[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
EXAMINING THE AGENDA OF REGULATORS,
SROs, AND STANDARDS-SETTERS FOR
ACCOUNTING, AUDITING, AND
MUNICIPAL SECURITIES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 22, 2016
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-104
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U.S. GOVERNMENT PUBLISHING OFFICE
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
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
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas STEPHEN F. LYNCH, Massachusetts
PATRICK T. McHENRY, North Carolina ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan DAVID SCOTT, Georgia
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
STEVE STIVERS, Ohio KEITH ELLISON, Minnesota
STEPHEN LEE FINCHER, Tennessee BILL FOSTER, Illinois
RANDY HULTGREN, Illinois GREGORY W. MEEKS, New York
DENNIS A. ROSS, Florida JOHN C. CARNEY, Jr., Delaware
ANN WAGNER, Missouri TERRI A. SEWELL, Alabama
LUKE MESSER, Indiana PATRICK MURPHY, Florida
DAVID SCHWEIKERT, Arizona
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas
C O N T E N T S
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Page
Hearing held on:
September 22, 2016........................................... 1
Appendix:
September 22, 2016........................................... 31
WITNESSES
Thursday, September 22 2016
Bricker, Wesley R., Interim Chief Accountant, Office of the Chief
Accountant, U.S. Securities and Exchange Commission............ 5
Colby, Robert L.D., Chief Legal Officer, Financial Industry
Regulatory Authority........................................... 13
Doty, James R., Chairman, Public Company Accounting Oversight
Board.......................................................... 6
Golden, Russell G., Chairman, Financial Accounting Standards
Board.......................................................... 8
Kane, Jessica, Director, Office of Municipal Securities, U.S.
Securities and Exchange Commission............................. 10
Kelly, Lynnette, Executive Director, Municipal Securities
Rulemaking Board............................................... 11
APPENDIX
Prepared statements:
Foster, Hon. Bill............................................ 32
Bricker, Wesley R............................................ 33
Colby, Robert L.D............................................ 42
Doty, James R................................................ 48
Golden, Russell G............................................ 62
Kane, Jessica................................................ 105
Kelly, Lynnette.............................................. 113
Additional Material Submitted for the Record
Bricker, Wesley; and Kane, Jessica:
Written responses to questions for the record submitted by
Representatives Royce and Hultgren......................... 131
Colby, Robert L.D.:
Written responses to questions for the record submitted by
Representatives Royce, Perlmutter, and Hultgren............ 140
Doty, James R.:
Written responses to questions for the record submitted by
Representatives Royce, Perlmutter, Hultgren, and Ross...... 149
Golden, Russell G.:
Written responses to questions for the record submitted by
Representative Royce....................................... 157
Kelly, Lynnette:
Written responses to questions for the record submitted by
Representatives Royce and Hultgren......................... 166
EXAMINING THE AGENDA OF REGULATORS,
SROs, AND STANDARDS-SETTERS FOR
ACCOUNTING, AUDITING, AND
MUNICIPAL SECURITIES
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Thursday, September 22, 2016
U.S. House of Representatives,
Subcommittee on Capital Markets and
Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:01 p.m., in
room 2128, Rayburn House Office Building, Hon. Scott Garrett
[chairman of the subcommittee] presiding.
Members present: Representatives Garrett, Neugebauer,
Huizenga, Hultgren, Schweikert, Poliquin, Hill; Maloney,
Sherman, Perlmutter, Scott, Himes, Ellison, and Murphy.
Ex officio present: Representative Hensarling.
Chairman Garrett. The Subcommittee on Capital Markets and
Government Sponsored Enterprises will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Today's hearing is entitled, ``Examining the Agenda of
Regulators, SROs, and Standards-Setters for Accounting,
Auditing, and Municipal Securities.''
Thanks, members of the panel, for being here. And I will
begin by recognizing myself for 5 minutes for an opening
statement.
So since 2011, one of the primary objectives of this
subcommittee and of the full Committee of Financial Services
has been to hold regulators and other governmental bodies
accountable to the American public who, lest we forget,
ultimately, we are the ones that pay the cost and have to
contend with rules and regulations that are issued out of here,
out of Washington.
In the last 3 years, our subcommittee has received
testimony from the heads of a number of offices within the
Securities and Exchange Commission, SEC, including our most
recent hearing that was just back in April, when we heard from
the chief economist, the Office of Compliance and Inspection,
the Office of the Whistleblower, and the Office of Credit
Ratings. These hearings that we have held have allowed our
subcommittee to take a deeper dive, as we call it, into the
regulatory apparatus of these various agencies so that we can
better understand how they operate and what their agenda is so
to ensure that they are actually carrying out their statutory
missions.
So if someone wants to step back, we may have a bit of a
Noah's Ark here on the panel in terms of the breadth of the
issues that we will be able to cover between the ones I listed,
municipal security regulations as well as accounting and
auditing. In all of that, I am particularly pleased that we are
able to hear from the PCAOB and FASB today. It has been, as you
know, a while since you have last testified, and there are a
number of areas within your jurisdiction that I think members
will be interested in.
In the time that I have left, let me just highlight a few
areas of particular interest I am looking forward to hearing
from you today, although certainly this is not an exhaustive
list.
The first one is related to enforcement. As members are
aware, the subcommittee has spent a great deal of time
examining and also criticizing the lack of due process
protections that exist for respondents who are the subject of
an administrative proceeding at the SEC and other agencies.
There are few issues that are more important to Congress than
upholding the rights of Americans to defend themselves when the
government brings a charge against them.
But in today's enforcement world, there exists an anomaly
in that proceedings initiated by the PCAOB are held in private
and are only made public if they are then later on referred to
the SEC. This obviously contrasts sharply with practices over
at the SEC or FINRA, where charges against an individual or a
firm are made public as soon as they are brought.
Even as someone who has long been concerned about
government overreach, I can't bring myself to find a good
reason for why an enforcement proceeding against an auditor
should be treated any differently. Well, then again, it is a
proceeding against a broker-dealer or a proceeding against an
investment advisor.
Seems that investors have a right to a certain level of
transparency. If an auditor of a company they have invested in
has serious charges brought against them, that seems to be
important information. Certainly, that auditor should be
granted every single right possible to defend themselves. But
keeping a proceeding quiet means and makes our market less
transparent and is potentially harmful to the investor.
Second issue I would like to discuss is what related to the
hearings the subcommittee held just yesterday. There we
discussed the topic of materiality, with regard to SEC filings,
of course. Companies, of course, make decisions on what to
disclose based off the questions whether they are material to
the investors or not. And as we heard from our witnesses
yesterday, the long-held definition in this country of
materiality has worked well and therefore should not be
changed. While it seems that the SEC and FASB are working
towards a common definition that would provide certainty to
preparers and to issuers and investors, what is less certain is
the role that the PCAOB is playing and whether they are
coordinating there properly with both the SEC and FASB.
The third and final issue that--and I don't think this will
come as a surprise to anyone in this room--is the issue of
cost-benefit analysis. This committee has made cost-benefit
analysis a top priority, not just for the regulators, but for
the SROs and the standard-setters as well.
I understand that some of the organizations represented on
our panel this afternoon have made efforts to improve economic
analysis. And this committee and myself appreciate that. But as
in many things, the devil is always in the details. So I am
looking forward to hearing how each one of your organizations
or offices incorporate cost-benefit analysis into either your
rulemaking or your standard setting.
And with that, I yield back the remainder of my time, and I
yield 3 minutes to the gentlelady from New York, the ranking
member of the subcommittee, Mrs. Maloney.
Mrs. Maloney. I am speaking for 1 minute and yielding 3
minutes to Mr. Sherman and 1 minute to Mr. Perlmutter, who have
a great deal of interest in this subject matter.
This hearing will cover a range of topics from auditing and
accounting standards to the municipal bond market, the
oversight of broker-dealers. And as a former city council
member, I know firsthand the importance of municipal bonds.
They allow cities and States to finance infrastructure, build
schools, pave roads. This is a huge market with more than $3.8
trillion in bonds outstanding. And as we look forward to the
next Congress, an infrastructure package is supported by both
Presidential candidates. And municipal bonds are an important
part of that.
The other main topic of this hearing is accounting and
auditing. Accurate and transparent financial statements are
absolutely critical to maintaining investor confidence in our
markets. And I have always said markets run much more on
confidence than they do on capital. And I also want to make
sure that we are not needlessly undermining confidence in our
own financial system. I understand the concern that the PCAOB
has about firms dragging out disciplinary proceedings. But I am
also concerned that by making these proceedings public, we may
be unnecessarily harming the reputation of a firm before any
official action is taken.
I look forward to the and listening to everyone's
testimony. And I reserve my time for Mr. Sherman, 3 minutes,
and Mr. Perlmutter for 1 minute.
Chairman Garrett. Mr. Sherman, you are recognized now for 3
minutes.
Mr. Sherman. I thank the gentlelady for the generosity in
granting the time.
FASB exercises tremendous government power. It is funded by
a tax. If you don't follow its rules, you go to jail. Yet it
gets little attention and is not subject to the cost-benefit
analysis requirements suggested by our chairman, nor to the
FOIA requirements, Open Meetings Act, or Senate confirmation of
its members. That would all be okay if they didn't make one
really bad decision. And that was the requirement to write off
research expenses.
Research is critical to our Nation. Congress determined
that when we passed a tax law last year providing $11 billion
every year to incentivize research by private companies. How
many refugees could you feed? How many veterans could we
provide better care for? But we have decided it is that high a
priority. But our $11 billion to incentivize research is
virtually wiped out in its effect by an unheralded decision
made I think 30 years ago by FASB to say that we are going to
violate all accounting theory and instead require companies to
write off research expenses. Now, if we had that rule for
inventories, if you bought inventory for your store, you had to
show that as an expense, retailers couldn't carry inventories.
But we say that you match the expenditure with the revenue it
generates. So you recognize the inventory as an expense when
you sell it.
With research, instead of writing off that cost as the
research is used, as the patent expires, you write it off all
the way. That is a system designed to discourage research. And
as I say, wipes out $11 billion of Congressional effort. It is
a clear violation of everything that you learn about accounting
theory. It is done solely for convenience.
And FASB has been resisting reviewing this for the 20 years
I have been in Congress, saying: Oh, we will get to it. Oh, the
Europeans are doing something. We will catch up to them maybe.
Oh, we will deal with development expenditures. Development
expenditures are not our focus here. It is research and
experimentation, which is the focus of Congress' $11 billion of
credit.
So I look forward to FASB coming up with better decisions.
And if they don't, then maybe they need a better process.
Senate confirmation, FOIA, open meetings, cost-benefit
analysis. Because the power that they have to control--to
really to be the arbiter that determines what publicly traded
corporations do. Because they will do what is necessary to show
higher earnings per share. That amount of power shouldn't be
hidden in Norwalk, Connecticut.
I yield back.
Chairman Garrett. The gentleman yields back.
And for the final 1 minute, Mr. Perlmutter.
Mr. Perlmutter. Thank you, Mr. Chairman. And thank you,
Ranking Member Maloney.
Today, it is my hope that our witnesses will focus some of
their remarks on how the current regulatory regime impacts
small broker-dealers. Since 2011, we have seen a 12.5 percent
reduction in the number of registered broker-dealer firms from
about 4,400 down to 3,900. Small firms are being forced to
consolidate, merge, or sell in order to achieve economies of
scale to compete in today's environment.
This committee spends a lot of time discussing the
important role independent community banks play in our towns
and States. We have considered several regulatory relief
proposals targeted at community banks, including tailoring for
risk and size, yet we rarely focus on the role of small broker-
dealers. Small firm broker-dealers in my district tell me the
regulatory pressures are squeezing them, especially the costs
associated with a PCAOB audit and supervision requirements on
activities happening away from their firms and not as part of
their firms.
So I would ask our panelists to please discuss those
particular issues that seem to be troubling small broker-
dealers.
Thanks, Mr. Chairman. I yield back.
Chairman Garrett. The gentleman yields back.
We now turn to the panel. And I appreciate all the members
of the panel being with us today. Some of you have been here
before, and some have not.
We will now recognize each of you for 5 minutes for an oral
presentation of your testimony. And without objection, your
complete written statements will be made a part of the record.
For those of you who have not been here before, I always
begin by saying that in front of you should be a lighting
system, a timing system. You will be recognized for 5 minutes.
The green light goes on initially, and then yellow is a 1-
minute warning to you to begin to wrap up, if you would,
please. And then the red is the conclusion of your time.
So we will begin to my left, with the SEC interim Chief
Accountant, from the Office of the Chief Accountant over at the
SEC. Mr. Bricker, you are recognized for 5 minutes. Welcome.
STATEMENT OF WESLEY R. BRICKER, INTERIM CHIEF ACCOUNTANT,
OFFICE OF THE CHIEF ACCOUNTANT, U.S. SECURITIES AND EXCHANGE
COMMISSION
Mr. Bricker. Thank you very much. And good afternoon,
Chairman Garret, Ranking Member Maloney, and members of the
subcommittee. It is a pleasure to be here. I appreciate the
opportunity to appear before you today to testify on behalf of
the Commission regarding current topics in accounting--in the
accounting and auditing profession that impact the capital
markets and the related activities of the Office of the Chief
Accountant, or OCA.
The reliability and the credibility of financial reporting
is critical to the proper functioning of our capital markets.
As the agency empowered by the Federal securities laws to be
the investor's advocate to maintain fair, orderly, and
efficient markets and facilitate capital formation, the
Commission has the authority and the responsibility to specify
the form and the content of financial statements filed with the
Commission. Also, the Federal securities laws mandate that
public company financial statements be audited by an
independent public accounting firm that will provide a report
as to the credibility and the reliability of the information
presented.
OCA furthers the Commission's mission by working to enhance
the foundation of our disclosure framework, which is the
disclosure of reliable and accurate financial information to
investors and other market participants. OCA is responsible for
establishing and interpreting accounting policy to enhance
financial reporting. OCA also leads the Commission's efforts to
oversee two entities with key roles in the financial reporting
process, which are the Financial Accounting Standards Board, or
FASB, whose accounting and financial reporting standards the
Commission has recognized as ``generally accepted'' for
purposes of the Federal securities laws, also the Public
Company Accounting Oversight Board, or PCAOB, which is
responsible for overseeing the audits and auditors of public
companies and registered broker-dealers.
Currently, OCA has been directing significant attention to
monitoring implementation activities for recently issued
accounting standards. First, the FASB and the International
Accounting Standards Board, or IASB, issued largely converged
standards for how a company should report information about
revenue from customers, which is generally intended to improve
existing requirements by eliminating inconsistencies, requiring
additional disclosures, and simplifying the preparation of
financial statements.
Second, the FASB and the IASB's new standards on the
measurement and reporting of leasing activities will increase
the transparency and comparability among organizations, thereby
enabling investors to more readily and accurately understand
the rights and the obligations associated with lease
transactions.
Finally, the FASB and the IASB have issued new credit loss
standards that will improve and simplify reporting for loans,
investments, and other financial instruments. These new
standards should improve financial reporting within the United
States and reduce country-by-country disparity in financial
reporting.
OCA is also focused in the area of internal controls over
financial reporting. Maintaining adequate internal accounting
control promotes reliable financial reporting and encourages
investment in our capital markets. Updating and maintaining
internal controls will be particularly important as companies
work through the implementation of significant new accounting
standards that I discussed earlier.
Now I would like to say a few words about the importance of
auditors and our oversight of the PCAOB. Independent auditors
have been long recognized as one of key gatekeepers in our
investor protection system. And the integrity of this system is
supported by the PCAOB's oversight of public company auditors.
Recent PCAOB inspection results show promising signs of
improvement in many audit firms' quality controls that are
designed to ensure compliance with the professional auditing
standards as determine by the PCAOB.
However, inspections alone cannot fully achieve the
objective without the complement of rigorous and high-quality
auditing standards that keep pace with the evolution and
financial reporting, the economic environment, and companies'
business models. The PCAOB has continued to update and
modernize its interim auditing standards that it adopted in
2003. For example, the PCAOB has made significant progress on a
major project of vital interest to investors, which is
improving the informative value of the standard auditor's
report upon which investors rely.
I commend the PCAOB for its efforts and its commitment to
high-quality auditing standards that have the potential to
further enhance the credibility of financial reporting for the
benefit of investors.
Thank you again for the invitation today, and I am happy to
respond to any questions.
[The prepared statement of Mr. Bricker can be found on page
33 of the appendix.]
Chairman Garrett. Thank you.
And speaking of the PCAOB, Mr. Doty, you are recognized,
and welcome, for the next 5 minutes.
STATEMENT OF JAMES R. DOTY, CHAIRMAN, PUBLIC COMPANY ACCOUNTING
OVERSIGHT BOARD
Mr. Doty. Chairman Garrett, Ranking Member Maloney, and
members of the subcommittee, it is a pleasure to be here today.
Thank you for the opportunity to appear.
As chairman, I want to highlight a few key themes and
priorities of the PCAOB. First, I believe the PCAOB is a vital
resource protecting investors and fostering economic resilience
by advancing reliable, informative, and independent audits.
Second, accurate and transparent financial audits are a key
to promoting investor trust and investment that grows capital
markets and drives a healthy economy.
Third, experience tells us that the PCAOB's role is
essential, and our standards and oversight programs are making
a real difference on behalf of investors and companies.
Fourth, it is critically important that PCAOB remain
vigilant and independent because persistent economic pressures
can threaten the integrity of audits.
Finally, going forward, a rapidly changing landscape will
require that the PCAOB sustain our investment in innovation to
meet the needs of investors and enable public companies in our
markets to benefit from a lower cost of capital.
When investors lose confidence in financial reporting, it
becomes more difficult and more expensive to finance the
businesses on which our economy depends. Moreover, inaccurate
financial reporting can mask poor business strategies or fraud
that, if left uncorrected, may result in the misallocation of
capital, business failures, and job losses.
The PCAOB promotes audit quality through its inspection and
enforcement programs, its standard setting, coordination with
other regulators, domestic and foreign, and an important
investment in economic analysis we have made in recent years.
The PCAOB also benefits from extensive outreach to
investors, preparers, and audit committees, academics,
auditors, and others. As we speak, representatives of PCAOB are
conducting a forum in Jersey City for auditors of small
businesses and brokers and dealers.
In the PCAOB's 14 years, our inspections have found many
examples of high-quality auditing, including evidence of
auditors requiring companies to change their accounting or
improve their internal controls over production of financial
reports. These auditors are the unsung heroes who avert the
scandals that don't happen.
But our inspectors have also found and reported instances
in which firms' audit reports should not have been issued.
These instances include audits of some of the largest companies
in the world, as well as midsize and smaller companies. What
this points to is smart regulation and accomplishments that are
changing the landscape.
Inspections have improved audits and changed firms'
attitudes and execution. Emerging research on our inspections
indicates that when we find audits that are deficient, the
engagement teams raise their game without a commensurate
increase in fees, but with a statistically significant
reduction in restatements. Issuance of regular inspection
reports provides meaningful information that didn't exist
before. And that helps all parties, including investors, audit
committees, and companies that make better decisions.
Enforcement has helped root out bad apples and fosters trust in
the system.
We have issued clearer and better audit standards and have
made progress in improving the relevance and transparency of
audits. Markets will soon have useful information to
differentiate auditors on the basis of track records for
quality. Awareness of our role and mission is now firmly
established, and emerging research suggests that this is
helping build public confidence in investing.
The PCAOB has helped foster global recognition of the
importance of cooperation. Our joint inspection with
counterparts around the world have proven to be both effective
and efficient. The PCAOB has established a center for economic
analysis headed by Luigi Zingales of the University of Chicago,
to further incorporate meaningful economic analysis in all
aspects of our work. I firmly believe that through these
accomplishments, the PCAOB has played a part in helping our
economy and capital markets be resilient and grow.
As we go forward, we must continue to invest in staff skill
sets, information technology, and analytics. The audit of the
future will need to take advantage of big data. And we will
need to stay ahead of that curve. Our 2017 budget is still
under development in consultation with the Commission, which
must ultimately approve it. I should point out that by law, our
budget is funded primarily by public companies, brokers, and
dealers.
In order to adequately address priorities, the PCAOB needs
to at least maintain the current budget level. I do anticipate
the need for a small increase over our $257.7 million budget
for 2016. This would be for the cost of living, annual merit
increases, as well as expected expenses for travel,
particularly for inspections, information technology, including
cybersecurity, and facilities. But we do have a keen sense of
stewardship. It is my goal to accomplish our objectives through
careful and continuous assessment with the best use of our
resources without a significant increase.
In conclusion, I appreciate the subcommittee's continued
interest in our work and I will be happy to answer questions.
Thank you.
[The prepared statement of Mr. Doty can be found on page 48
of the appendix]
Chairman Garrett. Thank you.
From FASB, Mr. Golden, thank you for being with us. You are
recognized for 5 minutes.
STATEMENT OF RUSSELL G. GOLDEN, CHAIRMAN, FINANCIAL ACCOUNTING
STANDARDS BOARD
Mr. Golden. Chairman Garrett, Ranking Member Maloney, and
members of the subcommittee, good afternoon. My name is Russell
Golden and I am the chairman of the Financial Accounting
Standards Board.
Established in 1973, the FASB operates under the oversight
of the Financial Accounting Foundation, a private sector
nonprofit organization. Through authority established by
Congress, the SEC has recognized the FASB as the designated
accounting standard-setter for public companies.
The objective of financial reporting is to neutrally depict
the economics of a transaction and thus provide financial
information that is useful to existing and potential investors,
lenders, and others. Accounting standards, however, are not
intended to drive behavior in a particular way. Rather, they
seek to present financial information so that users can make
informed decisions about how to best deploy their capital. U.S.
GAAP is essential to the efficient functioning of the U.S.
economy because investors, creditors, donors, and other users
of financial reports rely heavily on the information that they
contain. The FASB's goal is to improve financial information
that is useful to investors and other financial statement users
in making capital allocation decisions.
It is important to note that although the FASB has the
responsibility to set accounting standards, it does not have
the authority to enforce them. That falls to regulators like
the SEC and the PCAOB. An independent standard-setting process
is integral to producing high-quality accounting standards. The
FASB sets accounting standards through processes that are open
and that encourage input from all stakeholders. This involves,
among other things, proactively requesting meetings with
stakeholders, including a wide range of investors, auditors,
and issuers. These meetings help us to assess whether the
proposals or existing standards will lead to better information
as well as to assess the related costs.
Our comprehensive procedures permit timely, thorough, and
open study of financial accounting and reporting issues.
Because we understand that the FASB's actions affect so many
stakeholders, the procedures also encourage broad public
participation throughout the standard-setting process.
The FASB supplements its direct outreach by meeting
regularly with numerous advisory groups and with staff of the
SEC, the PCAOB, and banking regulators. This broad consultation
provides the opportunity for the FASB to hear and consider all
stakeholder views and to identify unintended consequences. The
FASB is keenly aware of the need to balance compliance costs
with the benefits investors and other users of financial
reports gain from the improved information. The FASB's broad
and inclusive process helps us to assess these factors and
strike appropriate balances. The FASB exercises its judgment
after considering relevant research, analyzing stakeholder
views, and carefully deliberating issues.
The FASB's role does not stop when a standard is issued. An
important part of the FASB's mission is to monitor
implementation and assisting preparers and other practitioners
in their understanding and ability to consistently apply a new
standard. Further, we ensure that stakeholders have sufficient
time to transition to a new standard, and our goal is to be in
a position to help them facilitate a smooth transaction.
The FASB recently completed a number of amendments to U.S.
GAAP designed to improve transparency and overall usefulness of
information provided in financial reports, as well as reduce
complexity. The most significant amendments are related to the
recognition of credit losses and lease accounting. The FASB has
a number of ongoing projects, including a disclosure framework
project in materiality continued to increase the utility of
information disclosed in a financial statement. Stakeholders
have also prompted us to look at four financial reporting areas
of concern, namely, intangible assets, including research and
development, pensions, and other postretirement benefit plans,
distinguishing liabilities from equity, and reporting
performance.
In conclusion, I would like to emphasize that the objective
of financial reporting is to neutrally depict the economics of
a transaction, and it is important for Members of Congress and
the American public to know that the FASB's accounting
standard-setting process is robust, transparent, and
accountable. Thank you for the opportunity to provide this
brief overview of the FASB and its priorities for the year. I
would be pleased to answer any questions.
[The prepared statement of Mr. Golden can be found on page
62 of the appendix]
Chairman Garrett. Thank you.
Moving next to the Director of the Office of Municipal
Securities at the SEC, Ms. Kane, welcome. And you are
recognized for 5 minutes.
STATEMENT OF JESSICA KANE, DIRECTOR, OFFICE OF MUNICIPAL
SECURITIES, U.S. SECURITIES AND EXCHANGE COMMISSION
Ms. Kane. Good afternoon, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee. Thank you for
inviting me to testify on behalf of the U.S. Securities and
Exchange Commission regarding the activities of the Office of
Municipal Securities.
The office supports the Commission's mission of protecting
investors, maintaining fair, orderly, and efficient markets,
and facilitating capital formation by overseeing the municipal
securities market, administering the Commission's rules
pertaining to municipal securities brokers and dealers,
municipal advisors, investors in municipal securities, and
municipal issuers, and coordinating with the MSRB on rulemaking
and enforcement actions.
The Commission created the office as an independent office
that reports directly to the SEC Chair as required by the Dodd-
Frank Wall Street Reform and Consumer Protection Act. The
office's current activities generally fall within the following
three areas: First, municipal advisors. Second, market
structure and disclosure initiatives. And third, regulatory
coordination.
The Dodd-Frank Act required municipal advisors to register
with the SEC and to comply with MSRB rules. The Commission
adopted final rules for municipal advisor registration in
September 2013. The office has significant responsibilities
relating to the implementation of the municipal advisor
registration rules, including providing interpretative guidance
to market participants, reviewing and processing MSRB rule
filings related to municipal advisor regulation, and overseeing
the registration of over 650 municipal advisory firms.
The office also consults with the Commission's Office of
Compliance, Inspections, and Examinations regarding municipal
advisor examinations, and coordinates with the MSRB and FINRA
to help promote fair and uniform application of new rules to
municipal advisors.
With respect to market structure and disclosure
initiatives, the Commission issued a report on the municipal
securities market in July 2012 that recommended a number of
possible actions to improve the municipal securities market in
these two areas. In a June 2014 speech, Chair White discussed
three of the report's market structure recommendations with
respect to the fixed income markets, and steady progress has
been made on these initiatives.
First, the Commission approved the MSRB's proposed rule
change to require brokers, dealers, and municipal securities
dealers to seek best execution of customer transactions in
municipal securities. And the MSRB and FINRA issued guidance on
their respective best execution rules. Second, the MSRB and
FINRA have filed proposed rule changes with the Commission to
require broker-dealers to disclose markups and markdowns to
retail customers on certain principal transactions for
municipal, corporate debt, and agency securities. And third,
the office continues to work with the Division of Trading and
Markets to consider ways to enhance the public availability of
pretrade pricing information for municipal and corporate bonds.
The Division of Enforcement's Municipalities Continuing
Disclosure Cooperation Initiative, a program for municipal
issuers and underwriters to self-report Federal securities law
violations, has focused significant attention on compliance
with the continuing disclosure requirements of rule 15c2-12 and
disclosure practices more generally. The self-reported
violations have provided the office with valuable information
as to how rule 15c2-12 is working, and will help us determine
where best to channel our efforts going forward.
The office regularly coordinates with other regulators in
the municipal securities market. The office is responsible for
reviewing and processing all MSRB rule filings on behalf of the
Commission. The office also regularly meets with the MSRB to
discuss rulemaking, examination, and enforcement activities in
the municipal securities market. And the office leads the
semiannual meetings with the MSRB and FINRA as required by the
Dodd-Frank Act.
In addition, the office also works with the municipal
securities industry to educate State and local governmental
officials and conduit borrowers about the Commission's rules.
Thank you again for having me here today. And I would be
happy to answer any questions.
[The prepared statement of Ms. Kane can be found on page
105 of the appendix.]
Chairman Garrett. Thank you, Ms. Kane.
I now recognize Ms. Kelly, the executive director of the
MSRB.
Ms. Kelly. Thank you.
Chairman Garrett. Welcome, and you are recognized for 5
minutes.
STATEMENT OF LYNNETTE KELLY, EXECUTIVE DIRECTOR, MUNICIPAL
SECURITIES RULEMAKING BOARD
Ms. Kelly. Thank you. My name is Lynnette Kelly, and I am
the executive director of the Municipal Securities Rulemaking
Board. On behalf of the MSRB, which regulates the $3.8 trillion
municipal securities market, I appreciate the opportunity to
testify today.
Since the enactment of the Dodd-Frank Act in 2010, and the
2012 release of an SEC report on the municipal securities
market, the MSRB has made significant strides in fostering a
municipal securities market that provides investors and State
and local government issuers with an unprecedented level of
transparency. In 1975, Congress created the MSRB under the
Securities Exchange Act of 1934 as an SRO with the mandate to
regulate the activities of broker-dealers and bank dealers that
buy, sell, and underwrite municipal securities.
We are a 501(c)(6) organization governed by a 21-member
board of directors with a majority of public members. The MSRB
is overseen by both Congress and the SEC, and our rules
generally must be approved by the SEC before becoming
effective. Our mission is to protect investors, State and local
government issuers, other municipal entities and the public
interest in promoting a fair and efficient municipal securities
market. The MSRB is unique amongst SROs in that it does not
examine for compliance with or enforce our rules. But we do
play a supporting role for those organizations that do,
including the SEC, FINRA, and the bank regulators.
Congress expanded the MSRB's authority under Dodd-Frank to
include the regulation of municipal advisors, those
professionals who act as fiduciaries to State and local
governments. Congress also expanded our original mandate to
protect investors, to include the protection of State and local
government entities. MSRB Chair Nat Singer wrote to this
committee earlier this week detailing the MSRB's progress in
advancing this expanded authority through its establishment of
our core regulatory framework for municipal advisors.
The MSRB is also working to enhance market transparency
through three avenues: rules for financial professionals
informed by economic analysis and regulatory efficiency
measures; improved access to market information through
enhancements to our EMMA website, which provides free public
access to municipal disclosures and data; and education for
issuers on their disclosure responsibilities.
First, we are improving transparency with rules intended to
ensure that retail investors in this market have a more
detailed view of the market, including dealer compensation. A
new MSRB rule proposal on that topic requires dealers to
disclose markups and markdowns to retail customers on certain
principal transactions. This and other MSRB rules benefit from
a 2013 MSRB policy to formally integrate economic analysis into
our rulemaking efforts. In addition, the MSRB has undertaken a
multiyear initiative to review the totality of our rule book
with the result of streamlining, clarifying, and modernizing a
number of rules.
Secondly, the MSRB has greatly enhanced municipal market
transparency through new tools and resources on our EMMA
website to improve retail investor access to important market
information. EMMA also offers tools and features that support
issuers in making full and timely disclosures to the market.
This is a topic we underscore through our third avenue for
enhancing transparency, education.
When State and local governments issue most types of
municipal securities, the issuer or obligated person generally
must agree to provide ongoing or continuing disclosures. We
have consistently called for better disclosure, better quality,
and more timely disclosure through market education
initiatives, including disclosure of bank loans and other
direct purchase debt which is not currently subject to SEC
disclosure requirements.
More generally, the MSRB highlighted for the Congressional
Task Force on Economic Growth in Puerto Rico principles and
practices that any municipal issuer should consider to ensure
timely and complete disclosures to the market. Attached to my
written testimony is a comprehensive MSRB report card that
shows the progress that we have made on numerous initiatives
aligned with those recommendations contained in the 2012 SEC
report.
I would be pleased to provide this committee with further
detail on these and other initiatives, and again very much
appreciate the opportunity to testify today.
[The prepared statement of Ms. Kelly can be found on page
113 of the appendix.]
Chairman Garrett. Thank you.
And Mr. Colby, chief legal officer of the Financial
Industry Regulatory Authority, you are recognized for 5
minutes.
STATEMENT OF ROBERT L.D. COLBY, CHIEF LEGAL OFFICER, FINANCIAL
INDUSTRY REGULATORY AUTHORITY
Mr. Colby. Chairman Garrett, Ranking Member Maloney, and
members of the subcommittee, I am Bob Colby, chief legal
officer of the Financial Industry Regulatory Authority, or
FINRA. Thank you for the opportunity to testify today.
As you have now heard twice before, the municipal
securities market is overseen via a well-developed
collaborative relationship between the MSRB, FINRA, and the
SEC. The MSRB has responsibility for adopting rules relating to
the municipal securities market. FINRA serves as the
examination, surveillance, and enforcement authority for its
regulated firms. And the SEC oversees the activities and
approves the rules of both FINRA and the MSRB.
Effective coordination among these regulatory bodies is
achieved through both leveraging of resources and collaborating
on many financial, operational, and business conduct topics.
FINRA examines for and enforces compliance with the Federal
securities laws and rules by broker-dealers engaging in
municipal securities transactions. In addition, since the
passage of Dodd-Frank, FINRA has examined its broker-dealers'
activities as registered municipal advisors. In doing so, we
coordinate closely with the SEC and the MSRB, and we have a
specialized team that acts as a central point of contact with
the SEC and the MSRB.
As part of this coordination, FINRA requests interpretative
guidance from the MSRB regarding its rules and provides
information to the MSRB about FINRA's municipal securities
market examinations and enforcement actions. FINRA also
participates in formal periodic meetings with the MSRB and the
SEC to discuss timely issues arising from current examinations.
Each year, FINRA and the MSRB collaborate on municipal
securities regulatory priorities leveraging, among other
things, regulatory intelligence gathered from current year
examinations, new rules, rule interpretations and emerging
issues. FINRA then performs a qualitative and quantitative risk
assessment of each municipal broker-dealer and municipal
advisor to determine its municipal dealer exam priorities.
FINRA conducts on average about 500 municipal broker-dealer and
60 municipal advisor examinations annually.
In recognition of the unique characteristics of the
municipal securities market, FINRA operates specialized exam
teams for the largest most complex municipal broker-dealers and
municipal advisors. We also conduct market surveillance of
municipal securities transactions using a risk-based approach.
FINRA worked closely with the SEC and the MSRB to develop
regulation for the fixed income market that is consistent yet
calibrated to reflect the unique regulatory needs of each
market. In particular, FINRA works with the SEC and MSRB and
focuses on initiatives designed to enhance transparency and
promote better execution quality in the fixed income markets.
One of these initiatives, which has been mentioned already,
involves proposals that the FINRA and MSRB recently filed with
the SEC that would require additional pricing information to
customers on their trade confirmations. Putting additional
pricing information in the hands of customers will better
enable them to evaluate the cost and quality of the services
that firms provide. FINRA and the MSRB also jointly conducted
investor testing to evaluate the potential benefits of the
proposed disclosures.
We look forward to evaluating the comments that will no
doubt be received on the proposal and coordinating with the
MSRB on this and other issues. I appreciate the opportunity to
testify today and would be happy to answer any questions you
may have.
[The prepared statement of Mr. Colby can be found on page
42 of the appendix.]
Chairman Garrett. Thank you. Thank you very much.
So I said at the--I will recognize myself for 5 minutes.
I said at the outset that our hearing today is examining
the agenda of regulators, SROs, standard-setters for
accounting, auditing, and municipal securities. We were saying
that this--and being done through one panel, it really could
have been two, but let's delve into it. And I guess I will
start off with PCAOB.
Mr. Doty, reading through your testimony and hearing you
today, as you know, you mention in your testimony that--you
know, and I mentioned in my comments, PSAOB enforcement
proceedings are somewhat of an anomaly, right, in that they are
held out of the public eye unless, what, both parties consent?
Essentially, I guess you would say, grants a--what do you call
it, veto power, if you will, before that gets out. And this
contrasts with other folks here, with the SEC, FINRA, and other
agencies.
And as you are aware, the subcommittee has been as I--I
have been one of the critics when it comes to the way in which
the SEC and FINRA conduct their enforcement proceedings, and
particular a lack of due process. And you have probably seen
some of my comments on that. But no point of our examination of
their practice they would say, you know what, let's just make
all of them private and out of the public eye.
So just from a practical sense, and I think you will
probably agree, if you were an investor in a public company and
that company's auditor had a charge brought against them, if
you are that investor in that company, wouldn't you want to
know whether that charge was brought against them?
Mr. Doty. Absolutely, Chairman Garrett. If you are an audit
committee making a selection of an audit firm--
Chairman Garrett. Right.
Mr. Doty. --you might want to know. And our strong hope for
this--the change that you are describing is that the present
situation as an anomaly creates harm. It harms--when we go
after the bad apples, they continue to practice, they continue
to issue bad audit opinions. They compete with the vast
majority of good auditors who are doing conscientious work. And
we think that is unfair.
Chairman Garrett. That is true. And I wasn't even thinking
about it from the audit committee perspective, but just the
investor. But that is true.
And I have said it, but does this type of enforcement
secrecy exist anywhere else, that you are aware of, within the
whole regulatory framework, certainly not right here, but
elsewhere, particularly within the banking securities area? The
secrecy aspect.
Mr. Doty. We see no reason why auditors--
Chairman Garrett. Yes, but you don't see it anyplace else.
Mr. Doty. No. No, we don't. It is a general practice in
Federal agencies and administrative law and other areas that
the public knows when we have made a determination that auditor
conduct is sufficiently egregious, and an extreme departure
from professional standards, that we have brought charges.
Chairman Garrett. Okay. And that is interesting. And so
under the Grassley-Reed Senate bill, you mention that in your
testimony, I will be introducing a version of that over here,
the investigation portion of it, however, would still remain
private. Correct?
Mr. Doty. It would. Absolutely.
Chairman Garrett. And this was an argument made up years
ago, but--a while back, but I assume you will agree here: Do
broker-dealers and investment advisors operate in an
environment where reputation and trust matters? And the answer,
of course, is yes. And is there anything inherently different
between those folks and auditors?
Mr. Doty. Other professionals who rely on the trust of the
public are subjected to public proceedings where they are
derelict.
Chairman Garrett. Right. Thanks.
Moving next to Mr. Golden. My time is going by quick. I
understand that FASB has been working on the disclosure
framework, you mentioned it in your testimony, to improve the
effectiveness of disclosures. We had a discussion on that about
disclosure. Were you watching our hearing yesterday by any
chance? Did you tune in?
Mr. Golden. No, I did not.
Chairman Garrett. You missed it. It was exciting. It was
the whole issue of materiality. One of the most fascinating
hearings we have held to date and--no. And I want to follow up
in my last minute on, last fall, FASB issued guidance that
would revise the definition of materiality for financial
statements, though it is based on a legal concept that the
Supreme Court has articulated. Can you explain briefly FASB's
logic behind that updated guidance and the importance of
following the materiality standard articulated by the Supreme
Court?
Mr. Golden. Sure. And thank you for that question. Our
intention in the project was to align the existing definition
with that of the PCAOB and the SEC, and remove a change that
the board made in 2010 to have the same words as that of the
IASB. We thought it was important that the conceptual
definition of the FASB align with the SEC, the PCAOB, and the
laws of this country.
Chairman Garrett. And let me just jump back to Mr. Doty. So
there is some degree I hear as far as confusion as far as where
you guys are and where they are. Are you consulting as you are
coming up with your--with definitions of materiality?
Mr. Doty. We do consult. And Chairman Golden is correct
that we have continued to observe the law, as we understand it,
on materiality under the Exchange Act.
Chairman Garrett. And be willing to make--
Mr. Doty. Supreme Court decisions.
Chairman Garrett. Yes, but my understanding is there some
discord or confusion at this--
Mr. Doty. Our--we do consult, and we will be looking to be
sure that auditors are auditing in accordance with the legal
standard for disclosure policy that the SEC and the FASB
established.
Chairman Garrett. And since--this is off page, but Ms.
Kelly, you raised one issue. I know my time is over. But you
brought up the aspect of some degree of materiality. Is your
standards--this is just for my information. I just don't
understand this. The materiality issue that you were raising
near the end of your testimony. Right? Are you with me? Ms.
Kelly?
Ms. Kelly. I am sorry, sir.
Chairman Garrett. At the end of yours talking about
disclosure regimes and materiality issues. Is there--no?
Ms. Kelly. Well, the disclosure regime in the municipal
market does--is based on a materiality standard.
Chairman Garrett. And is that all--this is my learning
education period--different definition here? Because you were
saying--you were going into some of the other areas that needed
to be disclosed and some of issues that are being brought out
there. Right? By your testimony. So is that something that I
need to understand better, I guess I do, as far as the
materiality definition over here versus where in your market?
Either one? Are you with me?
Ms. Kelly. Well, I can say during the MCDC initiative,
there were certainly market participants that did ask for
further clarity on the definition of materiality.
Chairman Garrett. Okay.
Ms. Kelly. And that wouldn't be something that is within
the MSRB's--
Chairman Garrett. Per your authority, but--okay. With that
uncertainty that I still have in my head on that point--I will
circle back with you--I now yield 5 minutes to the gentlelady
from New York.
Mrs. Maloney. I thank the gentleman for yielding, for
calling this important meeting, and for all of your testimony.
I have been called to a confidential briefing on the bombings
that--the terrorist attacks in our country, one of which took
place in my district.
But before I leave, I wanted to ask Mr. Colby about the
proposed rule to require the reporting of--FINRA's reporting of
Treasury trades. Certainly, our Treasury market is the deepest
and most liquid in the world, and tremendously important to the
financial markets, and very, very important to the financing of
government. So I wanted to ask you, where does this rule stand?
When will it be completed? What is the status of it? What can
you tell us about this important rule?
Mr. Colby. Thank you, Congresswoman. We have filed a
proposal to require our members to give us information for
purposes of an audit trail of Treasury securities. It is with
the Commission. There have been a round of comments. We are
about to respond to those comments, and we are hopeful the
Commission will approve it shortly.
Mrs. Maloney. And so you think it will be shortly. Okay.
What do you think of the argument that some people have put
forward that the Treasury trades should be reported publicly
rather than just to regulators? And do you think there is a
risk that public reporting could potentially in some way hurt
or disrupt the market?
Mr. Colby. Well, we believe that the question about
dissemination of the Treasury data is primarily a question for
the Treasury Department and the SEC. We responded to their
requests for us to develop an audit trail. We have made public
data with respect to corporate and agency securities, and we
heard these same arguments in that context. And so we went
through a very methodical process where we put out in the
public sphere the most liquid of the security transactions and
assessed the impact of those before moving on to other
transactions.
Mrs. Maloney. Well, I would like to address this question
also to Jessica Kane and to you. And would each of you describe
the types of enforcement actions you have brought in the
municipal market, both with the SEC and with FINRA, and any
emerging threats that you see either to municipalities or
investors, and how are you addressing them? First, Ms. Kane and
then Mr. Colby, if I could.
Ms. Kane. At the Commission we have a specialized unit
within the Division of Enforcement. It is the Public Finance
Abuse Unit, the PFAU, and their current efforts focus on
investigating and pursuing enforcement actions in four primary
categories: Offering and disclosure fraud, broker-dealer
abuses, public corruption, and municipal advisors.
Earlier, Ms. Kelly referenced the MCDC initiative. I would
say the lack of compliance with continuing disclosure
obligations was one area that we saw a potential for abuse and
the Enforcement Division, noting this area, brought the MCDC
initiative.
Mrs. Maloney. Mr. Colby?
Mr. Colby. Our efforts are focused on broker-dealers and
municipal advisors that are members. We have brought a range of
cases covering both market transactions and customer
transactions. In the customer area, we focused on suitability
issues, the sort of recommendations that are made to customers
and whether they are appropriate for that sort of customer. In
the transactions area, we have brought cases on markups where
excessive undisclosed markups were charged to customers; also
for failure to report transactions that should have been
reported under the municipal reporting system.
Mrs. Maloney. Thank you.
And my time is almost up, but I would like to ask James
Doty. It is my understanding that the PCAOB does not currently
have a budget request for 2017 because of a unique timeline.
Could you explain what the timeline is and discuss, in general
terms, what your views are on your expected budget request?
Mr. Doty. Yes. Ranking Member Maloney, we are in the
process of formulating our budget. That happens as a bottom-up
assessment of each program's needs. It occurs with extensive
discussions that begin in the spring. We receive some--a lot of
feedback and discussion from SEC staff here, which acting--
which Acting Director Bricker has referred to. We normally--we
will submit a preliminary budget for examination and review at
the end of July, which we have done, and that will receive a
lot of work, both with the SEC and ourselves pitching in and
meeting frequently. It will culminate with a final budget
request on November 30. That will then be the subject of a
hearing by the Commission.
Mrs. Maloney. Thank you. My time has expired. Thank you.
Chairman Garrett. Thank you. The gentlelady yields back.
The gentleman from Arizona is recognized for 5 minutes.
Mr. Schweikert. Thank you, Mr. Chairman. And this is one of
those hearings where you sort of get to ask those sort of
questions that have bounced around in the back of your head.
A decade ago, I was the treasurer of a very large county.
And so this is going to be to Ms. Kelly. I signed a lot of
bonds in that time. I mean, lots. I mean, the type where you
have the hand cramp. But I remember a number of occasions where
we were doing a defeasance, a refinance. And typically, my job
was just, you know, the official of the county putting our name
on it, saying, you know, the school district or whatever the
taxing district was, and I got loose with some of the fees and
costs. And in digging into them, I realized that the legal
fees, the rating fees, everything else that goes into that cost
stack of this refinance was actually almost as much as the
savings on the instrument was going to have to the taxing
district.
Is there a standard that is articulated that you don't walk
in and convince, say, a school district, someone else saying we
want you to refinance your bonds because we are going to make a
bunch of legal fees on it, but over the next decade, we are
going to save you five grand? I mean, what is the proper
etiquette or rules, and has that changed in the decade since I
was doing that?
Ms. Kelly. Thank you. The MSRB rules apply to broker-
dealers and municipal advisors, and we have rules for each,
fair dealing and fiduciary duty rules, for both of those types
of professionals that prohibit the charging--
Mr. Schweikert. Yes, but you already--because it was not--
there was no municipal advisors involved in this.
Ms. Kelly. Right.
Mr. Schweikert. And someone handed you a note; you might
want doublecheck that. Look, we all rely on our experts.
Because in this particular case, there seem to be some
extraordinary legal fees rolled into this defeasance.
Ms. Kelly. Right.
Mr. Schweikert. And, you know, I know that is sometimes
uncomfortable, but when we looked at the entire stack of costs,
from the rating to, you know, the analysis, this, that, there
was really very little savings happening here. Does the entire
cost stack get looked at?
Ms. Kelly. Not by the MSRB. We have no direct authority
over bond attorneys at all, but there are certain activities at
the State level that seek to really make cost of issuance on a
bond issue more transparent. So for example, the State of
California just adopted a bond disclosure law that would
require very detailed information about all of the
professionals and the costs that they were--or the fees that
they were paid per bond transaction.
Mr. Schweikert. Okay. And this is for anyone on the panel.
Has anyone ever seen a State municipal government or even a
national organization that says, hey, we have a very simple
online disclosure when someone walks in and wants your road
district, your sewer district, your school district, whatever,
you know. In Maricopa County we have, what, 3,300 taxing
districts, and I think 25 percent of those have the right to do
some type of bonding. Here is our cost. And any taxpayer can
log in, see it, and it is a nice, simple, looks like the back
side of a yogurt carton, of here is our legal costs, here is
our rating costs, here is our research costs, here is our
certification, here is our--and to see that, and particularly
in the occasion of a defeasance where, you know, you are moving
from one to the other and assuming that you are saving the
taxpayers money.
Does anyone know of something like that? Because I am
thinking of the elected officials who may not be from our world
of doing finances. How do they get a quick understanding of the
cost?
Ms. Kelly. What is fair, what is not. I am not aware--
Mr. Schweikert. No. What is rational.
Ms. Kelly. I am not aware of--well, there certainly is no
national database that requires municipal bonds.
Mr. Schweikert. Wouldn't that be a lot easier than a fairly
large regulatory statement?
Ms. Kelly. Sure.
Mr. Schweikert. Like as you were mentioning California,
which I am a little familiar with, which has, you know, what, a
couple dozen line items--
Ms. Kelly. Right.
Mr. Schweikert. --and categories in it, and just make it,
hey, this is it.
Ms. Kelly. Again, there are certain States that do require
disclosure at the State level. I am not aware of whether or not
that information is publicly available, but I take your point.
Mr. Schweikert. Okay. If anyone ever comes across something
like that, I would love to read more about that.
And with this I yield back, Mr. Chairman.
Chairman Garrett. The gentleman yields back.
Mr. Scott is recognized now for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman.
As a co-lead sponsor on Dodd-Frank a few years back, I was
happy that the law elevated the attention needed to the
municipal securities market by creating the Office of Municipal
Securities at the SEC. It has been a long time, indeed, since
this committee itself has even had a hearing on municipal
securities. So I wanted to ask the panel, especially you
Director Kane, if you could provide us with an update of any
emerging threats, any emerging threats that you see today,
either to the municipalities themselves or to the investors?
And I am particularly interested in this because municipal
bonds have been getting a lot of attention in my own district
in Georgia, in Cobb County, lately because of our brand-new
spanking Atlanta Braves stadium. So it is of particular
interest to me to make sure things are going to be going
smoothly, and so I would like to know, do you see any threats
on the horizon to either municipalities themselves or to
investors, or do we see smooth sailing along the way?
Ms. Kane. I am happy to start that off.
Mr. Scott. Yes, if anybody else would like to comment, I
certainly would like to cover the waterfront so all of us will
know. And we are on C-SPAN, so people across the country will
know if everything is fine.
Ms. Kane. Well, I think I would like to talk about two
issues in particular. The Dodd-Frank Act required municipal
advisors to register with the Commission and to comply with
MSRB rules. These are important rules that the Commission
promulgated in September 2013. The MSRB has rolled out a suite
of conduct rules applicable to municipal advisors, and these
rules were really designed with the idea of protecting
municipalities--
Mr. Scott. Let me ask you one thing. I think I just missed
you. Who would register with the Commission again?
Ms. Kane. Municipal advisors.
Mr. Scott. Okay.
Ms. Kane. These are persons who would provide advice on the
issuance of a bond or municipal financial products or would
solicit a municipal entity or obligated person. So the SEC does
have authority over municipal advisors with respect to
registration, examination, and enforcement. As Ms. Kelly
mentioned, the MSRB has recently completed a suite of conduct
rules applicable to municipal advisors, including a fiduciary
duty rule. So advisors to municipalities are now subject to SEC
registration, examination, and oversight, as well as to MSRB
conduct rules. These are important rules designed to protect
municipalities from conflicted advice and from unregistered
financial advisors advising them on transactions without the
municipalities' best interests at heart.
Another area that we have been focusing on at the SEC is
compliance with continuing disclosure obligations. The 2012
report that the SEC Commission put out noted that there were
widespread failures to comply with continuing disclosure
obligations on the part of municipal issuers. To correct that
widespread activity, the PFAU, the Public Finance Abuse Unit,
in the Commission's Enforcement Division launched the MCDC
program. This is a voluntary self-reporting program whereby
issuers and underwriters could self-report violations of the
Federal securities laws. It has been an incredibly successful
program from the perspective of my office in terms of focusing
compliance by municipal issuers and underwriters on continuing
disclosure obligations and ensuring that investors get the
information that they need.
Mr. Scott. So let me ask you this too. Also in my State, at
the same time we are building the new Atlanta Braves stadium on
municipal bonds in the area, downtown in Atlanta we are
building the new Falcons stadium in municipal bonds. And there
was some concern about is this too much in one area, and
particularly because municipal bonds now are becoming the
favorite way of building these huge mega stadiums now.
Do you all see any threat in that? I mean, we are doing
well given we are doing them all at the same time. We got both
stadiums supposed to come on in 2017, so that will be
interesting. But is that a threat? Is that something
communities need to be aware of, not to overload?
Ms. Kane. The decision to incur debt is a decision that is
made at the State and local government levels. The SEC has
authority over municipal advisors, municipal securities brokers
and dealers. The SEC also enforces the antifraud provisions of
the Federal securities laws with respect to disclosures made by
issuers to investors.
Mr. Scott. Right. So we are safe.
Chairman Garrett. The gentleman's time has expired.
Mr. Scott. Thank you.
Chairman Garrett. Thank you.
The gentleman from Texas is recognized for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman. Thanks for holding
this hearing.
One of the things I wanted to talk about a little bit is
the municipal bond market and the transparency in that market.
And, Ms. Kelly, I think I will start with you. You recently put
out a new proposal that would require the dealer to disclose
the markup. Kind of walk me through kind of where you are with
that process and what are some of the plusses and the minuses
of that proposal.
Ms. Kelly. Certainly. The MSRB worked, actually, very
closely with FINRA so that there could be a uniform standard
for disclosure across the fixed income markets. There were over
2 years of notice and comment on various kinds of disclosure
proposals, including price reference, you know, a reference
price on a confirm, which eventually evolved into a markup
disclosure requirement. This is a great example of where a
really thorough independent economic analysis worked, and it
was pretty clear that the price reference standard didn't make
sense from an economic analysis perspective.
So fast forward, in the last 2 months, both FINRA and the
MSRB filed rule proposals with the SEC. They are in public
comment right now, public comment directly to the SEC, which
MSRB and FINRA will respond to. And it is expected that there
will be an effective date possibly as long as 12 months. The
effective date, if approved, has not been set yet. This kind of
disclosure requires some very significant technological changes
and confirmation disclosure changes, so we want to make sure
that the industry has enough time to implement those
requirements.
Mr. Neugebauer. The interesting thing to me is the
technology in the securities area has, you know, been 4X, but
it seems like the municipal bond market has trailed that. And I
think one of the things that concerns me about the municipal
bond market is that--kind of the lack of information from an
investor's standpoint. I think most sophisticated investors
understand that municipal bonds can be less liquid than other
types of securities. But if we had more information, then as
investors we would actually know how illiquid that is, and for
example, the last time that bond traded, for example.
Ms. Kelly. Certainly.
Mr. Neugebauer. And what you can find out on the Web right
now, you can find the ask, but you can't find really
information on what maybe the current bids for those securities
are or what was the last trade in--the last trade date. So are
those some of the things that are being considered or what--
kind of give me some insight into that.
Ms. Kelly. Certainly. An equally important activity at the
MSRB, equal to rulemaking, is transparency in the market. And
in 2009, the MSRB launched the EMMA website, which is the
central location available for free and really geared to the
retail investor that has information on over 1.3 million
individual municipal securities. That includes offering
documents, ongoing disclosures, trade data, short-term interest
rate resets, market information, as well as other tools and
information useful to better understand the market.
You are right that municipal bonds generally don't trade
very frequently. We have a price discovery tool which allows a
retail investor to ascertain similar securities and look at
their trading patterns to get a better sense of the value of
their security. Perhaps we need a little bit more of a
marketing budget, but it is really a game changer for the
market. And what we have found out with the age of the
traditional municipal retail investor happens to be, you know,
in the 60 to 80 range, they are not as likely necessarily to
embrace technology and to do research on their own. The market
generally still is a buy-and-hold market, but we are very
confident that, you know, as the new investors come into the
market, that they will be much more self-directed.
Mr. Neugebauer. And one last question. In your cost benefit
analysis that you have done on this particular rule--
Ms. Kelly. On the what rule?
Mr. Neugebauer. The liquidity issues, did that come up? In
other words, if I have to start disclosing, you know, what my
markup is, I may not want to inventory certain bonds, and so
that might create some liquidity issues. Was that something
that was discussed?
Ms. Kelly. Yes, sir. We certainly invite a dialogue with
the industry about the costs and the benefits of each
regulatory proposal that we issue. Many times we have
quantitative information, and sometimes we don't, in which case
we would have to rely on a more qualitative assessment. So that
question absolutely is part of the analysis.
Mr. Neugebauer. Thank you.
Chairman Garrett. The gentleman from California, Mr.
Sherman, is recognized for 5 minutes.
Mr. Sherman. Let me first focus on the PCAOB. It has been
thought that we should publicize every time they do an
investigation. I would point out that nobody in the room is an
accounting firm, but we are all citizens, and as far as I know,
none of us have been indicted, but none of us know whether we
have ever been, you know, talked about in a grand jury. I don't
think it would make sense to publish everyone whose name is
mentioned in a grand jury. That is why we keep them private.
I will ask our witness from the PCAOB, if it was announced
that you were investigating a firm, that would punish the firm.
That would hurt the firm's position in the community. It would
cost them clients. Would you be reluctant to investigate a firm
if you didn't know that they had done any wrongdoing and you
knew that by merely announcing the investigation, you were
punishing folks that may be blameless?
Mr. Doty. Mr. Sherman, we would not identify witnesses or
even announce the fact of an investigation.
Mr. Sherman. Oh, I know that is your current policy. What
if Congress said that you couldn't investigate anybody until
you published the fact that you were investigating them? Would
that interfere with your work?
Mr. Doty. Our investigations should be confidential. And as
with other law enforcement agencies, including the SEC, we
would not seek the authority to announce and do not seek the
authority to announce the commencement of investigations or the
participants, no more than we would identify the identity of
companies that we audit or we have findings in an audit report
or where we have an investigation. That should be confidential.
We are seeking only the ability to publicize the facts when we
get to the point of filing charges.
Mr. Sherman. And then if you file charges, that is public,
and there could be, in effect, a public trial or hearing before
the SEC?
Mr. Doty. Well, there would be a hearing at the PCAOB in
which those persons charged would be entitled to all of the
protections of due process that government agencies, including
the right to counsel
Mr. Sherman. So a secret grand jury and a public trial.
Sounds familiar. That sounds like how we do business in this
country. We don't punish somebody because we want to
investigate them.
I want to go on to Mr. Golden. Well, the chairman believes
in cost-benefit analysis with regulations. You say that
accounting standards are not intended to drive behavior, and
they are not, but when you violate every accounting principle
for the convenience of accountants and provide tens of billions
of dollars of punishment to those companies that choose to do
research, can you ignore that you are driving behavior?
Mr. Golden. I have enjoyed the conversations we have had
over the number of years regarding the accounting for research
and development. As we have completed a number of standards
this year, we began to plan our future agenda, and a few months
ago we issued for--
Mr. Sherman. If I can interrupt. I talked to your
predecessor. I talked to your predecessor's predecessor. I
talked to your predecessor's predecessor's predecessor. I
talked to your predecessor's predecessor's predecessor's
predecessor. And they have all promised to look at this and
they have all done absolutely nothing, and you sound just like
them. So telling me that you are going to finally go back to
good, solid accounting of matching--of expensing and
expenditure when it generates revenue, you know you are not
going to do that. I know you are not going to do that. It is
pretty clear that your decisionmaking process is broken. Please
proceed.
Mr. Golden. A few months ago we issued for public comment
four very important issues that have been raised by a number of
stakeholders. One of those was the accounting for intangible
assets, including research and development. We plan to seek
feedback throughout the fourth quarter and have a public
discussion with our stakeholders as to whether or not we should
change the accounting for intangible assets, including research
and development, and I look forward to talking to your office
as that process continues.
Mr. Sherman. I look forward to a situation in which--you
can't build a two-story apartment building in my community
without a public hearing, Freedom of Information Act request,
and people paying attention. But you can do damage to the
entire state of science and research for decades, and as long
as your ruling comes out of Norwalk, Connecticut, nobody pays
any attention. There is no Senate confirmation. There is no
freedom of information. There is no cost-benefit analysis, and
there is no open meetings act. Just because accounting is
boring doesn't mean it is not important.
I yield back.
Mr. Poliquin [presiding]. Thank you, Mr. Sherman.
Mr. Hultgren from Illinois.
Mr. Hultgren. Well, I do want to express my appreciation to
Chairman Garrett for holding this series of oversight hearings
on our capital market. I especially want to thank Chairman
Bruce Poliquin for doing such a great job chairing this
committee. And I hear Maine is beautiful this time of year. All
of you, grateful that you are here. This is important.
Mr. Colby, if I can address my first question to you. As
you might be aware, Chair White stated last week that the
Commission is close to finalizing amendments on rule 15b9-1
that would require more firms to register with FINRA. I am
hearing concerns about the impact on the options markets if the
rule is finalized without changes. Can you tell me why
expanding FINRA supervision over these new registrants would
improve option markets?
Mr. Colby. The purpose of this rule is to extend FINRA
oversight to entities that are trading outside of specific
markets and to make sure that they are included in the broader
audit trail that FINRA currently operates. And so we have been
in discussions with a number of the participants for the
options markets trying to identify their concerns. We have a
filing that is going to go in that is going to have specific
changes to our fees that apply to trading, which we know that
they support, and we hope to respond to their concerns in other
ways through these discussions.
Mr. Hultgren. I would share their concerns. I mean, I do
think from at least an initial look, the proposal scope is
maybe broader than intended and really could do, as oftentimes
happens up here, harm when we want to do good. Mr. Colby, if I
can follow up. I am also co-chairman--not follow up but change
a little bit here.
I am co-chairman of the Municipal Finance Caucus. I am
especially interested in assuring that we have a highly
competitive municipal securities market. I have heard of some
unscrupulous marketing practices that would suggest States and
local governments are required to retain the services of
municipal advisors despite the statute and rule being quite
clear that this is not necessary. I recently introduced the
Municipal Advisor Choice Act to address this issue.
Is this an issue you have encountered in your surveillance
of the municipal securities market, and would you agree that
Congress should take all steps necessary to clarify its intent?
Mr. Colby. I certainly support Congress clarifying its
intent. We have seen situations where--and brought cases where
a firm has acted both as advisor and as underwriter in a
situation, contrary to the law.
Mr. Hultgren. Okay. Well, I hope we will be able to clarify
it and make our intent crystal clear.
Let me switch over to Ms. Kane real quick, if I could. As
you are aware, Dodd-Frank requires the SEC to promulgate rules
to make reforms to money market funds, which will go into
effect next month. A significant portion of the $3.7 trillion
in outstanding muni debt is held by money market funds.
According to a September 16 story in the Financial Times,
assets in tax-exempt funds have dropped by nearly 50 percent
since standing at $266 billion at the beginning of this year,
and the cost of borrowing for issuers to States and local
governments is already beginning to increase significantly.
What cost-benefit analysis did your office conduct on this rule
and how did you contemplate the increased cost in borrowing for
issuers and how did you weigh this with investor protection?
Ms. Kane. So I am aware of the issue that you referenced.
The Office of Municipal Securities monitors the municipal
securities market and current developments in that market. The
Commission's Division of Investment Management is responsible
for administering the Commission's rules on money market funds.
I am generally familiar with their 2014 amendments, which I
think is what you are referencing, and would note that these
amendments are not yet effective. They are scheduled to become
effective in October of this year. There are many factors
investors may be considering in their determinations in how to
allocate capital. The current low interest rate environment may
be one of those factors that investors are considering
currently.
Mr. Hultgren. We may follow up, if that is okay, and find
out who we should direct a question to directly of just, again,
looking at cost-benefit analysis, certainly seeing higher costs
and concern in the significant decrease this year.
I just have a few seconds left. Let me address my last
question to Ms. Kelly, if I may. You note in your written
testimony that the MSRB advances transparency of the municipal
securities markets in three ways. One, through rulemaking; two,
through your website, the Electronic Municipal Market Access;
and, three, by encouraging timely disclosures. I wonder if you
could please discuss briefly some of your initiatives in this
space. I am sure we can all agree that market transparency is a
crucial thing.
Ms. Kelly. Thank you. Yes, on transparency, again, it is
really a fundamental activity that we find to be certainly as
important as rulemaking. This year, the board of directors has
approved making third-party yield curves available on EMMA,
adding a new issue calendar, enhancing the EMMA user experience
for various types of users for the EMMA system, and we are also
exploring whether or not there are certain kinds of pretrade
information that might be helpful, especially for retail
investors. We want to study the impact of our regulatory
framework continuing our retrospective rule review. And
finally, on the education front, we have recently launched our
Muni Ed Pro system, which is a learning management system that
we are making available to all market participants and
including investors and issuers with courses over this year. We
really want to empower market participants to really understand
the market to make the decisions and to know what kinds of
questions to ask their market professionals.
Mr. Hultgren. Okay. Thank you.
Chairman Poliquin, you have been very generous, and I
appreciate that so much. I yield back to you.
Mr. Poliquin. Well, it is the fall in Maine. You are very
welcome, Mr. Hultgren.
Mr. Ellison from Minnesota is recognized for 5 minutes.
Mr. Ellison. Thank you, Mr. Chairman.
My first question is directed to Mr. Doty, chairman of the
Public Company Accounting Oversight Board. Section 404 of
Sarbanes-Oxley Act is a cornerstone in providing public
confidence in financial statements. Section 404 requires firms
to include information concerning the scope and adequacy of the
internal control structure and procedure for financial
reporting in their annual report.
What are the benefits of section 404(b) to investors?
Mr. Doty. I am sorry, sir?
Mr. Ellison. What are the benefits of section 404(b) to
investors?
Mr. Doty. Well, it is a fundament of good accounting, we
believe, that there be good internal controls. Good internal
controls have proven over time, Congressman, to be the best
tool we have for early detection of problems and the prevention
of fraud.
Mr. Ellison. Thank you. And since Sarbanes-Oxley was passed
in 2002, have costs for the implementation gone down? And if we
roll this back to cover fewer and fewer companies, what would
be the impact?
Mr. Doty. The cost has gone down, as you rightly point out,
because companies, I think, have gotten better and auditors
have gotten better at working with companies to spot earlier
the improvements in internal controls that are needed. We would
like to think that as the process continues to evolve, that
without regard to the very largest companies or the midsize or
even smaller companies, there is an advantage to adopting and
implementing the best internal control system that you can
find.
I am quite aware of the fact that there is a statutory
issue here, and I don't want to suggest that we have
disregarded the JOBS Act and the position of emerging growth
companies, which have a different and competing statutory
purpose.
Mr. Ellison. Are you concerned at all that if section
404(b) covered fewer and fewer companies, that some of the
internal controls that are so important--as you correctly point
out, in my opinion--are you concerned that some of those
controls will be relaxed and we could introduce more risk into
the system?
Mr. Doty. Congressman, we do see a change in the view of
audit committees and boards, and there is a perception
spreading in corporate America, which I think is very healthy,
that if you are on a board of directors, you want to know they
have good corporate--good internal controls. One of the
achievements of Sarbanes-Oxley, I think, might be that over the
time that we have had it, and over the 14 years of the PCAOB's
existence, the advantages of internal controls for the board of
directors as well as the stakeholders is becoming apparent. And
so many of the people on audit committees to whom we speak--and
we meet with businessmen and audit committee people all the
time--we continually hear this said, that most responsible
directors would not consider going on a board of directors now
that did not have an integrated audit of internal controls.
Mr. Ellison. Well, I just want to say that there is a lot
of criticism in this institution of Congress about regulation,
but Sarbanes-Oxley didn't come about because everything was
going great. And if we relax those requirements, I am concerned
that, you know, some of the trouble that we saw back then could
return. That is just my own view.
Let me ask you this also, Mr. Doty, regarding the issue of
technology. I think technology has always had and will continue
to have a transformative impact on the financial statement
audit. And I am eager to see the SEC implement Inline XBRL,
eXtensible Business Reporting Language, and I have opposed
efforts from certains of my colleagues to reduce XBRL coverage.
When it comes to audits, we know that the ability to
analyze vast amounts of data, access it remotely, and create
digital audit trail will change the audit forever. How will
technology impact the accounting profession and the PCAOB?
Mr. Doty. We are keenly aware, Congressman, of the need to
maintain our cutting edge and our investment in innovation. It
will be incumbent on us to understand the tools of technology
that are being used by audit firms to appreciate the extent to
which they can meaningfully contribute to a better audit. That
is a project the firms have now that will go on for a long
time, and it will be important for us to recognize that, to
adjust to it, to be able to evaluate how good their tools are
and how competent they are at using their tools. That will be a
technical challenge for us. We will have to maintain investment
in technical skills and the data ourselves to do that.
Mr. Ellison. Well, I have run out of time, so allow me to
thank the panel.
And I yield back.
Mr. Poliquin. Thank you, Mr. Ellison.
I recognize myself for 5 minutes.
Ms. Kane, you run the Municipal Securities area at the SEC?
Ms. Kane. That is correct. I am the director of the Office
of Municipal Securities.
Mr. Poliquin. Yes, ma'am. When I was the State treasurer up
in Maine, I came from the private sector and we were trying to
do things quite differently to save as much money as we could
for our taxpayers. And one of the things that was a big
surprise to me when I arrived, Ms. Kane, was the history in our
State of using negotiated bond sales instead of competitive
bond sales. And I always found this quite unusual, especially
when we were dealing with a plain vanilla offering, a general
obligation offering from State treasury, in that when the
legislature would come to us and say, you know, we need to
build a new road or we need to build a new bridge, or what have
you, or when some of our smaller rural communities needed to
pool their offerings and raise money that way.
And I know if the credit is a little bit unusual and
negotiated sale makes a lot of sense, but what we used to do,
Ms. Kane, for the first time, is introduce a competitive
process and such that we would get all the information to all
of the investment houses out and say, we are going to market on
Tuesday at 10:30. We would push the button. We would sit behind
the computer and we would watch the bids come in. And I
remember when we would get a dozen or so many or so bids, we
would drive down the interest rates in a very transparent way,
no hidden cost. And we saved the taxpayers a boatload of money.
Now, my question to you is, in the work that you do over at
the SEC, are States required--or municipalities required to
employ the services of independent advisors with respect to
this function? Because we did. We had a very small staff at
State treasury and we didn't have the depth of personnel that
we needed to to get this done. But what I found, it was very
refreshing when you had an independent set of eyes and set of
experience that could advise the folks that were borrowing the
money for the taxpayers of Maine to build the roads and
bridges. It was helpful to say, you know, Mr. Treasurer, I
think we can do very well with a competitive bond sale here
instead of a negotiated one here and not succumb to the
pressures of Wall Street.
What are your thoughts about that?
Ms. Kane. Well, the decision to incur debt at the State and
local level is a State and local government decision. The
decision to hire market professionals is a State and local
government decision. The SEC does have authority over municipal
securities brokers and dealers and municipal advisors.
Certainly, the municipal advisor registration rules bring a new
class of SEC registrant into SEC registration exams and
enforcement.
One of the benefits, as you pointed out, of hiring a
municipal advisor by a municipal entity is that that municipal
advisor owes a fiduciary duty to the municipal entity client
and can help the municipal entity client evaluate the advice
coming in from other transaction participants, can help
evaluate conflicts of interest. It is someone standing next to
the municipal entity advising them, acting in their best
interests.
Mr. Poliquin. I always found in our work at Maine State
Treasury, Ms. Kane, that in a negotiated sale, there tended to
be a lot of hidden fees, you know, the cost of issuance, where
a lot of things could be in there that wouldn't be clear to the
taxpayers who are eventually paying for all this. And have you
found in your work at the SEC that there have been surprises or
abuses in that regard with respect to that type of sale?
Ms. Kane. With respect to negotiated versus competitive?
Mr. Poliquin. Yes, in the cost of issuance.
Ms. Kane. I would have to take that back to our Office of
Compliance Inspections and Examinations, but I am happy to get
back to you on that.
Mr. Poliquin. Would you mind? And we look forward to that,
and I thank you very much.
Mr. Golden, I know that in the work that you folks do you
try to always assess the cost and the benefit with respect to
dealing with the space that you are in. Do you folks have a
very rigorous process, not only to look at specific companies,
but also in aggregate, look at whole different sectors of the
economy when it comes to assessing the cost and the benefit of
your regulations?
Mr. Golden. We do have a very robust and transparent due
process. All of our board meetings are in public and all of our
discussions are communicated in a basis for conclusion. We do
meet with a number of companies. For example, in our recently
completed project on expected credit losses, we met with over
200 users and over 100 different companies and received over
3,000 comment letters. What we were trying to do is to
understand what is the cost that the company will incur upon
transition and what is the cost it will incur over time. We
then compared that to the benefit that the investor will
receive with respect to more information.
Mr. Poliquin. Great. Thank you very much. My time has
expired.
I don't believe there are any more individuals here looking
to ask questions of our witnesses today.
I would like to thank all the witnesses today for your
testimony.
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.
And without objection, this hearing is adjourned.
[Whereupon, at 3:36 p.m., the hearing was adjourned.]
A P P E N D I X
September 22, 2016
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