiding their debt and lying about their 
profits or having people believe they were doing well and they 
were functioning properly.
    It is very important that we know and understand if there 
is collusion between the banks and other financial institutions 
who know what they are doing and who understand and who are 
helping them to hide the lies that they are promoting.
    I thank you for the vote that you have taken. I have no 
questions. I am very pleased that you are here.
    The Chairman. I thank the gentlewoman. I will take the one 
last minute because I do want to comment on Stoneridge. There 
is one very important distinction I want to make.
    I voted along, with the Chairman, for the Public Securities 
Litigation Act. It was the one time I voted to override the 
veto of Bill Clinton. I make this distinction, in that the 
issue was the degree of proof, the degree of argument you 
needed. That seems to me qualitatively different than 
Stoneridge where the question is what category of people are 
eligible.
    The two seem to me distinct in this sense. In the one case 
we were saying, those of us who voted for the Public Securities 
Litigation Act, you need a certain quantum of evidence before 
you can make a case against anybody.
    In the other situation, we were saying that no matter what 
evidence you have, no matter how well developed the case, these 
people simply are outside of it.
    People could obviously come to different conclusions on 
both, but I did think it was important to make that conceptual 
distinction, and that is why, having voted for the Public 
Securities Litigation Act, I felt strongly that the Commission 
did the right thing with Stoneridge.
    One is the case of insufficient evidence and the other is a 
case of sufficient evidence against the wrong party, except 
many of us do not think it was the wrong party.
    I really am very grateful, and I do believe this has been a 
very useful hearing. It has not produced any fireworks. It has 
produced some rational and enlightened conversation about some 
important issues.
    I apologize to the press, but I thank the Commission and 
the members.
    We stand adjourned.
    [Whereupon, at 5:53 p.m., the hearing was adjourned.]





                            A P P E N D I X




                             June 26, 2007


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