[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                    LEGISLATIVE PROPOSALS TO PROMOTE
                    JOB CREATION, CAPITAL FORMATION,
                          AND MARKET CERTAINTY

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

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 16, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-19



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas                BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan       DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri         ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan              JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin             GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York         JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio

                   Larry C. Lavender, Chief of Staff
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking 
    Chairman                             Member
PETER T. KING, New York              GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
KEVIN McCARTHY, California           ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico            JAMES A. HIMES, Connecticut
BILL POSEY, Florida                  GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK,              AL GREEN, Texas
    Pennsylvania                     KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 16, 2011...............................................     1
Appendix:
    March 16, 2011...............................................    41

                               WITNESSES
                       Wednesday, March 16, 2011

Bertsch, Kenneth A., President and CEO, Society of Corporate 
  Secretaries and Governance Professionals.......................     6
Deutsch, Tom, Executive Director, American Securitization Forum 
  (ASF)..........................................................     8
Hendrickson, Pamela B., Chief Operating Officer, The Riverside 
  Company........................................................     9
Silvers, Damon A., Policy Director and Special Counsel, AFL-CIO..    15
Weild, David, Senior Advisor, Grant Thornton LLP.................    11
Zubrod, Luke, Director, Chatham Financial........................    13

                                APPENDIX

Prepared statements:
    Hurt, Hon. Robert............................................    42
    Bertsch, Kenneth A...........................................    44
    Deutsch, Tom.................................................    50
    Hendrickson, Pamela B........................................    83
    Silvers, Damon A.............................................    93
    Weild, David.................................................   107
    Zubrod, Luke.................................................   122

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Written statement of the Center On Executive Compensation....   125
    Written statement of the Credit Union National Association 
      (CUNA).....................................................   127
    Written statement of NASDAQ OMX..............................   130
    Written statement of NYSE Euronext...........................   132
Hurt, Hon. Robert:
    Written responses to questions submitted to Pamela 
      Hendrickson................................................   133


                    LEGISLATIVE PROPOSALS TO PROMOTE
                    JOB CREATION, CAPITAL FORMATION,
                          AND MARKET CERTAINTY

                              ----------                              


                       Wednesday, March 16, 2011

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:04 p.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Schweikert, 
Royce, Manzullo, Neugebauer, McCotter, Posey, Hayworth, Hurt, 
Grimm, Stivers; Sherman, Lynch, Miller of North Carolina, 
Donnelly, Himes, Peters, and Green.
    Chairman Garrett. This hearing of the Capital Markets 
Subcommittee will come to order. Today's hearing is entitled, 
``Legislative Proposals to Promote Job Creation, Capital 
Formation, and Market Certainty.'' Each side will be limited to 
10 minutes for opening statements.
    And I will now yield myself 1 minute.
    Basically, all I want to say during my time is I am pleased 
to chair today's hearing inasmuch as today is the first 
legislative hearing in which we are going to try to discuss 
real solutions that address several of the negative 
consequences that resulted from Dodd-Frank. And these are the 
areas as mentioned: job creation; capital formation; and market 
certainty.
    I am also pleased that we have with us today the 
subcommittee's five freshmen. Basically, these freshmen have 
stepped up to the role of sponsoring the five pieces of 
legislation that we will be discussing from the panel shortly, 
which address the areas of promoting job creation and 
eliminating unnecessary government overreach. These are issues 
that they all engaged in during the campaign of last fall. And 
now that they are here in Washington, I would say that these 
freshmen are proving that they can get the job done and are 
doing something about these issues.
    Throughout the debate over Dodd-Frank in the last Congress, 
I often spoke about the many negative consequences, both 
intended and unintended, that it has caused. Now, some of those 
negative consequences are being exacerbated by what? By the 
rulemaking process that we are going through right now.
    So my hope is that the bills in front of us today will spur 
a productive discussion that will continue here in this 
subcommittee and throughout this Congress. They will focus on 
ways to--as I have already said--get capital, private capital 
off the sidelines, back into the marketplace and create those 
jobs that we so desperately need.
    And with that, I will yield 3 minutes to the gentleman from 
California.
    Mr. Sherman. Thank you, Mr. Chairman.
    Some say that all we worry about here is the next election. 
If you are only worried about the next election, you can 
achieve your purpose by passing statement bills, bills that 
might pass the House or committee, but have no chance in the 
other body. Hopefully, we are focusing on bills that will 
actually pass both bodies, be signed by the President and, 
hopefully, will focus on things that affect the capital 
markets, not just our own reelection chances.
    Dodd-Frank needs technical correction and improvement. 
Those who voted for it acknowledged that it would need a 
technical corrections bill. And we are going to need to pass 
several. But if we pass nothing except on a purely partisan 
basis--as I believe almost every vote at the full committee in 
markup has been absolutely party line, and that is thousands of 
votes we have cast already this year, each of us casting a 
couple dozen.
    And so, I hope that these bills will move forward and 
become bipartisan, both in content and in sponsorship. I am 
particularly concerned with the credit rating agencies. Senator 
Franken and I worked on an amendment that then got mangled in 
conference so that it is a little vague. And it gives a little 
too long to the SEC to act. What we need is to guarantee that 
we clarify that and that we expedite it and we make it clear to 
the SEC that within 2 years, we will not be in a circumstance 
where you get to pick your credit rating agencies when you are 
issuing a debt instrument.
    If the pitcher picks the umpire, it is a strike. We know 
that. And hopefully, we won't be dealing with tactics that try 
to dissuade us from that by saying things like, ``Well, just 
tell people not to rely on the credit rating agencies' 
rating,'' which begs the question, what social purpose do they 
serve, but also, how can you possibly not rely on it?
    Even if you are investing in a mutual fund, you have to 
choose between several different mutual funds. Which one of 
those funds, both with a 5 percent rate of return, is investing 
in the safest instrument? I guess if you have $10,000 to invest 
and you want to spend a couple million dollars evaluating the 
portfolios on your own, you could reach a conclusion. 
Otherwise, you have to rely on the credit rating agency.
    We do have one bill that deals with credit rating agencies, 
but it does not deal with the issue that we have to deal with, 
which is issuers selecting their own rater. And I hope that 
legislation that will drive this change forward may--on an 
expedited basis, will pass this committee on a bipartisan 
basis, whether that is through an amendment to the Stivers bill 
or as separate legislation.
    I yield back.
    Chairman Garrett. And I thank the gentleman. I think we are 
on the same page, hoping to see these bills get through the 
process and to the White House and signed.
    And with that, I will yield 1 minute and 20 seconds to the 
gentleman from Arizona.
    Mr. Schweikert. Thank you, Mr. Chairman. One minute, 20 
seconds. Okay. I am going to actually speak to H.R. 1070, which 
is the Small Company Capital Formation Act of 2011. And part of 
this, we have had a couple of the folks who are here to testify 
today have actually come and visited me in my office talking 
about what has gone on with Reg A.
    If you take a look at the little charts--and we have a 
handful of charts we have mocked up, you see that nice, long, 
flat line on the right-hand side? That is where we have been 
now since 1992, 1993 where we have not raised the dollar amount 
that you can take a small company and go and put it out on the 
market.
    If we truly care about creation of jobs, if we care about 
capital formation and getting that velocity of innovative ideas 
in the marketplace where you and I can buy and sell them in 
some type of stock or equity, I think this bill is simple. It 
directs the SEC to raise that limit up. We would like to raise 
it up to $50 million for initial offerings within those Reg A 
rules.
    Thank you, Mr. Chairman.
    Chairman Garrett. I thank the gentleman.
    Mr. Peters is recognized for 2 minutes.
    Mr. Peters. Thank you, Mr. Chairman, and thank you for 
holding a hearing on legislative proposals to promote job 
creation. I think there is bipartisan agreement that job 
creation should be our top priority. And some of the bills that 
we will be dealing with today are issues that were worked on in 
the last Congress in a bipartisan fashion.
    For example, I worked with Chairman Garrett as well as Mr. 
Meeks on including a provision in Dodd-Frank that includes a 
$150 million exemption from the SEC registration requirement 
for private funds and also directs the SEC to come up with a 
registration scheme for larger firms that takes into account 
the amount of risk they pose for investors or for the larger 
economy. I think the amendment provides the SEC with the 
flexibility that they need to come up with a less burdensome 
registration scheme and I look forward to continuing to work 
with Chairman Garrett on this issue.
    I also worked closely with many of my colleagues on both 
sides of the aisle and in both Houses of Congress on the 
derivatives title of Dodd-Frank. Bringing greater regulation 
and transparency to these markets is of critical importance. 
But I remain committed to making sure that end-users who are 
using derivatives to hedge actual risk are not required to post 
margins. It is important that as we revisit the end-user 
exemption, we keep in mind the important role that captive 
finance companies play in supporting the work that end-users do 
to create jobs and to grow our economy and also pension funds 
that provide retirement security to millions of workers and 
retirees.
    Mr. Chairman, I yield back the balance of my time.
    Chairman Garrett. Thank you.
    The gentleman from California for 1 minute and 20 seconds?
    Mr. Royce. Yes, thank you, Mr. Chairman. I think the future 
of U.S. competitiveness is dependent upon us looking at three 
glaring impediments to capital formation: first, unnecessary 
and duplicative regulation; second, excessive litigation; and 
third, a convoluted Tax Code. We have the second highest 
corporate tax code in the world.
    In terms of raising capital through IPOs, I have watched us 
go from a situation where half of the world's new public 
companies in the 1990s were here to one today where we have 13 
percent. And, as Mr. Weild notes in his testimony, there has 
been a precipitous decline in the number of publicly listed 
companies in the United States on our exchanges.
    We had 8,823 in 1997, and 5,091 at the end of last month. 
That is a 42 percent decline. And this is the definition of 
capital flight. When capital, both human and financial, can 
relocate anywhere around the globe with the type of ease that 
they have today, we have to reassess the business environment 
that we have created here.
    The three problems I indicated are all problems that 
Congress has contributed to mightily. And I am grateful to the 
Chair for taking a critical step in this endeavor and I look 
forward to the testimony of our witnesses.
    Thank you, Mr. Chairman.
    Chairman Garrett. I thank the gentleman.
    To the gentlelady from New York for a minute and 20 
seconds?
    Dr. Hayworth. Thank you, Mr. Chairman.
    And thank you to our witnesses for joining us. Congressman 
Royce's comment regarding the business environment could not be 
more apt. And vis-a-vis that, this week we have introduced the 
Burdensome Data Collection Relief Act, H.R. 1062. And that 
would repeal Section 953 of Dodd-Frank. There have been 
statements of support from both sides of our political aisle 
supporting this concept of repeal. And I appreciate that.
    Existing law does, as you all know, require extensive 
disclosure regarding executive compensation. And all material 
information that a company that issues stock--is a public 
company--is required to be disclosed, material information that 
would affect a decision to invest or divest or vote for 
directors. The legislation that we have proposed in H.R. 1062 
only applies to immaterial disclosures, which is, in fact, 
virtually all of that particular section.
    One lesson of our financial crisis that started, as we 
know, in 2008, is the importance of risks and incentives 
associated with executive compensation. H.R. 1062 focuses 
disclosures regarding executive compensation on these risks and 
incentives by eliminating irrelevant and confusing, extraneous 
information.
    The disclosure requirement, Section 953(b), as it now 
exists would be costly and time-consuming for employers, would 
serve no useful purpose for company shareholders, and most 
crucially, would divert resources from job creation. And that 
is our critical role here. So for these reasons, we need to 
repeal Section 953(b).
    I thank you again for your testimony today.
    And I thank the chairman. I yield back.
    Chairman Garrett. The gentlelady yields back.
    The gentleman from Virginia for a minute and 20 seconds?
    Mr. Hurt. Thank you, Mr. Chairman.
    I want to thank you all for being here this afternoon.
    Mr. Chairman, I want to thank you for holding today's 
hearing on these important legislative proposals that will 
facilitate job creation by increasing the flow of private 
capital to small businesses. As noted by Republican and 
Democrat Members in last week's hearing with the SEC, there is 
serious concern about the effects of the new government mandate 
for advisers to private equity included in Dodd-Frank. These 
unnecessary registration requirements, which do not make the 
financial system more stable or less risky, will impose an 
undue burden on small and mid-sized private equity firms and 
will decrease capital available to spur job growth.
    This is why I have introduced H.R. 1082, the Small Business 
Capital Access and Job Preservation Act, with bipartisan 
support. If enacted, private equity advisers will be given the 
same exemption under Dodd-Frank that venture capital advisers 
receive. This will allow small businesses to access capital, 
expand, and get people back to work. With unemployment still 
unacceptably high in my district, Virginia's 5th District, and 
across the country, now is not the time to impose onerous and 
unnecessary regulatory requirements that force firms to divert 
essential capital from preserving and creating jobs.
    I look forward to the testimony of our witnesses and thank 
them for their appearance before our subcommittee today.
    Thank you, Mr. Chairman. And I yield back the balance of my 
time.
    Chairman Garrett. I thank the gentleman.
    Now, the gentleman we have been waiting to hear from is 
recognized for a minute and 20 seconds.
    Mr. Stivers. Thank you, Mr. Chairman. You will always be 
waiting to hear from me because I am the most junior member of 
the committee. I would like to thank the chairman for calling 
this important hearing.
    And the five bills we are going to talk about today are 
going to be addressing some of the most burdensome parts of the 
Dodd-Frank bill that are having a negative impact on jobs in 
our country. Specifically, the proposal that I have brought 
forward deals with the asset-backed securities market. It is 
the Asset-Backed Market Stabilization Act of 2011.
    Last year, in Dodd-Frank, the credit rating agencies were 
basically held liable for potential shareholder lawsuits. And 
as a result of that, the Securities and Exchange Commission had 
to issue two no-action letters to get the asset-backed 
securities market moving again. And unfortunately, that is not 
a way to make things work.
    We can't have laws on the book and have regulatory agencies 
saying we are not going to enforce this law. So I think there 
is a better way to move forward.
    I know Mr. Sherman talked earlier about the conflict of 
interest. I think we need to deal with both of those things 
long-term. And we are looking at making some changes that may 
deal with a little more of that in this bill. But this bill 
will basically do away with Section 939(g) of the Dodd-Frank 
bill and go back to the old Section 436.
    It will help folks like Ford, and like Honda, that employs 
about 4,400 people in my district and built 400,000 cars last 
year. This is a way to finance the creation of things and make 
sure that we continue to have jobs in this country.
    I look forward to hearing the witnesses. And I appreciate 
the opportunity to bring this bill forward.
    Thank you, Mr. Chairman. I yield back.
    Chairman Garrett. The gentleman yields back.
    And at this point, I welcome again the entire panel for 
being with us here today. Without objection, your complete 
statements will be made a part of the record. And as those of 
you who have been on these panels before know that you will 
each be recognized for 5 minutes. And, of course, before you 
are the red, green, and yellow lights to advise you to keep you 
within that timeframe, if we can do so.
    So with that, I begin with 5 minutes to Mr. Bertsch, 
please.

STATEMENT OF KENNETH A. BERTSCH, PRESIDENT AND CEO, SOCIETY OF 
       CORPORATE SECRETARIES AND GOVERNANCE PROFESSIONALS

    Mr. Bertsch. Thanks. My name is Ken Bertsch, and I am the 
new executive head of the Society of Corporate Secretaries and 
Governance Professionals, which is an association of governance 
officers. We have 3,100 members.
    Thank you for the opportunity to testify on the repeal of 
Section 953(b) of the Dodd-Frank Act, which requires company 
disclosure on the pay ratio, as Congresswoman Hayworth just 
mentioned, between the CEO and the medium-paid employees of the 
company. We acknowledge the public policy concern on widening 
pay gaps in the United States. However, we believe the required 
disclosure will not be material or meaningful to investors and 
that Section 953(b) as now written will be difficult and 
expensive to implement.
    We note also, by the way, that the SEC faces challenges in 
implementing many Dodd-Frank reforms and is otherwise resource-
constrained. The SEC must prioritize and focus on the most 
important issues facing investors in the securities market. 
Accordingly, we believe the provision should be repealed. If 
Congress wishes to move ahead on the concept of the pay ratio, 
a more workable legislation should be enacted.
    We have two basic problems here. One, the pay ratio would 
not provide meaningful information to investors, in our view. 
Under existing SEC requirements, investors get extensive 
disclosure on executive compensation.
    SEC disclosure documents are meant to contain information 
that a reasonable investor needs to make an investment 
decision. SEC disclosure documents are not meant to contain 
every item of information that any investor could possibly want 
to know. Proliferation of disclosure requirements not censored 
on a disciplined standard will make SEC disclosure documents 
unusable for the average investor.
    The pay ratio will not provide meaningful, comparable data 
because it is not based on similarly situated employees. There 
is a great deal of noise around what constitutes a company 
employee with many firms contracting out work locally or 
globally and others not doing so. Some companies have overseas 
locations with lower pay levels where much of the work is done. 
They have outsourced.
    These companies may have better pay ratios than those that 
have chosen to maintain their operations, call centers, for 
example, in the United States. Companies with franchisees 
rather than company staff stores will also likely have a better 
pay ratio. The pay ratio will not be a meaningful measure to 
compare the CEO's compensation or to compare the pay practices 
within a single industry.
    We believe investors have indicated limited interest in 
obtaining such pay ratio information from companies. We are 
aware of votes last year on 10 shareholder proposals requesting 
reports on pay disparity. On average, the proposals were 
opposed by 93.9 percent of the shares voted. They received 
lower levels of support than many other shareholder proposals 
concerning executive compensation.
    Finally, if investors are concerned that they need 
additional disclosure on pay equity, they can exert pressure 
through say-on-pay votes, votes on directors, and shareholder 
proposals.
    The second major area of concern--the requirement as 
written is burdensome well beyond its benefit. Given the 
definition used in this provision, we fear that large, 
worldwide U.S. companies will not be able to calculate the 
median of the annual total compensation of all employees, as 
the law specifies, with the degree of precision and certainty 
required for information filed under U.S. securities laws.
    Payroll systems are not set up to gather the kind of 
information required under this provision. This is especially 
the case for companies organized into multiple business 
operating units. Those business units keep records and have 
internal controls over what each employee is paid, but they 
report aggregate figures to the parent company for inclusion in 
consolidated financial reports for public filings.
    A company would have to convert the pay of each employee 
globally into the elaborate pay formula applicable to the named 
executive officers in the summary compensation table. To our 
knowledge, no public company now calculates each employee's 
total compensation this way. For a company with tens of 
thousands of employees, this would be a very large and costly 
task, at best.
    My written testimony lists some of the questions that 
corporate staff must answer in trying to comply. I would point 
to one in particular that--and there are really a lot of 
different questions that would have to be answered. One that is 
a little bit different than other understanding is that local 
privacy laws in some markets actually prevent the export of 
personal compensation information across borders without 
employee consent.
    In summary, we believe the provision is simply unworkable 
and would produce information that is not meaningful to 
investors. Thank you.
    [The prepared statement of Mr. Bertsch can be found on page 
44 of the appendix.]
    Chairman Garrett. I thank the gentleman.
    Mr. Deutsch for 5 minutes?

    STATEMENT OF TOM DEUTSCH, EXECUTIVE DIRECTOR, AMERICAN 
                   SECURITIZATION FORUM (ASF)

    Mr. Deutsch. Thank you very much, Chairman Garrett, for 
inviting me to testify here on behalf of the American 
Securitization Forum. My name is Tom Deutsch. I am the 
executive director of the organization that represents over 330 
member institutions who originate the collateral for most 
mortgage and asset-backed securitizations in America. That 
includes auto loans, student loan companies, mortgage 
originators, small banks, large banks, as well as lenders to 
small and medium-sized businesses.
    Let me first just address a couple key points of the 
importance of the securitization markets to the overall global 
economy, in particular, the U.S. economy. Currently, there are 
over $11 trillion outstanding of securitized assets in America, 
of all these different asset classes: credit cards; student 
loans; asset-backed commercial paper, etc. In particular, 91 
percent of all outstanding loans--at least currently, loans 
that are being originated to support auto loans to consumers, 
91 percent of those are financed through the securitization 
process.
    Finally, even talking about Government-Sponsored 
Enterprises. Although 95 percent of mortgages in America today 
are backed by the U.S. Government, Fannie Mae, Freddie Mac, and 
Ginnie Mae all securitize those loans into the secondary market 
and sell them to the institutional investors such as pension 
funds, mutual funds, insurance companies, and others who seek 
returns on those investments.
    But as we saw in 2009, once the securitization market 
stopped working, the credit market stopped working. It is a 
very quick--and, unfortunately for American consumers, 
unfortunate that they wouldn't be able to access auto loans, 
credit cards, and student loans at many of the same levels, 
certainly not looking to go back to a 2006 credit availability, 
but we certainly don't want to go back to a 2009 credit 
availability, either.
    As we saw strong consumer ABS demand uptick into 2010, we 
had significant issuance of auto and other asset-backed 
securitizations. We also saw credit availability expand for 
more lower-income borrowers and also at cheaper rates 
throughout the United States.
    My purpose in testifying here today is to talk about two 
issues. In my written statement, I go into a great amount of 
detail about some key issues related to securitization that 
concerns the orderly liquidation authority provisions of the 
Dodd-Frank Act. There is a tremendous amount of detail, and I 
will leave that to your future reading.
    But in my oral remarks today, I do want to focus on the 
ASF's strong support for Congressman Stivers' legislation to 
effectively repeal the repeal of 436(g). Although he has not 
introduced it yet, we have seen the draft that is available 
online.
    In this testimony, I would like to provide a little bit of 
background of how 436(g) works and in particular, why it is 
important for the securitization markets that we have a long-
term fix. As Congressman Stivers indicated, on July 22nd, the 
repeal of 436(g) went into effect. That was the day after 
President Obama signed Dodd-Frank into law. That same day, the 
securitization markets completely shut down.
    No issuer of auto loans, student loans, etc., was able to 
put a securitization in the market because of a peculiar SEC 
regulation, items 1103 and 1120, that specifically require that 
ratings be included in statutory prospectuses. The 
securitization markets are the only markets to be impacted by 
this.
    Because of this, credit rating agencies were not willing to 
provide consent to include those ratings into the statutory 
prospectuses because at that point, they had become subject to 
strict Section 11 liability. That is in their ratings, when 
they are providing some forward-looking statements about the 
potential credit quality out of the underlying assets and what 
that performance may be over time, they are very concerned that 
with 20/20 hindsight 5 years down the road, you could look back 
and say, that assessment wasn't exactly right. We are going to 
bring litigation against you because you didn't have the right 
assumptions.
    This is very different than existing parties that are 
subject to Section 11 liability under the Securities Act 
because they look at existing facts and things that they can 
actually verify as opposed to make forward-looking statements. 
That is why it is critical to distinguish between credit rating 
agencies being subject to this Section 11 strict liability and 
other potential actors that are currently subject to this 
liability.
    But at this point, the markets have resumed under the SEC's 
no-action letter, which we certainly are very grateful for the 
SEC staff to be able to keep the securitization markets going. 
But a no-action letter is certainly not a long-term or 
permanent fix. So what we are proposing and what we are 
strongly supportive of is legislation that would ultimately 
repeal the repeal of Rule 436(g) so that the securitization 
markets can go back to normal and have the permanency 
associated with being able to understand the rules and not have 
this subject to change in the SEC's position.
    I thank you very much for the time. And I look forward to 
answering any questions that committee members may have.
    [The prepared statement of Mr. Deutsch can be found on page 
50 of the appendix.]
    Chairman Garrett. And I thank you for your testimony.
    Ms. Hendrickson for 5 minutes?

 STATEMENT OF PAMELA B. HENDRICKSON, CHIEF OPERATING OFFICER, 
                     THE RIVERSIDE COMPANY

    Ms. Hendrickson. Chairman Garrett, members of the 
subcommittee--
    Chairman Garrett. Can you just pull your microphone up a 
little bit?
    Ms. Hendrickson. Sorry.
    Chairman Garrett. And then you might want to even pull it 
up closer to you a little bit.
    Ms. Hendrickson. Can you hear me now?
    Chairman Garrett. There you go.
    Ms. Hendrickson. Chairman Garrett, members of the 
subcommittee, my name is Pam Hendrickson, and I am the chief 
operating officer of The Riverside Company.
    Riverside is a private equity firm that manages $3.5 
billion of investor funds. We use that money to buy and build 
small companies that, with our capital and guidance, will grow 
and create hundreds of jobs. Today, the 50 companies we own in 
the United States together employ more than 10,000 people.
    There are more than 2,000 small and mid-market private 
equity firms like us in the United States. I am here today to 
support legislation introduced by Representative Hurt of 
Virginia that would eliminate the Dodd-Frank requirement that 
private equity firms register with and report to the Securities 
and Exchange Commission under the Investment Advisers Act of 
1940.
    Registration will not accomplish Dodd-Frank's stated 
purpose of helping identify and reduce systemic risk in the 
U.S. financial system. Let me begin by sharing a story. 
Commonwealth Laminating and Coating is a small company based in 
Martinsville, Virginia. It manufactures solar window films that 
help shield cars, houses, and commercial properties from the 
sun's heat.
    Its products are sold all over the world, but they are all 
manufactured in Martinsville. In 2006, CEO Steve Phillips 
realized that he needed much more capital to continue to grow 
his company. Riverside was approached as a potential capital 
source and acquired a majority interest in CLC.
    At the height of the recession, Riverside and CLC together 
invested an additional $16 million in capital to significantly 
boost the company's production capacity. Together, we grew jobs 
by 73 percent.
    By the time Riverside sold CLC last summer, the company had 
grown its earnings by 277 percent. The teachers, firefighters, 
and government employees whose pension funds invested in 
Riverside received a significant return.
    The bottom line is that with Riverside's help, this small 
company in Martinsville nearly quadrupled its earnings and 
significantly increased its employee base during our ownership 
period. This is what Riverside and firms like us do every day.
    But suppose the CLC investment hadn't turned out so well. 
Could a failure there have created the type of cascading losses 
that caused the financial crisis? The answer is a resounding 
no.
    Private equity investors commit capital over a 10-year 
period. They generally have no right to pull their money out of 
a fund. So there simply couldn't be a run on the bank.
    Any financial loss would have been confined to this single 
investment. Private equity transactions are not interconnected 
with other financial market players. And they are not related 
to each other.
    The failure of any one company cannot cause a ripple 
effect. Our world is not the Wild West. Our industry is closely 
watched and heavily scrutinized by a very sophisticated group 
of investors, generally large pension funds, foundations, and 
endowments who employ highly-trained consultants and 
experienced lawyers.
    Private equity has been around for 50 years and has 
survived at least 3 cyclical downturns. In all those years, 
neither the SEC nor this committee have had to devote time to 
worrying about negative macroeconomic impacts or investor fraud 
in private equity. We invest in businesses and people, not 
publicly traded securities.
    What happens to Riverside if the proposed registration and 
reporting requirements take effect? Let us look at just one 
issue, valuation. Valuing private companies where there is no 
publicly traded stock is an art, not a science. It is 
challenging, and it is expensive. While we develop quarterly 
valuations for our investors, they understand that the true 
value of an investment is known only when the acquired company 
is sold and profits are returned to them.
    Under the proposed new rule, all private equity firms would 
be required to calculate the value and performance of each of 
their funds, and, therefore, each of their companies, on a 
monthly basis. You can do the math. Our 50 companies times 12 
months means we would have to undertake 600 separate valuations 
each year to comply with the regulation.
    Under the new rules, small firms might need to calculate 
240,000 company values each year. That is for members of the 
Association for Corporate Growth, who represent about 20,000 
small companies. According to comments filed with the SEC, 
estimated annual costs per firm of this exercise range from 
$500,000 to $1 million.
    To conclude, private equity exists in large part because 
the public equity markets do not do a good job of serving the 
capital needs of small companies, the companies that generate 
the most job growth. Instead of imposing additional costs and 
regulatory burdens, we should be supporting a system that has 
steadily provided critical capital to small and growing 
businesses, thereby strengthening companies, communities, and 
creating more jobs.
    Thank you for the opportunity.
    [The prepared statement of Ms. Hendrickson can be found on 
page 83 of the appendix.]
    Chairman Garrett. Mr. Weild?

  STATEMENT OF DAVID WEILD, SENIOR ADVISOR, GRANT THORNTON LLP

    Mr. Weild. Thank you. Chairman Garrett and members of the 
subcommittee, thank you for inviting me to testify this 
afternoon on job creation, capital formation, and market 
certainty, issues that are absolutely critical to our Nation's 
economic future. My name is David Weild, and I am a senior 
adviser for the Capital Markets Group of Grant Thornton, one of 
the six global audit tax and advisory organizations.
    The United States stock market, once the envy of the world, 
has suffered a devastating decline in numbers of small initial 
public offerings. Our research and analysis of relevant data 
strongly demonstrates that small businesses and entrepreneurs 
cannot access the capital they need to grow jobs. The United 
States is losing more public companies from our listed stock 
exchanges than we are replacing with new IPOs.
    When measured by number of listed companies, America's 
stock exchanges are declining while those of other developed 
nations are increasing. It is imperative that Congress, 
regulators, and stakeholders in the debate evaluate and take 
action to increase the number of U.S. publicly listed 
companies. An increase to the Regulation A ceiling will provide 
a less costly and more effective alternative for smaller 
entrepreneurial companies that want to access the public 
capital markets and may also enable smaller growth-oriented 
companies to access the public market at an earlier stage in 
their growth cycle.
    We applaud the Small Company Capital Formation Act as the 
beginning of a campaign to bring back the small IPO, the U.S. 
economy and our stock markets. Regulation A was originally 
enacted during the Great Depression to help the economy by 
improving small-business access to equity capital. Huge 
startups and growth companies have the option to borrow money 
from a bank, and consequently, access equity risk capital is 
essential to drive entrepreneurship.
    This bill does three things that are enormously beneficial 
for small companies' capital formation and in turn, the U.S. 
economy. First, it will drive down costs for issuers by 
permitting the use of a simpler offering circular for the SEC's 
review. Second, it opens up the Regulation A exemption to a 
size--this is important--that will allow companies to list on 
the New York Stock Exchange and NASDAQ and to avail themselves 
of the so-called ``blue sky'' exemption, thus avoiding 
extremely costly State-by-State filings.
    And third, it will allow issuers to gauge the viability of 
an offering by meeting with investors before incurring the 
significant costs of an offering. This last so-called ``testing 
the waters'' provision may not seem like much, but there has 
been a steady increase in IPOs that are postponed, withdrawn, 
priced below the low end of the range of the IPO filing range, 
or that have broken the IPO issue price within 30 days of the 
completion of an offering. These so-called ``busted deals'' can 
be ruinous to small companies.
    I fully endorse the passage of this bill to increase the 
cap on Regulation A from $5 million to $50 million with the 
following requirements: one, that issuers file audited 
statements with the Securities and Exchange Commission and 
distribute such statements to prospective investors; two, that 
issuers be required to submit their offering statements to the 
SEC electronically; three, that periodic disclosures be 
determined by the SEC--we recommend that they mimic those 
required of registered companies--and four, that the SEC 
stipulate so-called ``bad boy'' provisions to disqualify from 
participation in this market those individuals or entities with 
a disciplinary or criminal history.
    I applaud the subcommittee for seeking solutions to the 
capital formation challenges that small-growth companies face. 
Passage of the Regulation A draft bill is a necessary first 
step in the campaign to bring back the small IPO, generate 
jobs, and revitalize the U.S. economy.
    Please note, however, that this Regulation A draft bill 
alone is not going to be sufficient to get the IPO market back 
on track and to get America back on the path to prosperity. I 
encourage Congress to seek many solutions, including a 
congressional charter for a new stock market, one that focuses 
on providing the essential economic model that sustains the 
infrastructure needed to support small public companies and 
drive that long-term growth and prosperity that we all seek for 
all Americans. A market such as this would also drive tax 
revenues without costing the taxpayers a dime.
    Thank you for this opportunity to present on such an 
incredibly important topic. I am pleased to answer any 
questions. Thank you.
    [The prepared statement of Mr. Weild can be found on page 
107 of the appendix.]
    Chairman Garrett. I appreciate your testimony. We will have 
questions in a moment.
    Mr. Zubrod for 5 minutes?

     STATEMENT OF LUKE ZUBROD, DIRECTOR, CHATHAM FINANCIAL

    Mr. Zubrod. Good afternoon, Chairman Garrett, and members 
of the subcommittee. I thank you for the opportunity to testify 
today regarding legislative proposals to promote job creation, 
capital formation, and market certainty. My name is Luke 
Zubrod, and I am a director at Chatham Financial.
    Today, Chatham speaks on behalf of the Coalition for 
Derivatives End Users. The Coalition represents thousands of 
companies across the United States that utilize over-the-
counter derivatives to manage day-to-day business risk. Chatham 
is an independent adviser to businesses that use derivatives to 
reduce risk. A global firm based in Pennsylvania, Chatham 
serves over 1,000 end-user clients, ranging from Fortune 100 
companies to small businesses, including clients in 46 States 
and every State represented by members of this subcommittee.
    The Coalition supports the efforts of this subcommittee to 
pass legislation aimed at reducing systemic risk and increasing 
transparency in the OTC derivatives market. The Coalition also 
appreciates the bipartisan nature of the present undertaking. 
The overwhelming and bipartisan support for end-users was made 
clear in the amendments adopted to the financial reform 
legislation that passed the House in December 2009.
    Several amendments, including the Murphy-McMahon amendment 
which passed with 304 votes, were intended to ensure that the 
salient economic requirements of the Act were appropriately 
focused on those entities whose use of derivatives could 
jeopardize financial stability. In essence, they were intended 
to protect end-users from onerous bank-like regulation that 
would divert precious working capital from job-creating 
activities, including research and development and business 
expansion.
    Let me turn to where things now stand in terms of 
implementing the derivatives title of the Dodd-Frank Act and 
point out where end-users have the greatest concern. The 
Coalition appreciates recent comments by Federal Reserve 
Chairman Ben Bernanke, CFTC Chairman Gary Gensler, and SEC 
Chairman Mary Schapiro indicating that margin requirements 
should not be imposed retroactively. Appropriately, the 
chairmen recognized that the retroactive imposition of a margin 
requirement would upset the reasonable expectations of market 
participants when they entered into preexisting contracts and 
could severely restrict economic growth.
    The Coalition is concerned, however, by recent testimony 
provided by regulators concerning the imposition of margin 
requirements on end-user transactions used prudently for the 
purpose of risk management. Congress recognized that the 
imposition of margins on end-users would divert working capital 
from job-creating activities and hamper economic growth while 
offering no appreciable mitigation of systemic risk.
    Indeed, following the conclusion of the conference 
committee, the chairmen of the four committees with primary 
jurisdiction over Title 7 took steps to make clear that 
regulators did not have the authority to impose margins on end-
user hedges. However, in spite of congressional intent and the 
clear language of the statute, some regulators appear to have 
interpreted Title 7 as giving them authority to impose margin 
on end-user hedges and even worse, requiring swap dealers to 
impose margin requirements on all end-user hedges. We 
respectfully request that this committee provide end-users with 
certainty by clarifying that their hedges will not be subject 
to margin requirements.
    The Coalition appreciates the hard work of the CFTC, the 
SEC, and prudential regulators in proposing more than half of 
the 150 or more expected rules to meet the 1-year rulemaking 
timeline mandated by Congress. The regulators have run an open 
and transparent process and have met with representatives of 
the Coalition approximately a dozen times. However, we are 
concerned that the statutory deadline for rulemaking does not 
allow regulators sufficient time to incorporate 
recommendations, craft thoughtful rules, and conduct adequate 
cost/benefit analyses.
    The regulators have sufficient authority to adopt a phased-
in approach to implementation of rules. We are eager to ensure 
the final rules strengthen the market and minimize unintended 
and unnecessary consequences.
    We therefore, respectfully ask this committee to consider 
extending the date by which final derivatives regulations must 
be promulgated, which is now set at July 15, 2011. 
Additionally, I elaborate in my written testimony on two more 
issues, which I will briefly summarize.
    First, though we strongly support the legislation's 
transparency objective, we are concerned that proposed real-
time reporting rules could inadvertently jeopardize end-users' 
ability to secure efficient market pricing in certain 
situations. Second, the Coalition is concerned that capital 
adequacy guidelines finalized by the Basel Committee on banking 
supervision late last year could unnecessarily and 
substantially increase end-user costs incurred as they use 
derivatives to manage their business risk.
    As regulators go about the important work of finalizing the 
rules intended to address problems revealed by the financial 
crisis, it is critical that well-functioning aspects of these 
markets not be harmed. We appreciate your attention to these 
concerns and look forward to continuing to support the 
subcommittee's efforts to ensure that derivatives regulations 
do not unnecessarily burden American businesses, jeopardize 
economic growth, or harm job creation.
    Thank you for the opportunity to testify today.
    [The prepared statement of Mr. Zubrod can be found on page 
122 of the appendix.]
    Chairman Garrett. And I thank you.
    Mr. Silvers for 5 minutes?

  STATEMENT OF DAMON A. SILVERS, POLICY DIRECTOR AND SPECIAL 
                        COUNSEL, AFL-CIO

    Mr. Silvers. Thank you, Mr. Chairman. I am Damon Silvers. I 
am the policy director and special counsel for the AFL-CIO. I 
am testifying today on behalf of the Americans for Financial 
Reform and the Consumer Federation of America as well as for 
the AFL-CIO.
    The 250 member organizations of Americans for Financial 
Reform represent well over 50 million Americans and their 
families. I should note I am also the Deputy Chair of the 
Congressional Oversight Panel for TARP, however, I am not here 
on behalf of either the panel or its staff.
    The title of today's hearing is, ``Legislative Proposals to 
Promote Job Creation, Capital Formation, and Market 
Certainty.'' These are the very goals that the Dodd-Frank Wall 
Street Reform and Consumer Protection Act sought to achieve 
after the most traumatic financial crisis since the Great 
Depression cost our Nation 8 million jobs, left 13 million 
families facing home foreclosure, and destroyed $10 trillion in 
household wealth.
    Well-regulated financial markets facilitate capital 
formation and help private companies obtain the financing they 
need to grow and create jobs. Poorly-regulated markets, such as 
we have seen over and over again in the last 15 years, lead to 
bubbles and panics and excess volatility, which destroy 
confidence and jobs. If we want well-regulated markets, 
Congress must first give regulators the opportunity to 
implement the Dodd-Frank Act and the financing necessary to do 
so effectively.
    The American people are genuinely worried--I think that is 
an understatement--about unemployment and are frustrated that 
Congress is focused on side issues that will not help people 
get back to work. A tracking poll conducted by the Kaiser 
Foundation in February found that 71 percent of adults in this 
country feel that Congress is paying too little attention to 
the economy and jobs. Tragically, cynical exercises in 
financial deregulation, such as the bills under consideration 
today, are only going to intensify public frustration with this 
Congress.
    If there was a truth-in-labeling act for Congress, the 
Business Risk Mitigation and Price Stabilization Act would be 
called the ``Help Create Another AIG Act.'' The proposal would 
amend the definition of a major swap participant to prevent 
regulators from designating from special oversight 
undercapitalized and highly-leveraged financial institutions 
that maintain major derivatives positions that threaten U.S. 
financial stability.
    I have here the Congressional Oversight Panel's 300-page 
unanimous bipartisan report on AIG that will hopefully help 
refresh the subcommittee's memory as to where this type of 
deregulation leads. The Burdensome Data Collection Relief Act, 
which would repeal the Dodd-Frank requirement that issuers 
disclose the ratio between CEO pay and median worker pay, 
should be called the ``Promote CEO Pay Secrecy Act.''
    I have here the Congressional Oversight Panel's unanimous 
bipartisan report on executive compensation and the TARP, 
which, among other things, contains the testimony of the 
special master for executive pay that executives of our 
country's major financial firms ``feathered their own nests to 
the tune of billions of dollars while their companies were 
receiving public money and laying off tens of thousands of 
Americans.''
    The Small Business Capital Access and Job Preservation Act, 
which would amend the Investment Advisers Act to provide a 
registration exemption for private equity fund advisers, should 
be called the ``No Accountability for Leveraged Buy-Out Funds 
Act.'' I have here the special regulatory reform report of the 
Congressional Oversight Panel, which lays out the systemic 
risks associated with leveraged private pools of capital. And 
if one has an interest, one could take a look at tens of 
thousands of jobs lost through leveraged buy-outs over the last 
2 decades in the United States.
    The Small Company Capital Formation Act, which would allow 
offerings of up to $50 million to rely on the Regulation A 
exemption and seek capital from the investing public without 
audited financial statements should be called the ``Promote 
Penny Stock Fraud Act.'' And finally, the Asset-Backed Market 
Stabilization Act, which would exempt the rating agencies from 
the same standards that apply to other experts giving an 
opinion in connection with offerings of asset-backed 
securities--remember asset-backed securities. They are, after 
all, the market that caused the collapse of our economy--would 
be called the ``Illegal Immunity for the People who Brought You 
the Financial Panic Act.''
    In reality, these legislative proposals are not attempts to 
help put Americans back to work or to restore confidence in our 
financial markets. They are a systematic effort to chip away at 
the first meaningful steps toward reregulating our financial 
markets and restoring some level of stability after 30 years of 
deregulation led to the worst financial crisis, the worst 
unemployment, and the greatest economic suffering in our 
country since the Great Depression.
    For these reasons, the Americans for Financial Reform, the 
AFL-CIO, and the Consumer Federation of America strongly oppose 
each of these efforts on behalf of Wall Street interests to 
weaken the Dodd-Frank Act and to further put our country in 
danger of repeating the experience of 2008. Thank you.
    [The prepared statement of Mr. Silvers can be found on page 
93 of the appendix.]
    Chairman Garrett. I thank the gentleman for his testimony. 
But if we rename all the bills, we won't continue to get the 
bipartisan support that we have been getting for all of them.
    [laughter]
    So with that, I thank the panel for all their testimony.
    And we now go for questioning to the gentleman from 
Virginia for the first 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman. And I appreciate you 
taking me out of order.
    Mr. Silvers, I was particularly interested in your 
testimony. I assume that you would agree--it sounds like you 
have been around here long enough. It sounds like to me you 
would agree that there are significant costs to increased 
regulations to businesses--in this case, private equity funds--
which have to comply with these new regulations. Do you agree 
with that?
    Mr. Silvers. I would compare that to telling you that every 
time you sneeze, there is a cost. The regulations that the 
Dodd-Frank Act subjects private equity funds to, which is 
registration under the Investment Company Act, I think is 
widely understood to be among the least onerous of the 
regulations that we apply to financial markets.
    Mr. Hurt. But you would agree there is a cost?
    Mr. Silvers. I think there is a--as I said, I think there 
is a cost to every act one takes in life.
    Mr. Hurt. Okay. Thank you. And in the SEC budget, have you 
been following the SEC budget request and the tremendous strain 
that all these additional regulations are going to put on the 
SEC? Are you familiar with that?
    Mr. Silvers. I have been following the systematic effort to 
strip the SEC of the resources necessary to protect American 
investors by you and your colleagues. Yes, I have.
    Mr. Hurt. Okay. And so, you understand that by imposing 
these new costs on these businesses, it necessarily means there 
is less capital to put into companies that create jobs in 
Martinsville, Virginia, where I represent the people who have 
25 percent unemployment? You understand that?
    Mr. Silvers. Are you asking me to agree with the way you 
see the world? Or are you asking me a question? I am not sure 
which.
    Mr. Hurt. I am asking you a question. And that is--
    Mr. Silvers. Can you restate it?
    Mr. Hurt. --do you agree that by increasing the costs to 
these businesses, that it necessarily means they have less 
capital to put on the street to employ people in this country 
and specifically, in Martinsville, Virginia--
    Mr. Silvers. Absolutely not.
    Mr. Hurt. --which is part of my district.
    Mr. Silvers. Absolutely not. And let me explain to you why.
    Mr. Hurt. How, then, do you--what would you say to the 61 
people who now have jobs in Martinsville, Virginia, as a 
consequence of the investments made by, in this case, 
Riverside? What would you say to those people?
    Mr. Silvers. I am saying you are cynically exploiting them 
to deregulate Wall Street and further put our entire country in 
danger of repeating 2008. That is what I would say.
    Mr. Hurt. You call it exploitation. I call it a paycheck.
    I yield back my time.
    Chairman Garrett. Thank you.
    The gentleman from Massachusetts for 5 minutes?
    Mr. Lynch. Yes. Let us continue along that line of 
questioning, Mr. Silvers.
    First of all, I want to thank the chairman. And I want to 
thank all the witnesses for their willingness to help the 
committee with its work.
    I want to associate myself--and I do this rarely--but I 
want to associate myself with the remarks of Mr. Silvers. As a 
general matter, I think this group of bills, these five bills--
some are worse than others. But I generally think that the 
effort to redefine a major swap participant and to induce 
leverage--hello--I am astounded.
    I am astounded that we have not even recovered from this 
disaster, this financial crisis, and we are planting the seeds 
for the next one by inducing leverage, by removing liabilities 
from rating agencies who grade asset-backed securities as AAA 
and they turn out several weeks later to be junk bonds, to stop 
the disclosure of CEOs' pay in relation to their employees in 
denigration of the efforts of Dodd-Frank to align the interests 
of the CEO and the investors and shareholders, to block the 
registration of financial advisers for private equity firms. 
This is back to the future.
    I am as astounded by the substance of this proposal as I am 
by the speed at which we have forgotten what got us into this 
mess to begin with. It is really breathtaking that we are back 
into a--regulation.
    And in response to the gentleman who asked the question 
about costs, Mr. Silvers, can you estimate what it cost 
American homeowners and--well, go globally. These asset-backed 
securities were sold--they went viral, including through AIG 
and others. What is the total cost of the failure, the abject 
failure of us to induce responsibility and accountability and 
to preserve the integrity of our financial system? What was the 
cost of that?
    Mr. Silvers. Congressman Lynch, a lot of people have been 
trying to figure that out. The number is very large. I will 
give you some numbers to give you a frame of reference.
    Mr. Lynch. Please.
    Mr. Silvers. As I think everyone knows, this Congress gave 
authority for TARP that was $700 billion.
    Mr. Lynch. Which I voted against. But go ahead.
    Mr. Silvers. Approximately $500 billion was laid out. 
Current estimates are that the net cost will be somewhere in 
the $50 billion range for TARP alone. Trillions of dollars were 
laid out by the Federal Reserve to address the economic crisis 
and prevent it from worsening. The costs involved in that are 
very hard to measure.
    In terms of vanished wealth, in terms of the fall of the 
stock market, the fall of the housing market--and the housing 
market is still falling--my testimony reflects, I think, the 
general estimates of around $10 trillion.
    In terms of lost GDP, it is hard to figure exactly because 
you have to make assumptions about what would have happened had 
we not gone through this horrific policy failure. But again, 
the estimate--I think one could reasonably estimate something 
on the order of 5 percent of GDP a year for several years 
running. That is approximately--let us see, GDP is $15 
trillion. That is $1.5 trillion in lost GDP. It is very hard to 
estimate. What is the financial cost one associates with 
throwing 13 million families out of their homes? I don't know 
how to price that.
    I don't know how to price what it means that multiple 
millions of Americans have graduated from high school and 
college and gone into nothing. I don't know how to price that. 
And, by the way, we are just talking about the United States 
now. We are not talking about worldwide--Ireland, Iceland, 
Spain, one could go on. I don't think there is any doubt, but 
the right number here is well in excess of $10 trillion.
    Mr. Lynch. Okay. I see my time has expired. I thank the 
gentleman.
    And I yield back. Thank you, Mr. Chairman.
    Chairman Garrett. I thank the gentleman and recognize 
myself for 5 minutes. First, although the gentleman says he is 
baffled that we are moving legislation or considering 
legislation that would induce or increase leveraging, I don't 
know of any of the legislation that the panel has just 
discussed here today that says anything with regard to 
leverage.
    Second, the gentleman speaks to the fact that we are trying 
to undo some of the causes--legislation dealing with the 
underlying causes of what brought us to the--
    Mr. Lynch. By redefining--will the gentleman yield?
    Chairman Garrett. If you will just let me finish this 
thought.
    Mr. Lynch. Sure.
    Chairman Garrett. --the causes of it. And I don't know that 
any panel that we have had over the last year-and-a-half said 
that part of the cause of the problems was the lack of data 
compilation with regard to salaries, nor was it anything to do 
with the interconnectedness of private equity funds. So those 
were not the causes. Those are just the elements that are now 
the additional burden that we are placing onto industry and the 
capital markets that are preventing the very same jobs that I 
think everyone on this panel would like to see brought to 
fruition.
    Did the gentleman have just a--
    Mr. Lynch. Right, just in looking at the way we are 
redefining major swap participants, we are--allowing entities 
that do not have the underlying capital as Dodd-Frank would 
require.
    Chairman Garrett. Yes.
    Mr. Lynch. And so, those folks would be included and be 
able--that would be an inducement to that type of activity for 
firms that don't have the underlying capital.
    Chairman Garrett. Okay.
    Mr. Lynch. You will have more of that. That is why I am 
saying it increases leverage.
    Chairman Garrett. Reclaiming my time. And I am reminded 
that that provision has already been addressed by this House 
and has passed this House by over 300 bipartisan votes 
previously.
    Mr. Lynch. Why did we redefine here, then?
    Chairman Garrett. Well--
    Mr. Lynch. It is also in law--and the House and Senate--
    Chairman Garrett. The gentleman--
    Mr. Lynch. --passed that. And the President signed it.
    Chairman Garrett. I did not yield the remaining time.
    Mr. Lynch. I am sorry.
    Chairman Garrett. So with my remaining time, Mr. Zubrod, I 
see in your testimony that you are requesting legislative 
extension of Dodd-Frank with regard to derivatives. Can you 
very quickly, with regard to rulemaking, talk to us about how 
much time is necessary in order to get this thing right?
    Mr. Zubrod. I think the Coalition for Derivatives End Users 
hasn't formally put forward a proposed time request.
    Chairman Garrett. No?
    Mr. Zubrod. But I think it is eventually critical that as 
we regulate this very large market for the first time, 
regulators have sufficient time to write thoughtful rules.
    Chairman Garrett. Thank you. And you also mentioned other 
changes to legislative fixes that the Coalition has looked 
through. You talked about real-time reporting, the capital 
considerations with regard to Basel, not creating margin 
requirements by the end-users, I guess, would be one specific 
one you need. Anything other than those?
    Mr. Zubrod. We have written over 100 pages of comment 
letters to the--
    Chairman Garrett. For legislative fixes?
    Mr. Zubrod. On regulatory matters. For now, the items that 
we are focused on receiving some legislative clarification 
include the clarification that margins shall not be applicable 
to end-user transactions.
    Chairman Garrett. Right. That is the main one.
    Mr. Zubrod. And the implementation date.
    Chairman Garrett. Okay.
    Mr. Silvers, you came up with a couple of different names 
for these bills. The Business Mitigation and Price 
Stabilization Act should be called the ``Help Create Another 
AIG Act.'' But if you look at the legislation that is drafted 
out there, any reading of it--and when you consider under the 
Murphy amendments that passed the House, as I said before, with 
wide bipartisan support, how would anyone take that to read 
that it would not capture an AIG situation again? It didn't 
capture it the last time with the regulators. But why would it 
not capture it with that definition as we have presented?
    Mr. Silvers. There are, in Dodd-Frank, in addition to those 
capital requirements that obviously fall under the--that banks 
fall under through the normal banking system, there are two 
categories of swaps--of actors in the derivatives market under 
Dodd-Frank.
    Chairman Garrett. I understand.
    Mr. Silvers. One category is what you call--is a dealer, 
swaps dealer. The other category is a major swaps participant. 
The full definitions of both categories are being worked out 
through regulation at the moment. But the difference between 
the two fundamentally is the notion of a dealer is somebody who 
is basically working to--would appear to be somebody working to 
maintain a balanced book. A major swaps participant would be 
someone likely to be taking risks. They would be taking one 
side of a particular position.
    What AIG was doing was taking one side of a particular 
position. They were not a dealer. They sometimes referred to 
themselves as a dealer. But that is not what they were. They 
were taking the risk without the other side--
    Chairman Garrett. So you are saying--I understand what they 
were doing.
    Mr. Silvers. --in a whole set of derivatives--
    Chairman Garrett. So you would say that they would not be 
captured by this definition?
    Mr. Silvers. While it is always conceivable that the 
regulators could write their definition of a dealer in such a 
way as to capture parties that are taking a major position in 
one direction, it doesn't seem the obvious way one would 
envision a dealer.
    Chairman Garrett. Mr. Zubrod, do you have a comment on 
that? And then I will close on that.
    Mr. Silvers. But that is your risk right there.
    Chairman Garrett. I understand your perspective.
    Mr. Zubrod. AIG had a $2 trillion book of derivatives. I 
think the bill that this House passed and the bill that the 
Senate passed--each of them would very clearly encompass AIG in 
its major swap participant definition.
    Chairman Garrett. There is no way they are going to squeak 
out of this, however the regulators--
    Mr. Zubrod. A $2 trillion derivatives book is not a needle 
in a haystack.
    Mr. Silvers. But you are gutting that provision.
    Chairman Garrett. Thank you.
    Mr. Himes, from Connecticut, for 5 minutes.
    Mr. Himes. Thank you, Mr. Chairman.
    Just a question for Mr. Silvers. I share your concern that 
there is a fairly cynical effort under way now to--in a not 
terribly thoughtful fashion--roll back a lot of the progress 
that was made. As a response to all of the catastrophe that you 
described--and I appreciate the dramatic flair of your 
testimony. But I am also very conscious of the fact that the 
exercise of getting this right is a very nuanced, technical, 
and esoteric thing. And there is one thing I wanted to ask you 
about, which pertains to private equity. It is something I have 
been thinking a lot about.
    You object to the Small Business Capital Access and Job 
Preservation Act, suggesting that perhaps private equity 
entities generate what you call leverage pools of capital. And, 
by the way, if we are talking about hedge funds, I am with you 
on that one. But I am really curious whether it is your belief 
that private equity operates at the fund level with a lot of 
leverage.
    I don't know a lot of private equity entities that operate 
with leverage at the fund level. Of course, they do leverage-up 
their investments. But if not, whether you really do believe 
that even the largest private equity players do create systemic 
risk.
    Mr. Silvers. Congressman Himes, you correctly point out 
that where private equity or leverage buy-out funds put 
equity--put leverage into our economy is at the firm level, not 
at the management company level or at the fund level. The 
limiteds are not borrowing money. Right? The company that they 
invest in is.
    As--there were two issues that have led, I think, investor 
advocates and people concerned about the regulation of the 
financial system to be in favor of including private equity 
funds in the requirement to register--that private pools of 
capital have to register with the SEC. The first issue is the 
one that I addressed in my oral testimony, which is the issue 
of systemic risk.
    Systemic risk comes as several things happen: one, as the 
firms that private equity funds invest in get larger; two, as 
the banking system lays on more and more leveraged loans; and 
three, as particular private equity sponsors essentially have 
more and more--have larger and larger sets of obligations 
through their portfolio companies into the banking system. If 
the economy weakens, bank lenders and credit rating agencies 
become very interested in the capacity of the private equity 
complex to be able to backstop the credits across the pool.
    Mr. Himes. I agree that--
    Mr. Silvers. [Off microphone.]
    Mr. Himes. I am sorry, let me just interrupt.
    Mr. Silvers. Yes.
    Mr. Himes. I am following you here. But it seems to me that 
the right answer for us, then, is to follow the extenders of 
leverage, which are typically lenders into the firm level 
investments. And I am 100 percent with you there. I just am 
really wondering--and I have one follow-up question about the 
industry, too--whether we are, in fact, looking at the private 
equity entities as themselves generators of systemic risk.
    Mr. Silvers. What I was pointing out is contrary to the 
testimony of my fellow panelists. There is an interlinked 
quality to that risk at the private equity fund level that is 
not going to be very easily captured by bank regulators looking 
at the exposure of this bank or that bank.
    The second point that is not in my prior oral testimony, 
but which is very important to investor advocates is that there 
is a set of fundamental investor protections such as a single 
common standard of fiduciary duty and access to Federal courts 
in cases of breaches of fiduciary duty or worse conduct that is 
created when a private equity fund registers with the SEC as an 
investment adviser. And those investor protections are 
extremely important to the teachers and firefighters and the 
like--my fellow witnesses.
    Mr. Himes. Thank you. I don't mean to interrupt. But I do 
actually have one question. It is actually not relevant to the 
legislation at hand. It is just something that, oddly, I don't 
know the answer to. It doesn't often happen in these hearings.
    But very quickly, if the chairman would indulge me, I have 
heard anecdote after anecdote of leveraged buy-outs that 
destroyed jobs and leveraged buy-outs that created jobs. My 
question to both Ms. Hendrickson and Mr. Silvers--is there any 
study, any third-party validation as to whether this industry, 
net-net--and, by the way, it is not perhaps legislatively 
relevant. I am just curious what the facts are. Is there any 
third-party validation around whether this industry as a whole 
creates or subtracts jobs from the economy?
    Maybe Ms. Hendrickson, and then Mr. Silvers.
    Ms. Hendrickson. As with most things, there are many 
studies. And it depends on which one you choose to look at. The 
most recent studies that I have seen and corroborated by our 
own data, actually, are that through the recessionary period, 
we grew jobs 6 percent. Now, we invest in middle-market-type 
companies. But the industry average appears to be about 6 
percent job growth through the recession.
    Mr. Himes. Thank you.
    Ms. Hendrickson. There are obviously anecdotal examples 
where that did not happen.
    Mr. Silvers. There is a gentleman named Joshua Lerner at 
Harvard who has done very good work in this area. The evidence 
that he has found is somewhat inconclusive. There are two 
methodological problems. Many studies, particularly those 
sponsored by the industry, conflate essentially the LBO 
business model and the venture business model. No question the 
venture business model creates jobs.
    European studies that have disaggregated those two models 
tend to find that the--and there is another issue, which has to 
do with sort of apples to apples issues around companies. The 
issues that disaggregate the business models typically find 
that the LBO model destroys jobs, and the leverage model 
creates them. The V.C. model creates them. The labor movement's 
view of this is heavily influenced by some very large anecdotes 
at companies like SafeWay and RJR Nabisco, which involve tens 
of thousands of lost jobs, worker suicides and the like.
    Mr. Himes. Thank you.
    Thank you very much, Mr. Chairman.
    Chairman Garrett. And if there are other things that you 
just don't know. Okay.
    To the--
    Mr. Himes. Don't get used to it.
    Chairman Garrett. Okay. Wow. Okay.
    To the gentleman from Arizona for 5 minutes.
    Mr. Schweikert. Thank you, Mr. Chairman. I thought that was 
an interesting question.
    Mr. Silvers, forgive me for not jotting these down. Who are 
the folks that you speak for?
    Mr. Silvers. The AFL-CIO, the Consumer Federation of 
America, and the Americans for Financial Reform, which is a 
large Coalition of more than 250 organizations. The members of 
the Americans for Financial Reform are in my written testimony.
    Mr. Schweikert. Okay. Mr. Silvers, is it typical for those 
groups to take a position opposing a bill without reading it?
    Mr. Silvers. Excuse me?
    Mr. Schweikert. Is it typical for those organizations to 
take a position on the bill without reading it?
    Mr. Silvers. I can tell we are going to have a dispute as 
to what the bill says. Why don't we come to it?
    Mr. Schweikert. Mr. Silvers, can you grab for me the nice, 
little bill in regards to the $50 million capital formation?
    Mr. Silvers. Just a moment. What did I do with the bills? 
Sorry. I brought the bill text with me, if--
    Mr. Schweikert. The Small Company Capital Formation Act.
    Mr. Silvers. Okay.
    Mr. Schweikert. H.R. 1070.
    Mr. Silvers. Okay.
    Mr. Schweikert. Do you have it?
    Mr. Silvers. Not yet, but that is okay. Why don't you read 
the provision that you think I misunderstood?
    Mr. Schweikert. No, no, I was going to ask you--to take you 
to page three, line six. You made a rather bold statement 
that--how simple and evil this was because of the lack of 
audited financials. And I know literacy may be a problem around 
here, requiring the issuer to file audited financial statements 
with the Commission and distribute such statements to 
prospective investors. What are we missing here, Mr. Silvers?
    Mr. Silvers. When we reviewed the bill, the bill gave that 
as an option to the SEC. If you since changed it to make it 
mandatory, then I would suggest that is an improvement, and I 
congratulate you for it. But when we look at it, it was 
voluntary. It wasn't voluntary. It was an option the SEC could 
choose to impose.
    Mr. Schweikert. Okay. Mr. Chairman, Mr. Silvers, it was 
always this way in our work-up. But I appreciate you being 
willing to play.
    Mr., is it ``Weild?''
    Mr. Weild. ``Weild.''
    Mr. Schweikert. ``Weild.'' Could you actually share with 
me--because you and I have already had some conversation--both 
the good and the bad you think would come from changing the 
Rule A amounts, or the Reg A amounts?
    Mr. Weild. First of all, the bill the way it is currently 
crafted has some--I would call it an enhanced Regulation A, not 
only in terms of size, but in terms of investor protections. So 
I applaud the committee on that.
    It allows us to access capital--corporations, small 
corporations--more cost-effectively and avoid the train wrecks 
that they typically have in the market by not being able to 
test the waters. And so, that is a great positive--much more 
cost-effectively because you don't have to add a lot of the 
exhibits that are typically associated with the prospectus of 
formal S-1 that add up to quite a bit of cost and that very few 
people ever actually read in the marketplace.
    Mr. Schweikert. Mr. Weild, share with me what you think the 
biggest threat to the markets is if we do this.
    Mr. Weild. If we do this? I truly believe there are not big 
threats to the market. To put it into context, when WorldCom 
went--filed for bankruptcy, it had $100 billion in assets. And 
that represents 2,000 $50 million transactions, which in 
today's terms would be increasing the size of the listed market 
by 40 percent. So essentially, by strangling small companies 
and entrepreneurship by not allowing them cost-effective access 
to capital, we really dampen the economy job formation. And 
exactly, I would say the constituency that Mr. Silvers 
represents.
    Mr. Schweikert. All right. Mr. Weild, as you may know, I 
have a compulsion about making graphs and charts. It is a 
problem in my statistical background.
    Up on the screen--actually, go back one, please, you will 
notice the lines. And one thing I found fascinating is it looks 
like over the last decade or so, we have actually had a 
shrinkage of U.S. listings. While you see our competitors, 
somewhat of an explosion by some of them. What is your 
understanding of what has happened to the number of traded 
equities?
    Mr. Weild. We have lost from the peak in 1997, which 
interestingly was before the crescendo in the bubble--we have 
lost 42 percent of listed companies from the United States 
listed equities markets, which, by definition, is pulling jobs 
out of the U.S. economy. And by contrast, other countries, 
including China--the one at the top of the chart there is 
China. But almost every other industrialized country in the 
world is net adding listed companies to their markets.
    Mr. Schweikert. Mr. Weild and Mr. Chairman, thank you.
    Chairman Garrett. And I thank the gentleman.
    The gentleman from Ohio for 5 minutes?
    Mr. Stivers. Thank you, Mr. Chairman. Thank you for holding 
this hearing.
    I appreciate all the witnesses.
    I would like to ask Mr. Deutsch a question about Ford. If 
you remember, last year Ford had to cancel an offering. You 
talked about the whole bond market closing down. But clearly, 
there was a front page article in the B section of the Wall 
Street Journal about Ford having to cancel, I think it was a 
$100 million asset-backed bond, because of the very provision 
we are talking about, Section 929(g) in the Dodd-Frank Act. Can 
you just explain to the committee quickly what happened there?
    Mr. Deutsch. Yes, I think Ford and--again, I don't know all 
the extreme particulars of the Ford transaction. There were 
actually a number of transactions in the market, coming to the 
market at that point. I believe Ford had a transaction. I think 
it was closer to a billion dollars that they were looking to 
sell off into the secondary market of loans backed by prime 
quality auto collateral.
    Mr. Stivers. And what is the effect of them not being able 
to finance that $100 million?
    Mr. Deutsch. Ultimately, they can't sell cars.
    Mr. Stivers. Or employ people, right?
    Mr. Deutsch. Which, obviously, you stop employing people to 
make those cars.
    Mr. Stivers. Right. So, the change in the law was effective 
immediately. The SEC did step in and have a no-action letter 
that kept the law from being enforced. And that is where we are 
today. And that is why some things are allowed to sort of go 
forward at this point.
    But I guess the SEC is maybe talking--according to Mr. 
Silvers and some other reports I have seen--about removing 
rating agency references altogether. That is another direction 
to go. Frankly, that would solve this problem, too. But the 
result is two things. It has more cost in the marketplace 
because if the liability is passed on through the increased 
cost at the rating agencies, it will cost issuers more and, 
therefore, affect jobs. But the second piece is less 
information will be available in the marketplace--readily 
available in the marketplace. Are those good or bad things?
    Mr. Deutsch. Generally, it is a very bad thing. Although 
the SEC could change their rules to no longer require that a 
rating has to be included in a statutory prospectus, you would 
still have ratings being conveyed to investors.
    Mr. Stivers. Right.
    Mr. Deutsch. But they are conveyed in these ancillary 
documents. Why wouldn't you want to convey the information in 
your primary offering document?
    Mr. Stivers. They would be less readily available is a way 
to say that.
    Mr. Deutsch. Of course.
    Mr. Stivers. The information may still be available, but it 
results in less information in the marketplace.
    Mr. Deutsch. Correct.
    Mr. Stivers. And so, that is why I prefer this approach as 
opposed to that approach. You could just remove the rating 
requirement from the prospectus, which is the other way to go. 
But it makes information less readily available.
    I do have a question for Mr. Silvers really quickly because 
I want to talk about more information and less information in 
the marketplace. Can you quickly tell me how people know what 
an investment grade bond is?
    Mr. Silvers. If you are asking whether I think that having 
ratings in the bond market is a good idea or not, I think that 
is a complicated question. I think it is--
    Mr. Stivers. I am not asking you that. I am asking you how 
people would describe an investment grade bond. If you were 
going to just tell somebody what an investment grade bond is, 
what would you refer to? You know what the answer is.
    Mr. Silvers. An investment grade bond is a term of art, and 
it derives from the credit rating.
    Mr. Stivers. Thank you. And that is the point. Credit 
ratings are an important part of the information in the 
marketplace.
    Mr. Silvers. I think you misconstrue my testimony.
    Mr. Stivers. Yes.
    Mr. Silvers. I don't disagree with you.
    Mr. Stivers. Okay. Essentially, what I am telling you is if 
you remove the ratings from the prospectus, which is the 
direction you want to go, you are going to have information 
less readily available in the marketplace.
    Mr. Silvers. Actually--
    Mr. Stivers. It is just a fact.
    Mr. Silvers. No, but you misunderstand the direction I want 
to go.
    Mr. Stivers. Okay. Okay. I will let you go a little bit 
here. I don't have much time, though.
    Mr. Silvers. I think you have touched on a very important 
issue in terms of financial reform.
    Mr. Stivers. And, by the way, it is not that I want to do 
nothing about the rating agencies.
    Mr. Silvers. No, I know. And I--
    Mr. Stivers. There is work to be done.
    Mr. Silvers. I think it may very well be that you and I 
completely agree about this.
    Mr. Stivers. Okay.
    Mr. Silvers. Now, it is not a matter of--
    Mr. Stivers. --I am reading or listening to your testimony, 
by the way.
    Mr. Silvers. Right. It is not a matter on which I can say 
that it is--you put me in an awkward position, in a sense, 
because there are differences of opinion in the people that I 
represent on this question.
    Mr. Stivers. I notice the United Auto Workers not on your 
list, by the way.
    Mr. Silvers. That is not--
    Mr. Stivers. You are going to have a hard time getting them 
on this one.
    Mr. Silvers. That was not what I was referring to.
    Mr. Stivers. Okay. Yes.
    Mr. Silvers. All right. What I was referring to is--and I 
will give you an example.
    Mr. Stivers. Yes.
    Mr. Silvers. Credit ratings have been used to screen out 
investment grade commercial paper for money markets.
    Mr. Stivers. Yes.
    Mr. Silvers. Many people feel that is a critical function 
to avoid a huge moral hazard problem in the money market area.
    Mr. Stivers. Can I come back to this? Because I have one 
more question for Mr. Deutsch because it is an important--
something happened in the marketplace last week, and I want to 
ask him about it.
    Redwood Capital made a disclosure, not a required 
disclosure, about ratings shopping. Would disclosures on 
ratings shopping help fix a lot of the problems that occurred 
in the marketplace? I know I am out of time. I think they will 
let you answer.
    Can he answer, Mr. Chairman?
    Mr. Deutsch. I think certainly additional disclosures 
around ratings shoppings--I think that many investors would 
like to see additional disclosure around that. Many investors 
would find that helpful to understand the different ratings--
the agencies that issuers have approached. And so, I think 
there would be some--that would be well-received by the 
investor community.
    Chairman Garrett. Thank you.
    The gentlelady from New York for 5 minutes?
    Dr. Hayworth. Thank you, Mr. Chairman.
    And I am fascinated by our witnesses' testimony from Mr. 
Bertsch and Mr. Deutsch, Ms. Hendrickson--forgive me--Mr. Weild 
and Mr. Zubrod, in particular, because you are describing a 
litany of loss in a sense, due, no doubt, to unintended 
consequences. And those losses are very real to the nearly 14 
million unemployed Americans who are counting on us to help 
them. And that is what we are trying to do today.
    We have lost resources that should be devoted to job 
creation. You have described that eloquently in your testimony. 
That is what we are endeavoring to reverse in the pieces of 
legislation we have introduced. We have seen that there is a 
loss of trust in the common sense of our fellow citizens, in 
this case, investors and entrepreneurs, who are the engines of 
job creation in so many instances. And this represents a loss 
for all Americans as working capital is kept out of the 
marketplace due to regulation-induced stasis, or worse, working 
capital is migrating out of the United States market entirely. 
And I think it is important for everybody listening to remember 
those things.
    So in an effort to clarify the highly useful nature of what 
we are endeavoring to do by repealing Section 953(b) of Dodd-
Frank, Mr. Bertsch, could you talk more about the disclosure of 
information that is currently necessary and how that is useful 
to investors?
    Mr. Bertsch. Disclosure of information before Dodd-Frank?
    Dr. Hayworth. Before Dodd-Frank, before 953(b).
    Mr. Bertsch. Sure. There is extensive disclosure on senior 
executive pay that has been in place for quite a while. It had 
been modified a few years ago. And I think that the interest in 
that information on the part of investors relates in part to 
the fear of conflict of interests to the extent that the CEO, 
in particular, has influence over that, over his own or her own 
compensation. So I think that that is appropriate disclosure 
and has been useful in understanding that whole dynamic.
    I do think, frankly, that--and this is my view. With these 
organizational representations, I haven't done enough of this 
to know to what extent I should try to clear this. But from my 
perspective--and I worked most of my career on the investor 
side, some of the disclosure enhancements made a few years ago 
by the SEC in a particular compensation disclosure analysis 
requirement actually complicated things so much that proxy 
statements are actually less useful than I think they used to 
be.
    It used to be faster and easier to get a pretty good fix on 
CEO pay than it is now. So I think disclosure requirements can 
backfire at some point. I think they are legitimate, but I 
think you want to make them as smart as possible.
    Dr. Hayworth. The phrase that always comes to my mind when 
I think about so many of the regulations we talked about that 
have been promulgated in Dodd-Frank, among other things, is 
more heat than light is generated by these things.
    Speaking of light, compensation disclosure requirements 
that you have just described, Mr. Bertsch, that perhaps, in 
fact, we have asked for too much information, so to speak, even 
before Dodd-Frank--you alluded to a survey among investors, I 
believe it was, that described their desire, if you will, for 
more information about compensation.
    Mr. Bertsch. Yes, in the testimony I just referred to, that 
we have seen a series of shareholder proposals on--requesting 
reports on pay disparity. And they don't get very high votes.
    Dr. Hayworth. Right.
    Mr. Bertsch. So that is an indication that shareholders 
generally don't express a lot of interest as opposed to, for 
example, the say-on-pay. There were many shareholder 
resolutions requesting advisory votes on pay. Those got much 
higher levels of support other than these have. So 6 percent 
support is not--on an average, is not very high.
    Dr. Hayworth. And if there were some sort of movement 
toward say-on-pay, presumably current--or pre-Dodd-Frank data 
would satisfy the informational requirements for shareholders 
to make those sorts of decisions--or to participate in those 
decisions.
    Mr. Bertsch. I think that issue is not, to my knowledge, at 
this point being addressed again.
    Dr. Hayworth. Right.
    Mr. Bertsch. But that is a more substantial issue than this 
one.
    Dr. Hayworth. Yes.
    Mr. Bertsch. And my major point is that this is actually a 
lot of work.
    Dr. Hayworth. Right.
    Mr. Bertsch. This is not a simple statistic to throw out 
there. And it is not one that I believe is of particular value 
to investors.
    Dr. Hayworth. Right. And, indeed, as I understand it, to 
compute a median--as I understand it, the problem exists on 
several levels. To identify the population of workers to whom 
this regulation would actually apply, if we wanted to start the 
process of data collection. There are all sorts of 
complications in identifying then what pieces of data would 
actually be applicable, how they would fit into a computation 
and then the fact that they would have to be computed for every 
single employee so as to identify a median.
    Mr. Bertsch. That is correct.
    Dr. Hayworth. Am I correct?
    Mr. Bertsch. A median is a lot different than an average to 
calculate. Our members believe that you need to calculate it 
for every single person in order to arrive at the correct 
median.
    Dr. Hayworth. Right. How else could you arrive at a median, 
indeed?
    Mr. Bertsch. There you go.
    Dr. Hayworth. I appreciate your clarifying all of those 
points for us, Mr. Bertsch. Thank you.
    Mr. Bertsch. Yes. Thank you.
    Chairman Garrett. And I announce to the rest of the 
committee that we do have a vote that is called, but we are 
just going to plug along as long as we have our panel here. And 
members here--just the order that--unless anyone else comes 
from your side, will be--next will be Mr. Royce. And then--I 
guess the other people have probably stepped out to vote 
already. So when they come back, they will be in line.
    So the gentleman from California for 5 minutes?
    Mr. Royce. Thank you.
    Mr. Weild, I want to thank you for your testimony. And you 
gave some pretty staggering statistics there that I think 
should give us all pause. But in terms of capital formation for 
small-growth companies, you recommend passing this Reg A 
change. What else should we be focused on here?
    Mr. Weild. I think there are three things that the House 
Financial Services Committee can think about. One of the Reg A 
passes, which is a big step forward in terms of knocking down 
the costs of capital and the certainty of raising money. The 
second is that the stock market itself, the way it is currently 
constructed, has deprived issuers of any real choice in market 
structure. And it is really optimized where the 10 percent of 
the largest market value stock that represent 90 percent of the 
volume. It is a one-size-fits-all stock market.
    And I think that to create a market structure that--just 
like bridges, roads, and tunnels are infrastructure to the U.S. 
economy, so is the stock market. And if we don't have a way of 
paying for the research, sale support, and the liquidity 
provision that is so desperately needed by small-cap. 
companies, then the low end of the market, the smaller 
companies, die on the vine. They wither in the vine, just like 
our communities would if we didn't have bridges, roads and 
tunnels.
    The third thing is you might consider in the private 
market, there are some archaic restrictions, in the private 
market. The prohibition against general solicitation and an 
inability for accredited investors effectively to be able to 
buy and sell stocks in the private market. Those are things 
that could help capital formation.
    Mr. Royce. So those things come to mind. I am wondering if 
there are additional provisions in Dodd-Frank that sort of 
compound this problem with capital formation. And one of the 
frequent things we see in the financial press is the 
conversation about capital flight, about the decision to move 
business to Europe rather than to try to soldier through here. 
Because in Europe, they don't have any intention of following 
our lead on some of these particular provisions that have been 
raised as a concern, right?
    They have a different regulatory framework there. There is 
certainty to it. And I think that a lot of businesses look at 
that and say, ``All right, we will opt for that as the 
alternative.''
    It is a mouse click away, basically, these days to get to 
do business under a regulation that seems far more certain. We 
are in the throes of waiting for 300 rules to be written. We 
haven't been able to reach agreement, for example, between the 
SEC and the CFTC and get them on the same page--50 differences 
we know of so far, 60 more rules to come down the pike by 
September. And after that, 40 more that we are waiting for.
    And in this environment, the derivatives business and a lot 
of other businesses seem to be flirting with relocating. Some 
of it is already happening. Do you see that as a challenge 
here?
    Mr. Weild. I see getting the regulation right-sized for the 
company size to be absolutely critical. I think that is one of 
the themes that I have heard a little bit here from this panel, 
that what worked for a $200 billion market value company isn't 
necessarily appropriate for a $100 million equity market value 
company.
    Mr. Royce. We have made no adjustment yet, really, on 
Sarbanes-Oxley to address this problem, have we, really?
    Mr. Weild. There are some exclusions from 404 for sub-$75 
million equity float value company. So there have been some 
adjustments.
    Mr. Royce. Do you think that is helping?
    Mr. Weild. I think that the bigger issue--if you look at 
the charts that we submitted, Congressman, what was interesting 
was our discovery that the sub-$50 million equity market value 
companies started to disappear from the IPO market before 
Sarbanes-Oxley ever came into effect in 2002, that the 
implosion started in 1997.
    Mr. Royce. I agree. And I gave these--in my opening 
statement, I gave these figures. I agree that erosion began for 
that portion of the market. But what has happened since is that 
the acceleration has included the entire market. So it is not 
now just the smaller firms. It is across-the-board. IOPs are 
now 13 percent of the market. We were 50 percent of the market. 
This is quite an adjustment.
    So I think we can attach some of this to the way in which 
we have--Sarbanes-Oxley, for example, has really been--we have 
had a failure to address it in ways that solve at least that 
problem. I grant you, Mr. Weild, some of your other points in 
terms of what we have to do for the niche of the market that 
you are most interested in. But on top of it, I am just saying 
it is the market in its entirety that we risk losing to Europe 
and elsewhere.
    Mr. Weild. I would tell you that if you don't get the 
growth side of the economy back in high gear, then it actually 
drags down the performance of the entirety of the economy, 
including the large cap. stock.
    Mr. Royce. Yes.
    Mr. Weild. To your point about moving capital offshore, I 
gave a presentation at the New York Stock Exchange to a bunch 
of pension fund trustees not that long ago. And I sat through a 
number of the presentations prior to my own. It was very 
interesting how many consultants to the pension fund industry 
were advocating to American pension funds to move their money 
offshore to higher-growth economies, the brick countries, which 
are Brazil, Russia, India, and China. That is very disturbing.
    Mr. Royce. Thanks for that information.
    I yield back.
    Chairman Garrett. The gentleman yields back?
    Mr. Royce. Yes. I yield back.
    Chairman Garrett. I thought you had another question.
    Mr. Royce. I have used all my time.
    Chairman Garrett. With unanimous consent, you can ask your 
other question.
    Mr. Royce. Yes, I will then ask another question, if you 
don't mind.
    The NRSRO issue--that has been around for some time. And I 
was going to ask Mr. Deutsch.
    We had a few entities issuing what ended up being flawed 
rulings. But they were treated as the gold standard with few 
alternatives. It was very, very frustrating. And in 2006, we 
tried to correct that in the Credit Rating Agency Reform Act, 
which I think made some strides to promote competition. That 
was the goal there, to establish a more transparent rating 
process.
    But unfortunately, the financial markets have turned upside 
down since the passage of that Act. And clearly, part of it was 
the credit rating agencies. But Dodd-Frank, I think, took a 
different approach here and essentially opened the NRSROs up to 
a very active trial bar. And when I laid out in my initial 
statement here, I pointed out we had 97 percent of the lawsuits 
worldwide are here in the United States. The day after the law 
was enacted, the NRSROs refused to allow their ratings to be 
used, bringing a temporary freeze to the credit markets before 
the SEC promised not to enforce the provision.
    Where is the happy medium with the NRSROs? We need to 
encourage due diligence among counterparties in the market, but 
essentially removing the rating agencies from the picture 
altogether seems to be overkill. So I was going to ask you, Mr. 
Deutsch, about that.
    Mr. Deutsch. I have, I guess, multiple responses. I think 
first, credit ratings serve an important part of the financial 
markets. I am not sure either side of the aisle will disagree 
with that.
    The second point is that creating policy reform around the 
rating agencies has been extraordinarily perplexing.
    Mr. Royce. Right.
    Mr. Deutsch. It is very challenging to try to figure out, 
in a market with some natural economies of scale, how to 
improve that market and make appreciable change. But I think--
    Mr. Royce. On that thought, let me give you some time to 
contemplate the answer, give it back to us in writing. We have 
20 seconds left of the vote. And I think Mr. Garrett is a 
little faster than me. If we head out right now, we can make 
that vote.
    Mr. Chairman, I yield back. Are you ready?
    I will get that answer in writing, all right?
    Mr. Deutsch. Right.
    Mr. Royce. Thank you very much.
    Chairman Garrett. The gentleman yields back.
    I appreciate the testimony of the panel. If there are other 
questions--and it looks like there may be another question--
there may be someone doing what Ed is doing, rushing to the 
vote, and the others may be rushing back. So with that, unless 
there is an objection, I will ask one last question and 
hopefully, find out our one last member, who is probably in a 
hallway someplace here.
    So I yield myself such time as I consume, I guess, to--
    [laughter]
    Just a question for Mr. Silvers.
    With regard to H.R. 1062, which is--you euphemistically 
called it the ``Promote CEO Pay Secrecy Act.'' Okay. Which is 
obviously--what the sponsor is trying to do is try to make not 
such a burdensome requirements in a legislative format. But 
what I will throw to you is we sort of went through to look to 
see what is already out there if you do repeal this. Right? 
What the SEC is doing.
    Now, correct me if I am wrong on any of these because this 
is just our quickly running through it. But even if we pass 
this, you would still have what the SEC has done. One is 
companies would be required to disclose a total pay number for 
the CEO and other senior executives. Is that correct?
    Mr. Silvers. That is a longstanding SEC rule, yes, sir.
    Chairman Garrett. So that information has always been out 
there, and that would continue to be out there, right?
    Mr. Silvers. Yes.
    Chairman Garrett. Then secondly, companies whose--also the 
flow is--more specific information around retirement benefits 
as well.
    Mr. Silvers. The Commission's disclosures around retirement 
benefits have increased over time. It is certainly true that 
there is today required disclosure around retirement benefits. 
There is some dispute about the details of it, I would say, but 
it is certainly there.
    Chairman Garrett. Okay. So that is there. So you have the 
pay and the retirement. And thirdly, companies also have to 
disclose additional information about termination payments, 
which, I guess, is, what, like golden parachutes and that sort 
of thing, right?
    Mr. Silvers. Yes. Yes. Mr. Chairman, if you--
    Chairman Garrett. Yes.
    Mr. Silvers. If you would allow me--
    Chairman Garrett. Sure.
    Mr. Silvers. Two points--one is there is no--the Commission 
has made great progress over the last decade in getting more 
comprehensive data about CEO pay available to investors and the 
public. I don't think that is a matter of dispute. I think that 
the--what is so important about the provision of the Dodd-Frank 
Act that we are discussing here is that it creates a critical 
context for evaluating what CEO pay means in the context of a 
public company.
    Right? And the question of whether CEO pay--and this has 
two consequences. One is whether CEO pay is essentially eroding 
the corporate culture by effectively placing the CEO and 
perhaps other senior executives in a completely different place 
than the other members of their team. And the second issue is, 
like many issues with CEO pay, whether or not it gives 
investors and the public a context for determining whether or 
not the level of CEO pay that you are receiving is essentially 
commensurate with, in general, the type of value that is being 
created by this firm.
    Chairman Garrett. But doesn't that go to another 
requirement they have that the board or the compensation 
committee, I guess, would actually also have to lay out why is 
it they are giving the CEO all these benefits, most notably, 
the executive pay? And so, if it is extremely high, they would 
have to say this is why we think he is worth ``X.''
    Mr. Silvers. Right.
    Chairman Garrett. Which, in my opinion, in many cases, also 
I agree, are astronomical sums that you and I probably can't 
comprehend. Maybe you can because you--who knows what your 
salary is. But--
    [laughter]
    Mr. Silvers. Let me put it this way. The multiple between 
my salary and any of the ones that we are talking about is 
itself a very large and hard to encompass number. I think 
your--
    Chairman Garrett. There may be multiples between your 
salary and my salary.
    Mr. Silvers. I think we have that in common, Mr. Chairman.
    Chairman Garrett. Yes, okay.
    Mr. Silvers. The narrative you are discussing is, I think--
my colleague on the panel talked about the frustrating issues 
involved in credit rating agencies and trying to find the right 
balance, a comment I very much agree with. The SEC has tried to 
get public corporations to tell investors and the public, give 
them some meaningful detailed explanation as to why they are 
paying 300, 400, or 500 times the amount the typical employees 
are paid, to their CEOs. If you have read those narratives, I 
think they are uniformly meaningless.
    Mr. Chairman, if you could indulge me for 10 seconds? Your 
colleague, Mr. Schweikert suggests that I hadn't read his bill.
    Chairman Garrett. Yes.
    Mr. Silvers. His bill clearly, as it is now--because it was 
in a different paragraph--makes auditing of companies under Reg 
A optional. It is very clear. It was just hidden. And I want to 
make clear that I stand by my original testimony in that 
matter. It is in the heading paragraph of that section. And he 
read a misleading excerpt when he read that section of that 
bill.
    Chairman Garrett. He was just--I can't say whether he--
    Mr. Silvers. No, I am not--it is not your fault, Mr. 
Chairman.
    Chairman Garrett. I am certainly not saying that he was 
misleading. I saw he had a section of the bill actually 
circled, so he was reading a piece from his own legislation on 
page three of the legislation.
    Mr. Silvers. It says, ``The Commission may determine 
necessary in the public interest to require an audit.'' The 
word ``may,'' as we all know around here, means voluntary.
    Chairman Garrett. With that, I see that--well, no. Is it 
voluntary for the Commission, but not--
    Mr. Silvers. It is precisely--
    Chairman Garrett. --but not for the company?
    Mr. Silvers. It is precisely as I said it was in response 
to his question. The way the bill reads, ``If the Commission 
chooses to do,'' which the Commission may or may not do, right, 
the Commission can choose to require an audit. But the bill 
does not require it. It would be perfectly legal, under this 
bill, for the Commission to sit tight and for companies to go 
to market and raise up to $50 million in investment from the 
general public and not provide an audited financial statement.
    Chairman Garrett. The entire premise behind Dodd-Frank is 
that the regulators, whom we are entrusting with all these 
grand, new authorities and some regulators, additional funding 
sources as well, that they are not going to be doing the wrong 
thing.
    Mr. Silvers. Why don't we just require it? I think that was 
the testimony of my fellow witness. My testimony is about the 
bill as written.
    Chairman Garrett. All right.
    The gentleman from Ohio?
    Mr. Stivers. Thank you, Mr. Chairman. I appreciate you 
giving me a little more time.
    I wanted to ask Mr. Silvers about some of the other 
sections relating to the credit rating agencies in the Dodd-
Frank bill, because, frankly--I don't know if you have it in 
front of you, and I can bring you my copy, if you need it, but 
my bill does impact Section 939(g). But I would like to talk to 
you about Sections 932 and 933, especially. Section 932 
subjects rating agencies to additional restrictions on--or 
disclosures, keeps people from doing revolving door from an 
issuer to the agencies and then more importantly, Section 933.
    Section 933 of Dodd-Frank does subject the rating agencies 
to legal liability for misleading statements and just untrue 
statements, which your testimony about Section 939(g) implied 
that it overturned Section 933 of Dodd-Frank as well. I just 
would like Mr. Silvers to clarify for the audience and the 
world that might be watching on C-SPAN3. It won't be a very big 
world.
    [laughter]
    Whether he thinks my bill turns over any of the other 
sections with regard to the rating agencies, including and 
especially Section 933 of Dodd-Frank.
    Mr. Silvers. As I think the prior exchange showed, it can 
be dangerous to express an opinion on these matters without 
having lots of time to look at the text. My testimony did not 
say that your bill is a grant of total immunity to the credit 
rating agencies. I think it is nonetheless a grant of immunity.
    If you might indulge me a moment or so longer--
    Mr. Stivers. We have a little time now.
    Mr. Silvers. Yes. I think that several people in this 
hearing have expressed the view that this matter with the 
rating agencies is complicated. And I very much agree with 
that. I think our exchange a few moments ago suggests that we 
probably have some common ground on some of these questions.
    Mr. Stivers. Yes.
    Mr. Silvers. I think the view of the Coalitions and the 
organizations that I represent here today very much goes back 
to what Mr. Miller said very--at the--Mr. Miller?
    Mr. Stivers. It was Mr. Sherman, I believe.
    Mr. Silvers. Mr. Sherman, I am sorry, Mr. Sherman's comment 
at the beginning of the hearing. We need to have a robust 
regulatory framework for the rating agencies because of the 
embedded and unresolvable conflicts.
    Mr. Stivers. Conflicts of interest, yes.
    Mr. Silvers. And if we did that, then I think we could 
talk, I think, with a greater degree of flexibility about a 
variety of issues of the type that you are concerned with. I 
think it is absolutely correct that we should not be in a mode 
of no rating agencies at all because there is a substantial 
sort of information economics being associated with having 
rating agencies, if they are properly regulated.
    We very much got into a--much as we did with independent 
auditors prior to Enron and WorldCom, we got into a world where 
we didn't have the necessary framework to capture those 
economics. We had sort of false economics around the rating 
agencies. It seems to me, that might be a sort of space where 
there might be some bipartisan opportunities.
    Mr. Stivers. I think there are. And I appreciate it. I 
guess, my point is to say I am not saying that Dodd-Frank did 
completely bad things about rating agencies. I support Section 
932. I support Section 933. I support Section 938.
    Section 932 creates disclosures so that rating agencies, 
for the first time, have to list the assumptions underlying 
their ratings so investors can understand what those ratings 
mean. Section 938 creates universality of ratings so that they 
all have a very similar meaning. And Section 933 gives them 
real liability if they make meaningful misstatements or 
purposeful misstatements or mislead people on purpose.
    And, I guess, the point that I am trying to bring out is 
Section 939(g) is only one teeny piece of the--what Dodd-Frank 
did on the credit rating agencies. And unfortunately, it didn't 
work. It is not working today. That piece of law is not being 
enforced. And there is a better way to go by getting rid of it 
and then moving to what I talked about at the very end of my 
questions, on an additional disclosure on rating shopping.
    And, I guess, Mr. Silvers, I am curious what your thought 
is about what Redwood did on ratings shopping and whether you 
think that kind of--and my understanding, from reading the 
Financial Times, not--the SEC didn't tell me this. But the 
Financial Times says the SEC may be working on something with 
regard to that. What I would consider doing in this bill is 
including a requirement in the bill that ratings shopping has 
to be disclosed, which is currently not part of Dodd-Frank. And 
I think it would make this bill a little stronger.
    I have talked to Mr. Peters from Michigan about it, 
frankly. And so, I guess, Mr. Silvers, in the minute we have 
left, what do you think of that?
    Mr. Silvers. Right. Ratings shopping--I am very pleased to 
hear that you are working as you say you are on the ratings 
shopping issue. It is a serious part of the problem.
    I think our view would be that there is much unfinished 
work to be done with the rating agencies. And it seems as 
though you and your colleagues on both sides of the aisle have 
some--have a fruitful path here.
    Mr. Stivers. Yes. Thank you.
    Mr. Silvers. Thank you.
    Mr. Stivers. Thank you, Mr. Chairman. I appreciate it.
    Chairman Garrett. Thank you.
    The gentleman from California is recognized for 5 minutes.
    Mr. Sherman. I believe it is Mr. Weild who is here to focus 
on credit rating agencies. No? Which of your--
    Mr. Deutsch. I would raise my hand, but I am not sure what 
question you are going to ask.
    [laughter]
    Mr. Sherman. Okay. Right now, other than patriotism, which 
is often in short supply, why wouldn't a credit rating agency 
selected by the issuer--and this bill proposes that they 
wouldn't be liable if they even knowingly gave too high a 
rating. What constraint would there be on the credit rating 
agencies?
    Mr. Deutsch. I think what this bill does is creates a whole 
panoply of potential liability for a rating agency.
    Mr. Sherman. When you say this bill, you mean the Stivers 
bill?
    Mr. Deutsch. Section 939(g) by repealing--
    Mr. Sherman. Okay.
    Mr. Deutsch. --Section 436(g) now.
    Mr. Sherman. Right.
    Mr. Deutsch. You would subject the rating agencies to a 
whole panoply of possible liabilities under Section 11, which 
is strict liability under the securities law, which is the 
highest form of liability under those securities laws. So it is 
not just that you can point out one thing here or one thing 
there. It creates this whole broad set of liabilities that the 
rating agencies, whether we like it or not, would say, we are 
not willing to accept that level of liability. Hence, we won't 
rate these asset-backed bonds. Hence, those bonds, at least 
under current SEC law, can't move forward.
    Mr. Sherman. So are you suggesting we go back to the old 
approach, no liability and every economic incentive to give AAA 
and Alt-A?
    Mr. Deutsch. I think Congressman Stivers' questioning of 
the witness, Mr. Silvers indicates that there is significant 
liability for rating agencies. But it is not Section 11's 
strict liability under the securities law, which currently only 
applies--
    Mr. Sherman. Wait a minute. Those rating agencies have 
testified in this very room that they are so proud that they 
got a court to rule that, under the First Amendment, you can't 
sue them and that, therefore, they feel invulnerable and wish 
to--and it is that invulnerability that emboldened them to get 
the additional market share that they could get by giving AAA 
to Alt-A. So why do you think that their legal analysis of the 
law prior to Dodd-Frank is wrong?
    Mr. Deutsch. Again, what I think Congressman Stivers is 
indicating is this is not prior to Dodd-Frank. Dodd-Frank has 
created private rights of action here.
    Mr. Sherman. Right. And the position of the credit rating 
agencies before Dodd-Frank was that they were immune from such 
private rating. Do you agree with that position?
    Mr. Deutsch. Correct. I am not here to testify as to 
Sections 933 or 944, the advisability of that. That is now law. 
That is moving forward. There are these private rights of 
action. What I am here to testify is that the repeal of Section 
436(g) shut down the securitization markets completely, 
absolutely without deniability.
    Mr. Sherman. So you think--
    Mr. Deutsch. That is a fact in record that if we would have 
moved forward with--by creating this liability to the rating 
agencies, they would, in fact, not rate these transactions, and 
credit would not flow in America.
    Mr. Sherman. Okay, what about--
    Mr. Stivers. Would the gentleman from California yield for 
1 second?
    Mr. Sherman. Yes, I will.
    Mr. Stivers. Have you looked at Section 933 of Dodd-Frank? 
It does provide an amount of liability outside of Section 
939(g). So I don't want anybody to think that Section 939(g) is 
the only liability the credit rating agencies had to deal with 
in Dodd-Frank. There is also Section 933. And I have a summary 
for you, if you need it.
    Mr. Sherman. I am just beginning to look at your bill and 
by implication, which provisions of Dodd-Frank it repeals and 
what is left afterwards.
    But, Mr. Deutsch, are you arguing that the credit rating 
agencies should be subjected to an ordinary liability 
negligence standard?
    Mr. Deutsch. I am arguing that credit rating agencies 
should not be subjected to the Section 11 strict liability 
standards that issuers are subjected to because the statements 
that they are making are looking at the future.
    Mr. Sherman. But my question was about ordinary negligence 
liability.
    Mr. Deutsch. I am answering your question as to what I am 
testifying is that we are not taking a position on what they 
should be subjected to.
    Mr. Sherman. Okay.
    Mr. Deutsch. It is that they should not be subjected.
    Mr. Sherman. So let me ask Mr. Silvers. Do you think we 
should go to a world where there is no strict liability, it is 
not clear there is negligence liability, the credit rating 
agency is selected by the issuer, who is anxious to get the 
highest rating and willing to write a $1 million check? Does 
that sound like a good system to you?
    Mr. Silvers. No, I do not think that is a good system. My 
testimony is clear. We are not in favor of extending further 
legal protections to the credit rating agencies. And 
furthermore, as, I think, my exchange with Mr. Stivers, 
hopefully, drew out, there is a deep need to make structural 
changes in the business model of the rating agencies. And I 
believe, Congressman, that is your intention. And hopefully, 
that is something that maybe some bipartisanship should be 
built around.
    Mr. Sherman. Yes, I could see quicker implementation of 
what I believe is Section 939(f), that is to say, a system 
where the issuer is not selecting their umpire along with Mr. 
Stivers' bill. And I look forward to working with him to try 
to, on the one hand, make sure that they don't face excessive 
liability, and on the other hand, make sure that they are not 
selected, just as umpires at a baseball game. The pitcher 
doesn't pick the umpire. And he can't sue the umpire.
    Mr. Silvers. Congressman, if I might just add. I think the 
distinction between forward-looking and backward-looking 
statements that the rating agencies would like to hold up here 
in relation to Section 11 is spurious.
    Mr. Sherman. I look forward to looking at that distinction.
    And I yield back the balance of my nonexistent time.
    Chairman Garrett. There you go.
    The gentleman from New York for 5 minutes?
    Mr. Grimm. Thank you, Mr. Chairman.
    I think that we all agree the purpose for all of us--and 
there certainly are good intentions all around. It is the 
unintended consequences that we have to worry about because we 
all want the economy to grow. We want to create jobs.
    There was a meltdown. There are a lot of reasons for that 
meltdown. A lot of the rules and regulations simply weren't 
enforced. There was a lack of proper oversight and enforcement 
of rules that existed. And I think the pendulum has swung so 
far the other direction that we are--we can be overregulating 
and hurting industry.
    Very quick question, Ms. Hendrickson. Do you have an 
approximate cost to your firm, specifically your firm that you 
will have to--you would expect to pay for compliance to be 
fully compliant with the Dodd-Frank Act?
    Ms. Hendrickson. At the moment, I expect the cost to be 
between $350,000 and $500,000 for the first year. That is 
buying new software to do trading, to monitor trading activity. 
And, of course, we don't do anything in the public market. It 
is to hold legended worthless securities by a third-party 
custody agent. And then, of course, to hire a third compliance 
officer to certify valuations of our companies, which were 
already looked at by two nationally-known accounting firms.
    Mr. Grimm. Thank you.
    Mr. Zubrod, my Business Risk Mitigation and Price 
Stabilization Act, the newly-termed ``AIG Act'', which is 
pretty good. I have to admit. I did get a chuckle out of that. 
That is good. That is very good. End users--will end-users, in 
your opinion, just in your opinion, migrate the markets that 
operate under a less punitive regulatory environment if they 
are not exempt from clearing requirements?
    Mr. Zubrod. I think end-users would certainly evaluate 
opportunities to ensure that they can operate efficiently and 
manage their risks sufficiently. But I think the message that 
we would like to give is that we are simply looking for 
clarification on something that Congress and this committee 
intended all along, which is that there would not be a margin 
requirement on end-users. That is something that was part of 
the--in addition to containing systemic risk and increasing 
transparency in this market, Congress came together and said 
that we also need to ensure that end-users are not subject to 
the salient economic requirements of this Act.
    Mr. Grimm. If I could, just to put this in perspective, 
because I think when you talk about the numbers, it scares some 
people--$600 trillion is the overall market, derivatives 
market, notional number? Is that somewhere in the realm of 
reason?
    Mr. Zubrod. That is right. The $600 trillion notional 
amount is not a measure of risk in the market. It is simply a 
quantification of the--what we call the notional amount. A more 
appropriate measure of risk is the market value of the 
transactions. And once you net offsetting positions, once you 
contemplate transactions that have been cleared through central 
clearing--currently about a third of the entire derivatives 
market is already subject to central clearing. And that will 
increase substantially as a result of this Act. If you 
contemplate other such mitigation factors, that $600 trillion 
amount compresses to something less than $2 trillion in market 
value, which is a much more appropriate measure of risk.
    Mr. Grimm. Will the growth of clearing reduce systemic risk 
or increase systemic risk, in your opinion?
    Mr. Zubrod. The Coalition supported both the Act's 
objective of increasing transparency by subjecting every single 
derivatives trade to a trade reporting requirement so that 
regulators could have information on where market risks lie. We 
also did support increased collateralization, whether through 
clearing or otherwise, amongst systemically significant users 
of derivatives. And so, I think that, indeed, the Act will 
contribute toward mitigation of systemic risk and reduce 
materially, if not eliminate, the derivatives market's 
contribution to the ``too-big-to-fail'' problem.
    Mr. Grimm. Thank you.
    Thirty seconds, Mr. Chairman? One last question?
    Mr. Silvers, I see that you are a big proponent of Dodd-
Frank. And it appears from your testimony that Dodd-Frank 
really zeroes in on the heart of the problems that caused the 
meltdown. Simply yes or no, is that accurate?
    Mr. Silvers. Mostly.
    Mr. Grimm. Okay. Is there anywhere in here that it mentions 
Fannie Mae or Freddie Mac?
    Mr. Silvers. That is why I answered mostly.
    Mr. Grimm. Okay. Thank you. I thought that point needed to 
be made.
    Chairman Garrett. Thank you. I appreciate that.
    And I appreciate the panel. And at this point, I would seek 
unanimous consent to enter into the record--bear with me here--
the following documents: from NASDAQ, a letter with regard to 
their support for the Small Company Capital Formation Act of 
2011; from the New York Stock Exchange strongly supporting the 
Small Company Capital Formation Act of 2011, among others; from 
the Center on Executive Compensation, the support of H.R. 1062 
seeking to repeal Section 953(b) of the Dodd-Frank Act; and 
finally, I believe it is a statement from the Credit Union 
National Association as well. Without objection, it is so 
ordered.
    And finally, this concludes today's hearing. The record 
will remain open, however, as is always the case, for an 
additional 30 days for all those folks who still think of 
additional great questions to provide to the panel, the things 
that maybe they don't--just don't know about, as some of the 
other members have suggested earlier in the day.
    And so, with that, again, I thank the panel. And this 
hearing is concluded.
    [Whereupon, at 4:04 p.m., the hearing was adjourned.]



                            A P P E N D I X



                             March 16, 2011


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