[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]




 
                    LEGISLATIVE PROPOSALS TO RELIEVE
                    THE RED TAPE BURDEN ON INVESTORS
                            AND JOB CREATORS

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

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 23, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-26





                   U.S. GOVERNMENT PRINTING OFFICE

 81-761 PDF                WASHINGTON : 2013
------------------------------------------------------------------------
 For sale by the Superintendent of Documents, U.S. Government Printing
  Office  Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; 
       DC area (202) 512-1800  Fax: (202) 512-2104  Mail: Stop IDCC, 
                      Washington, DC 20402-0001



                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             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            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          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        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
PETER T. KING, New York              RUBEN HINOJOSA, Texas
EDWARD R. ROYCE, California          STEPHEN F. LYNCH, Massachusetts
FRANK D. LUCAS, Oklahoma             GWEN MOORE, Wisconsin
RANDY NEUGEBAUER, Texas              ED PERLMUTTER, Colorado
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              KEITH ELLISON, Minnesota
MICHAEL G. GRIMM, New York           MELVIN L. WATT, North Carolina
STEVE STIVERS, Ohio                  BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MICK MULVANEY, South Carolina        TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida
ANN WAGNER, Missouri
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 23, 2013.................................................     1
Appendix:
    May 23, 2013.................................................    37

                               WITNESSES
                         Thursday, May 23, 2013

Bullard, Mercer E., President and Founder, Fund Democracy, Inc., 
  and Jessie D. Puckett, Jr., Lecturer and Associate Professor of 
  Law, University of Mississippi School of Law...................     7
Ehinger, Ken, Chief Executive Officer, M Holdings Securities, 
  Inc., on behalf of the Association for Advanced Life 
  Underwriting (AALU)............................................     9
Quaadman, Thomas, Vice President, Center for Capital Markets 
  Competitiveness, U.S. Chamber of Commerce......................    11
Reich, Marc A., President, Ironwood Capital, on behalf of the 
  Small Business Investor Alliance (SBIA)........................    13
Silvers, Damon A., Policy Director and Special Counsel, AFL-CIO..    15
Smith, Robert, Corporate Secretary, Vice President and Deputy 
  General Counsel, NiSource, Inc., on behalf of the Society of 
  Corporate Secretaries and Governance Professionals.............    17
Tharp, Charles G., Chief Executive Officer, Center On Executive 
  Compensation...................................................    18

                                APPENDIX

Prepared statements:
    Huizenga, Hon. Bill..........................................    38
    Bullard, Mercer E............................................    39
    Ehinger, Ken.................................................    57
    Quaadman, Thomas.............................................    67
    Reich, Marc A................................................   106
    Silvers, Damon A.............................................   116
    Smith, Robert................................................   126
    Tharp, Charles G.............................................   142

              Additional Material Submitted for the Record

Hurt, Hon. Robert:
    Written statement of the Association for Corporate Growth 
      (ACG)......................................................   149
    Written statement of the Investment Company Institute (ICI) 
      and the Independent Directors Council (IDC)................   151
Maloney, Hon. Carolyn:
    Written statement of the California Public Employees' 
      Retirement System (CalPERS)................................   158

                    LEGISLATIVE PROPOSALS TO RELIEVE
                    THE RED TAPE BURDEN ON INVESTORS
                            AND JOB CREATORS

                              ----------                              


                         Thursday, May 23, 2013

             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 9:31 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Hurt, King, 
Royce, Huizenga, Stivers, Fincher, Mulvaney, Hultgren, Ross, 
Wagner; Maloney, Sherman, Scott, Himes, Peters, Watt, Foster, 
and Carney.
    Also present: Representative Green.
    Chairman Garrett. Greetings. Good morning, everyone. Good 
morning to the panel.
    The Subcommittee on Capital Markets and Government 
Sponsored Enterprises is hereby called to order. Today's 
hearing is entitled, ``Legislative Proposals to Relieve the Red 
Tape Burden on Investors and Job Creators.''
    I welcome the panel to today's hearing. We will begin with 
opening statements, and after that, we will turn to the panel. 
And with that, I recognize myself for 3 minutes for an opening 
statement.
    Today's hearing is entitled, as I said, ``Legislative 
Proposals to Relieve the Red Tape Burden on Investors and Job 
Creators,'' and it will focus on four specific pieces of 
legislation that would remove various regulatory impediments 
and target red tape that hinders small businesses' ability to 
create new jobs and help the economy grow.
    The Dodd-Frank Act significantly expanded the SEC's 
authority. However, Congress did not first determine that this 
unprecedented expansion was necessary to further their mission 
or that the SEC was capable of executing its new authorities 
and mission.
    Despite what my Democratic colleagues are likely to allege, 
we are not attempting to deregulate the financial services 
industry. Very simply, the bills before us are a series of 
targeted and pragmatic fixes to some of the most burdensome and 
unnecessary provisions of Dodd-Frank.
    In fact, three of the four bills before us today already 
enjoyed bipartisan support last Congress. The SEC has a 
threefold mission: to protect investors; to maintain fair, 
orderly, and efficient markets; and to facilitate capital 
formation. So by removing unnecessary and time-consuming 
requirements, these bills discussed in today's hearing will 
ensure that the SEC has the time and resources to focus on its 
core mission and reach other congressional mandates, such as 
those outlined in the JOBS Act, which the SEC has failed to 
fully implement. Last week, there was a lot of discussion about 
the SEC's resources. Now, these four bills fix many of the 
unnecessary provisions of Dodd-Frank, freeing up SEC resources 
to be devoted to mission-critical rules.
    I want to specifically recognize and thank Congressman 
Hurt, Congressman Huizenga, and Congresswoman Wagner for their 
terrific work on these bills. I commend each of you, and I look 
forward to passing these bills through the committee, hopefully 
in a bipartisan manner, as we have done in the past.
    In conclusion, the Dodd-Frank Act, was not written in stone 
or handed down from on high, and Congress has an obligation to 
amend or repeal those provisions that did not cause or 
contribute to the financial crisis and whose cost outweigh 
their purported benefits. That is what we begin with today.
    And with that, I now turn to the gentlelady from New York, 
Mrs. Maloney, for 4 minutes.
    Mrs. Maloney. I thank the gentleman for his leadership, and 
I welcome all the witnesses. This hearing will focus on four 
bills that are designed, as the title of the hearing suggests, 
to relieve what is seen as red tape.
    So we have four bills under consideration today. The first 
would repeal a section of Dodd-Frank that requires companies to 
disclose the ratio of the total compensation of their CEO to 
that of the median compensated employees on a quarterly basis.
    The intent was to bring transparency to the compensation 
process and to encourage fair practices. The SEC has not 
written rules yet in this area, and when the committee reviewed 
this bill in the last Congress, an amendment was passed that 
gave the SEC additional authority to narrow the requirements 
while maintaining the intent behind the provision.
    The second bill would exempt certain private equity fund 
managers from the SEC registration requirement. Private equity 
registration was something we incorporated into the Dodd-Frank 
Act because many believed there were areas in the industry that 
were completely dark, even while recognizing that this was not 
the cause of the financial crisis.
    The bill this committee reviewed last year included an 
amendment from my colleague and friend, Mr. Himes, which said 
that only private equity firms that were leveraged more than 
two to one would be required to register. Since that time--and 
his bill did pass the committee--the SEC has required private 
equity firms to register.
    The third bill we are looking at would prohibit the PCAOB 
from mandating audit firm rotation. I would like to understand 
why audit firm rotation is necessary, and I question why we are 
interfering with the PCAOB's independent authority.
    Finally, a fourth bill would put additional hurdles on the 
SEC to interfere with its ability to write rules that would 
change the legal standard for broker-dealers. Dodd-Frank 
required the SEC to study the fiduciary duty broker-dealers owe 
to their clients and that investment advisers have. The SEC 
completed the study, and recommended a uniform standard for 
broker-dealers and investment advisers. However, they have not 
yet proposed a rule that is under comment, and some feel that 
this is not a necessary--that there are different duties.
    I look forward to hearing from the panelists today and 
gaining a greater understanding of this issue. I want to thank 
everybody for coming, and I want to thank everyone who authored 
these important bills, and I especially thank our chairman for 
calling this important hearing. Thank you.
    Chairman Garrett. I thank the gentlelady. The gentleman 
from Virginia is now recognized for 4 minutes.
    Mr. Hurt. Thank you, Mr. Chairman. Mr. Chairman, thank you 
for holding today's hearing on these important proposals. 
Today, we will discuss several bills that will reduce the 
regulatory burdens that restrict the flow of private capital to 
small businesses.
    In Virginia's 5th District, thousands of jobs would not 
exist but for the investment of private equity. These critical 
investments allow our small businesses to innovate, expand 
their operations, and create jobs. One P.E.-backed company in 
my district, Virginia Candle, told me that, ``Without private 
investment, we would not have been able to take our business 
out of a garage in Lynchburg, and into millions of homes all 
across the world.''
    The same can be said for many small businesses in the 
districts of Representatives here in this room, and all 
throughout Congress. Unfortunately, Dodd-Frank placed a costly 
and unnecessary regulatory burden on private equity by 
exempting advisers to similar investment funds. These 
unnecessary registration requirements, which do not increase 
the stability of our financial system, impose an undue burden 
on small and mid-sized private equity firms, and therefore 
decrease capital available to spur job growth.
    That is why I have introduced H.R. 1105, the Small Business 
Capital Access and Job Preservation Act. This bill is co-
sponsored, as the ranking member said, by Representatives Himes 
and Cooper. If enacted, these undue burdens on private equity 
advisers will be eliminated, and they will be given the same 
exemption that SEC's registration requirements under Title 4 of 
Dodd-Frank, that venture capital advisers receive. 
Additionally, the bill will specifically limit the exemption to 
advisers to private equity funds that have leverage of less 
than 2:1.
    It is important to note that private equity funds did not 
cause the financial crisis. They do not appear to be a source 
of systemic risk, as some have suggested. These funds are not 
highly interconnected with other financial market participants, 
therefore, the failure of a private equity fund would be highly 
unlikely to trigger cascading losses that would lead to a 
similar financial crisis. By eliminating unnecessary 
regulations, this bill seeks to expand capital formation so 
that companies can innovate, expand, and create jobs.
    In that same vein, I have introduced H.R. 1564, the Audit 
Integrity and Job Protection Act, with Representative Meeks. 
This bill will eliminate the threat of mandatory audit firm 
rotation by prohibiting the Public Company Accounting Oversight 
Board, the PCAOB, from moving ahead with its potential 
rulemaking.
    In 2011, the PCAOB released a concept draft to impose 
mandatory audit firm rotation, a directive requiring public 
companies to change their independent auditor every few years. 
As a result, this proposal would significantly impair the 
quality of public audits; reduce the supervision and oversight 
of audit committees; and impose significant, unnecessary costs 
that impede investment and harm investors and consumers.
    A GAO study conducted pursuant to Sarbanes-Oxley found that 
initial year audit costs under mandatory audit firm rotation 
would increase by more than 20 percent over subsequent year 
costs in order for the auditor to acquire the necessary 
knowledge of the public company. Beyond harming the competitive 
position of American public companies, I have heard from 
innovative private companies in Virginia's 5th District, 
including many of our research and development bio-tech firms, 
that mandatory audit firm rotation would create a further 
disincentive to go public in light of the increased costs, and 
already complex regulatory scheme.
    Both the SEC and Congress have previously rejected 
mandatory audit firm rotation, and most recently, the JOBS Act 
explicitly banned audit firm rotation for emerging growth 
companies. Let me close by saying that unemployment in my 
district, Virginia's 5th District, continues to be unacceptably 
high. We cannot continue to impose onerous and unnecessary 
regulatory requirements that force firms to divert essential 
capital from preserving and creating jobs, to needless rules 
and regulations.
    I look forward to the testimony of each of our 
distinguished witnesses today, and I thank them for their 
appearance before the subcommittee. Mr. Chairman, thank you, 
and I yield back the balance of my time.
    Chairman Garrett. The gentleman yields back. And before I 
go to Mr. Scott, I yield to the gentlelady from New York for a 
unanimous consent request.
    Mrs. Maloney. It is done.
    Chairman Garrett. I thought you wanted to--
    Mrs. Maloney. Oh. I have a legislative proposal here and 
statement from Ian Simpson, the director of global governance 
for CalPERS, the California Public Employees Retirement System, 
and I request unanimous consent to place it into the record.
    Chairman Garrett. Without objection, it is so ordered.
    Mrs. Maloney. Thank you.
    Chairman Garrett. Thank you. Mr. Scott is now recognized.
    Mr. Scott. Thank you, Chairman Garrett, and thank you, 
Ranking Member Maloney.
    This is an important subject, and I kind of view these four 
bills with a bit of trepidation. I think it is important for us 
to be very careful. The Dodd-Frank Act is an extraordinarily 
important act to make sure that we never get into a financial 
crisis such as we had before.
    And I do believe in making the right kind of adjustments. 
Oftentimes when we make adjustments, we sometimes can create 
unintended consequences, create sometimes more of a problem 
than we had before, so we have four bills.
    The Audit Integrity and Job Protection Act addresses 
questions as to whether or not mandatory audit firm rotation by 
the Public Company Auditing Oversight Board is the most 
efficient way to enhance auditor independence and audit 
quality. I think it is important that we hear from our 
accounting firms on that. They are the ones that have to make 
all of this work. And we have to make sure that we get the 
right answers.
    H.R. 1135, the Burdensome Data Collection Relief Act, looks 
to repeal disclosure requirements for a public company's ratio 
of CEO pay to median employee, as is required under Dodd-Frank. 
There are reasons why such language was put into Dodd-Frank. 
So, I think we have to be very careful.
    H.R. 1105, the Small Business Capital Access and Job 
Preservation Act, exempts investment advisers to certain 
private equity firms from SEC registration and reporting. 
Again, this is required under Dodd-Frank. What does the SEC say 
about this? I am saying all of these things were put in for a 
purpose.
    So, as we move forward to address the many regulatory 
issues raised by these pieces of legislation, what I am saying 
is, we have to get the right balance, and balance the concerns 
on behalf of, yes investors, but also consumers. Also, the 
users, and our constituents with the concerns that are raised 
by American public companies, many of which are also run by our 
constituents and have stakes in our communities.
    I believe in transparency, and I am also a pragmatist who 
recognizes that while notably improving admittedly less than 
satisfactory economic and market conditions that our American 
businesses are operating under, we must do everything we can to 
improve conditions, and facilitate growth without imposing any 
undue, unexpected regulatory burdens. And I am sure my 
colleagues share in this evenhandedness. If they are onerous, 
we need to say why. Onerous to one person, might not be onerous 
to another. So, all I am asking for is that we move with a very 
clear, jaundiced eye, and not with an overwhelming zeal to move 
in and try to undermine or repeal Dodd-Frank.
    With that, I yield back.
    Chairman Garrett. The gentleman yields back. Before we go 
to Mrs. Wagner, the gentlelady from New York is recognized for 
30 seconds.
    Mrs. Maloney. I would just like to take this opportunity to 
thank Kristin Richardson for her extraordinary work on this 
committee, and prior to that, for her work in my district 
office in New York. She has done an extraordinary job and will 
be leaving to join the private sector. But I am deeply grateful 
for her sacrifice, and her devotion, and her hard work. Thank 
you, Kristin.
    [applause]
    Chairman Garrett. So we will be seeing you in New York when 
we go up to New York? Great. Okay.
    Mrs. Wagner is now recognized for 3 minutes.
    Mrs. Wagner. Thank you very much, Mr. Chairman.
    The first thing I would like to note is that the discussion 
draft amending Section 913 of the Dodd-Frank Act that I have 
circulated is just that, a draft. And I appreciate the 
opportunity to have it included in this hearing to receive all 
of the proper input. The draft is intended to address what has 
become one of the biggest issues facing retail investors today. 
I guess this has simply become known as the fiduciary issue. 
And what we have is two different Federal agencies, the SEC and 
the Department of Labor, heading towards a separate and massive 
rulemaking that could fundamentally change the way in which 
families and investors choose financial products and services, 
and not necessarily for the better.
    Today, we will focus on the SEC. In January 2011, the SEC 
proposed adopting a ``uniform fiduciary standard for brokers 
and advisers for their dealings with retail customers.'' While 
the SEC claimed this proposal would better protect investors, 
the agency failed to provide any evidence to support such a 
claim. And in fact, failed to provide any data, or evidence 
showing that retail customers were being harmed or 
disadvantaged under current standards of conduct.
    SEC Commissioner Paredes, and then-Commissioner Casey said 
in a joint statement that the study ``failed to justify its 
recommendation that the Commission embark on fundamentally 
changing the regulatory regime for the broker-dealers and 
investment advisers.'' And even though investor confusion 
surrounding standards of care was the main rationale behind the 
study's recommendation, Paredes and Casey went on to say that 
the uniform standard ``may in fact create new sources of 
confusion for investors.''
    So it seems to me that we have a solution in desperate 
search of a problem. And the solution could end up harming 
investors more than helping them. The draft that I have 
circulated is meant to address the shortcomings of the SEC's 
proposal, and to ensure that regulators do not lose focus on 
the fact that, at the end of the day, it is everyday Americans 
who are harmed most when Federal agencies regulate without 
justification.
    I hate to break it to you, but it is not the ultra-wealthy, 
or the 1 percent who are most affected by this: it is the new 
dad looking to buy life insurance so he can sleep better at 
night; or the mom looking to set up an education account for 
her child who gets turned away because she is told that she is 
not sufficiently wealthy; or the grandfather who has fewer 
choices when deciding how to pass on wealth to his 
grandchildren.
    You don't protect investors by simply restricting their 
choices and adopting a one-size-fits-all regulatory regime. In 
fact, I would submit that this does more harm than good.
    The draft legislation would improve the regulatory process 
by requiring the SEC to identify whether investors are being 
harmed or disadvantaged under current standards of care, and 
also require the SEC to conduct a rigorous cost-benefit of any 
potential rule.
    In addition, the SEC would be required to verify that any 
final rule would actually reduce, I underscore, reduce investor 
confusion. I think we can all agree that the SEC shouldn't make 
the problem worse.
    I thank the chairman for the time, and I look forward to 
hearing from our witnesses today on this very important matter. 
And I yield back my time.
    Chairman Garrett. Thank you. And before we get to the 
witnesses, one last comment. The gentleman from--
    Mr. Hurt. Mr. Chairman, I just have two letters: one from 
the Association for Corporate Growth; and one from the 
Investment Company Institute and the Independent Directors 
Council. And I was wondering if I could have unanimous consent 
to make them a part of the record?
    Chairman Garrett. Without objection, it is so ordered.
    Mr. Hurt. Thank you.
    Chairman Garrett. Now, we can go to the panel. And thank 
you to the entire panel for being here today. For those who 
have not been here before, just recognize that your entire 
written testimony will be made a part of the record. We will 
now yield to you 5 minutes each.
    We also ask that you--we always say this a number of 
times--make sure that your button is pushed and that the 
microphone, as you have done, is pulled fairly close to you, 
otherwise it is sometimes hard to hear you.
    So to begin things, from the University of Mississippi, Mr. 
Bullard, you are recognized for 5 minutes.

  STATEMENT OF MERCER E. BULLARD, PRESIDENT AND FOUNDER, FUND 
   DEMOCRACY, INC., AND JESSIE D. PUCKETT, JR., LECTURER AND 
ASSOCIATE PROFESSOR OF LAW, UNIVERSITY OF MISSISSIPPI SCHOOL OF 
                              LAW

    Mr. Bullard. Thank you, Chairman Garrett, Congresswoman 
Wagner, and members of the subcommittee for the opportunity to 
appear before you today. It is certainly an honor and a 
privilege to be back before the committee.
    I would like to direct my comments today to the draft cost-
benefit bill, and although I am going to talk about the bill as 
if it is final text, I just want you to note that I do 
appreciate it is a draft, and certainly I wouldn't be surprised 
if there were changes made to the text going forward.
    I also want to note that the bill's cost-benefit 
requirements, in theory, are certainly unobjectionable. And for 
the most part, they describe how the SEC should think about 
cost-benefit analysis in doing its rulemaking. However, in 
practice, the requirements will have little relationship to how 
cost-benefit analysis is actually conducted.
    My concern is that they will not improve cost-benefit 
analysis. Rather, they will impede or simply prevent needed 
rulemaking, add unproductive employees to government payrolls, 
and trigger more litigation and more expense for all parties 
involved.
    Excessive cost-benefit requirements ultimately will turn 
government agencies into the Orwellian two factions that 
opponents of red tape claim to oppose. Legal challenges to 
rules have proven time and time again that there is only one 
standard for cost-benefit analysis that is really needed, the 
arbitrary and capricious standard under the Administrative 
Procedures Act.
    Industry participants have been successfully challenging 
inadequate cost-benefit analysis under that standard for 
decades. One consequence of the regulatory paralysis that 
excessive cost-benefit standards create that does not receive 
much attention is the problem of unintended consequences.
    As every experienced lawyer knows, one response to 
regulatory paralysis is always the same--rulemaking through 
enforcement. The fiduciary duty is no exception. States bring 
State law fiduciary claims against brokers. FINRA brings FINRA 
rule-based fiduciary claims against brokers. Fiduciary claims 
are the most common claims in FINRA arbitration proceedings 
where no one even knows what the standards are that are being 
applied because arbitration panels are not required to tell us 
what they are.
    When you take away the SEC's ability to define the 
fiduciary duty, you guarantee that there will be dozens of 
versions of fiduciary duties promulgated by dozens of sources 
of authority. Excessive cost-benefit standards ultimately 
promote the development of non-uniform, enforcement-based law.
    Others will also step in and do their own rulemaking. Let 
me read you the headline from an article on Rick Ketchum's 
speech, delivered only yesterday--``FINRA's Ketchum to SEC: Act 
Now on Fiduciary, or We Will Make Our Own Disclosure Rules.'' 
FINRA rules already have a substantive fiduciary component. 
Industry lawyers have characterized its most recent amendments 
to a suitability rule as establishing a de facto fiduciary 
standard.
    The fiduciary duty has already blossomed, gassing 1,000 
lights that are anything but illuminating. As an alternative to 
rulemaking, the SEC itself has brought a number of claims, for 
example, for failures to disclose revenue-sharing payments that 
allege what are essentially fiduciary duty violations clothed 
in the garb of anti-fraud claims.
    In fact, one might even predict that when cost-benefit 
requirements threaten to paralyze rulemaking by the SEC or the 
CFPB, for example, the Executive Branch might choose to 
sidestep rulemaking by appointing prosecutors to run those 
agencies.
    The cost-benefit bill also requires SEC coordination with 
other agencies that may reflect an intent to constrain the 
DOL's own fiduciary rulemaking. If so, in light of recent 
events, I would say this approach is at least premature. The 
DOL's original proposal, which has been roundly criticized by 
me in this room itself and others, has been withdrawn.
    The DOL is conducting an intensive cost-benefit analysis. 
DOL's officials have expressly stated they are crafting 
exemptions for reproposal that are designed to accommodate 
existing industry practices. And the re-proposal is only a 
couple of months off. I would say that Congress should at least 
wait to know what the DOL proposal is going to be before 
seeking to prevent the rulemaking from going forward.
    The bill also includes a provision that requires the SEC to 
make a finding, as a condition of adopting a fiduciary rule, 
that the rule would reduce investor confusion about the legal 
standards that apply to financial professionals. This customer 
confusion test does nothing more than hold investors hostage, 
denying them the right to an efficient fiduciary standard until 
they can prove that they have achieved a higher level of legal 
sophistication.
    The solution to investor confusion is not to require 
investors to become smarter about regulations. It is to make 
smarter regulations.
    In conclusion, the bill requires that the SEC, again, as a 
condition of imposing a fiduciary duty on brokers, to impose 
unrelated rules on investment advisers. There is no question 
the SEC should consider whether broker rules that apply to 
activities that advisers also engage in should be extended to 
advisers as well.
    But making the adoption of a fiduciary rule automatically 
triggers such unrelated rulemaking, creates a strong inference 
that this provision is nothing more than rent seeking by an 
industry that wishes to regulate its competitors into 
submission. Investor adviser rules, like the fiduciary rule, 
should stand or fall on their own merits.
    Thank you, and I would be happy to answer any questions.
    [The prepared statement of Mr. Bullard can be found on page 
39 of the appendix.]
    Chairman Garrett. I thank the gentleman. Next, from the 
Association for Advanced Life Underwriting, Mr. Ehinger, you 
are recognized for 5 minutes, and welcome to the panel.

 STATEMENT OF KEN EHINGER, CHIEF EXECUTIVE OFFICER, M HOLDINGS 
  SECURITIES, INC., ON BEHALF OF THE ASSOCIATION FOR ADVANCED 
                    LIFE UNDERWRITING (AALU)

    Mr. Ehinger. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee. I am Ken Ehinger, 
president and chief executive officer of M Holdings Securities, 
Inc. I am testifying today on behalf of the Association for 
Advanced Life Underwriting.
    We appreciate the opportunity you have given us to testify 
on draft legislation by Representative Wagner. Her draft 
legislation would, in essence, require the SEC to identify a 
real need and determine that there will be real benefits 
outweighing the costs before upending the current standards 
that apply to broker-dealers.
    While we understand the Wagner proposal is a discussion 
draft at this point, we support her effort as a sensible 
proposal that we believe will lead to better rulemaking by the 
SEC.
    I have spent more than 3 decades in the securities and 
insurance business. I was honored to share that experience with 
this subcommittee when I testified more than a year-and-a-half 
ago.
    As I said then, a standard of care for financial 
professionals that sounds good in theory may fail in practice 
if it is vague and amorphous and provides no guideposts for 
compliance. And, a fiduciary duty offers little protection if 
regulators do not have the tools and resources to effectively 
oversee the financial professionals who are subject to it.
    I reiterate those statements today.
    During consideration of Dodd-Frank, the then-Chairman of 
the SEC advocated that the bill include a legislative mandate 
to the SEC to impose a new standard on broker-dealers. Congress 
rejected that approach and directed the SEC to study whether 
there were gaps in existing investor protection before acting 
on any new rule.
    The 2011 SEC study was criticized on all sides because of 
the lack of economic analysis and findings of specific harm and 
market failure supporting its conclusions. The SEC says that it 
needs to address investor confusion. A 2008 Rand Corporation 
report found that investors were confused about the legal 
differences between brokers, dealers, and investment advisers, 
although they were very satisfied with their own financial 
professionals.
    But instead of addressing the confusion issue by developing 
better, clearer, and more concise disclosure about the role in 
which a financial professional serves, the SEC took a different 
path. Over the past 5 years, it has used precious time and 
staff resources to continue to press for a change in the 
broker-dealer standard of care to conform to the standard that 
applies to investment advisers.
    The SEC most recently set out various options for reform in 
this area in a 72-page release requesting a mountain of data, 
little of which relates to whether investors are being harmed.
    I have great respect for the SEC and for its dedicated 
staff. But, the Commission has detailed dozens of staff to work 
on this discretionary rulemaking project over the last few 
years.
    I believe the SEC could make much better use of those 
staff, if it would do two things. First, direct two or three to 
develop a targeted disclosure rule that addresses any issue of 
investor confusion. And second, reassign the others to fill 
what continues to be a monumental gap in investment adviser 
inspections and oversight.
    Representative Wagner's bill would address these issues 
very directly. If the criteria in her discussion draft had been 
in place from the outset, precious time and resources would 
have been saved by the SEC. The focus on the SEC's regulatory 
effort would have been to identify real and specific harm, and 
then to craft a rule or other remedy to address that harm cost-
effectively. Investors would have been far better off.
    AALU's members are licensed life insurance professionals. 
Many are licensed in multiple States. Most AALU members are 
registered representatives at SEC and FINRA-registered broker-
dealers, and/or are investment adviser representatives of SEC-
registered advisers. Our members are subject to multiple layers 
of Federal and State regulation and oversight.
    The variable insurance products our members sell, which 
trigger broker-dealer registration, give customers investment 
choices and an insurance guarantee, which has been recognized 
as even more important in recent years of market volatility.
    The range and features of products such as variable life 
and variable annuities make it difficult to determine which 
product is ``best,'' and a ``best interest'' standard almost 
certainly would lead to increased litigation. Determining what 
is ``best'' would be highly subjective, opening a producer to 
second-guessing and liability, often years after the sale of 
the product.
    Life insurance enables individuals and families from all 
economic brackets to maintain independence in the face of 
potential financial catastrophe. The life insurance industry, 
through permanent life insurance and annuities, provides 20 
percent of Americans' long-term savings.
    Two out of three American families--that's 75 million 
families--count on the important financial security that life 
insurance products provide. Therefore, any proposed change in 
regulation that could limit consumer choices and access to 
these critical protection and savings vehicles should meet a 
high burden with respect to the need for the changes.
    I want to thank you again for the opportunity to testify. 
AALU looks forward to continuing to work with you on these 
critical issues.
    [The prepared statement of Mr. Ehinger can be found on page 
57 of the appendix.]
    Chairman Garrett. And I thank the gentleman. It is good to 
see you back here again.
    Mr. Quaadman from the U.S. Chamber of Commerce, welcome to 
the panel.

   STATEMENT OF THOMAS QUAADMAN, VICE PRESIDENT, CENTER FOR 
   CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE

    Mr. Quaadman. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee.
    If you take a look at the four issues that are before us 
today, there is a common thread that runs throughout them. 
There is a lack of benefit for investors and businesses. There 
are large costs that are imposed on businesses. And there is a 
mode of government micromanagement that inhibits investors and 
the ability for businesses to grow and create jobs.
    That is why the Chamber, in releasing our Fix, Add, Replace 
(FAR) agenda earlier this year, included these four issues as 
those that should be addressed. The FAR agenda was specifically 
designed to fix the flaws in Dodd-Frank, add the issues that 
were left unaddressed in Dodd-Frank, and replace those 
provisions that are unfixable.
    In looking at the specifics of the four issues before us, 
the Chamber supports H.R. 1135, the Burdensome Data Collection 
Relief Act, which would repeal Section 953(b) of the Dodd-Frank 
Act. The pay ratio disclosure in Section 953(b) in Dodd-Frank 
creates a corporate disclosure that forces businesses to 
disclose irrelevant information for investors. It doesn't 
convey information to investors as to company performance, 
their long-term prospects or its management.
    Instead, it imposes costly compliance burdens that, if you 
take a look at a public company that may be operating in 
dozens, if not in over 100 countries, they have to reconcile 
differing definitions of compensation, employees, and benefits, 
quantify those, and then take into account currency 
fluctuations over all those different borders.
    So if you take a look at the information provided by the 
Center On Executive Compensation, one company has estimated it 
will cost almost $8 million to comply with this provision; 
another company has estimated it will cost $2 million just to 
determine the pension benefits that could be subject to this 
provision.
    When you start to extrapolate those numbers across the more 
than 10,000 public companies in the United States, you are 
looking at costs well into the hundreds of millions of dollars.
    The Chamber also supports H.R. 1105, the Small Business 
Capital Access and Job Preservation Act. This solves the 
problem, the classic problem, of trying to pound a square peg 
into a round hole. The SEC has created a mismatch of trying to 
impose public investor disclosures upon private investors.
    Therefore, private equity funds, which are important 
sources of capital for the business community, have to 
safeguard untradeable securities and also have to start to 
engage in expensive periodic valuations of businesses that are 
in their portfolio.
    It has been estimated by the Association for Corporate 
Growth that for each of these businesses in a portfolio, it 
will cost the fund between $500,000 and $1 million. When you 
take a look at a private equity fund that could be invested in 
20, 30, or 50 businesses, that starts to actually sideline a 
sizable amount of capital that could be used for productive 
purposes.
    The Chamber also supports H.R. 1564, the Audit Integrity 
and Job Protection Act. The Chamber agrees that Congress should 
not legislate independent standard setting standards and that 
there should be independent standard setting. But this is an 
example where the PCAOB has left its field of audit region and 
got into corporate governance. With possibly only two to three 
audit firms engaged in audit activities in an industry, it 
could actually turn into a government mandate as to what vendor 
a company should use and when they should use them.
    Furthermore, this will diminish audit committee oversight. 
The GAO, as has been noted, has estimated this would raise 
audit costs by at least 20 percent and it would harm audit 
quality. Over 90 percent of the commenters to the PCAOB over 
the last 2 years have opposed this provision and then, in fact, 
the majority of investors have also done so.
    The Chamber is also very appreciative of Congresswoman 
Wagner's discussion draft on Section 913 of Dodd-Frank. The 
Chamber echoes the concerns of over 150 Members of Congress on 
a bipartisan basis who have raised concerns about fiduciary 
duty roles.
    We agree that there needs to be a coordinated effort 
amongst the SEC and other Federal agencies to look at the issue 
and then determine what the problems are, what the solutions 
are, and what the cost-benefit should be.
    Unfortunately, what we have seen with the history of joint 
rulemakings under Dodd-Frank, is they have happened in a 
disjointed manner. They have happened out of sequence and they 
have created market confusion in and of themselves.
    That, we think, is something that would harm investors and 
the businesses that they help capitalize.
    Finally, I would just like to say if you take a look at 
each of these issues and bills in the abstract, they are trying 
to address costs and burdens, as I mentioned, but we also need 
to look at them on a much broader and global basis.
    We would also support consideration of Congressman 
Fincher's bill, H.R. 1221, the Basel III Capital Impact Study, 
which would look at a cumulative impact study of various Dodd-
Frank rulemakings.
    Finally, I would just like to say we commend Congress for 
the bipartisan action it took last year in passing the JOBS 
Act. And we think that the passage of these four bills is a 
page from the same playbook and would support that. Thank you.
    [The prepared statement of Mr. Quaadman can be found on 
page 67 of the appendix.]
    Chairman Garrett. And I thank the gentleman.
    Now, on behalf of the Small Business Investor Alliance, Mr. 
Reich. Welcome, and you are recognized for 5 minutes.

  STATEMENT OF MARC A. REICH, PRESIDENT, IRONWOOD CAPITAL, ON 
     BEHALF OF THE SMALL BUSINESS INVESTOR ALLIANCE (SBIA)

    Mr. Reich. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee. Thank you for the 
opportunity to testify today.
    My name is Marc Reich, and I am president of Ironwood 
Capital, a private equity firm in Avon, Connecticut. I 
represent the Small Business Investor Alliance, the trade 
association of lower middle market private equity firms, and 
the many institutional investors that provide the capital that 
we, in turn, invest in small and medium-sized businesses 
nationwide.
    My firm manages six private equity funds, four of which are 
organized as small business investment companies, investment 
funds that are licensed and regulated by the U.S. Small 
Business Administration. We invest subordinated debt and equity 
in amounts ranging from $5 million to $12 million to support 
small business owners in growth financings, recapitalizations, 
and buyouts. I strongly support H.R. 1105, the Small Business 
Capital Access and Job Preservation Act, introduced by 
Representatives Hurt, Himes, Garrett and Cooper. Thank you to 
the committee for examining this bill today, and especially to 
the sponsors of the legislation for working so diligently to 
bring it to this point.
    H.R. 1105 strengthens the ecosystem of the private equity 
marketplace by reducing overregulation that threatens capital 
access for small businesses. The Investment Advisers Act of 
1940 as modified by Dodd-Frank requires private fund advisers 
to register with the SEC if they manage more than $150 million 
of capital.
    Since the Act became effective, over 1,500 private equity 
funds have registered with the SEC.
    My testimony today will be brief and pointed, focusing on a 
few of the most common and vexing problems experienced by 
managers of middle market private equity funds as a result of 
SEC registration and regulation, in my view, the potential 
negative impact on small businesses if H.R. 1105 does not 
become law.
    First, however, I would like to speak to the issue of 
middle market private equity and systemic risk to the financial 
system. The global economic downturn was a tremendous stress 
test for the financial system. The middle market private equity 
industry weathered the downturn in good shape.
    In fact, private equity saved many small businesses during 
the financial crisis when their access to capital was severely 
curtailed.
    Middle market private equity doesn't create systemic risk 
by trading in synthetic financial instruments. We don't 
speculate on currency or commodities. We don't put the 
retirement funds of individuals at risk. We invest directly in 
small businesses, the backbone of our economy and the growth 
engine for job creation.
    I support having a strong body of regulation within which 
to operate. Good government regulation is, in fact, the 
strength of our system. But that regulation must be appropriate 
to the context to which it is applied, should not be redundant 
with or in conflict with other regulations, and should not 
adversely impact the flow of capital--in our case, again, the 
flow of capital to U.S. small businesses.
    SEC compliance and regulatory costs are especially high for 
small investment funds. At Ironwood Capital, we already spend 
approximately $250,000 annually on SBA compliance costs. 
Initial SEC registration costs us $100,000, plus an additional 
$250,000 annually thereafter.
    In addition to the actual dollar cost of additional 
compliance, having a second Federal regulator removes fund 
managers from their primary role of investing in and coaching 
small businesses. While this is true for both large and small 
funds, there is a disproportionate impact on smaller funds 
since they have smaller chains, teams, and operate in very lean 
environments, but face the same array of regulations.
    Many of the regulatory requirements we now face under SEC 
rules are inappropriate to the nature of our business. We 
invest almost exclusively in privately held companies and hold 
securities which are not readily marketable or otherwise 
transferable. Nonetheless, we are now subject to the SEC 
custodial rules, which require us to hire a third-party 
custodian to hold onto untradeable securities.
    If our securities ended up in the hands of unscrupulous 
people seeking to profit from them, nothing would happen.
    Likewise, we are now required to retain and archive all e-
mail messages, then review them to detect illegal activity, 
such as insider trading. Again, we don't hold anything that is 
tradable. But we are subject to this rule. This is a purely 
regulatory exercise with no benefit to investors, nor does it 
contribute to the safety and integrity of the overall financial 
system.
    Having two regulators overseeing substantially the same 
segment of the market has resulted in several unnecessary and 
costly situations.
    In one case, the manager of multiple SBICs now regulated by 
the SEC has been preparing its financial statements for years 
in accordance with SBA regulatory accounting standards, but was 
required by the SEC to restate all of their financial 
statements on a GAAP basis, which cost them about $500,000.
    The effect of relatively high compliance expenses and 
conflicting regulation motivates managers of small funds to 
either exit the business or raise far more capital for their 
next fund to offset the cost of double regulation, which, in 
turn, has the effect of causing those funds to now invest in 
bigger companies, leaving the smaller companies significantly 
out in the cold. Neither option is good for the sustained flow 
of capital to small businesses.
    Thank you to the committee for holding this hearing on H.R. 
1105, a bill that removes overregulation and helps small 
business. The SBIA looks forward to working with you to craft 
better legislation and the appropriate modifications. I am 
happy to answer any questions you may have.
    Thank you.
    [The prepared statement of Mr. Reich can be found on page 
106 of the appendix.]
    Chairman Garrett. I thank the gentleman.
    From the AFL-CIO, welcome back, Mr. Silvers.

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

    Mr. Silvers. Good morning, Chairman Garrett. It is a 
pleasure to be with you again. And good morning to you, Ranking 
Member Maloney.
    I am Damon Silvers, the policy director and special counsel 
to the AFL-CIO. I want to thank you and the committee for the 
opportunity to appear today.
    Since 1980, the United States has gone through several 
cycles of financial deregulation, each of which was followed by 
speculative bubbles and mass unemployment. The Bank of England 
has estimated that the worldwide costs of the collapse of the 
most recent U.S.-centered financial bubble driven by 
deregulation is in excess of $60 trillion and rising.
    Today, this committee is considering a package of bills, 
each of which is wrong-headed in its own peculiar way, but when 
taken as a package, together with other measures being taken up 
by the House such as derivatives deregulation, constitute the 
House seeking to initiate yet another round of financial 
deregulation. If successful, there is no reason to believe that 
the outcome of this effort will be any different than the 
outcomes of the last 3 times that Congress went in this 
direction.
    Now, I am going to take up briefly each of the four bills. 
In my written testimony, there is a detailed analysis.
    H.R. 1135, the Burdensome Data Collection Relief Act, seeks 
in truth to keep secret the relationship between CEO pay and 
the median pay of other employees at public companies by 
repealing Section 953-b of the Dodd-Frank Act, which requires 
such disclosure. The AFL-CIO strongly opposes H.R. 1135. It is 
a bill designed to hide material information from investors, to 
encourage runaway CEO pay, and to increase economic inequality. 
Each of these outcomes of this bill will feed systemic risk.
    H.R. 1105, the Small Business Capital Access and Job 
Preservation Act, as drafted now--it could be drafted to 
narrowly address the concerns the previous witness, Mr. Reich, 
has raised, which I think are legitimate--has nothing to do 
with small business. It exempts leveraged buyout firms. That is 
what private equity is code for. It exempts leveraged buyout 
firms from the registration and reporting requirements in the 
Dodd-Frank Act.
    This bill would increase systemic risk, weaken investor 
protections, and offer further regulatory subsidies to 
leveraged buyout firms, a portion of Wall Street that is 
already the beneficiary of inexcusable tax subsidies. And it is 
drafted in a manner aimed at misleading Members of this House 
into thinking the bill has meaningful protection against 
leverage when it does not, because the firms do not incur 
leverage at the firm level. They do so at the investment level. 
For all of these reasons, the AFL-CIO strongly opposes H.R. 
1105.
    The draft legislation to amend Section 913 of the Dodd-
Frank Act places a number of unusual procedural obstacles in 
the way of the SEC strengthening the standard of conduct that 
is applied to broker-dealers' treatment of their clients. 
Currently--and this has not come out yet, despite the amount of 
time spent in this hearing on this bill--brokers have no legal 
duty to give investors advice that is actually in the client's 
interest.
    This fact was at the heart of Goldman-Sachs' defense when 
the SEC charged Goldman with selling credit default swaps in 
the Abacus transaction to clients without telling them the 
swaps had been designed by the party on the other side of the 
transaction. In a sense, this draft bill is designed to 
facilitate Goldman-Sachs and their future imitators continuing 
treatment of their less favored clients as feedstock for their 
most favored clients. The AFL-CIO strongly opposes this bill.
    H.R. 1564, the Audit Integrity and Job Protection Act, 
seeks to prevent the Public Company Accounting Oversight Board 
(PCAOB) from placing limits on the length of time a public 
company can use the same audit firm, audit firm rotation. H.R. 
1564 both substantively weakens the ability of the PCAOB to 
play its role in protecting our economy against systemic risk, 
and it weakens the independence of the body. Both results are 
contrary to the public interest, and will significantly 
increase the risk of financial crisis, and the AFL-CIO opposes 
this bill.
    I should note that the subcommittee does not possess the 
information the PCAOB has as a result of its inspection 
process. I would suggest the subcommittee consider seeking to 
grant itself that authority so it can have the information the 
regulator has, as the regulator considers whether or not to do 
this, from the inspections.
    Now, in conclusion, there is an urgent financial regulatory 
agenda, and it is not this one. That agenda is completing the 
Dodd-Frank rulemaking process, really taking on too-big-too-
fail institutions, as Senators Brown and Vitter are attempting 
to do, and fairly taxing the financial sector, starting with 
ending the carried interest loophole and enacting a financial 
transaction tax.
    This subcommittee should turn away from yet another costly 
indulgence in the delusions of deregulation, and instead focus 
on how to strengthen our statutory and regulatory protections 
against systemic risk and the exploitation of investors.
    Once again, on behalf of the AFL-CIO, I want to thank the 
subcommittee for the opportunity to appear. I look forward to 
your questions.
    [The prepared statement of Mr. Silvers can be found on page 
116 of the appendix.]
    Chairman Garrett. Thank you.
    On behalf of the Society of Corporate Secretaries and 
Governance Professionals, Mr. Smith, you are recognized for 5 
minutes.
    Thank you.

STATEMENT OF ROBERT SMITH, CORPORATE SECRETARY, VICE PRESIDENT 
 AND DEPUTY GENERAL COUNSEL, NISOURCE, INC., ON BEHALF OF THE 
 SOCIETY OF CORPORATE SECRETARIES AND GOVERNANCE PROFESSIONALS

    Mr. Smith. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee. I am here today in my 
capacity as director of the Society of Corporate Secretaries 
and Governance Professionals, and I appreciate the opportunity 
to participate in this hearing. And I will jump right in to the 
heart of the issues.
    My comments this morning will be limited to the CEO pay 
ratio disclosures and potential audit firm rotation issues. We 
believe these issues, if implemented, would be detrimental both 
to companies and their investors. With respect to H.R. 1564, we 
believe that the exclusive authority to hire and retain an 
audit firm should remain with the company's independent audit 
committee.
    The audit committee remains tasked by Congress and the SEC 
with the responsibility of selecting a company's audit firm, 
and we believe the audit committee is best able to judge if the 
audit firm is bringing the right level of technical competence, 
objective, and professional skepticism to its work. Mandatory 
rotation would unnecessarily impinge on the audit committee's 
independent judgment and fiduciary duties, and it would replace 
this with an arbitrary one-size-fits-all requirement.
    Second, we believe that the costs of mandatory rotation 
outweigh any benefits from a blanket rule. The costs associated 
with mandatory audit firm rotation are considerable, entailing 
as much as 2,600 to 3,700 hours of audit committee, senior 
management, and staff time.
    Additionally, approximately half of our surveyed members 
indicated they believe fees for audit committee and audit-
related services would increase 20 percent or more in the 
initial years following the auditor change. In addition, the 
GAO also estimated that additional costs would average 
approximately 80 percent higher than the audit costs had there 
been no change.
    Furthermore, we believe that the benefits of forced 
rotation would be minimal and that rotation would likely have a 
negative effect on audit quality. More than 85 percent of our 
members surveyed were very concerned about the loss of the 
audit firm's institutional knowledge of the company and 
industry if required to switch auditors. And 70 percent of the 
responding members that had experienced an auditor change in 
the last 10 years indicated that they had noticed a change in 
the audit quality as a result of the new engagement.
    Finally, we believe that mandatory auditor rotation would 
leave many public companies with few experienced and eligible 
audit firms. Many public companies in certain industries have 
very limited choices with respect to audit firms with 
appropriate expertise.
    Many, again as a practical matter, only use one or two of 
the big four firms to provide their audit services. Nearly 90 
percent of our members surveyed indicated that their company's 
audit committee evaluates audit firms based on industry 
knowledge or international scope, and considered these items 
very important in the selection of the audit firm.
    Requiring a company to choose a less qualified, less 
experienced firm seems significantly less than ideal from a 
governance perspective. For these reasons, we oppose mandatory 
audit firm rotation.
    With respect to CEO pay ratio, we believe the requirement 
that the ratio be based on the median employee is simply 
unworkable. In order to know who the median employee is, each 
company in the United States would have to calculate the cash 
and non-cash compensation for every employee: full time; part 
time; domestic; international; hourly; and salaried.
    Pension accruals would have to be calculated by actuaries 
and H.R. professionals for no productive purpose other than to 
determine the median employee. International companies face an 
even more daunting task. They have foreign subsidiaries that 
have completely different computer systems, pay scales, 
compensation structures, and laws, including privacy laws in 
some jurisdictions that could prohibit the transfer of personal 
compensation information across borders without express consent 
of that employee. The potential issues with pay ratio are 
significant and numerous.
    Additionally, this type of disclosure does not appear to be 
desired by shareholders or investors. The 12 shareholder 
proposals of which we are aware that have been voted on since 
2010 on average received less than 7 percent support. The 
bottom line is that there are already a lot of disclosures on 
compensation and shareholders have a regular venue and voice in 
the compensation process through say on pay.
    The disclosure is not meaningful. The skewed results that 
would result where two similar companies produced the same 
equipment, but one outsources the production of its products 
and the other one does not, clearly demonstrates the non-
materiality and even potentially misleading nature of the 
disclosures.
    Similarly, the inclusion of part-time employees and 
international employees yields absurd results, where a full-
time executive would be compared with a part-time employee who 
may only work 20 hours per week, or with international 
employees who may live in a third world country.
    Lastly, we agree with the Chamber's earlier comments that 
these additional disclosures could be incredibly costly without 
an offsetting benefit that would justify the cost. Hiring staff 
to perform the detailed calculation and then audit it and 
confirm it so that it is reliable and accurate would be 
daunting and overly burdensome. For these reasons, we believe 
that the requirement should be repealed.
    Thank you very much.
    [The prepared statement of Mr. Smith can be found on page 
126 of the appendix.]
    Chairman Garrett. Thank you.
    And representing the Center On Executive Compensation, Mr. 
Tharp.
    Welcome.

STATEMENT OF CHARLES G. THARP, CHIEF EXECUTIVE OFFICER, CENTER 
                   ON EXECUTIVE COMPENSATION

    Mr. Tharp. Thank you. Thank you, Chairman Garrett, Ranking 
Member Maloney, and members of the subcommittee. My name is 
Charlie Tharp, and on behalf of the Center On Executive 
Compensation, I am pleased to provide our views on Section 
953(b) of the Dodd-Frank Act, commonly known as the pay ratio 
mandate, and to express our strong support for Congressman 
Huizenga's bill, H.R. 1135, which would repeal the pay ratio.
    As was commented earlier, we believe that it would impose 
significant costs on organizations, especially global 
employers, and would divert resources from more productive uses 
such as job creation and investment without providing 
meaningful information to investors.
    The Center On Executive Compensation is an advocacy and 
research organization. And we are a division of the H.R. Policy 
Association, which represents human resource executives of over 
340 large companies, 100 of whom are members of the Center.
    I would like to make four key points in support of our 
review for the repeal of Section 953(b). The first is that the 
pay ratio calculation is overly complex. As was mentioned, the 
law would require that a company find the median compensation--
not the average--of employees using the definition of pay that 
is used for the summary compensation table in the proxy 
disclosure.
    Companies don't keep that information except for the 
calculation of the high five executives, and this is something 
that would have to be gathered manually and calculated. And as 
was pointed out, there is really no other legitimate business 
reason to collect the information in this way, so it would be a 
redundant effort.
    Second, there is a requirement that it be conducted on all 
employees. And that would include part-time and full-time 
employees. And as it is literally read, that could be employees 
around the world in various locations, no matter how many hours 
they work for the company. Again, this data is not housed in 
any accessible way by companies.
    And third, there would be a burden to conduct this 
collection of data. In our survey, half of our companies said 
it would take 3 months to collect this data. Another 20 percent 
said it would take 5 months. And this is information that would 
have to be disclosed in each SEC filing from a company, which 
are numerous.
    I would offer one example from one of our subscribers that 
said they have no existing way to calculate the annual total 
compensation of every employee around the world. They have 101 
payroll systems. They have 3,600 employees who are paid in 2 
different countries because of the nature of their assignment. 
Six countries that use noncalendar tax years. And it was 
mentioned earlier that many countries have privacy rules that 
inhibit the ability to share this information.
    There is also a tremendous expense, as Mr. Quaadman pointed 
out, since the cost of implementation would be millions of 
dollars. The two examples used, one company would be $7.6 
million as their estimate just to collect this data. And the 
pension calculations, again, would be over $2 million.
    The final point is that it is information which isn't 
useful to investors and which investors haven't asked for. If 
you look at the differences between company structures, the 
labor markets in which they operate, the product markets, it 
would be very difficult to compare information across 
companies.
    And in those cases where shareholders have had an 
opportunity to vote on the pay ratio, the 9 that were in 2010, 
none received support of over 10 percent by investors, and the 
average support was just a little over 6 percent. And it is 
clear that when given the opportunity to request this 
information--over 90 percent of investors have voted against 
it.
    In conclusion, we believe that the pay ratio wouldn't be 
helpful to investors, would be potentially confusing, and would 
be overly costly and burdensome to implement. And that is why 
we support repeal. Again, thank you very much for the 
opportunity to offer our views.
    [The prepared statement of Mr. Tharp can be found on page 
142 of the appendix.]
    Chairman Garrett. Thank you. Just so the panel knows, votes 
have been called, but I think we will get in at least one 
series of questions, and then close after that. I am not going 
to go next, as I normally would as Chair. I am going to defer 
to the vice chairman. The gentleman from Virginia is recognized 
for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman. Again, I thank each of 
the panelists for being here. I guess I wanted to first talk 
about the private equity registration bill, and wanted to first 
turn my attention to Mr. Quaadman. Obviously, the purpose of 
Dodd-Frank is to get at the idea of systemic risk. How do we 
prevent systemic risk and prevent another financial crisis?
    Obviously it strikes me, as the chairman said, that the 
implementation of Dodd-Frank and the enactment of Dodd-Frank is 
not something that should prevent us in and of itself from 
looking at ways to make Dodd-Frank more useful or to make it 
less harmful, especially to those who are trying to create 
jobs.
    And jobs is obviously--if you look at my rural Virginia 
fifth district, there are places in my district where we have 
had unemployment as high as 15 percent. So this is a very real 
issue, and capital formation is very important.
    I was wondering if you could maybe talk a little bit about 
the importance of private equity in capital formation, and then 
also address the issue of systemic risk and whether or not the 
investment that takes place as a consequence of that really 
presents any systemic risk as contemplated by Dodd-Frank.
    Mr. Quaadman. Thank you, Mr. Hurt. First off, in the United 
States we have an extremely diverse set of capital financing 
for businesses. So, private equity is a very important part of 
that.
    Private equity obviously can be where a fund comes in and 
takes a troubled company and turns it around. On the other 
side, they can take a smaller company that is looking to grow 
and provide them with the basis to do so. So private equity in 
that regard is a very critical part of the funding structure 
that businesses have.
    In terms of systemic risk, private equity was not a cause 
of the financial crisis. In fact, when you take a look at Title 
I of Dodd-Frank through the prior Vitter Amendment, which was 
the last amendment agreed to in the Senate, the Senate on a 
bipartisan basis put a very strong line around what systemic 
risk can actually be in order to keep as many non-financial 
companies out of it.
    So when you take the fact that private equity was not a 
part of the financial crisis, where you actually have Congress 
and Dodd-Frank trying to restrict systemic risk regulation, 
clearly this is--private equity should not fall within the 
focus of this.
    Mr. Hurt. Thank you. Mr. Reich, I wanted to see if you 
could also address the issue of systemic risk, and then also 
talk about whether or not this added regulation has the 
potential of perhaps creating more systemic risk, more too-big-
to-fail. I think you addressed that a little bit in your 
comments, but maybe you could address that issue?
    Mr. Reich. I would be happy to. Thank you for the question. 
As I said in my comments, it has been demonstrated that private 
equity hasn't contributed in any meaningful way, and maybe 
perhaps not at all, to the systemic risk.
    Part of that is because of structure. And the private 
equity industry, whether by design or through evolution, is a 
very, very stable system. Our investors are not individuals. 
They are large financial institutions. We have California State 
Teachers. We have New Hampshire Prudential, MetLife, all major 
investors. It is not Ma and Pa Kettle showing up with their 
savings in a coffee can asking to invest in private equity. But 
the structure is such that when our investors are in, they are 
in. They can't exit. They commit to a 10-year period, which 
creates real stability in the system. We all saw what happened 
with the hedge funds. They have quarterly redemption rights, 
and people were running for the door and created tremendous 
problems. Private equity, again, is very, very stable--
structurally very stable.
    As to the systemic risk, it is interesting when you take a 
look at Dodd-Frank and H.R. 1105 and what has gone on--and by 
the way, I don't view this as a step towards deregulation.
    Mr. Hurt. Yes. But my time is running out, and I really 
want you to address what the implication for capital formation 
for small businesses could be?
    Mr. Reich. Certainly. What happened is because of the cost 
of regulation, the players that continue in the industry have 
had to raise more capital to cover the increased costs. That 
creates some systemic risk in itself because it is forcing more 
capital into the hands of fewer. So we have less 
diversification. And by moving up in size, they can't invest in 
the smaller businesses. So the smaller businesses really get 
hurt in the process.
    Mr. Hurt. Excellent. Thank you. I yield back the time I 
don't have.
    Chairman Garrett. The gentleman yields back.
    Votes were called about 7 minutes ago, so let's go into 
recess. We only have two votes, so it should not take long. As 
a matter of fact, after they vote the first time, we move right 
into the second vote, and then we will whip back here. So we 
will be in recess until that second vote is over. Thank you.
    [recess]
    Chairman Garrett. The hearing is called back to order. And 
at this time, I yield to the gentlelady from New York.
    Mrs. Maloney. I would like to follow up on the question by 
my good friend, Mr. Hurt, who is very sensitive, and I respect 
his sensitivity to being sensitive to the really burdensome 
requirements on smaller firms. But also to involve in the 
conversation Mr. Quaadman and Mr. Silvers, who had really 
competing statements on the bill. Already, people have started 
registering in these private equity firms with the SEC.
    And now, firms under $150 million are exempted from 
registration. Yet Mr. Silvers, in your testimony, you said the 
way that this is written is that it applies to the leverage at 
the fund level, and only to private equity funds, and that it 
would exempt many private equity funds. Could you explain that 
further? You made it sound like the leverage argument doesn't 
really apply to the private equity funds. Maybe a better way to 
help the small firms would be to raise the ceiling as opposed 
to going into the leverage idea? I would like the comments of 
the panel on that. Mr. Silvers, and then Mr. Quaadman, and Mr. 
Reich, or anybody who would like to respond.
    Mr. Silvers. Congresswoman, what my testimony addresses is 
that leverage, which is the systemic risk issue associated with 
leverage buyout firms or private equity firms. Leverage in 
these firms is incurred not at the firm, but at the level of 
the partnership. So if you put in the bill language as is 
currently in the bill that says, we are not exempting firms 
with leverage, that language is completely misleading because 
it measures the leverage at the investment fund level, and not 
at the level of the companies the investment fund controls.
    Leveraged buy-outs are done at the company level, right? So 
that in a given leverage buy-out, a private equity firm might 
own the equity, the controlling share in 10 operating 
companies. Each of those operating companies will have done the 
borrowing. The way the language is written right now, you can 
have vast amounts of leverage in the total portfolio controlled 
by that leverage buy-out fund, and it would register the way 
leverage is measured in this bill as none whatsoever. Now your 
question about size? My reaction to Mr. Reich's testimony was 
that he was describing the concerns of funds that were somewhat 
larger than the $150 million level, but were not in the big-
time of private--in the world of leverage buy-outs and private 
equity.
    And also, funds that were perhaps less leveraged than the 
typical large player in the business. Now, I would agree with 
you that I think that his testimony raises a question of 
whether the $150 million limit is the right number. I am not 
going to express a view on that today. I am somewhat skeptical, 
but I think it would be worth looking into. But the way this 
bill is written, it is very easily a blanket exemption for 
funds that definitely represent systemic risk.
    Mrs. Maloney. Okay. Mr. Quaadman?
    Mr. Quaadman. Mrs. Maloney, thank you for the thoughtful 
question. I think first off, some of the work that Mr. Himes 
has done, which was incorporated with this bill has been very 
helpful. I do think Mr. Hurt's approach is actually a very 
thoughtful way forward. What we are seeing with the SEC is that 
you have an agency that is really geared toward public company 
disclosures and regulations. And that while Congress made a 
decision that there should be more oversight over private 
equity firms, the way that it is being done, it is being done 
through a check-the-box mentality that neither benefits the 
regulators nor does it help the P.E. firms themselves.
    So I think there is an appropriate balance here where you 
can have P.E. firms that can go out there and help businesses 
with capital, and with management, and not necessarily put 
onerous regulatory burdens on them. And it is just a matter of 
that balance.
    Mrs. Maloney. Mr. Reich, and anyone else who would like to 
comment? Mr. Bullard? Mr. Reich, please, if you could comment 
on this discussion?
    Mr. Reich. On that specific point, you are certainly 
correct. There is leverage both at the firm level, the fund 
level, and at the company level. But again, I think it is best 
covered just by disclosure. And I think there is adequate 
disclosure that is required right now by the SEC and the 
government in general to assess the systemic risk. I don't see 
it as a big problem, however.
    Mrs. Maloney. Okay. Mr. Bullard?
    Mr. Hurt [presiding]. Just briefly.
    Mr. Bullard. I would just like to point out that the SEC 
dealt with this issue in its venture capital rulemaking, which 
is the other major category that is exempted. It dealt 
specifically with the leverage requirements that are imposed on 
venture capital. It seems to me that looking at this bill, the 
2:1 ratio doesn't really do the kind of leverage restriction 
that you are looking for, simply--but directing the SEC to do 
the leverage restrictions itself would solve the problem. And 
the venture capital rulemaking seemed to be the one the 
industry was happy with the resolution. It is one that people 
were happy with the way the SEC dealt with leverage--
    Mr. Hurt. Thank you.
    Mr. Bullard. --I think that might be a better fix to that 
approach.
    Mr. Hurt. The gentlelady's time has expired. The Chair now 
recognizes Mrs. Wagner for 5 minutes.
    Mrs. Wagner. Thank you, Mr. Chairman. And thank you all for 
being here today. Mr. Ehinger, I want to begin with just a 
general question, sir. What effect do you believe a broad, 
loosely defined fiduciary standard will have on retail, 
investors, and families who purchase insurance or other 
financial products?
    Mr. Ehinger. Thank you, Congresswoman Wagner. I appreciate 
the question. I also wanted to repeat one of your statements, 
that this is a solution in search of a problem, for sure. But I 
think in answer to your question, almost certainly it could 
create some increased liability. My concerns would be that 
particularly with respect to the life insurance business, there 
would be a shift to other kinds of products, non-bearable 
products, which in essence means less choice. I also think many 
insurance agents may choose not to stay registered, again not 
offering the opportunity to their clients perhaps to have the 
choices that are available at this point today.
    So I think that, coupled with higher costs, that again will 
be passed on in some regard could have a detrimental effect on, 
really the accessibility for products and services to all--
    Mrs. Wagner. I couldn't agree more. Again, Mr. Ehinger, in 
the Section 913 study, the SEC failed to identify any kind of 
systemic harm or disadvantage being done to investors under 
current standards of conduct. How do you feel that omission 
undermined, or misinformed the study's recommendations to adopt 
a uniform fiduciary standard?
    Mr. Ehinger. I think the only thing that has been found--
and I will reference back to the 2008 Rand study--with respect 
to the concerns about not understanding the legal 
responsibilities is confusion. And it is our view, our position 
that confusion is not resolved by changing legal structures, 
and creating more confusion, by having multiple definitions of 
what, even the term fiduciary means.
    Confusion is resolved by proper, simplified disclosures, we 
think with access to better information in a more in-depth way. 
And in addition, education, and the SEC has a division really 
set up to address that, as well.
    Mrs. Wagner. I think those are the two big takeaways. I 
know you have mentioned the 2008 Rand study, as have I, about 
the confusion issue. But to me, the most interesting thing 
about that study is that they said that generally, most 
investors and families were very happy with the services that 
financial professionals were in fact providing them. So I think 
those are the two big interesting takeaways there. So then it 
would seem, as the SEC pointed out in their study, that 
investor confusion is the real issue to be addressed.
    And for the record here, I do want to state that I do 
believe it is a completely legitimate concern. But, do you feel 
that there are better ways for the SEC to address investor 
confusion, as opposed to making wholesale changes in the way 
that financial professionals are regulated?
    Mr. Ehinger. I do, absolutely. And so I am reiterating what 
I mentioned before and that is to more properly and in a simple 
way, disclose really the roles and responsibilities of the 
investment folks who are working with individuals. And also to 
really support the educational efforts, as well. I think the 
other side of that is really if there is some concern about 
that confusion, one of the things that ought to be understood 
is really what the gaps truly are between the different ways 
that regulators, whether it is the B.D. regulators, or whether 
it is the SEC regulators act in practice.
    Mr. Ehinger. Because the term, fiduciary, while it may 
appear, and it may sound as a higher standard, in practice that 
standard really depends on how it is really enforced, how it is 
really complied with.
    Mrs. Wagner. I appreciate that. I have limited time. Mr. 
Quaadman, you used a phrase in your testimony that caught my 
eye. You stated that the SEC has shown benign neglect to retail 
advisers through past rulemakings. Who will ultimately pay the 
price if fiduciary standards are broadly applied with little 
regard to the cost or restrictions on choice that would come 
with it?
    Mr. Quaadman. Thank you for asking that question. First 
off, in terms of investor confusion that you were talking about 
and the increased cost, it is going to be the retail investor 
that is going to face that confusion, face that cost. And, in 
fact, they actually may have less products to choose from if we 
don't have coordinated rulemaking.
    What has also been clear with the SEC, in terms of their 
policies over the last several years, which is why we use that 
term, in terms of enfranchising retail investors or retail 
investor protections, whatever, they have always gone down to 
the bottom of the list in favor of institutional investors and 
others, so that, unfortunately, it is the mom-and-pop 
shareholder who has really been neglected and is unfortunately 
going to pay a price at the end of the day.
    Mr. Hurt. Thank you, Mr. Quaadman.
    Mrs. Wagner. Thank you.
    Mr. Hurt. I thank the gentlelady, and the Chair now 
recognizes Mr. Scott for 5 minutes.
    Mr. Scott. Thank you very much. As I said in my opening 
statement, we have to get sort of a delicate balance on many of 
these issues. Let me talk about the first one. We have a 
serious problem in this country and that problem is this wide 
gap between what those at the top are making and those in the 
middle are making in terms of income. And so, Dodd-Frank 
attempts to address that.
    I heard some of the same arguments against that, that we 
had on say on pay. I have nothing against people making as much 
money as they want to make, and can make. And I don't think 
there is anything in this section that does that. But we have a 
serious problem. And the country cannot go on with this huge 
wage and income gap between the top half of 1 percent, our CEOs 
making gobs of money, which they have a right to do, I don't 
question that. But when you get to the middle class, this 
country's heart and soul is based on the middle class, and it 
is shrinking.
    And so, Mr. Silvers, I would like for you to address for a 
moment why this is so important and how we can remove some of 
the arguments--and Mr. Smith, you make good arguments, and I 
want to come to another point, because I think I agree with you 
on this necessary audit rotation, which I want to get to, as 
well.
    But Mr. Silvers, please address why this is really, really 
important and give some factual information as to where we are 
going if we don't address--we will not have a middle class.
    The other point I want to make is that these people, these 
are public companies. And these individuals of the middle class 
make investments in these companies. They have a right to know, 
and I think what we are trying to do with this ratio is to try 
to come up with some mechanism that would encourage a fairer 
deal in compensation for the middle class.
    Mr. Silvers?
    Mr. Silvers. Thank you, Congressman Scott. Let me begin 
with your point about income inequality.
    CEO pay, at the height of the post-war economic boom, when 
corporate profits were highest and when middle-class income 
growth was strongest, was 24 times that of the pay of the 
average worker. Now today, there are different studies with 
different numbers, and my testimony cites a study by Bloomberg, 
the news organization, which finds that average CEO to worker 
pay ratio in the S&P 500 is 204 to 1.
    Other studies have found in varying years in the last 
decade, the ratio is as high as 500 to 1. There are two things 
about these studies, though, that make them limited in 
understanding just how bad the problem is that would be 
corrected if the SEC were to issue the implementing rules on 
the Dodd-Frank measure that we are discussing this morning.
    The first problem is that these numbers are actually not 
firm-specific, meaning it is impossible for anyone--you, in 
your role as a legislator, an investor, an employee, anyone--to 
know what those numbers are company by company and to make 
judgments based on what those numbers are.
    And this is important because academic study after academic 
study cited in my written testimony, and the wisdom of 
management experts like Peter Drucker, is that this ratio is a 
key window into whether or not companies are actually being run 
as teams and whether or not they are going to be capable of 
generating long-term value over time.
    The other issue, and it has been cited by several of my 
fellow witnesses in a kind of upside-down way, but the other 
issue is we live in a global economy. If you want to understand 
how a global public firm is being run, and whether it is being 
run in a manner that is sustainable and is likely to produce 
maximum effort on everyone's part, you need to know what the 
executive pay--how the executive pay looks for the firm 
globally.
    I'm sorry, sir.
    Mr. Scott. I only have 20 seconds, and I think those are 
excellent points. We have addressed that a little.
    But Mr. Smith, I think your point is well-taken. I have 
concerns about this mandatory rotation of audit firms. Auditing 
and accounting firms get right to the skeletal operations, the 
intricacy, the complexities of companies in dealing with taxes, 
audits, all of that. You can't get more deep penetration.
    And I think there is something lost if we try to mandate 
that industry, put a time scope on how long or what accounting 
companies can do and then they must rotate when the whole 
purpose in the accounting firms is familiarity. So I am with 
Mr. Silvers and with Mr. Smith, I think those are the two major 
bills that we have to examine closer. Thank you, Mr. Chairman.
    Mr. Hurt. I thank the gentleman. The gentleman's time has 
expired. The Chair now recognizes Mr. King from New York for 5 
minutes.
    Mr. King. Thank you, Mr. Hurt. And I intend to yield time 
back to you. But first, I would like to ask Mr. Quaadman 
whether he believes there is a need to study the cumulative 
impact of the Dodd-Frank rulemakings? And are you aware of any 
estimates regarding their impact to date?
    Mr. Quaadman. Thank you, Mr. King. If you just take a look 
at some of the bills here, as I mentioned before, pay ratio 
could cost $7 million for a large company. If you take a look 
at audit firm rotation, you could have a firm that spends $100 
million on audit costs, and that could go up by at least $20 
million. Just those two bills alone could cost a company $27 
million.
    We also have to take a look at the Volcker Rule and others, 
to take a look at the money market fund regulations that are 
coming down that could boost the cost of capital for some firms 
by 400 basis points. So we think that a study like that is 
needed.
    Mr. King. Thank you. I yield the balance of my time to Mr. 
Hurt.
    Mr. Hurt. Thank you, Mr. King. I would like to just focus a 
couple of questions on the audit firm rotation bill. Obviously, 
investor protection is an extremely important jurisdiction of 
this committee and the SEC and the PCAOB.
    But I was wondering if I could get Mr. Quaadman just to 
talk briefly about the protections that are already organically 
found within the corporate audit committee process. And what 
are the incentives? If you could just talk about that broadly 
in terms of investor protection?
    Mr. Quaadman. Thank you, Mr. Hurt. First off, Sarbanes-
Oxley greatly strengthened audit committees and the role that 
they have and the independence that they have. So Congress, 
through its directive, has actually authorized the audit 
committee to really be the overseer of financial reporting for 
a company.
    What is happening here is that what the PCAOB has been 
looking at for 2 years, despite overwhelming opposition, is to 
actually neuter the audit committee, go against what Congress 
wanted to do and really start to create rotation.
    What is also going on, and I just want to throw this out 
there, is this isn't happening in a vacuum because in the 
European Union, they are not only looking at mandatory audit 
form rotation, but they are also looking at something known as 
mandatory re-tendering, which means that every couple of years, 
a company has to go out regardless and just solicit new bids.
    This is just going to create a vicious cycle where there is 
going to be constant marketing going on and actually 
everybody's--their eyes are going to be taken off the ball of, 
in terms of good financial audited financial statements.
    Mr. Hurt. Thank you. Mr. Smith, over the years this issue 
has been looked at before, the audit firm rotation. Could you 
talk a little bit about what findings and conclusions have been 
made in previous bodies that have examined this issue?
    Mr. Smith. Yes, thank you. When I looked at it--I am trying 
to remember the exact years, but it is in my written 
testimony--there were findings that showed several failures 
that were the result of the weakened state of the audit 
committee, as the reports were--I am sorry, not of the audit 
committee, of the audit firms, in doing their audit in those 
reports as they were considering this rulemaking 3 separate 
times over the last decade or so.
    So the record is clear in those committee reports with 
respect to the weakening of the audit committees.
    Mr. Hurt. And can you talk a little bit about the actual 
costs that this suddenly accrues to the company, and are there 
any benefits? If we are going to talk about the cost-benefit 
side of this, in your opinion, do the benefits, if there are 
any benefits, outweigh the costs?
    Mr. Smith. Sure. As we surveyed our members, the members 
responded that they would expect to see at least a 20 percent 
increase in the audit costs over--
    Mr. Hurt. Which is consistent with the GAO study.
    Mr. Smith. And the GAO even went further and they had a 
range that averaged approximately 80 percent of an increase 
just in the first year alone. And so what happens is you 
combine that increase in costs and the perceived benefit of 
independence and audit skepticism. But what really happens as 
we sieve through those concept releases is that not only do you 
have the increased costs but you also have a deterioration and 
a learning curve that is going on at the audit firms, which is 
substantial, and creates risks that an audit committee should 
be--I believe, have a choice and exercise their fiduciary 
duties in order to make that decision as opposed to having it 
mandated.
    Mr. Hurt. You think that the imposition of such a rule 
would affect your company's competitiveness and the 
competitiveness of American companies generally?
    Mr. Smith. I think it would be hard to say that increasing 
our costs by a substantial amount in the millions of dollars, 
which would be money that otherwise would be used for capital 
improvements and capital investments on infrastructure or 
creation of jobs through other investments, would not harm the 
economic state of our company or any other--
    Mr. Hurt. Thank you, Mr. Smith. And I think the gentleman's 
time has expired.
    I recognize Mr. Himes for 5 minutes.
    Mr. Himes. Thank you, Mr. Chairman. I was moved by 
Congressman Scott's comments and want to associate myself with 
those comments. I honestly don't know whether disclosure is 
going to fundamentally alter compensation in this country. But 
I know that in addition to the economic challenges that the 
disparity creates, there is a perception of fairness issue that 
is terribly important.
    And in the presence of members of the industry, I have been 
in those meetings where compensation is determined always with 
an eye to comparability, comparable pay. I would suggest that 
we have to start going to fairness or we will be in a lot of 
trouble.
    Mr. Silvers, on H.R. 1105, you talked about the leverage 
limitation, the 2X leverage limitation. You said this 
limitation was clearly drafted in bad faith. Mr. Silvers, I 
drafted that limitation, and I object on two counts. One, I see 
what happens to this institution when we challenge each other's 
good faith or thereof, and I also see what happens when we get 
to each other's motivations.
    But more importantly, I drafted this leverage limitation 
because of a criticism that you raised 2 years when you came 
before this committee and said these are large leveraged pools 
of capital. Now in discussion, we ultimately determined that 
they are not large leveraged pools of capital, that in fact 
they create leverage at the industrial company level that they 
purpose.
    But I thought, gosh, a lot of people out there think that 
they are a large leveraged pool of capital, and perhaps we 
ought to address that by saying that if they were to become 
such, we should put a limitation on them. Mr. Silvers, since 
you got this personal, I would point out that I have about a 95 
percent AFL-CIO voting record. So I suspect that we can 
philosophically find agreement on many issues. But I do want to 
pursue this issue now that we have moved the discussion to the 
sponsored companies, the Burger Kings, and the car wash 
companies that LBO firms, love them or hate them, invest in.
    I am wondering whether anybody on the panel can point to a 
Burger King--and by the way, there have been monumental 
failures, for example, Federated Department Stores. Can anybody 
on the panel point to an LBO'd or an MBO'd company that went 
down because their banks made unwise decisions or because 
bondholders made unwise decisions that created systemic risk? 
An LBO private equity purchased company that got leveraged the 
way companies do every single day in our economy, that went 
down and created a systemic problem for the United States of 
America. Okay. That is a lengthy period of silence.
    So what I--Mr. Silvers, you move on to the bond market. And 
I have two questions. You move on to the bond market in your 
testimony here. And I agree with you, by the way. I suspect 
that there may be a bubble developing in the high-yield market.
    But I am puzzled by using that as an argument against a 
bill which simply attempts to take the smaller private equity 
companies, unleveraged by definition because of that limitation 
that I put in, and not have them sending reams of data to the 
SEC that is a burden to them and which we have acknowledged 
doesn't create systemic risk.
    How does the existence of H.R. 1105 or the nonexistence of 
H.R. 1105 in any way impact the bond market, and in particular 
the high-yield market? If H.R. 1105 passes, is the high-yield 
market going to be any different?
    Mr. Silvers. Congressman?
    Mr. Himes. Yes.
    Mr. Silvers. Your statement ratifies my criticism of your 
bill because you make clear that you understand that the issue 
of leverage in the leveraged buyout or private equity business 
is an issue of portfolio leverage and not of firm leverage, and 
that you understood that when you wrote the bill. I think that 
is all there is to be said about this.
    Mr. Himes. You and I both know that these entities don't 
take on leverage. By the way, 2 years ago you testified that 
they were highly leveraged pools of capital.
    Mr. Silvers. No. I disagree with that, Congressman.
    Mr. Himes. Well, the record will show it. But I--out of an 
abundance of caution--put in that limitation. I was on the 
high-yield market. I have one other question, though. H.R. 
1105--this is your testimony--would deny investors and private 
equity funds, including worker's pension funds, protections of 
investing with a registered investment adviser. And I take that 
very seriously.
    My understanding is that investors like the AFL-CIO pension 
funds and others which invest in these funds are accredited 
institutional investors, that is to say, sophisticated 
investors. And my understanding further is that they negotiate 
partnership agreements with these funds in which they say, we 
want this kind of disclosure.
    We want this--that there is a negotiation in which those 
accredited and institutional investors receive protections that 
a retail investor couldn't possibly hope to negotiate with 
respect to a company they may invest in. So where is the 
investor protection angle here?
    Mr. Silvers. Congressman, you rightly point out that there 
are some pension funds that are large enough dealing with large 
leveraged buyout firms or hedge funds or venture capital firms 
in certain market conditions to effectively negotiate bespoke 
or customized terms. That is true.
    Our concern is that those funds are not the only funds that 
are out there. There are many smaller funds, and there have 
been market conditions over the last 15 years in which even 
large funds had effectively no ability to negotiate fundamental 
investor protections such as the ones that you cited from my 
testimony.
    Registration with the SEC as an investment adviser protects 
all of those funds, right? And as we both know, the limitations 
on who can invest in a private equity fund, a leveraged buyout 
fund, a hedge fund, a venture capital fund, those limitations 
ensure that we are not talking about mom-and-pop investors 
anyway.
    Mr. Hurt. The gentleman's time has expired.
    Mr. Himes. Thank you, Mr. Chairman.
    Mr. Hurt. The Chair now recognizes the gentleman from South 
Carolina, Mr. Mulvaney, for 5 minutes.
    Mr. Mulvaney. Thank you, Mr. Chairman. I intend to yield my 
entire 5 minutes to the gentlelady from Missouri, Mrs. Wagner.
    Mr. Hurt. Mrs. Wagner is recognized.
    Mrs. Wagner. Thank you very much, Mr. Mulvaney, and Mr. 
Chairman. Mr. Ehinger, just in follow up here, in the Section 
913 study, the SEC staff claimed that it is not likely that 
many broker-dealers would ``implement major changes to their 
businesses in response to the imposition of a uniform fiduciary 
standard.'' And it also went on to say that the uniform 
standard would ``not require that broker-dealers limit the 
range of products and services they currently offered to retail 
investors.''
    I guess I would be interested in both Mr. Ehinger and Mr. 
Quaadman, do you agree with either of these assessments?
    Mr. Ehinger. I do not agree. I think having the experience 
of 3 decades, as I said, of being involved in the broker-dealer 
securities and insurance business, I can say that the changes 
would be many.
    First of all, compliance oversight, and perhaps even 
expectation of plans for any and all transactions, whether they 
were solicited or unsolicited types of transactions, would 
probably come into place: disclosure document requirements; 
more complex audits; and supervisory reviews.
    The supervision that we do in our firm, we will look at the 
transactions and the insurance products that are sold in 
particular on a one-on-one basis specific to that situation. 
And if we are looking at that relative to plans as such, it 
could be very difficult to discern what is best.
    We have already spoken to some of our liability insurance 
organizations, errors and omissions insurance in particular, 
who estimate that costs would increase as much as 20 to 30 
percent to anticipate this. Not to mention what I mentioned 
earlier, and that is the unknown. That is the legal liability 
cost that there is, as well. I think there would be many 
changes.
    Mrs. Wagner. Mr. Quaadman?
    Mr. Quaadman. I echo the same concerns. We have talked to 
our members about this, and we are getting a lot of the same 
feedback also.
    Mrs. Wagner. Great. Wonderful. Thank you. I yield back my 
time to the Chair. Mr. Hurt, if you have any--
    Mr. Hurt. I thank the gentlelady. The gentlelady yields 
back. The Chair now recognizes Mr. Carney for 5 minutes.
    Mr. Carney. Thank you, Mr. Chairman. Thank you to the 
panelists for coming in. I would like to go back to the 
discussion about costs of audit rotation. Mr. Smith, there was 
some discussion a couple of questioners ago about those costs.
    Could you summarize them again and talk specifically about 
what the costs--what drives those higher costs from the GAO 
study and the survey, I think that you said you did, of 
corporate secretaries? What are the elements of those higher 
costs? Eighty percent in the one case, and I think you said 20 
percent in terms of your corporate secretaries. If that wasn't 
the number, whatever that number is.
    Mr. Smith. It was 20 percent and 80 percent, respectively. 
One example of one of our members that we have documented in 
the written testimony is a large global company that 
voluntarily rotated its audit firm within the past 10 years.
    And I have ballparked its numbers, but in the written 
testimony, I break it down showing that they estimated that 
there were approximately 100 hours of audit committee time that 
were utilized, 500 to 600 hours of senior management, and 2,000 
to 3,000 hours of finance, legal, tax, accounting, and internal 
audit employee's times. And so, if you think about--
    Mr. Carney. So as you transition from one firm to another, 
it involves a lot of extra time of staff to bring that firm up-
to-speed on the particularities of that company's operation.
    Mr. Smith. Absolutely. So if you picture an audit committee 
who is independently charged with making sure that the audited 
financials are correct and accurate, and they are thinking 
about making a change, they have to go through for the 
shareholder's benefit, and we are all happy that they have to, 
to examine any potential firms that are coming in to make sure 
that they can get the same high level of comfort that they have 
with their current firm in order to make a decision to transfer 
it.
    They would also then have to go through a process of 
documenting and making sure that reports were put into place 
and transition plans were put into place that begin the 
transition. And then afterwards, there are heightened levels of 
double-checking to make sure that everyone followed the 
processes needed to do that. So, it is just a tremendous amount 
of work.
    Mr. Carney. Presumably, there are some benefits involved in 
the rotation. Mr. Silvers expressed his objection to the bill. 
And I guess I would ask you, Mr. Silvers, what the benefits are 
opposite those costs and why you think they are justified?
    Mr. Silvers. In my written testimony, I--
    Mr. Carney. And I think there was other testimony, and 
somebody can correct me if I am wrong, that there are really 
effectively only two or three firms that actually do this.
    Mr. Silvers. Congressman, in my testimony, I go into, at 
some length, the challenges of this issue. Because there are 
currently really only four global audit firms, and some of them 
have specialties, and companies can find themselves in really 
challenging spots. The issue on the other side, though, is the 
question of auditor independence. And the issue of whether or 
not the same company has had the same auditor for decades, for 
example, which is true in the case of some long-lived 
companies, whether there really can be the requisite level of 
independence at that point?
    Mr. Carney. Yes, I understand that. Is there anything in 
Sarbanes-Oxley, for instance, that puts something in the audit 
committee to balance that out? You, or Mr. Smith, either one?
    Mr. Silvers. Congressman, there is no question, as one of 
the prior witnesses said, Mr. Quaadman I believe, that 
Sarbanes-Oxley strengthened auditor committee independence, and 
made the relationship between auditors and issuers more 
independent. We have been though for the last 10 years since 
Sarbanes-Oxley passed, more than 10 years we have been in this 
environment with only 4 major audit firms. And we have been 
through a major financial crisis that raised serious issues 
about whether the current--about whether the audit firms really 
performed their roles properly.
    In my written testimony, and earlier in this hearing, I 
mentioned that the PCAOB has done extensive examinations of 
what occurred during that crisis. And they are in relation to 
auditor independence. The PCAOB's interest, as I understand it, 
and I serve on the standing advisory group for the PCAOB's 
interest in auditor rotation is, I believe, based significantly 
on the results of those inspection reports. And I would urge--
before this subcommittee moves on this bill--
    Mr. Carney. I am running out of time, and I would have 
liked some time to talk a little bit about the systemic risk 
that--and some of the other bills, but did you have something 
else, Mr. Smith, you wanted to add?
    Mr. Smith. If I could. Your question was on what Sarbanes-
Oxley did to strengthen--
    Mr. Carney. Right. Does it counterbalance this issue of 
independence?
    Mr. Smith. --and so the audit committees were strengthened. 
There is a requirement that they be completely independent, and 
that is modified in the major exchange rules as well. There is 
also partner rotation that must occur on a regular basis. And 
so, if you think about what partner rotation does, it brings a 
fresh set of eyes. Someone who presumably is not cozy with 
management, if that were the case anyway, to make sure, and to 
have that fresh look. So--
    Mr. Carney. And presume, actually, some additional cost. 
Thank you.
    Mr. Smith. Correct.
    Mr. Carney. I see my time has expired.
    Mr. Hurt. The gentleman's time has expired. The Chair now 
recognizes the gentleman from Michigan, Mr. Huizenga, who is 
also the patron of H.R. 1135, for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman, I appreciate that. 
And I would be more than willing to grant my friend 30 seconds 
if he wanted to pursue that line of questioning on the systemic 
risk? It may be a continuation of a conversation we already 
started.
    Mr. Hurt. The gentleman is recognized for--
    Mr. Carney. Yes, I just wanted--
    Mr. Hurt. --30 seconds?
    Mr. Carney. --to go back to the back-and-forth with my 
colleague Mr. Himes, Mr. Silvers. And I am at a loss to 
understand how the two pieces of legislation that are being 
discussed implicate systemic risk? And maybe you could 
summarize that briefly?
    Mr. Silvers. Congressman, you mean the registration--
    Mr. Carney. Both the registration one and the pay ratio 
one.
    Mr. Carney. I understand the overall purpose in pay ratio 
in particular. But I don't understand how it implicates 
systemic risk.
    Mr. Silvers. I will start with CEO pay, okay?
    Mr. Carney. All right.
    Mr. Silvers. As I stated in my written testimony, the CEO 
pay rule does 3 things. It proves the ability to look at firms 
and whether they are essentially unbalanced in the way they are 
managed, right? Such that CEO--
    Mr. Huizenga. Before I reclaim my time, I am going to have 
you hurry that up very quickly, because it is eating into my 
time, and I have some questions, as well. Because I am at a 
loss, as well.
    I appreciate that. I am at a loss as to how this possibly 
puts companies, or a system at risk. Systemic risk was 
something that you were talking about, and it seems to me--and 
we had some conversations here about Dodd-Frank not only being 
a regulatory bill, but it is a social engineering document, I 
understand that might have been the motivation for some in the 
drafting of it. I am just afraid that this is more of a knee-
jerk reaction to any kind of discussion about changing, 
improving, or looking at, or opening up Dodd-Frank. And we saw 
that 2 weeks ago when the Administration, through Secretary 
Lew, opposed all of the bipartisan derivatives bills.
    We are seeing that now, I think. And it seems to me that 
this is part of the problem with Washington, D.C. We can't have 
a rational conversation without somebody having a knee-jerk 
reaction. But Mr. Quaadman, Mr. Smith, Mr. Tharp, obviously you 
heard Mr. Silvers report that my legislation specifically would 
significantly increase this risk, and I am very curious to see 
whether you agree with that. And whether that creates pitfalls 
in our economy? And how disclosing CEO to worker pay ratio 
determines the performance of these companies with a particular 
sector in the market?
    So if you don't mind, in my remaining 2 minutes?
    Mr. Quaadman. Okay Mr. Huizenga, if I could answer that in 
two ways, and also to take up something that has been discussed 
by both Mr. Silvers and Mr. Scott, Dodd-Frank actually mandates 
that there is a joint rulemaking, which is not yet complete, on 
intent of compensation rules, which is supposed to look at 
excesses in compensation, and to deal with potential issues of 
compensation in the financial crisis. So regulators are already 
looking at that. Pay ratio in and of itself isn't designed to 
deal with those systemic risk issues.
    Second, in answer to your question, let me just give two 
examples. If you were to take a company, let's say a retail 
chain or a fast-food chain or whatever, that has a lot of 
hourly workers, they are going to have a high differential. If 
you take a Wall Street firm where you could have a lot of 
employees making comparable pay to a CEO, they are going to 
have a very low ratio. So what does that ratio tell you about 
the company? About the industry? It doesn't convey anything 
that is material to investors. And materiality should be the 
test.
    Mr. Huizenga. And Mr. Tharp?
    Mr. Tharp. Congressman, I think it is a great question that 
there should be an assessment to the extent to which the 
purported relationship between pay ratio and risk would be a 
factor. And in fact, in the written testimony from Mr. Silvers, 
he cites James Collins' work on ``Good to Great.'' And we did a 
little research. Those companies in fact have a higher pay 
ratio than the average company, and of the 11 cited--in fact 
one went bankrupt and the other was Fannie Mae, but their ratio 
is 412, versus the--and this is AFL-CIO data, versus the data 
of the average CEO, which is 354, according to their data.
    Mr. Huizenga. Yes.
    Mr. Tharp. So, I think there should be challenges to the 
basic assumption that it does lead to better performance, or--
    Mr. Huizenga. I agree, and I am very familiar with ``Good 
to Great.'' I came out of an organization which used that book 
as a basis of how it operated. And, I am tempted to take a 
friendly amendment from somebody that would require union 
executive pay to be compared to union membership pay. And then 
maybe we should expand that to who they are affiliated with in 
France, the Philippines, Greece, and others, to get a better 
picture, rather than hiding ``material information.''
    And I think that everybody would realize that with 57 
unions, and 12 million members, even the AFL-CIO would have 
some difficulties in doing that. Mr. Chairman, my time is up, 
and I appreciate that.
    Mr. Hurt. Thank you. The gentleman's time has expired. The 
Chair now recognizes the gentleman from California, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. Thank you. Mr. Quaadman, we have been working 
on a separate issue, which is the proposal of the FASB to 
require the capitalization of leases. They are supposed to 
define Generally Accepted Accounting Principles (GAAP). It has 
been generally accepted for 200 years that you don't do that, 
where our profession is only 200 years old. Why don't I ask you 
to just spend a minute explaining what the harm would be if 
that proposal goes forward?
    Mr. Quaadman. Thank you, Mr. Chairman. Thank you for your 
leadership on this issue, along with Mr. Campbell. What this 
would do is it would--number one, it would actually boost up 
the liabilities that are on balance sheets of companies by 
trillions of dollars. That would actually impact their ability 
to raise debt. It would also increase reporting requirements as 
well as onerous requirements. It would also shut down the 
ability of companies to get equipment. And also for commercial 
real estate tax refunction.
    What is more important, however, is that the investor 
community 3 years into this project has said that this exposure 
draft will not provide any more additional information than 
they already have today. So while you have all of the costs 
that are going to be borne by businesses, investors aren't 
going to be benefited. So it is really a question of why are we 
even doing it?
    Mr. Sherman. And wouldn't we be penalizing those companies 
that enter into 5- and 10- and 20-year leases, and give a push 
towards less certainty in stability in leases, communities, 
shopping centers, et cetera?
    Mr. Quaadman. That is correct. It actually will focus 
business activities on a much shorter-term basis and less on a 
long-term basis. And it will also artificially force an earlier 
recognition of expenses than actually happen.
    Mr. Sherman. I want to turn to, I guess, Mr. Smith, on the 
audit rotation. One concern I have is, we only have, as you 
point out, four firms. Could there be a circumstance where 
there are only two firms with the capacity, both in terms of 
having offices in the right place, if you are headquartered in 
Wichita, only one of those firms may have an office in Wichita. 
You may be in an industry that only a couple of firms have 
specialty in.
    So if we currently return Firm A, and the only other firm 
in the world that can do it is Firm B, and we have to abandon 
firm--right now we can always tell Firm A to keep their fees 
down, otherwise we will go to B. If you require me to go with 
B, how high will the audit fee be then?
    Mr. Smith. Yes, and even more troubling is that it takes 
away the competitive nature of the transfer for sure, right? 
Because they know that you are going to be coming to them, so 
there would be no competitive negotiation of the transfer fee, 
presumably. But even additionally, the feedback from our 
members is--and specifically in certain industries where you 
only have two audit firms that would be qualified, or expertise 
to the level that would make an audit committee comfortable, 
both of those firms may be engaged by that company in the first 
instance, right?
    Because there are non-audit fees that are being used, and 
so you could already have them engaged on matters that--you are 
already working with them, so is there really that transfer you 
are looking at? So I think there is a hyped--
    Mr. Sherman. Now--
    Mr. Smith. --perception that there would be an independent 
shift in that case. Having said that--
    Mr. Sherman. --you pointed--
    Mr. Smith. --the firms--the large firms work closely with 
those companies anyway.
    Mr. Sherman. --you pointed out that currently there is at 
least rotation of the engagement or audit partner?
    Mr. Smith. Correct.
    Mr. Sherman. One thing I bored my colleagues with is--and I 
don't know whether this has become just practice or whether it 
is mandated, that the technical review department of the audit 
firm actually sign off. Arthur Andersen had a policy of don't 
ask, don't tell, that is to say, the technical review 
department, if they weren't asked, they didn't tell.
    With the four firms that still exist, is there at least a 
practice and is there a mandate that the technical review 
department actually review the audit before the sign-off?
    Mr. Smith. My understanding is that the concurring partner 
relationship has been significantly strengthened as a result of 
the audit changes that took place through 2003 in Sarbanes-
Oxley.
    Mr. Sherman. And then, finally, you quantified the 
additional work that the company has to do when they change 
auditors. What is the increased fee likely to be? It is not 
only the time of their own employees, but they are going to 
have to write a bigger check. Any idea what the start-up fee, 
changeover fee, additional fee is as a percentage?
    Mr. Smith. Other than those percentages, I really don't 
have hard numbers at my fingertips right now. But they would be 
expected to be very significant and--
    Mr. Sherman. Half a year about?
    Mr. Smith. At 80 percent, according to the GAO study. You 
are really looking at almost double the audit fees, which--
    Mr. Sherman. So you pay 108--
    Mr. Smith. --if you have a $8 to $10 million audit fee, 
then you are looking at almost $6 to $8 million in increased 
costs.
    Mr. Sherman. Thank you.
    Mr. Hurt. The gentleman's time has expired.
    Let me again thank the witnesses for their testimony today. 
I also thank you, in addition to your insights, for your 
patience as we had to work through our voting schedule.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    With that, the hearing is adjourned. Thank you.
    [Whereupon, at 1:52 p.m., the hearing was adjourned.]
                            A P P E N D I X


                              May 23, 2013
[GRAPHIC] [TIFF OMITTED] T1761.001

[GRAPHIC] [TIFF OMITTED] T1761.002

[GRAPHIC] [TIFF OMITTED] T1761.003

[GRAPHIC] [TIFF OMITTED] T1761.004

[GRAPHIC] [TIFF OMITTED] T1761.005

[GRAPHIC] [TIFF OMITTED] T1761.006

[GRAPHIC] [TIFF OMITTED] T1761.007

[GRAPHIC] [TIFF OMITTED] T1761.008

[GRAPHIC] [TIFF OMITTED] T1761.009

[GRAPHIC] [TIFF OMITTED] T1761.010

[GRAPHIC] [TIFF OMITTED] T1761.011

[GRAPHIC] [TIFF OMITTED] T1761.012

[GRAPHIC] [TIFF OMITTED] T1761.013

[GRAPHIC] [TIFF OMITTED] T1761.014

[GRAPHIC] [TIFF OMITTED] T1761.015

[GRAPHIC] [TIFF OMITTED] T1761.016

[GRAPHIC] [TIFF OMITTED] T1761.017

[GRAPHIC] [TIFF OMITTED] T1761.018

[GRAPHIC] [TIFF OMITTED] T1761.019

[GRAPHIC] [TIFF OMITTED] T1761.020

[GRAPHIC] [TIFF OMITTED] T1761.021

[GRAPHIC] [TIFF OMITTED] T1761.022

[GRAPHIC] [TIFF OMITTED] T1761.023

[GRAPHIC] [TIFF OMITTED] T1761.024

[GRAPHIC] [TIFF OMITTED] T1761.025

[GRAPHIC] [TIFF OMITTED] T1761.026

[GRAPHIC] [TIFF OMITTED] T1761.027

[GRAPHIC] [TIFF OMITTED] T1761.028

[GRAPHIC] [TIFF OMITTED] T1761.029

[GRAPHIC] [TIFF OMITTED] T1761.030

[GRAPHIC] [TIFF OMITTED] T1761.031

[GRAPHIC] [TIFF OMITTED] T1761.032

[GRAPHIC] [TIFF OMITTED] T1761.033

[GRAPHIC] [TIFF OMITTED] T1761.034

[GRAPHIC] [TIFF OMITTED] T1761.035

[GRAPHIC] [TIFF OMITTED] T1761.036

[GRAPHIC] [TIFF OMITTED] T1761.037

[GRAPHIC] [TIFF OMITTED] T1761.038

[GRAPHIC] [TIFF OMITTED] T1761.039

[GRAPHIC] [TIFF OMITTED] T1761.040

[GRAPHIC] [TIFF OMITTED] T1761.041

[GRAPHIC] [TIFF OMITTED] T1761.042

[GRAPHIC] [TIFF OMITTED] T1761.043

[GRAPHIC] [TIFF OMITTED] T1761.044

[GRAPHIC] [TIFF OMITTED] T1761.045

[GRAPHIC] [TIFF OMITTED] T1761.046

[GRAPHIC] [TIFF OMITTED] T1761.047

[GRAPHIC] [TIFF OMITTED] T1761.048

[GRAPHIC] [TIFF OMITTED] T1761.049

[GRAPHIC] [TIFF OMITTED] T1761.050

[GRAPHIC] [TIFF OMITTED] T1761.051

[GRAPHIC] [TIFF OMITTED] T1761.052

[GRAPHIC] [TIFF OMITTED] T1761.053

[GRAPHIC] [TIFF OMITTED] T1761.054

[GRAPHIC] [TIFF OMITTED] T1761.055

[GRAPHIC] [TIFF OMITTED] T1761.056

[GRAPHIC] [TIFF OMITTED] T1761.057

[GRAPHIC] [TIFF OMITTED] T1761.058

[GRAPHIC] [TIFF OMITTED] T1761.059

[GRAPHIC] [TIFF OMITTED] T1761.060

[GRAPHIC] [TIFF OMITTED] T1761.061

[GRAPHIC] [TIFF OMITTED] T1761.062

[GRAPHIC] [TIFF OMITTED] T1761.063

[GRAPHIC] [TIFF OMITTED] T1761.064

[GRAPHIC] [TIFF OMITTED] T1761.065

[GRAPHIC] [TIFF OMITTED] T1761.066

[GRAPHIC] [TIFF OMITTED] T1761.067

[GRAPHIC] [TIFF OMITTED] T1761.068

[GRAPHIC] [TIFF OMITTED] T1761.069

[GRAPHIC] [TIFF OMITTED] T1761.070

[GRAPHIC] [TIFF OMITTED] T1761.071

[GRAPHIC] [TIFF OMITTED] T1761.072

[GRAPHIC] [TIFF OMITTED] T1761.073

[GRAPHIC] [TIFF OMITTED] T1761.074

[GRAPHIC] [TIFF OMITTED] T1761.075

[GRAPHIC] [TIFF OMITTED] T1761.076

[GRAPHIC] [TIFF OMITTED] T1761.077

[GRAPHIC] [TIFF OMITTED] T1761.078

[GRAPHIC] [TIFF OMITTED] T1761.079

[GRAPHIC] [TIFF OMITTED] T1761.080

[GRAPHIC] [TIFF OMITTED] T1761.081

[GRAPHIC] [TIFF OMITTED] T1761.082

[GRAPHIC] [TIFF OMITTED] T1761.083

[GRAPHIC] [TIFF OMITTED] T1761.084

[GRAPHIC] [TIFF OMITTED] T1761.085

[GRAPHIC] [TIFF OMITTED] T1761.086

[GRAPHIC] [TIFF OMITTED] T1761.087

[GRAPHIC] [TIFF OMITTED] T1761.088

[GRAPHIC] [TIFF OMITTED] T1761.089

[GRAPHIC] [TIFF OMITTED] T1761.090

[GRAPHIC] [TIFF OMITTED] T1761.091

[GRAPHIC] [TIFF OMITTED] T1761.092

[GRAPHIC] [TIFF OMITTED] T1761.093

[GRAPHIC] [TIFF OMITTED] T1761.094

[GRAPHIC] [TIFF OMITTED] T1761.095

[GRAPHIC] [TIFF OMITTED] T1761.096

[GRAPHIC] [TIFF OMITTED] T1761.097

[GRAPHIC] [TIFF OMITTED] T1761.098

[GRAPHIC] [TIFF OMITTED] T1761.099

[GRAPHIC] [TIFF OMITTED] T1761.100

[GRAPHIC] [TIFF OMITTED] T1761.101

[GRAPHIC] [TIFF OMITTED] T1761.102

[GRAPHIC] [TIFF OMITTED] T1761.103

[GRAPHIC] [TIFF OMITTED] T1761.104

[GRAPHIC] [TIFF OMITTED] T1761.105

[GRAPHIC] [TIFF OMITTED] T1761.106

[GRAPHIC] [TIFF OMITTED] T1761.107

[GRAPHIC] [TIFF OMITTED] T1761.108

[GRAPHIC] [TIFF OMITTED] T1761.109

[GRAPHIC] [TIFF OMITTED] T1761.110

[GRAPHIC] [TIFF OMITTED] T1761.111

[GRAPHIC] [TIFF OMITTED] T1761.112

[GRAPHIC] [TIFF OMITTED] T1761.113

[GRAPHIC] [TIFF OMITTED] T1761.114

[GRAPHIC] [TIFF OMITTED] T1761.115

[GRAPHIC] [TIFF OMITTED] T1761.116

[GRAPHIC] [TIFF OMITTED] T1761.117

[GRAPHIC] [TIFF OMITTED] T1761.118

[GRAPHIC] [TIFF OMITTED] T1761.119

[GRAPHIC] [TIFF OMITTED] T1761.120

[GRAPHIC] [TIFF OMITTED] T1761.121

[GRAPHIC] [TIFF OMITTED] T1761.122

[GRAPHIC] [TIFF OMITTED] T1761.123

[GRAPHIC] [TIFF OMITTED] T1761.124

[GRAPHIC] [TIFF OMITTED] T1761.125

[GRAPHIC] [TIFF OMITTED] T1761.126

               
