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37–560 PDF 2007

REVIEW OF INVESTOR PROTECTION

AND MARKET OVERSIGHT WITH THE

FIVE COMMISSIONERS OF THE

SECURITIES AND EXCHANGE COMMISSION

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JUNE 26, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–46

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

June 26, 2007 .................................................................................................... 1

Appendix: 

June 26, 2007 .................................................................................................... 67

WITNESSES 

TUESDAY, JUNE 26, 2007

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

Commission ........................................................................................................... 10

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 68

U.S. Securities and Exchange Commission .................................................... 70

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

U.S. Securities and Exchange Commission: 

Written responses to questions from Chairman Frank ................................. 81

Written responses to questions from Hon. Paul E. Kanjorski ...................... 91

Written responses to questions from Hon. Al Green ..................................... 101

Written responses to questions from Hon. Ed Royce .................................... 109

Written responses to questions from Hon. Walter Jones .............................. 111

Written responses to questions from Hon. Scott Garrett .............................. 114

Written responses to questions from Hon. Kenny Marchant ........................ 121

Joint response by Commissioners Roel C. Campos and Annette L. Nazareth to questions from Hon. Al Green ......................................................... 130

(1)

REVIEW OF INVESTOR PROTECTION 

AND MARKET OVERSIGHT WITH THE 

FIVE COMMISSIONERS OF THE 

SECURITIES AND EXCHANGE COMMISSION 

Tuesday, June 26, 2007

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 2:04 p.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Present: Representatives Frank, Kanjorski, Maloney, Velazquez, 

Watt, Sherman, Meeks, Moore of Kansas, Capuano, Hinojosa, Clay, 

McCarthy, Baca, Miller of North Carolina, Scott, Green, Cleaver, 

Bean, Davis of Tennessee, Hodes, Klein, Mahoney, Perlmutter, 

Murphy; Bachus, Baker, Pryce, Castle, Royce, Biggert, Shays, 

Feeney, Hensarling, Garrett, Neugebauer, Price, Campbell, 

Bachmann, Roskam, and Marchant. 

The CHAIRMAN. This hearing of the Committee on Financial 

Services will come to order. I am very pleased, along with the ranking member and the other members of the committee, to welcome 

all five Commissioners of the United States Securities and Exchange Commission. 

For some reason, some people seem to think it was very unusual 

for us to listen to all five Commissioners. I want to say at the beginning, someone asked me why I was asking all five Commissioners to come now, rather than over the past 10 or 20 years, and 

the answer is very simple: I wasn’t the chairman over the past 10 

or 20 years. 

I say that because the fact that we have asked all five Commissioners to appear before us is not a sign that there is great turmoil 

or trouble or anger. There are five Commissioners. They are all 

presidentially appointed and Senate confirmed. They all have decision-making power, and frankly I would have thought the relevant 

question would be how come you never talk to all five Commissioners, and this is a very important opportunity for us to do that. 

But I really just want to dispel the notion that the fact that we 

have asked all five Commissioners means that somebody has a 

sense of impending doom. That is not the case. 

We have a series of very important issues that are being dealt 

with by the Commission. And let me say first, on the subject of it 

being all five Commissioners, one or two of the issues we will get 

into today we will be asking—I will be asking what the progress 

2

is. And I understand that trying to get a consensus among the 

Commission is a factor. That’s a legitimate one. 

The SEC is, to a very great extent, a law enforcement agency. 

And no law enforcement in a free society will succeed if there is 

not a significant degree of acceptance of the fairness of the rules 

by those against whom they are being enforced. We are not ever 

going to create in this country a core of enforcers sufficient to 

watch everybody all the time: We don’t want it; we can’t afford it; 

and it would not be the society we want to live in. 

That means, as I said, there has to be some degree of a buy-in 

by those who have to abide by the rules. Three to two votes of a 

Commission enforcing rules undercuts our ability to do that over 

time. If you think a rule is a bad idea and it is voted by all five 

members of the Commission, it seems to me you are likelier to acclimate yourself to that than if it’s three to two and you just wait 

for somebody to die, get appointed to something else, or get bored 

and go off and do something else. 

So I want to acknowledge that it is a relevant factor to try to get 

the kind of vote that will help us have these things enforced. On 

the other hand you do come to a point where decisions have to be 

made, and I guess I would say if there were never any three-two 

decisions, I would think that there was a problem, and that we 

were shying away from dealing with some tough issues, but if there 

were a lot of three-two decisions, that would not be a good sign either. 

And in my judgment, the Commission, as currently constituted, 

has hit the right kind of balance. I do think that we need to press 

forward in a couple of areas, but I do understand, as I said, the 

importance of the consensus. 

Secondly, I want to begin by talking about a couple of things for 

which I think the Commission deserves a great deal of credit and 

for which it has not gotten enough credit, not surprising in today’s 

world. First is the revisions that you have put forward, along with 

the PCAOB in Sarbanes-Oxley. 

Now I can speak about Sarbanes-Oxley without any kind of pride 

of authorship or defensiveness. While I was on the committee when 

it was adopted, I was not the ranking member. It was not one of 

the things in which I was very active. I think it was a very important piece of legislation, and I think it has done a great deal of 

good. 

There is a problem in our society and in our controversies in 

which when we do something good, we tend to pocket the benefit, 

ignore it, and then focus on those things with which people aren’t 

fully satisfied. I think anyone who compares what’s gone on in the 

markets, the attitude towards investing today, compared to what 

we had during the height of the Enron and MCI situations, will understand the importance of Sarbanes-Oxley. 

I was pleased recently to get a letter from the Chamber of Commerce saying that the quality and performance of boards of directors has significantly improved in substantial part because of Sarbanes-Oxley. Now they sent that letter in the context of telling me 

we didn’t have to do anything about executive compensation, but 

the fact is that they still gave full credit to Sarbanes-Oxley. 

3

There was one area where I think there was a consensus, that 

we needed to make some changes. In implementing section 404 it 

does appear that we went a little too far, those who did it. That’s 

not surprising; this is a new enterprise and people don’t always get 

things perfectly the first time. 

I believe that the Commission along with the PCAOB in a collaborative fashion has responded appropriately and I am struck by 

a number of people who still ask me, well, when are you going to 

make these changes in Sarbanes-Oxley when in fact they are well 

underway. 

Now there may be some who would like to go further. I do note 

that Secretary Paulson, when he testified before us last week, disagreed with the notion that legislative change was necessary. Secretary Paulson strongly asserted his view that he thought that 

what the Commission was doing now was appropriate and in fact 

responded to the need, and I’d be interested in the Commission’s 

view. 

Secondly, and the Commission’s statement does refer to one of 

the great issues we will be dealing with soon, which is the question 

of harmonization, cooperation, internationally—we have had, for all 

of our time, securities regulation that was nationally based. Increasingly we have securities transactions that are not nationally 

based, that are transnational and trying to make that work is important. 

The policy that the Commission has embarked on, mutual recognition, for instance, in the accounting area, I think is a very appropriate response. And it does look to me like we’re making real 

progress there. The concept of mutual recognition obviously has application elsewhere, so those are two areas where I am very supportive of what the Commission is doing. 

There were a couple of other areas I will get to in my questions. 

I’m just going to touch on them now so I can get to the other statements. One is, that I have had increasing concerns expressed to me 

about the problem of naked short selling. And some of our former 

colleagues who have been engaged in this work have talked to me 

about it, and it does appear to me to violate some fundamental 

rules. I have spoken to the Chairman about it and I hope that we 

can get some conversation about that. 

And the other area, the one area where I would hope we would 

pretty soon be able to get some resolution, is the question of proxy 

access. It does seem to me that this is an area where there’s a lot 

to be said for getting a decision. Obviously I hope it is a decision 

that will improve proxy access. I continue to be bemused by the 

fear of shareholders that exists among some in the corporate world. 

I don’t know what phobia that will be. I guess we should have 

a contest: what phobia is it when you are afraid of your own shareholders? But it does seem to me that fear is excessive, and I hope 

we can touch on that. 

With that, I will recognize the gentleman from Alabama. 

Mr. BACHUS. I thank the chairman. And Chairman Cox and the 

Commission, I want to welcome you on behalf of the minority on 

the committee. I think you’ve done an excellent job. I think the 

Commission has worked well together. 

4

The subcommittee ranking member Ms. Pryce and I are going to 

yield our time to six members for opening statements, but please 

know that she and I both think you’ve done an outstanding job and 

we compliment you. 

At this time, I will yield 2 minutes to the gentleman from Louisiana. 

Mr. BAKER. I thank the ranking member for yielding time. I 

think it’s important in this brief period to recognize the problem 

currently engaged in our U.S. securities markets, which is an overriding prevalence of securities class action litigation. The result is 

that Fortune 500 companies in this country pay 6 times as much 

in insurance as they do in Europe. 

But the cost is not just to companies; it is to investors as well. 

Typical settlements to avert expensive litigation result in awards 

averaging from 2.3 to 2.9 percent per loss claimant, rarely giving 

defrauded investors any real financial return. And it is the smallest investor which is most disproportionately adversely impacted, 

having the most limited resources to pursue relief and also having 

the least diversification in portfolio, resulting in concentration of 

loss risk. 

The 2007 Bloomberg/Schumer report states the prevalence of 

meritless securities lawsuits and settlements in the United States 

has driven up the apparent and actual costs of business and driven 

away potential investors. The Chairman of the President’s council 

of economic advisors states that the size and frequency of damage 

settlements and securities class action suits sets the United States 

apart from other major financial centers and is an important factor 

in the declining competitive position of our markets. 

So in an arena where it is clear that relief is obvious and necessary to stem frivolous suits in a period when global markets are 

gathering momentum, the announced plan to pursue recovery is 

the now new scheme liability approach. This seems incredibly out 

of touch with market function and necessity. This clear and present 

danger, the current proposed remedy, flies under the flag of this 

creative scheme liability assignment. This would extend the actionable causes for plantiffs’ financial claims to parties which did not 

make fraudulent representation to the defrauded investors. 

The facts of the Stoneridge case would, based on precedent of all 

other Federal appeals holdings, be set aside without merit. So it 

should be, save for a single appellate court holding. Dramatic expansion of causes of action will have an untenable market consequence which will expand beyond all reason filings without merit 

already facing significant adverse market conditions, would make 

our markets clearly less competitive and deter outside investment 

in the United States, and result without doubt in a debilitated U.S. 

marketplace. 

I cannot conceive in a world where anyone who has a claim ready 

to be filed there is more than one firm ready to fabricate the cause 

of action, go to court and for a limited fee pursue those with deep 

pockets for whatever reason that might yield a claim through the 

class attorney. 

It strikes me as odd that where our class action system results 

in an average payment of pennies on the dollar to the claimant and 

yet the trial bar is making a very substantial income we continue 

5

to focus on expanding the reasons and opportunities for people to 

file such frivolous suit. 

I yield back. 

The CHAIRMAN. The gentleman from Pennsylvania, the chairman 

of the Subcommittee on Capital Markets. 

Mr. KANJORSKI. Thank you, Mr. Chairman. I just wanted to congratulate you for assembling this tremendous panel that we are 

going to get an opportunity to hear from. So with no further ado, 

and intending to listen to the panel, I thank you for the calling of 

this hearing. 

The CHAIRMAN. The gentleman from Delaware is recognized for 

2 minutes. 

Mr. CASTLE. Thank you, Chairman Frank, and Ranking Member 

Bachus, for holding this hearing before the Financial Services Committee today, and I thank all of the Commissioners for being here 

today. 

I look forward to hearing from each of you regarding the Commission’s investor protection initiatives and efforts to maintain the 

virtue of our markets. I commend the chairman and the Commissioners for their hard work over the years and realize that creating 

the rules and regulations that govern our Nation’s securities industry is a difficult and enduring process. 

With that being said, I have some ongoing concerns, particularly 

regarding pension fund investments in hedge funds, stock option 

manipulation, and 12b-1 fees, which I would encourage the Commission to examine. 

The New York Federal Reserve president Timothy Geithner has 

repeatedly warned that hedge funds pose the largest risk since the 

long-term capital management crisis and Treasury officials have 

cautioned that a hedge fund collapse has the potential to affect the 

overall financial markets. While I understand that there are risks 

associated with investments, I want to make sure we are not ignoring these warnings and perhaps end up with an overreaction from 

Congress in the event of another LTCM. 

Increased disclosure of the industry, which has grown more than 

400 percent since 1999, is necessary and will further enhance market discipline and investor confidence. I also have concerns that 

certain manipulation of stock options may still persist, but I was 

pleased to hear that the Commission has made their investigations 

of backdating options a top priority. 

I have been monitoring this issue, especially with regards to the 

timing of stock options grants to ensure the new disclosure rules 

are effectively detecting further manipulation. These practices are 

a violation of insider trading rules and place shareholders at a serious disadvantage. 

Lastly, the 12b-1 rule, which was issued in the 1980’s to assist 

struggling funds in getting their materials out to investors needs 

to be fully reformed. Funds are not struggling today with the same 

advertising dilemmas as they were in the 1980’s and fees are now 

being used to compensate broker-dealers. The use of the 12b-1 fee 

is unclear to investors and if the intent of the fee has evolved from 

the 1980 intent of advertising a distribution to now compensate 

brokers it should be reevaluated and dealt with as such. 

6

Reform of this rule is long overdue and I strongly encourage the 

Commission to make this fee more transparent so that investors 

are not being misled by certain mutual fund fees. 

Mr. Chairman, I thank you for holding this hearing today, I look 

forward to hearing from the witnesses, and I yield back the balance 

of my time. 

The CHAIRMAN. The gentleman from New Hampshire is recognized for 4 minutes. 

Mr. HODES. Thank you, Chairman Frank, for holding this important hearing on the SEC’s role in investor protection and market 

oversight, and I welcome the panel, including the Chairman and 

the distinguished Commissioners. 

According to the SEC’s Web site, the mission of the SEC is to 

protect investors, to maintain fair, orderly, and efficient markets, 

and to facilitate capital formation. I have a number of significant 

concerns about the structure of the recent initial public offering or 

IPO of the Blackstone Group LP. This offering is essentially not 

regulated by the SEC. 

According to the Investment Company Act of 1940, in a recent 

court decision, I believe that it should be. Under the Investment 

Company Act of 1940, if more than 40 percent of a company’s assets are ‘‘investment securities,’’ the company must register as an 

investment company before offering shares to the general public. 

When Blackstone was only dealing with millionaires who invest 

in hedge funds they weren’t subject to SEC regulation, however, in 

my judgment, the day Blackstone issued an IPO and Main Street 

investors were able to purchase stock in their company they should 

have registered with the SEC under the 1940 Act like other public 

investment companies. 

Once a company goes public it has a fiduciary duty to its investors. This is one of the largest IPOs in recent years and it is unacceptable to this Congressman that the process has not been more 

transparent for investors. 

I believe the SEC has an obligation to ensure that the 1940 Act 

is not violated and that investors are protected. I am concerned 

that this offering sets a precedent for other hedge funds, private 

equity funds, to go public without complying with applicable law. 

I look forward to hearing from the panel on compliance with the 

Investment Company Act, fiduciary duty, and national security implications, which I think are inherent in this IPO because China 

has bought a major stake in this company. 

Thank you, and I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman from California. 

Mr. ROYCE. Chairman Frank, I thank you for holding this hearing. I thank you also for having all five SEC Commissioners here, 

and I just wanted to personally welcome my good friend and former 

colleague Chairman Cox, who represented a neighboring district in 

Orange County prior to his appointment as head of the Securities 

and Exchange Commission, and I believe, Mr. Chairman, who attended law school with you as well. 

And there has been a lot of attention recently on flight of capital 

out of the United States into London, into Hong Kong, and into 

Dubai. And the fact that only 2 of the top 20 IPOs that went public 

in the United States last year—what’s that, that’s about 10 percent 

7

compared to 12 of 20 in 2001—reflects an aversion of our public 

markets by corporations around the world. That’s something we 

should address today. 

The three major studies on U.S. competitiveness released in the 

last year focus attention on two great hindrances afflicting our public companies. The first is the regulatory environment within the 

United States, most notably, Sarbanes-Oxley, and the burdensome 

requirements it places on such companies. We had this remark 

from the former chairman of the Federal Reserve, Alan Greenspan. 

He said, ‘‘most of Sarbanes-Oxley is a cost creator with no benefit 

I’m aware of; regulatory and statutory changes need to be made as 

well if we’re going to move forward; I hope it happens before the 

whole financial system walks off to London.’’ 

And then second, the bipartisan Bloomberg/Schumer Report says 

that the prevalence of meritless securities lawsuits and settlements 

in the United States has driven up the apparent and actual cost 

of business and driven away potential investors. So these studies 

show that when companies are allocating millions of dollars funding overly burdensome reporting requirements and protecting 

against frivolous lawsuits they respond by becoming more risk 

averse or by looking at alterative markets at home or abroad. 

If we are to remain the market of choice for the world’s public 

companies, we must implement legislative and regulatory changes 

to properly address the problems facing these companies as recommended by former chairman Alan Greenspan. I look forward to 

hearing from the Commission, from the SEC, on these and other 

important matters this afternoon. 

Thank you again, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. I, too, want to add 

my voice to welcome our Commissioners, especially our former colleague Chairman Chris Cox. I do believe, although there are many 

important matters that will be discussed in today’s hearing, clearly 

few will be as important as this expansion of a private right of action for secondary liability. 

Many call it the great new consumer protection. I fear that nothing could be further from the truth. Recently there was an editorial 

in the Wall Street Journal, the June 9th edition, that I would like 

to quote from that I think encapsulates this challenge well: ‘‘What 

the SEC should be explaining is the damage that secondary liability will do to investors. Tort lawyers want to establish a breathtaking new legal standard, to wit, that any business partner or 

supplier,’’ a bank, say, or a law firm, ‘‘of a corporate offender either 

should have known of the fraud or was reckless in not knowing and 

thus is guilty of aiding and abetting fraud. Under such a standard, 

this newspaper could be sued for running an advertisement in 

which a company misreports its earnings.’’ 

Companies should be held liable for the culpability of their actions not their proximity to a fraudster much less the size of their 

bank account, and I fear, unfortunately, this has less to do with 

consumer protection and more about expanding a target rich environment for the tort bar. 

We’ve had many, many hearings about capital fleeing our country, avoiding our country, companies going private. And as we’ve 

8

heard from the gentleman from Louisiana and the gentleman from 

California, much of it has to do with an environment in which we 

find many frivolous securities class action lawsuits. 

And even when these lawsuits are justified, we have to remember that more often than not it’s one set of innocent investors having to pay off another set of innocent investors. So we should look 

very, very carefully as we approach this area. 

With that, I yield back the balance of my time. 

The CHAIRMAN. Next, the gentleman from New Jersey, Mr. Garrett. 

Mr. GARRETT. Thank you, Mr. Chairman. Thank you, Mr. Cox, 

and all the members of the Commission. Today’s hearing is stated 

to be a review of investor protection and market oversight. I would 

like to just focus here on something that’s equally as important as 

that, and that’s America global economic competitiveness. 

As Mr. Royce has already indicated, Secretary Paulson and others have testified about the two biggest problems that we’re facing 

in our Nation’s global competitiveness: excess litigation and regulation. But there are two recent decisions by this Commission that 

greatly concern me indicating that we’re going in the wrong direction on both of these fronts. 

Recently, there was a case of Stoneridge versus Scientific-Atlanta, where the Commission recommended that the solicitor general file a brief in support of the trial lawyers that would expand 

legal liability further and add to the heavy legal burden that’s already being borne by our public companies. 

A spokesman for the Department of Treasury noted in response 

that, ‘‘Treasury believes uncertainty related to primary liability for 

third parties could adversely affect the competitiveness of American financial markets by posing unknown risks for entities that do 

a broad range of business with public companies.’’ 

So if excess litigation is harmful, I don’t see how expanding legal 

liability to third parties in instances like this will help to lessen 

that burden and encourage more listings on our markets. 

The other decision by the Commission recently that has me concerned and troubled is the decision not to extend the exemption for 

small U.S. companies in complying with section 404; U.S. companies, small ones, will bear a disproportionately large share of the 

Sarbanes-Oxley burden. 

This exemption, as you know, was extended last year through 

the end of 2007 so that the SEC and the PCOB could finalize their 

revised guidance to management and new standards by the auditors. And so while I commend the SEC for trying to improve these 

recommendations and implementations it remains unclear whether 

these revisions make it possible for small businesses to comply 

without still suffering severe economic consequences. 

Furthermore, it is unfair I think to make our small businesses 

comply with these new regs that are just still now being finalized 

and adopted halfway through this year. So in light of that, 2 weeks 

ago I offered a bipartisan, small business SOX compliance extension act that would extend it for another year, the current exemption, and I would appreciate your comments on that in light of the 

fact that NASDAQ says as a percentage of revenue basis, it’s 11 

times greater for small businesses to have to comply. 

9

And with that, Mr. Chairman, I yield back. 

The CHAIRMAN. The gentleman from Georgia. 

Mr. PRICE. Thank you, Mr. Chairman. I want to thank you and 

Ranking Member Bachus for having this hearing. I also want to 

thank Mr. Bachus for graciously yielding his time to allow these 

statements. 

The two biggest problems facing our capital markets today are 

excessive securities litigation and overly burdensome regulation. 

Treasury Secretary Henry Paulson has called securities litigation 

the Achilles heel of our economy, threatening the ability of American financial markets to compete in today’s increasingly international marketplace. In essence, we’re trying to compete with one 

hand tied behind our back, while allowing our competitors to pass 

us by because of our failure to adapt. 

We’re all familiar with the Stoneridge case. Not only is it an 

over-the-top attempt by trial lawyers to extend the liability to third 

parties uninvolved in fraud but it should make shareholders and 

all Americans cringe due to the uncertainty and cost it would add 

to our system. Any verdict or settlement against a company ends 

up coming out of the pockets of shareholders and of the American 

people. 

It’s been said that Congress does two things well: overreact and 

nothing. And with the benefit of hindsight we can see that Congress dramatically overreacted with the Sarbanes-Oxley legislation. 

Our companies in our capital markets are now paying the price, 

which means that Americans are paying the price. 

Since its passage, compliance costs for companies doing business 

in the United States have grown far beyond anything even the 

harshest critique anticipated. We must never limit our ability to 

detect corporate fraud and protect investors but congressional action is often a blunt instrument and the unintended consequences 

of this legislation have forced both corporate leaders and auditors 

to focus far too much of their time on compliance minutiae, diminishing the opportunities left for innovative strategies and growth 

due to their fear of facing harsh personal financial penalties. Reexamination dictates that reform is needed to ensure our capital markets remain competitive. 

Let me briefly touch on one topic on which I intend to submit 

questions for the record. As exchanges have become for-profit entities, their for-profit status could create new conflicts of interest. I 

don’t believe that the exchanges should have been prevented from 

seeking a change in their status or that fee increases are inherently inappropriate but the Commission must ensure its due diligence to ensure fairness in the process. 

I thank Chairman Cox and the panel for coming and I look forward to the question and answer time. And I thank the chairman. 

The CHAIRMAN. All requests and time having been accommodated, we will now begin the testimony, and as I understand it, we 

have a joint statement that was submitted by all five Commissioners which will go into the record. 

My understanding is that the Chairman will be making an oral 

presentation, as well as a visual one. After that, we will go into the 

normal questioning, and questions may obviously be addressed to 

any of the five Commissioners. 

10

I would urge members—we have obviously a lot of interest and 

it’s a big committee—I will try not to cut people off, but I will advise members that the longer the preface, the shorter the answer 

is going to be that we can fit in, so members will be able to submit 

statements but I would urge members—let me just say at this 

point, in the interest of time, I’m taking on more time now, let me, 

on behalf of all the members, thank you all for coming. 

[Laughter] 

The CHAIRMAN. That may not sound like much, but if 37 people 

don’t say, ‘‘I thank you very, very much for coming,’’ we’ll save a 

couple of minutes. So why don’t you get right to your questions. 

They’re nice people. They don’t expect you to be excessively polite. 

Mr. Cox, please go ahead. 

STATEMENT OF CHRISTOPHER COX, CHAIRMAN, UNITED 

STATES SECURITIES AND EXCHANGE COMMISSION 

Mr. COX. Thank you, Mr. Chairman, Ranking Member Bachus, 

and members of the committee. I will say just once at the outset, 

thank you all very much for inviting us. We are all five of us very 

pleased to be here. As a former member of this committee, I have 

enormous respect for each of you and for the work that the committee does. We are all of us, all five Commissioners of the Securities and Exchange Commission, pleased to be here today to discuss 

the important work that the SEC is doing to protect investors, to 

strengthen our markets, and to promote capital formation. 

The initiatives that we have underway at the Commission all 

have a common theme. They are aimed at benefiting investors who 

depend on healthy and well-functioning markets. This is the SEC’s 

traditional responsibility. Back in Joseph Kennedy’s day, our first 

Chairman, he was amazed that one in every ten Americans owned 

stocks. But today, over half of all American households own securities. In fact, when one considers the staggering growth in Americans’ participation in markets, the enormity of the SEC’s task 

today becomes apparent. 

About 3,600 staff at the SEC are responsible for overseeing over 

10,000 publicly traded companies; over 10,000 investment advisers 

who manage over $37 trillion in assets; nearly 1,000 fund complexes; 6,000 broker-dealers with 172,000 branches; and the $44 

trillion worth of trading that’s conducted each year on America’s 

stock and options exchanges. 

Perhaps the most striking development underway in our markets 

is that they are becoming increasingly interconnected with other 

markets around the world at an accelerating pace. This is challenging the United States and securities regulators around the 

world to collaborate more closely than ever before. Over the past 

year, a number of reports have been published which advised the 

SEC and the Congress on how to deal with our increasingly global 

capital markets. They’ve offered the Commission and policymakers 

in the Congress and the Executive Branch many recommendations, 

and undoubtedly more such recommendations are on the way. 

While each of us may not agree with all of the recommendations 

and conclusions of these reports, we take seriously the detailed 

study that’s gone into each of them, as we do the constant and varVerDate 0ct 09 2002 13:07 Nov 06, 2007 Jkt 037560 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\37560T~1.002 HFIN PsN: TERRIE
11

ied advice that’s offered to the Commission from a host of financial 

services providers and consumers. 

Mr. Chairman, many of the issues that we face are sometimes 

trivialized as disputes between business and investors. The truth 

is, only if the business succeeds will its investors prosper. That’s 

why the SEC’s first Chairman described the SEC’s role and our relationship to business as a partnership. But anyone who seeks to 

drive a wedge between the interests of the business and the interest of investors in that business will find themselves confronted by 

a relentless and powerful adversary in the Securities and Exchange 

Commission. 

Today, the SEC’s Enforcement Division is substantially larger 

than it was 5 years ago. Our staff are engaged in combating a full 

range of abuses. We’ve created special working groups within our 

Enforcement Division to deal with emerging risks, such as hedge 

fund insider trading, stock options backdating, and micro cap 

fraud. Earlier this year, we filed the largest insider trading case 

against Wall Street professionals since the days of Ivan Boesky and 

Dennis Levine involving major Wall Street firms as well as hedge 

funds. 

We’ve also devoted special attention to combating internet fraud, 

such as e-mails that tell investors, ‘‘This stock’s Ready to Explode.’’ 

And we’ll have well over 100 investigations of backdating underway with the results of those cases coming forward very soon. 

Seventeen years ago, in 1990, this Congress gave the SEC the 

power to levy penalties against individuals and against companies. 

But throughout the 1990’s, that power was almost never used to 

sanction companies. It was only in 2002 that the Commission 

began to use its authority with any frequency. After extensive 

study within the Commission of the legislative language, the history, and the purpose of the Remedies Act, the Commissioners in 

early 2006 voted unanimously to publish a set of principals for a 

penalties policy and practice going forward. 

Already this year, the Commission has imposed nearly as many 

penalties against companies as in any full year in the Commission’s history. And the second highest SEC penalty ever imposed 

on a company, $400 million, came after the Commission unanimously approved its penalty guidelines. The Commission is continuing to work with our staff across the country to ensure, that 

as new cases are initiated and resolved, the guidelines are being 

implemented as intended. 

To that end, the staff are beginning to present their recommendations for penalties to the Commission before negotiating 

penalties with the issuer. When we recover a penalty against an 

issuer or an individual, our efforts don’t end at the courthouse 

door. We’re increasingly using the new authority that you gave us 

in the Sarbanes-Oxley Act to use ‘‘fair funds’’ to ensure that those 

dollars are returned to investors as quickly as possible. 

Since 2005, we have returned over $1 billion to injured investors 

through fair funds and will be announcing several additional large 

disbursements shortly. All of these enforcement initiatives undergird the integrity of the U.S. capital markets and the confidence 

that investors can place in them. Beyond the SEC’s law enforceVerDate 0ct 09 2002 13:07 Nov 06, 2007 Jkt 037560 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\37560T~1.002 HFIN PsN: TERRIE
12

ment function, we are pursuing a number of important regulatory 

initiatives as well that are designed to put investors first. 

With over 10,000 baby boomers each day turning 60, an estimated 75 million over the next 20 years, nowhere is there greater 

need for the SEC’s attention than fighting fraud against senior citizens. Very soon, the vast majority of our Nation’s net worth will 

be in the hands of our Nation’s seniors. Following the Willie Sutton 

principle, scam artists will swarm like locusts over this increasingly vulnerable population because that’s where the money is. 

We’re attacking this problem from all angles, from aggressive enforcement efforts to targeted examinations and rules and investor 

education. 

Both the SEC and the Congress have also identified the men and 

women of our military as an at-risk group who are vulnerable to 

unscrupulous sales practices for financial and investment products. 

We’ve directed our enforcement, our examinations, and our investor 

education resources to protecting against these abuses, and we’ve 

initiated a coordinated approach with other regulators. And we 

have worked with you in the Congress to enact the Military Personnel Financial Services Protection Act last year to outlaw the 

sale of potentially abusive insurance and investment products to 

military personnel. 

Yet another of our important initiatives to benefit individual investors is our drive to improve disclosure for mutual fund and 

401(k) investors; 47 million Americans now have 401(k) accounts 

through their employers. Together with defined contribution plans, 

these accounts now represent over $3 trillion in assets. But the disclosure that the individual investor receives about what’s in the 

401(k) is typically inadequate. It offers nothing, in many cases, 

more than a one-page chart that contains extremely limited information. What’s needed is clearly presented information that makes 

it far easier for busy Americans to understand the expenses that 

they’re being charged in connection with their investments and the 

returns that they’re actually getting. This sort of simplified disclosure should be readily available, and so we’re hard at work on a 

simplified, plain English disclosure for mutual funds that gives investors what they need to know in a form they can use it. 

We’re also busy on our own regulations concerning mutual fund 

fees and expenses, and the disclosure of these costs to investors, including the $12 billion that investors pay each year in the form of 

12b-1 fees. With the same objectives in mind, the SEC has intensified our focus on soft dollars, the moneys that brokers receive from 

mutual funds to pay for things other than executing brokerage 

transactions. Recently, the Commission acted unanimously to publish interpretive guidance that clarifies that money managers may 

only use soft dollars to pay for eligible brokerage and research 

services, and not for such extraneous expenses as office rent, carpeting, and even entertainment and travel expenses. 

When it comes to giving ordinary investors the information that 

they need in a timely, useful way, nothing holds more promise than 

interactive data. It simply takes too much time and effort for investors to separately look up each SEC filing for every single company 

or fund that they own or might be interested in. Interactive data 

is changing that. It will allow any investor to quickly find, for exVerDate 0ct 09 2002 13:07 Nov 06, 2007 Jkt 037560 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\37560T~1.002 HFIN PsN: TERRIE
13

ample, the mutual fund with the lowest expense ratio, or the companies within an industry that have the highest net income, or the 

overall trend in a particular company’s earnings. 

To ensure that shareholders have the opportunity to exploit this 

new informational power and SEC filings such as proxy statements, the Commission is updating our rules to permit the use of 

the Internet to improve communications between a company and 

its shareholders. For example, our recently adopted E-proxy rules 

will allow shareholders to choose whether to access their proxy materials in paper or electronically. 

And, in connection with the Commission’s review of our proxy 

rules governing shareholder proposals, we’ve just completed a series of roundtables that considered among other rules, the future 

role of technology in improving communications not only between 

shareholders and their company, but among shareholders themselves. As we prepare to put the new proxy rules in place in time 

for the next proxy season, to address the Court’s decision in 

AFSCME against AIG, the Commission is also considering ways to 

make it easier for shareholders to interact online by removing any 

obstacles in the current rules. As a result of a Commission action 

just last week, interactive data will soon allow mutual fund owners 

to make instant comparisons of the ‘‘risk/return summary’’ provided by each fund and will soon showcase the potential of interactive data to help investors in yet another area, the disclosure of 

executive compensation under the Commission’s new rules that 

have taken effect this year. 

These new executive compensation disclosures represent a sea 

change. Instead of bits and pieces of information scattered about 

the proxy statement, buried in footnotes, or not properly disclosed 

at all, there is now one number that clearly totals all compensation 

from all sources. And that one number is clearly broken down into 

its parts, so that anyone who wants to compute the totals differently can do so. That’s where interactive data comes in. Once all 

companies report their information this way using interactive data, 

it will be a cinch to reconfigure the numbers any way you please 

and to make instant comparisons across companies and across industries. 

To demonstrate the power of interactive data to make the investor’s job easier, the SEC will soon go live with a new tool on our 

Web site that will make the executive pay data interactive. Rather 

than tell you about it, let me offer you a brief example of how this 

will work. We can pull it up on the screen. Let me click into the 

first slide. This is what you will find on the SEC’s Web site. It is 

our new Executive Compensation disclosure tool that will include 

data for the S&P 500. Here’s how it works. Since we’re here in the 

Financial Services Committee, we hit the ‘‘Industry’’ drop-down 

arrow. Let’s look up banks and depositary institutions. Let’s say 

you are focused on the largest bank. So you’d look up companies 

with the largest public float and the greatest revenue. And then 

we’ll click ‘‘search’’ to bring up the companies that meet these criteria and scroll down to see the whole list. 

Now we’ve gone from hundreds of companies to a manageable list 

of three banks. For the sake of protecting the innocent, this demVerDate 0ct 09 2002 13:07 Nov 06, 2007 Jkt 037560 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\37560T~1.002 HFIN PsN: TERRIE
14

onstration uses notional data from fictitious banks, but rest assured that this works equally well with real ones. 

The CHAIRMAN. As opposed to fictitious data from banks. 

[Laughter] 

Mr. COX. With interactive data, Mr. Chairman, you could do it 

both ways. So now, let’s go to the CEOs who run these banks. Click 

on the scroll bar to see the whole table and using the ‘‘tools’’ on 

our site, we’ve now narrowed the field from more than 2,500 reporting executives to three CEOs at the three largest banks. Their 

summary compensation data is lined up next to each other for easy 

comparison. Before our new executive compensation rules and before interactive data, just coming up with this information would 

have required plowing through hundreds of documents, and it 

would have been a challenge for even the most proficient user of 

the SEC’s EDGAR system. 

But soon anyone is going to be able to find data like this in a 

matter of seconds. As you can see, the CEO compensation for the 

three banks that we chose ranges from about $26 million to about 

$39 million. But, using interactive data, we can generate much 

more useful information. For example, by clicking this button, ‘‘estimated potential value at grant date,’’ you can see various executives’ compensation using a different system to value their stock 

and their options. 

The first table showed the value of total compensation using 

stock and option grants valued according to U.S. generally accepted 

accounting principles. In other words, it showed the expenses of the 

executives’ compensation to the company. The second table shows 

compensation using an estimate of the potential value of the grants 

to the executives in the future. The range here, as you can see, is 

slightly larger than it was using GAAP, from about in this case $25 

million to $41 million. 

The beauty of interactive data is that investors can use whatever 

method they want. And, if you prefer, look at the ‘‘Graph’’ button. 

Scroll to see the full graph. Here’s the ‘‘grant date fair value method.’’ You can look at the data in graphical format using either 

method as well. Scroll over again, and use the ‘‘U.S. GAAP’’ button 

until you see that full table. 

You may have noticed that the CEO of two of the fictional companies appear to make slightly more if you use the GAAP expense 

for stock compensation to the company. And the CEO of the third 

made slightly more if you use the potential value to him of stock 

options in grants. From the real world executive compensation data 

that we’ve tagged so far, we found that 62 percent of the CEOs at 

the 100 largest companies show equal or higher compensation 

using the generally accepted accounting principles method. And 38 

percent showed higher compensation using the potential value 

method. 

This tells us that, for those companies, more often than not, the 

one number that the SEC requires them to report for total compensation is showing a higher figure than if we use the full grant 

date, fair value method. But obviously the new rules require that 

all of this information be reported so investors can customize the 

figure any way they like. And that’s what many people are already 

doing in a way that was never before possible. 

15

It’s important to recognize that interactive data is a truly international standard that revolutionizes the way that financial information is being exchanged across the planet. Technology is also 

driving the rapidly accelerating globalization of capital markets. 

We’re confronting the challenges and opportunities of more foreign 

listings here in the United States in a number of ways, not least 

of which is the growing prevalence of international financial reporting standards. 

The SEC now reviews IFRS financial statements from foreign 

issuers, right alongside U.S. GAAP financial statements from domestic issuers. And, just last week, the Commission proposed to 

eliminate the U.S. GAAP reconciliation report for foreign issuers. 

Another matter of great importance in the international realm is 

rationalizing the implementation of the Sarbanes-Oxley Act. Because, while many countries, including the United Kingdom, have 

adopted requirements similar to our internal controls assessment 

in Section 404 of the Sarbanes-Oxley Act, ours is the only country 

that requires an independent auditor’s report and attestation on 

those controls. And that fact has been a source of friction, not only 

with other markets, but also with other national regulators and 

international bodies. 

The Congress has charged the SEC with making 404 work effectively and efficiently. And we’re doing just that, recognizing that it 

will benefit not only U.S. investors, but also the competitiveness of 

U.S. companies and financial services providers throughout our 

global capital markets. The SEC has just finished over 2 years 

worth of work towards improving the implementation of 404 for all 

companies. Our new guidance will allow management to focus on 

what matters most, and a significantly improved 404 audit standard will enable auditors to deliver more cost effective services. 

To ensure that we actually gain the efficiencies in 404 compliance that we intend, the PCAOB’s inspection program will monitor 

whether audit firms and the SEC will monitor whether the 

PCAOBs are striving toward efficiency. No discussion of the work 

that the SEC is doing today would be complete without a reference 

to our role as the consolidated supervisor for the Nation’s largest 

investment banks. In our role as the functional regulator of United 

States broker-dealers, we have long been concerned that a brokerdealer could fail due to the insolvency of its holding company or an 

affiliate. Our CSE program enables the Commission to monitor 

these major securities firms, which is of growing importance given 

their possible systemic implications. 

Mr. Chairman, since we have the opportunity to appear before 

you today as a group, as a full Commission, let me offer a word in 

conclusion about the way we function as a body. This particular 

group of Commissioners has worked hard together to achieve our 

common goals of investor protection, efficient markets, and healthy 

capital formation. During my tenure as Chairman, 98 percent of 

the Commission’s decisions have been the result of unanimous 

votes. That’s not because the issues that we’ve just discussed are 

easy or because we always agree. Rather, it’s because the capital 

markets of the United States and now the world depend upon clarity and consistency from the SEC. The Agency’s non-partisanship 

has underscored that it’s the rule of law and not one’s political 

16

point of view that should determine our actions. It’s in this spirit 

that we continue to tackle the significant challenges that lie ahead. 

So I thank you now as I did at the beginning for the opportunity 

to appear before this committee, and I look forward to working 

with you to meet the needs of America’s investors. We look forward 

to taking your questions. 

[The joint prepared statement of Chairman Cox and the other 

Commissioners can be found on page 70 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Cox. Some specific questions I’m 

going to be submitting—there is a great deal of concern about 

naked short-selling. I know this is something you’ve had under consideration. I’ll ask it in writing. You give us a sense of where we 

are and there is a frustration on the part of some that in the face 

of Reg SHO and others the total seems to be going up, and this is 

the cause of some concern. So we would be interested in your view 

on that. 

Secondly, I notice you say you are—did I read this correctly—you 

are close to a decision on proxy access? 

Mr. COX. That is correct, Mr. Chairman. 

The CHAIRMAN. What’s the timetable? 

Mr. COX. We intend to have proxy rules in place for the next 

proxy season, which will be late in the fall. 

The CHAIRMAN. So you’ll be promulgating that and it will be 

open for comment, I assume? 

Mr. COX. Yes, the APA requires that. 

The CHAIRMAN. Well, let me say this. Rather than take up your 

time now, this is an issue of great significance. Many of us are supportive of increased proxy access. There are some who would be 

concerned about it and that might well be something in which we 

might have a future hearing. So, I’m glad to know that by the Fall, 

we will be able to deal with this. 

One other question from my Secretary of the Commonwealth of 

Massachusetts, Mr. Galpin, who is a very energetic securities regulator, because that’s where the jurisdiction is up there. He’s been 

concerned on the potential for pre-emption, and his question is 

whether there could be a pre-emption of State ‘‘blue sky’’ securities 

laws by Commission rulemaking. Is anything like that contemplated? 

Mr. COX. When the question is put that broadly, I’m not sure, 

Mr. Chairman. Obviously, pursuant to statute, our rulemaking in 

many cases pre-empts blue sky regulations. 

The CHAIRMAN. Right. Is there anything that’s currently pending 

that you think might be? 

Mr. COX. I don’t know from the general way that the question 

was put what he might have in mind. 

The CHAIRMAN. I guess the question is whether anything the 

Commission is currently considering might be preemptive of current State securities regulation. 

Mr. COX. I don’t believe so, and particularly with respect to proxy 

access, for example. We just had a series of roundtables focused on 

the pre-eminent role of State law in establishing shareholder rights 

and the importance of the Federal proxy regime in vindicating 

those rights. So we have, I think, a very healthy view among all 

five Commissioners. 

17

The CHAIRMAN. Let me then turn to the— 

Mr. COX. We have an amicable relation between Federal and 

State regulation associations. 

The CHAIRMAN. Some of my colleagues expressed very critical 

views about Sarbanes-Oxley. I feel once again called in the spirit 

of bipartisanship to come to the defense of the Republican Congress 

and the Republican President who passed it—although there was 

a temporarily democratic effort. And I share the view of Secretary 

of the Treasury Paulson last week, that he thought that with the 

efforts that you and the PCAOB are undertaking, we are making 

the improvements that preserve the purposes of Sarbanes-Oxley 

without it being unduly burdensome. 

Is it your view, and I would ask all five Commissioners, that any 

action is required by the Congress. Would you believe you now 

have the sufficient statutory authority among you, obviously to do 

what you’re doing, but to do anything else. Do you feel the need 

for any congressional action to amend Sarbanes-Oxley? 

Let me begin with Commissioner Nazareth. 

Ms. NAZARETH. No. I don’t. I believe that the steps that we took 

to address 404 were sufficient. That really was just about the only 

area of Sarbanes-Oxley for which we understood there were implementation difficulties. And I think that we had all the authority 

that we needed to address those issues and I believe that we have 

addressed them appropriately. 

Mr. ATKINS. Well, as Commissioner Nazareth said, Section 404 

was the problematic section. Right now, we have out for comment 

Audit Standard Five, which was passed by the PCAOB and sent 

over to us. Since it is now out for comment, I’m waiting anxiously 

to see what the comments will be, and I think after that we can 

then assess the situation. 

The CHAIRMAN. Mr. Chairman? 

Mr. COX. There is no question that Section 404 has been the 

flash point, the most expensive, compared to other sections, and 

particularly in relation to the benefits that it provides. So we have 

proceeded, all of us, on the premise that the cost benefit ratio has 

to be adjusted so investors actually get something. 

The CHAIRMAN. And that was a five-to-nothing vote, I assume, to 

put that out for comment? 

Mr. COX. It was indeed. It was indeed. 

The CHAIRMAN. Commissioner Campos? 

Mr. CAMPOS. I concur with the comments of my colleagues about 

404. I believe that what we have done is essentially fix the problems with 404. We’ll see. We’ll look at the comments carefully. 

We’ll see how it works. But I think, most importantly, SarbanesOxley is a great asset for this particular economy, and I think that 

Congress needs to be very careful before any changes are looked at. 

I work in the international arena and what I see is every jurisdiction copying Sarbanes-Oxley and looking in its own way to emulate what we have here in the United States. And I hear foreign 

investors tell me that they believe their capital is best protected in 

the United States by Sarbanes-Oxley and the protections that are 

offered here. So therefore Sarbanes-Oxley is not driving capital 

away. In fact, it is attracting capital. It is a magnet for capital. 

The CHAIRMAN. Thank you. Commissioner Casey. 

18

Ms. CASEY. I also agree with the comments of my colleagues 

about the fact that there’s no need for legislation at this time. I believe that the changes that we’ve made in our management guidance and in the proposed auditing standard, which we do have out 

for comment and we’ll closely look at the comments, encourage 

great cost savings and efficiencies and hopefully scalability for 

smaller companies. 

But I would note that what will be crucial to whether or not we 

achieve them will be the implementation. And so I think that it 

will be very important as the Commission and the PCAOB look at 

the filing schedule for the larger filers whether or not we’re achieving those savings, and then take a decision on whether or not we’re 

getting the savings that we anticipated. 

The CHAIRMAN. We’ve been trying to do that the way that would 

be sequenced. 

Ms. CASEY. Absolutely, sir. 

The CHAIRMAN. The gentleman from Alabama. 

Mr. BACHUS. Thank you. I would ask Commissioner Casey if it 

feels different. A year ago, you were preparing tough questions for 

panelists. 

Ms. CASEY. It’s warmer down here, much warmer. 

[Laughter] 

Mr. BACHUS. My first question, after the slide show, I tried to 

prepare a quick question on ‘‘XYZ’’ corporation and the compensation of Richard Roe and John Doe, but I think I’ll pass on that one. 

And my first question, Chairman Cox, I’m concerned over municipalities engaging in complex swap transactions without adequate 

technical expertise. Do you have concerns over the quality of disclosure and transparency when it comes to a municipal securities 

market? 

Mr. COX. Yes, I do. It’s an enormous market. It’s in a market 

that is dominated by retail investors, traditionally thought to be 

safe, and yet we have seen significant examples to the contrary. 

Most recently, our enforcement division was involved in the City of 

San Diego because of securities fraud issues there. We have, on the 

other hand, only enforcement jurisdiction when it comes to municipal securities and limited to no jurisdiction with respect to preventing these problems before they happen. 

Mr. BACHUS. Is there any practical reason why investors in municipal bonds should not be given or shouldn’t receive the same information that investors in corporate debt receive? And would the 

markets benefit from more disclosures in this regard? 

Mr. COX. I don’t think there’s any question that we can make significant improvements in the quality of disclosure. It’s very complicated. You’ve heard me complain about the complexity of disclosure when it comes to corporate issuers. I think, if anything, it is 

even more complex, more prolix when it comes to municipal disclosure. It’s not very user friendly, and there really doesn’t seem to 

be much prospect for change on the horizon, absent some 

supervening force. 

Mr. BACHUS. Thank you. Other Commissioners might want to 

add something. If not, I will move to my second question. My second question, for almost 30 years, we have had a regulatory system 

that divides financial products into securities and futures and reguVerDate 0ct 09 2002 13:07 Nov 06, 2007 Jkt 037560 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\37560T~1.002 HFIN PsN: TERRIE
19

lates them quite differently. No other country has the distinctions 

in how they regulate basically equivalent products. Should the 

United States have one agency to regulate both securities and futures and would you support modernizing the rule filing process so 

that the equities and the options markets could have self-executing 

rules similar to those that govern U.S. commodities and futures 

market filings? 

Mr. COX. Well, you have asked me two very distinct questions. 

Mr. BACHUS. Yes. 

Mr. COX. Let me take them in order. With respect to the balkanization, if you will, of financial services regulation and the Federal 

Government, particularly as compared to other nations, I do not 

think there is any question that, as our markets continue to integrate globally, this is going to present increasing difficulties for us. 

On the other hand, we have historical reasons for the system that 

we have. And as a former of Member of Congress, I recognize fully 

how difficult it is to contend with those historical differences. But 

I think being respectful of that, speaking now only for myself, I can 

say that anything that the Congress can do to rationalize the regulation of products that increasingly are competing against one another or ought to compete against one another, that are similar in 

many respects but are regulated very differently, would be much 

better for the markets and investors. 

Mr. BACHUS. All right, thank you. I guess I have time for one 

more question. In a speech last July regarding the Commission’s 

soft dollar initiative, you stated that the initiative was designed to 

remove some of the uncertainties about how the 30-year-old law 

authorizing soft dollar arrangements applies in the current environment. What has happened in the year since you made that comment to warrant a call for the complete repeal of the safe harbor 

provision? 

Mr. COX. What the Commission has done is work as well as we 

can within the statutory safe harbor for soft dollars. Section 28(e), 

because it is a statute, is something that the Commission cannot 

mess with. And so, to the extent that anything more is to be done 

to make it clearer to investors how these monies are spent, to permit competition and transparency, it will have to be done in the 

Congress. I should add that, to the extent that I, as Chairman, 

have expressed concerns and made recommendations about this, 

they are my own, and the Commission as a group is focused on 

rationalizing to the maximum extent that we can the statutory 

scheme that we are administering. So I think we have done a great 

deal. And to specifically answer your question, I think that life is 

better now. There is more clarity than there was before. We hope 

that our guidance is going to continue to have that effect, a salutary effect. 

Mr. BACHUS. Do you believe there are any further steps, short of 

full repeal, that could be taken? 

Mr. COX. There is no question. In fact, in the letter that I wrote 

to this committee, I counseled either repeal or revision, and I hope 

that you would at least consider all of those options. 

The CHAIRMAN. The gentleman from Pennsylvania? 

Mr. KANJORSKI. Thank you, Mr. Chairman. Mr. Chairman, I 

have eight questions that I would like submitted for the record, 

20

and responded to in writing, rather than trying to read them and 

get some explanation today. One thing that conflicts me a little bit, 

Mr. Chairman, and members of the Commission, is in response to 

some of the questions today, particularly the chairman’s questions, 

is there anything that the Congress can do to move you along and 

help you in your process? I think I heard that everybody is satisfied 

that you have all the jurisdiction in the world that you need on 

Sarbanes-Oxley. That being the case, I am constantly bombarded 

by studies indicating that we are not a very competitive society or 

financial market anymore. Furthermore, I constantly hear that 19 

of the 20 largest IPOs were handled in Europe or elsewhere and 

not in New York. As a result, the skies over New York are falling. 

Does the Commission have an answer for this? Have you responded 

to some of these studies? Should we respond as the Congress and 

not expect you to respond? In reality, are these merely ‘‘the sky is 

falling’’ scenarios that should be ignored? Mr. Chairman? 

Mr. COX. Well, I do not think, first of all, that the sky is falling. 

And, second, to the extent that anyone is telling us that the sky 

is falling, I think they are, at a minimum, overstating things. 

There have been a number of studies from a number of corners and 

sources that have counseled steps that Congress can take, the Executive Branch can take, and the SEC can take. Many of those 

studies have been very carefully considered, and I think they contain a number of useful facts and useful recommendations. So we 

are actually quite busy trying to do what we can as regulators to 

keep capital markets in the United States competitive. But, as I 

say, I do not think the sky is falling; I think rather what is happening is that all around us there is more competition. There is 

more opportunity to raise money and deeper, more varied pools of 

capital than ever before. And so, while the United States has the 

leading position in the world and the biggest markets and the 

deepest markets and the most liquid markets, that is not a birth 

right. We have to constantly earn it. That is true for our private 

sector, and it is true for our regulatory system. So we will work 

constantly to sharpen our competitive edge as regulators as well. 

Mr. KANJORSKI. Comparatively, do you see any relationship between the number of IPOs that have been done over in London and 

the lack thereof in New York or is that situation just an anomaly? 

Mr. COX. Well, there has been a great deal said and written 

about this. Those data have been taken apart and put back together front ways and sideways, and I do not know that I can add 

anything original to it today other than to point out that it is useful to look at each of the offerings to see where they came from, 

where their home markets are, what were the circumstances, and 

what would have been their prospects of listing in the United 

States. While we are surely feeling the effects of competition in this 

country, there is a steady stream of foreign companies that are continuing to tap the U.S. markets. This year, we are on pace to have 

the most foreign listings on U.S. exchanges since 1997 and, in fact, 

the second highest year in American history. Only that peak in the 

middle of the 1990’s is yet to be surpassed. It was also recently reported that foreign companies accounted for 23 percent of IPO proceeds last year, the highest amount again since the mid-1990’s. 

21

Mr. KANJORSKI. So, the final conclusion I should come to is that 

there is no ‘‘sky is falling’’ scenario out there. In reality, we are 

very competitive, and Congress needs to do nothing to make the 

United States any more competitive? 

Mr. COX. Well, just as I would observe that the sky is not falling, 

I would also observe that doing nothing is a very dangerous course. 

What we need to recognize is that it is a very dynamic, competitive 

world, that our capital markets are changing at an accelerating 

pace, and that we have to do a great deal if we are to maintain 

our traditional standards and are to maintain America’s leadership 

for the benefit of our own investors. This is not just wanting America to be first; it is also a fact that we have the highest standards 

of regulation and investor protection in the world. And so, to the 

extent that more activity takes place on U.S. exchanges and in U.S. 

markets, investors are better protected. 

Mr. KANJORSKI. Very good. I cannot quite get you to say, Mr. 

Chairman, that we are just the greatest and the best and the most 

competitive, but I will be satisfied. 

Mr. COX. I will sign on to that statement forthwith because I believe that, but I also believe we need to work to earn it each day. 

Mr. KANJORSKI. I appreciate that. One last question. After some 

70 to 75 years of overall regulation of our equity markets, do you 

think it would be wise for the Congress to look at the overall regulatory scheme in the United States and compare it to other countries like the U.K.? 

Mr. COX. I do, and I think that is a cognate of the question that 

Mr. Bachus was raising. I think to the extent that Congress can 

do that, particularly to the extent you can do it multi-jurisdictionally, across committees, and House and Senate, bicamerally, that 

would be a very good thing. 

The CHAIRMAN. The gentlewoman from Ohio? 

Ms. PRYCE. Thank you very much, Mr. Chairman. Following up 

on Mr. Kanjorski’s discussion of competitiveness, I have three basic 

questions, all of them somewhat related. First off, Commissioner 

Atkins gave a recent speech and encouraged companies to look 

closely at the quarterly earning statements. The U.S. Chamber, 

and the Aspen Institute have recommended that companies move 

away from these statements toward more long-term planning, although you, I think, also stated that there is not a whole lot you 

can do rulemaking-wise, I often equate that same scenario to Congress, if we did not have elections every 2 years, we could do a lot 

more long-term planning too. So do you have any suggestions of 

what we could do or how we could help business to move away 

from this standard? That is my first question. 

Second, there is a lot of talk on Capitol Hill now about raising 

taxes on private equity, some to the tune of a 133 percent increase. 

What impact do you believe that would have on our economy and 

competitiveness? 

And the last question, Chairman Cox, when you were with us 

last May, you mentioned that market data was a front-burner issue 

for the Commission. You have several pending market data fee filings before the Commission. Do you have a long-term plan to resolve the approval of market data filings and what is the CommisVerDate 0ct 09 2002 13:07 Nov 06, 2007 Jkt 037560 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\37560T~1.002 HFIN PsN: TERRIE
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sion’s timing on those that are pending? And I just thought I would 

encapsulate all three and let you have at them. Thank you. 

Mr. ATKINS. Okay, thank you, Madam Congresswoman. With respect to long-term planning by corporations, that is a theme that 

has come out of at least three reports that have been published in 

the last half year or more. And I think it is one thing that a lot 

of people identify as something that the public companies suffer 

from—that because they are trapped by the quarterly earnings 

statement, they shoot for the short term. I have heard that from 

a lot of folks in the private equity world as well. So, clearly one 

thing, along with what the chairman was talking about, that Congress can do is to study the marketplace. Do I have a clear answer 

to that? No, because it has to do with disclosure obviously to the 

shareholders and how that folds into the bigger picture. 

Mr. COX. And I guess I can clean up and take the other two 

points that you raised. With respect to taxes, obviously, the Securities and Exchange Commission implements our securities laws, 

and we do not make tax policy. So I will make a more general observation that taxes on investment and taxes on public companies, 

as compared to private companies, can have an effect on capital 

formation. Our statutory mission includes the promotion of capital 

formation, so we have concerns about this. And I would encourage 

the Congress, as you consider tax legislation, to take capital formation and the impacts that the legislation might have on capital formation into account, particularly if the legislation is drafted in 

such a fashion as to discriminate between public companies and 

private companies, thereby discouraging companies from going public. 

With respect to market data, we are considering market data as 

part of our broad review of the SRO structure, as you know. The 

review is intended to ensure that the regulatory structure for market data remains up to date and reflects such important developments as for-profit SROs and the expanding types of data that are 

needed by investors. Very recently, in December of last year, the 

Commission granted a petition from the Net Coalition to review the 

staff’s approval by delegated authority of an NYSE ARCA proposal 

to begin charging a fee for its depth of book data. The staff is currently preparing a new order for the Commission to consider that 

would approve the fee primarily because NYSE ARCA was subject 

to significant competitive forces in setting the fee. In addition, the 

NYSE and NASDAQ since have filed proposals for innovative reference data products that make economic sense for advertiser 

Internet-supported companies, like Google, Yahoo, and CNBC. 

Ms. PRYCE. And is there a timeframe you would like to discuss? 

Mr. COX. Well, these are ongoing, and so I think you can expect 

developments in real time. 

Ms. PRYCE. Real time, all right. Thank you. Would you like to 

comment at all—in some of the opening statements we heard mention of the amicus brief filed by the SEC. 

[Gavel] 

Ms. PRYCE. My time is expired? 

The CHAIRMAN. Yes, but make it the last question and get a 

quick answer. 

23

Ms. PRYCE. This is the last question. Do you want to comment 

on that now or would you rather have a more pointed question? 

Mr. COX. Well, I need a more pointed question just to know 

which amicus brief you are talking about. 

The CHAIRMAN. Go ahead and point. 

[Laughter] 

Ms. PRYCE. All right, the Stoneridge case, amicus brief, thank 

you. 

Mr. COX. All right, the Stoneridge case, and you can get a variety 

of opinions here because, as you know, that was a three to two 

vote, but the Stoneridge case was very similar to a prior case that 

the SEC had considered in 2004 called Homestore. It was my 

view—and it is my view generally with respect to decisions that are 

recently taken by the SEC in precedent matters—that, because 

Homestore and Stoneridge were very much on all fours with another, I thought it important for the SEC to be consistent and be 

clear on these points. As I mentioned in my opening statement, I 

do not believe that SEC rules, our policies and so on, should be so 

effervescent as to change with one or two people coming on board. 

It would be awfully nice if the regulatory process were sufficiently 

transparent that people would know what to expect, and I think 

this is doubly so when what we are doing is trying to interpret law, 

what law means. Law has to have some objective meaning; it cannot be just a question of how we all feel about it. And so the SEC, 

having voted in 2004, just one year before I arrived, on this very 

point, I thought it important for us to be consistent. And I should 

point out that that 2004 vote was not a three to two vote, it was 

an unanimous vote of the SEC. 

Ms. PRYCE. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from New York? 

Mrs. MALONEY. Thank you. I would like to be associated with 

some of the many of the issues raised by Representatives Pryce and 

Frank and Kanjorski, but I would like to ask you, Mr. Chairman, 

about the front page today of the Wall Street Journal. It highlighted the growing risk from collateralized loan obligations, a 

product whose volume has doubled in the past year. And the Wall 

Street Journal calls them volatile and risky and the loan standards 

have loosened and lowered, and I wonder if you share that concern? 

More specifically, because there are no disclosure requirements for 

CLOs, investors do not know their value or the quality of the loans 

they represent. And up until now, the SEC has not regulated CLOs 

but it is my understanding that the Commission does have the authority under the law to require more disclosures and greater 

transparency for investors, and is it correct that the Commission 

has authority to regulate CLOs under the 1933 Act or other securities law? 

Mr. COX. Well, the answer to your last question would be yes, if 

they were registered under the 1933 Act but, in fact, most of them 

are not. 

Mrs. MALONEY. Well, if we had them registered, do you think 

greater transparency in these products would be desirable and important to safety and soundness? 

Mr. COX. Well, there is no question that there is now a commonality of interest between the banking regulators and the securiVerDate 0ct 09 2002 13:07 Nov 06, 2007 Jkt 037560 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\37560T~1.002 HFIN PsN: TERRIE
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ties regulators when it comes to issues such as safety and soundness, when it comes to overall issues of systemic risks throughout 

our economy and the health of our economy, the securitization of— 

Mrs. MALONEY. How does the situation with the CLOs compare 

with the secondary subprime market, the CDOs, which are facing 

a challenge in our economy now? And do you think the same risks 

are present? Do you think that that market should be more transparent and regulated? 

Mr. COX. Well, as I was about to say, I think that there are great 

commonalities because obviously the underlying risks stem from 

the same source. We come at these problems in many cases 

through our Division of Enforcement because of the overlapping 

regulatory jurisdiction. Our Enforcement Division currently has 

open about 12 investigations focused on issues such as this. 

Mrs. MALONEY. Okay. I would like to follow up on the questioning of Deborah Pryce on the data information. And the SEC, in 

my opinion, took a bold step with regulation by opening market 

data up to competition and allowing exchanges for the first time to 

sell their own data. Three exchanges in New York, the New York 

Stock Exchange, AMEX and NASDAQ, and I would say many others, have innovative data products on hold and waiting for the approval from the Commission. And it seems to me that this delay 

deprives investors of innovative data products and deprives exchanges of their ability to compete with foreign markets. When 

does the Commission plan to rule on these pending proposals? You 

testified that you did not know when but could you give us a generalization, in the next year, in the next 6 months? And if not very 

soon, what additional steps are required by the Commission rules, 

what could we do to move this along? Competition between our 

markets and foreign markets are very, very important to our economy. 

Mr. COX. I completely agree with that. What I said to Congresswoman Pryce was ‘‘real time’’ but to answer your question in precisely the terms you put it, months. 

Mrs. MALONEY. Months. Is there anything else, any additional 

information you need in order to move this forward? 

Mr. COX. Well, we are in the midst of a review that is inductive, 

we are learning as much as we can from marketplace sources. We 

have a good deal of public input, and we are constantly getting 

more. But I do not think other than that process we need more, no. 

Mrs. MALONEY. Has my time—I would also like to talk about mutual fund disclosures. More than 90 million Americans are invested 

in mutual funds, and I think the Commission could do more to 

make it easier for individual investors to make comparisons among 

them. Last week, the SEC voted to expand its XBRL business reporting language, a pilot program, which will allow investors to use 

computer data tagging to make comparisons among funds, but it is 

very technical and difficult I would say for most individual investors. I would like to know what you are doing in this area. I know 

that at the last week’s meeting, Commissioner Campos— 

The CHAIRMAN. The time has expired, so please wrap up the 

question. 

25

Mrs. MALONEY.—mentioned the need for the SEC to move forward with short-term innovative IPOs prospectus proposals that 

would be easier to understand and where do you stand on that? 

Mr. COX. Well, I will let Commissioner Campos add to what I am 

about to say, but I think the whole Commission is very, very enthused about the prospect of improving mutual fund disclosure. We 

are focused on getting a simpler presentation for investors that focuses on decisions that they really need to make and the information they need to make those decisions. This is an area that is infused with retail participation, busy Americans with real jobs who 

have other things to do than look through big books of data. And 

so it is a very high priority for us, and I think that the industry 

is very much willing to participate in these initiatives. 

Mrs. MALONEY. My time has expired. 

The CHAIRMAN. Yes, it has. 

Mrs. MALONEY. Thank you. Good to see you again. 

The CHAIRMAN. And the gentleman from Louisiana is now recognized. 

Mr. BAKER. Thank you, Mr. Chairman. Mr. Chairman, members 

of the Commission, I am appreciative of your work in the world of 

XBRL data tagging. I very much appreciated the demonstration of 

how it would work. As a long time advocate of that particular approach, however, I am anxious to see it more fully deployed in the 

world of public reporting. As you know, financial institutions insured depositories now report in that fashion. And I believe the 

taxonomy development is the limitation on more full deployment 

for XBRL for public operating companies. But as to another longterm interest, and that is elimination of quarterly earnings statements, I suggest to you upon further examination, as XBRL becomes more transparent and easily deployed, that that methodology would enhance the ease with which investors could get access 

to real time data as opposed to paper-based retrospective reporting, 

which is outdated by the time of its submission. And so I see the 

two very carefully married to one another and the outcome could 

be a very good benefit to investors. 

Secondly, I am appreciative for the work on the Fair Fund, having some small paternal interest in that matter. I was pleased to 

see $1 billion had been distributed out of the $8 billion collected. 

And you note in your written statement that there are more significant announcements to be made. I hope those are statistically significant in relation to the $1 billion already deployed. 

And to the principal reason for my questions today, although Ms. 

Pryce made indirect reference to it, as to your own view, perhaps 

not prejudicing the views of all Commissioners, that it must be a 

violation of a law or regulation that would precede an action by the 

Commission or an appropriate action in a court of law against that 

person who is presumed to have violated the rule or regulation or 

law that leads to a regulatory enforcement action or a financial 

award of some remedy at an appropriate time. The triggering device that leads to a regulatory or civil action against an individual, 

as a matter of legal judgment, do you believe that person should 

be at least be found guilty in the correct terms as the primary violator in order to sustain such penalties or a regulatory enforcement 

action? 

26

Mr. COX. Yes, I believe that you are talking about the scheme liability case. 

Mr. BAKER. I am. 

Mr. COX. Yes. And I think it is very important to know that the 

liability that is being discussed in that context is knowing liability, 

intentional; it is fraudulent conduct, it goes beyond aiding and 

abetting. It is meant to be primary liability. In other words, the 

person can be charged themselves with the fraud, not in loose 

terms as an accessory. 

Mr. BAKER. For example, if I am a vendor of a product to a customer, and I provide financial terms for the repayment of that benefit, and that underlying recipient of my product and financing arrangement inappropriately books that transaction in his accounting 

reporting and is found to have violated proper accounting standards, generally accepted principles, then it would not be a likely extension of liability to go to the provider of the product, who in good 

faith sold the product, enabled the financing to occur, and because 

the underlying management of the recipient financial transaction 

mis-reported, there should not be an extension of liability in that 

case because there was no willful intent to violate law, rule or regulation? 

Mr. COX. That is exactly right. And a key point that you made 

in your hypothetical example is that the person is acting in good 

faith. They shouldn’t at all, if those are the facts, be charged with 

securities fraud. 

Mr. BAKER. I am going to surrender. As long as I get yes for an 

answer, I am very happy. Thank you very much, sir. I yield back. 

The CHAIRMAN. The gentlewoman from New York, Ms. Velazquez? 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Commissioner Cox, 

after you testified before the Committee on Small Business, I sent 

a letter requesting detailed information about the efforts that the 

SEC has made to quantify the cost of SOX for implementation 

under the proposed revised auditing standards and the new management guidance. As of today, we have not received a reply to my 

letter, so I am giving you an opportunity to share with us or I will 

ask any of the Commissioners if they are able to provide a specific 

estimate of the cost of SOX 404 for implementation under the new 

regulations on small companies? 

Mr. COX. Thank you, Madam Congresswoman. The cost benefit 

analysis that we discussed in the Small Business Committee was 

published last week in the Federal Register. We are going to provide to you and your office a more expansive discussion of the specific questions that you had about that. The reason that there is 

not a dollar amount estimate for management guidance is that we 

will have the opportunity going forward to use the management 

guidance experience that we have with people already in compliance with SOX as a touchstone for making more solid estimates 

when it comes to people, smaller public companies who have not 

yet complied. I think it is also very important to distinguish between the costs—and there are very real costs that will be occasioned for smaller companies, when eventually they comply with 

Sarbanes-Oxley—that flow from having to comply with Section 404 

as against those that are related to management guidance. Because 

27

the statute, Section 404, is the source of the cost. The management 

guidance, on the other hand, is meant to mitigate that cost and reduce it. And so, to the extent that what we are doing with our 

OMB cost benefit analysis— 

Ms. VELAZQUEZ. Commissioner, my understanding is that there 

is no estimate— 

Mr. COX.—of the management guidance diminishes the cost, 

which is not estimated. The reason that is not estimated is that it 

is an act of Congress and Congress does not do that. When Congress passed SOX 404, it just passed it with no estimate. 

Ms. VELAZQUEZ. You mentioned that it was published in the Federal Register last week? 

Mr. COX. Yes. 

Ms. VELAZQUEZ. And does it have an estimate on it? 

Mr. COX. As I say, if you are talking about smaller companies— 

Ms. VELAZQUEZ. Yes. 

Mr. COX.—and the impact on smaller companies, because they 

will not come into compliance with SOX 404 until the following 

year, the experiential base that we will have with companies already complying with management guidance will give us a better 

touchstone for measuring and estimating the impact on smaller 

public companies. 

Ms. VELAZQUEZ. Do you think it would be helpful for small companies to have a number, to know a number? 

Mr. COX. Well, I think the number that you are looking for is the 

cost of complying with 404, and 404 is an act of Congress, it is not 

a regulation. It did not contain any exemption for smaller companies. All we can do is try and mitigate that cost, but we are not 

imposing any additional cost beyond the cost of the statute. 

Ms. VELAZQUEZ. The final rule regarding the management report 

on Internet controls refers to a CRA international estimate that 

early compliance costs incurred by companies implementing SOX 

404 range from $160,000 to $5.4 million per company. The SEC 

final rule goes on to declare that companies could experience a substantial benefit in terms of lower costs of compliance. So, for the 

record, I would like to ask each of you, one by one, to tell me how 

much these new regulations will lower costs of compliance for small 

companies? 

Mr. COX. With whom would you like to begin? 

Ms. VELAZQUEZ. With Ms. Nazareth? 

Ms. NAZARETH. Well, I agree with what Chairman Cox said, that 

I do not think it would be appropriate for us to guess at this point 

how effective the mitigation will be under the management guidance. We obviously believe that it will reduce the cost, but it would 

be a better estimate if we waited until what the experience was 

with the management guidance in the next year in order to give 

you a better assessment of what the actual cost would be. 

Ms. VELAZQUEZ. Yes, Mr. Atkins? 

Mr. ATKINS. Well, there is no question that the costs of 404 implementation have been too high. Originally, back in 2003 I think 

it was, the SEC estimated about $94,000 per company, it is something like 20 times that for the rules as they were implemented. 

Hopefully, the new rules will be better but there is no question 

that the costs have been too high. 

28

Ms. VELAZQUEZ. You do not think— 

The CHAIRMAN. Well, I am sorry, we do not have time for further—we only have time for the answer. 

Ms. VELAZQUEZ. Thank you. 

The CHAIRMAN. We are over time. 

Mr. COX. If your question is, do I think a number would be better, the answer is yes. And we want to base our estimate on real 

world data, which we are going to acquire in the coming year. 

Ms. VELAZQUEZ. Mr. Campos? 

Mr. CAMPOS. I think what we have done will bring costs down, 

but I agree with my colleagues that we need to have the experience 

base to come up with the number that you are looking for. 

Ms. CASEY. And I would reiterate again that I think implementation will be key and our experience and whether or not we are 

going to get the cost savings that we anticipate will be very necessary to take decisions about how that will benefit smaller companies. 

The CHAIRMAN. The gentleman from Delaware? 

Mr. CASTLE. Thank you, Mr. Chairman. Going back a little to the 

earlier questions from the gentleman from Pennsylvania, with respect to the whole issue of recent IPOs and how many of them are 

not taking place in the United States, and a couple of the members 

in their opening statements blamed some of this on excess litigation and regulation, which I guess even incorporating would not 

overcome in some cases. But my question is, Mr. Chairman, do you 

consider that to be a factor, this whole business of excess litigation 

and regulation in terms of corporate activity in the United States? 

Mr. COX. I do. Regulation has costs, so does litigation. Regulation—nobody thinks regulation is free. So the challenge is always 

to make sure that you are getting benefits that exceed the cost. 

Since we are administering a relatively stable but, in terms of the 

21st century, ancient statutory system, as rulemakers, we have to 

constantly provide the grease in the wheels, if you will, to make 

sure that some of those ancient statutory concepts have some 

meaning in a high-tech global world in the 21st century. So we constantly need to sharpen our competitive edge as regulators in tune 

with the market and keep track of what is going on. Otherwise, our 

regulations are going to be excessively expensive. 

The litigation aspect of this is to a lesser extent within our control, but we have to be very cognizant of it because what we do influences the climate. One of the things that the SEC has to be particularly attentive to is the degree to which conflicts of interest 

among people bringing litigation produce results that neither we as 

the regulator nor you as Congress would want in carrying out the 

statutory scheme. As regulators, we of course have one object, and 

that is to improve the lot of investors. We do it as public servants. 

We have no other motive. People who have a financial stake in the 

outcome—sometimes very, very significant—can act for other reasons; and yet they have the same power, through discovery and 

otherwise, to create a great deal of cost and expense. And we have 

to always be attentive to those risks in the system. That is one of 

the reasons that the Private Securities Litigation Reform Act was 

so important—because it made it very much more likely that private system, which was meant to extend the reach of the SEC in 

29

important ways, patterns itself after the policies that Congress, 

and the regulator applying the will of Congress, seeks to obtain. 

Mr. CASTLE. Thank you, Mr. Chairman. Let me change subjects 

for a minute, I want to go to mutual fund fees, which is a way 

many, many people in America are investing now. And I mentioned 

in my opening statement the 12b-1 fee sort of conundrum, as I look 

at it, which was once a methodology, as I understood it, to help 

mutual funds to be able to advertise themselves and then became 

sort of a broker compensation mechanism over some period of time, 

which is the way it is defended now, but that has not been changed 

as far as the way the law was originally written in the 1980’s is 

concerned. Are you looking at that, and are you looking at any 

other fee aspects of mutual funds? You did mention interactive 

data, etc., that kind of thing, which I think would be helpful. But 

the whole business of understanding what it is that you are dealing 

with and what is out there with respect to mutual funds to me 

seems important. 

Mr. COX. Well, I think probably most members of this committee, 

probably most of us Commissioners and everyone else in this room, 

owns a mutual fund or indirectly has some connection with mutual 

funds. It is a very retail space. We are all very concerned about understanding our choices and making sure we have our money wisely invested for all sorts of important future needs. So, as the regulator of mutual fund disclosure and to a certain extent promulgator 

of rules that govern what kinds of things can be charged from fund 

assets in the first place, we want to make sure investors are being 

treated right. There is a great deal more that we can do to make 

the purpose of fund expenses clear. There is more that we can do 

to make returns in mutual funds clear and to obtain the general 

disclosure that investors are looking for. So that has been the main 

subject of attention. 

With respect particularly to 12b-1 fees, we just had a roundtable 

on this subject to consider from top to bottom what they are good 

for, what they are not good for, and what their future should be. 

And I think we got a great deal of very useful information, both 

substantively with respect to the purposes of 12b-1 fees and on the 

disclosure side. 

The CHAIRMAN. The gentleman from North Carolina? 

Mr. WATT. Thank you, Mr. Chairman. Welcome back, Mr. Cox, 

to the committee. Last year, the SEC proposed eliminating broker 

voting in all director elections by changing Rule 452. And you got 

some feedback and amended or resubmitted that to exempt mutual 

funds, which was understandable. However, we have not gotten 

any indication of what has happened with that since then. And our 

State treasurer in North Carolina—and we have had an experience 

in North Carolina where broker voting apparently or appears to, although we have not been able to get the full facts, have influenced 

or been decisive in who got elected to a board in a way that a lot 

of people are concerned with because CVS and Caremark merged. 

So, I guess I have been trying to figure out some analogy to this. 

This strikes me at some level as being tantamount—allowing 

broker voting—to basically saying whoever does not vote in an election, their votes will be cast for the sitting incumbent, which might 

be beneficial to us as incumbents, but does not seem to me to be 

30

all that democratic a process. Can you give me some estimate of 

the timetable on which this new proposal will be vetted and whether we will have a new standard by the next proxy season, can you 

just talk to me about that a little bit? 

Mr. COX. Yes, I can. And you are right, this is connected to our 

proxy rulemaking for the next proxy season because it is bound up 

with the whole issue of how votes are cast and in what way shareholders participate in the proxy process. The New York Stock Exchange amendment that they have filed to their proposal to exempt 

registered investment companies from the proposed new prohibition on broker discretionary voting was filed with us on May 23rd 

of this year, relatively recently. But the overall question of not just 

broker voting, but also over-voting, empty voting and so on, was 

the subject of a roundtable that we held recently. And each of us 

here as Commissioners are very, very focused on the mechanics of 

the proxy system in the context of our pending rule proposal. The 

timetable is probably going to have us proposing next month, the 

end of next month, on the proxy rules generally. Whether we put 

questions out with that release or whether we do a separate release 

or just publish the NYSE rule proposal then remains to be seen. 

Mr. WATT. Mr. Cox and members of the Commission, we had a 

markup this morning of a bill, a resolution I guess, that encouraged diversity in the financial services industry and this is an issue 

that I personally am very concerned about, diversity at all levels 

of the industry. What can the SEC do to encourage—what is the 

SEC doing first and then what can it do that it is not already doing 

to encourage greater diversity in the financial services industry 

and in other registered corporations? 

Mr. COX. Our investor education mission at the SEC gets us out 

to a lot of places around the country. Commissioner Atkins, as a 

matter of fact, has probably logged more miles on behalf of that office than any of us, but all of us are very profoundly interested in 

that. We have a very aggressive diversity program at the SEC 

itself, which models and leads in this respect, but we also participate in private sector efforts to lead on diversity. And we think it 

is very, very important. 

Mr. WATT. My time has expired. 

The CHAIRMAN. Do any other Commissioners wish to comment on 

that? 

Mr. CAMPOS. Congressman, I think all of us need to directly encourage Wall Street to look at the great resources in America in 

its diverse communities and in the diverse makeup of individuals. 

I think to the extent Wall Street does not have minorities and people of color in their ranks, they are missing out on a great resource. 

I think it is pretty clear, from all studies that are done today, that 

if you have a diverse group of individuals making decisions, you get 

better decisions, so it is a competitive item, it is not a charitable 

thing. And, moreover, capital needs to be allocated to the inner cities. Capital needs to be allocated in America where there are Third 

World returns available under our rule of law and for some reason 

Wall Street still does not hear that message. I think it is incumbent on us to make that message loud and clear. 

The CHAIRMAN. The gentleman from California, Mr. Royce? 

31

Mr. ROYCE. Thank you. Chairman Cox, I am increasingly concerned about the growing number of investor class action lawsuits 

and their impact on the U.S. capital markets. As I stated, in one 

of the studies I saw was Professor John C. Coffee of Columbia Law 

School, and he wrote that securities class actions essentially impose costs on public shareholders in order to compensate public 

shareholders. But on each such transfer, a significant percentage of 

the transfer payment goes to lawyers and other agents. It can run 

up to 40 percent. And he has suggested changes to securities class 

actions. 

Now, I along with 15 other Members, have sent a letter to the 

SEC requesting that they examine several questions about the effect of these lawsuits. First, we urge the Commission to examine 

the costs and the benefits to the average individual investor of private class action litigation under the Federal securities laws. 

Second, we urge the Commission to examine the cost of the benefits of class action settlements to the average shareholder, not only 

in terms of settlement payments but also transaction costs, including fees paid to attorneys, as well as a potential decrease in the 

value of innocent shareholders’ investments as a result of the litigation. 

And we urge the Commission to examine whether existing protection against professional plaintiffs are sufficient and whether 

the apparent link between political contributions and selection of 

counsel by public pension funds warrants a prohibition like the 

Pay-to-Play ban that was adopted in the context of municipal bond 

underwriting. 

And, lastly, we urge the Commission to examine various means 

to adequately coordinate Fair Funds payments with related private 

class action lawsuits and make recommendations to Congress regarding appropriate legislative action on that front. 

And I wondered if you would comment, Chairman Cox, on the 

possibility of the SEC undertaking such a study and reporting back 

to Congress maybe by the end of the year; it is just recently that 

we sent the letter. 

Lastly, I had a question for Mr. Atkins. I was going to ask him—

Mayor Michael Bloomberg and Senator Schumer combined forces 

there to put together that Committee on Capital Markets Regulation, and they released a report highlighting the need to do more 

if the United States is to remain the world leader in the financial 

services industry. And I was going to ask you, Mr. Atkins, if you 

believe that the SEC could do more to assist us in this objective 

and, if so, what do you think that would be? And maybe if you 

agreed with your colleague Mr. Campos’ observation that SarbanesOxley actually is attracting capital because when I was in London, 

I saw those signs that said, or that advertisement that said, ‘‘London is a Sarbanes-Oxley Free Zone.’’ They were actually marketing 

the idea to investors because of the purported costs under Sarbanes-Oxley, so I was going to ask you, after Mr. Cox responds, if 

you would give me your perception on that? Thank you very much. 

Mr. COX. Well, I guess I will start. Since you have used Professor 

Coffee as the foundation for the statements that you are making, 

let me say that he is greatly respected around the SEC, and his 

views are always worthy of serious consideration. One of the reaVerDate 0ct 09 2002 13:07 Nov 06, 2007 Jkt 037560 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\37560T~1.002 HFIN PsN: TERRIE
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sons that the Commission is so aggressively using our Fair Funds 

authority is that we are very cognizant of the transaction costs that 

are built into private litigation. There is nothing anyone can do 

about those costs other than to the extent that fees might be more 

competitive or what have you, but there are big costs that are just 

built into private litigation. When the SEC is recovering and can 

distribute those monies directly to shareholders and cut out the 

middle man, those transaction costs are washed out, and the recovery to investors is greater. So the over $1 billion that we have been 

able to get back to investors since you gave us that authority, I 

think, is a signal victory for the policy that the Congress established and for the SEC in administering it. 

We look forward to answering very formally the questions that 

you and other Members of Congress have put to us about the effect 

of lawsuits on investors, private class action settlements, transaction costs, the effect on innocent shareholders, and so on. And we 

will do, I hope, a very thorough job of it. 

Finally, I think the Pay-to-Play rules in place are exceptionally 

important. That principle is a worthy one, and we will be happy 

to consider the suggestion that you have made. 

Mr. ATKINS. Well, thank you, Congressman Royce, for your question. I read with interest the report that Mayor Bloomberg and 

Senator Schumer sponsored that was done by McKinsey and they 

have a lot of suggestions by which not just the SEC but also you 

in Congress can turn your attention to the costs of regulation here 

in the United States. And there is no doubt that litigation costs 

and regulatory costs do discourage issuers from coming here to the 

United States. You just have to look back to the Kennedy Administration, back in the early 1960’s, to the so-called interest equalization tax that was imposed on securities transactions. That really 

helped create the Euro dollar market as people went to try to get 

away from that tax. So once you open that Pandora’s Box, it is 

hard to get capital raising back here. So people do look at costs 

when they try to make decisions of where to issue their securities. 

No doubt, as Commissioner Campos said, U.S. legal protections 

do attract investors from around the world, but they can also, if 

they are not in balance, work to repel people from coming here. I 

used to live and work in Paris, France, and I heard so many stories 

over there, similar to what went on here in Washington recently 

with the lawsuit against the dry cleaner, but also similar things 

that have people concerned about our litigation system. And I have 

heard the same sentiment recently from government officials, from 

public company officials and officers, people like that. U.S. investors over the last 40 or 50 years have had really the best of all 

worlds. We had a deep liquid market; we still do. Issuers from 

around the world came to issue their securities in the United 

States on our terms, under our laws, and with our protections. 

Now, as things have become more competitive, U.S. investors with 

a click of a mouse can invest directly abroad. We have to make 

sure that we have things in balance so that we continue to attract 

people to issue their securities here. 

The CHAIRMAN. Thank you. The gentleman from California? 

Mr. SHERMAN. Thank you. I have an awful lot of questions, and 

I would like responses for the record. I will go through those quickVerDate 0ct 09 2002 13:07 Nov 06, 2007 Jkt 037560 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\37560T~1.002 HFIN PsN: TERRIE
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ly, and then focus on some that deserve an oral response. Looking 

at Sarbanes-Oxley, we have in effect two kinds of securities in this 

country. We have those that are publicly traded with all the maximum disclosure, legal costs and ‘‘Sarbanes-Oxley-ization,’’ and 

then we have Regulation D, those securities not eligible for private 

invest—for public trading with limited numbers of investors and 

limited liquidity. I wonder whether you would work with us to explore the possibility of creating an intermediate level of security, 

one in which you did not have Sarbanes-Oxley in its full-blown 

form and in which there would be a public market but only eligible 

to or available to qualified investors? So that somewhere in between saying you have no liquidity on one hand or that your security was eligible to have the full repository of all the assets of widows and orphans on the other, that we would have an intermediate 

level that would be excluded from the more onerous parts of our 

Sarbanes-Oxley system? 

Second, as to Stoneridge, I hope that you would provide for the 

record what you would like to put in an amicus brief if you were 

allowed to file such a brief, and also whether you think that statute 

should be adopted so that you can file an amicus brief on your own 

regardless of whether the Solicitor General agrees with or disagrees with it. As to that issue, I hope that you would focus on the 

interesting argument of the President, that it is the SEC that 

should pursue redress for injured investors. How would you do that 

if scheme liability were not available? And how would that affect 

your ability to enforce 10b-5? If we are going to take a whole group 

of wrongdoers and say that they are not liable for damages because 

they did not actually make a statement, are we going to be in a 

position where neither SEC nor private tort action can provide relief? 

Finally, as to corporate law, this has traditionally been a matter 

for the States. Delaware falls over Nevada, which falls over Delaware, in an effort to race to the bottom and provide the least possible rights for shareholders and the most protection for entrenched 

management and to tell corporations they do not have to have cumulative voting. Should we have a corporation’s code for publiclytraded corporations in this country and/or should we at least mandate that there be cumulative voting so that a minority group of 

shareholders would at least have one representative on the board? 

Now, turning to proxy access, under the AFSCME v. AIG case, 

you have for a while suspended your no-action letters and in doing 

so, the world has not caved in, and I wonder whether you would 

want to continue this approach of allowing proxy access to those, 

especially those who want to change the bylaws so that they are 

then able to propose a slate of directors? Chairman Cox? 

Mr. COX. Now, you said that you would like answers to many of 

those for the record? 

Mr. SHERMAN. Yes. 

Mr. COX. Which ones would you like me to address? 

Mr. SHERMAN. I would like you to address that last question 

about proxy access. 

Mr. COX. What we are going to do is put a rule in place because 

right now we have a decision from one Circuit Court of Appeals 

that has a different rule functionally in place than was in place in 

34

the rest of the country. We need to make sure that there is one 

rule for the whole country, that everybody understands it, and that 

we have it in time for the next proxy season. I do not think that 

the relatively quiescent environment that we had for one year is 

going to last forever, we should not expect it to. Shareholders have 

every right to bring their proposals in whatever ways the law allows, and we just need to make clear what the rules are, so we intend to do that. 

Mr. SHERMAN. Well, one last question, the Wall Street Journal 

reported that you are considering a proposal to allow corporations 

to mandate arbitration in securities class actions. Is this proposal 

under active consideration by the SEC? 

Mr. COX. No, we do not have pending any proposed or other more 

mature rule or procedure governing this. 

The CHAIRMAN. The gentleman from California? 

Mr. CAMPBELL. Thank you, Mr. Chairman. And as the CPA in 

the room, I will ask an accounting question first. 

Mr. COX. Did you not just follow a CPA? 

Mr. CAMPBELL. As one of the two CPAs. As the only CPA in the 

room with an active certificate, how is that? 

Okay, I will start with an accounting question. Chairman Cox, in 

your remarks, you talked about your proposal, the Commission’s 

proposal last week regarding international companies or foreignbased companies that are listing on U.S. markets and the ability 

perhaps to use foreign financial statements. Obviously, what that 

is going to do, international accounting rules, is potentially create 

two different companies that are global companies that are competing with one another whose financial statements are both listed 

on U.S. markets or traded on U.S. markets, whose financial statements will be computed under different rules. Would it be desirable 

for us to move to a principles-based accounting system here? And, 

if so, what should we do to look at that? And, secondly, can we do 

it given our litigation structure, which we have just been talking 

a lot about and has been one of the problems that has migrated accounting rules from principles-based, which they were some years 

ago, into this very much rule-based accounting that we have today? 

Mr. COX. Well, this whole debate about principles-based versus 

rule-based is very much at the center of attention around the world 

among global regulators and among market participants. The Congress has directed the SEC on multiple occasions, most recently in 

the Sarbanes-Oxley Act, to explore whether we cannot move to a 

principles-based system and how fast. So we know, in the wake of 

Enron, for example, that there was a great deal of attention paid 

to whether or not the complexity of accounting might not have been 

one of the contributing factors to people’s ability to get away with 

fraud because they could technically purport to comply with all 

sorts of detailed rules; but, if you took a few steps back and looked 

at the whole picture, it was fraudulent. If you had a principlesbased system, perhaps that might be a better way to get after the 

problem, and that is why, in SOX, that direction was given to the 

SEC. 

Meanwhile, around the rest of the world, there has not only been 

movement on this front but rather decisive action taken so that in 

2005, for example, the entire European Union mandated the use of 

35

international financial reporting standards, which have gone from 

a standing start to very mature in record time. The United States 

has been an active participant in this. Paul Volcker was the head 

of the IASB initially. And now we have foreign companies filing, as 

you point out, in the United States on our exchanges with U.S. listings using IFRS. So at the SEC we are now getting experience 

looking at IFRS right alongside U.S. GAAP. This summer, the 

Commission expects to put out a Concept Release asking the very 

questions that you put and putting them out for public comment, 

and we are going to see what the marketplace participants, investors, consumer advocates, everyone else has to say about it. 

Mr. CAMPBELL. Can we do it with our litigation—we have talked 

about this Schumer/Bloomberg report and that litigation is already 

a barrier to capital formation in the United States but if you go to 

principles-based, does that not become an even more ripe target for 

second guessing afterwards? 

Mr. COX. Not necessarily. I infer, however, from the way you put 

the question that your concern is that people would like to be able 

to point, in the event of litigation, to a very specific rule that they 

adhered to in order to protect themselves. 

Mr. CAMPBELL. Yes. 

Mr. COX. And there is no question that is part of the yin and 

yang of all of this. On the other hand, as regulators, as policymakers here in Congress, we want a system that prevents fraud, 

not that cleans up the mess after it happens. And so we should do 

everything within our power to make sure that the system really 

achieves the objectives that we intend. And I think we have to constantly look at this and constantly strive to make ourselves better. 

Private litigation is a very important adjunct to SEC enforcement. 

We want it. It needs to be there. But I think every shareholder 

that gets involved in litigation would much rather not have the 

problem in the first place. 

Mr. CAMPBELL. Right. Okay, one last real quick question. 

The CHAIRMAN. Quickly. 

Mr. CAMPBELL. Sorry? 

The CHAIRMAN. Quickly. 

Mr. CAMPBELL. Okay, just one very quick question, I believe you 

are looking at—there are all kinds of financial instruments that did 

not exist when the 1940 Act was put together, frankly there are 

some coming up that we did not think about 3 months ago, I know 

you are reviewing whether commodity index swaps are securities 

under the 1940 Act. Can you advise us as to the status of that and/

or how you are going to deal in the future with all these new financial products that are coming up as to whether—which somebody 

is thinking up something right now that none of us are anticipating 

as to whether— 

The CHAIRMAN. Why don’t we get the answer now. 

Mr. CAMPBELL. Sorry, thank you. Thank you, Mr. Chairman. 

Mr. COX. Well, I think where you were headed was to the much 

longer list of cross-jurisdictional issues with the CFTC, all of these 

products that are coming up either on the futures or options market and what we’re going to do about that. Because of the jurisdictional balkanization, if you will, that is based in statute, the best 

that we can do is work together. And so I have spent a great deal 

36

of time with the Chairman of CFTC and our Commission with their 

Commission, trying to work these things out one at a time. And our 

staffs are very much rolling up their sleeves trying to solve these 

problems together. 

There are very real markets and marketplace competitors that 

care a lot about these issues and for whom a great deal turns on 

whether something is or is not a security and whether it trades on 

one exchange or another. The margining is different. A lot hangs 

on this. And so we are under scrutiny and pressure when we make 

these decisions. But we want to make them as honestly and 

straightforwardly as we can. 

The CHAIRMAN. The gentleman from New York. 

Mr. MEEKS. Thank you, Mr. Chairman. I’m going to ask four 

questions and then just—they’re quick questions, and hopefully you 

can answer them before the gavel. One of course deals with, you 

know, Mr. Feeney and I have sponsored a bill dealing with Sarbanes-Oxley. One of the concerns that the bill addresses is the communication between management or management’s outside consultants and management’s auditors in relation to management conducting its assessment of its internal controls. Question: How will 

the rules and guidance you just released affect that relationship so 

that management’s assessment and the audit are more efficient 

and hopefully less costly? That’s one question. 

I also introduced—my second question is, I also introduced a bill 

with Mr. Tiberi on money market fund parity—H.R. 1171. This bill 

basically gives the ability of broker-dealers to use money market 

funds to meet their cash management obligations under the SEC 

rules. Shortly afterward, the SEC proposed rules to address the use 

of money market funds by broker-dealers, but it only addresses the 

2 percent haircut, and not to use the money market funds for special reserve accounts, collateral, or escrows. Clearly, AAA rated 

money market funds have a spotless track record. 

So my question is, don’t you think it would be preferable to allow 

broker-dealers to use AAA rated money market funds that provide 

greater safety and better yields than Treasury-only money market 

funds, and are you prepared to go further and consider revising the 

proposed rule changes to incorporate the provisions of H.R. 1171? 

The next question I had is basically, as I understand it, there’s 

another rule change. What impact will changing the NASD bylaws 

have on small to regional broker-dealers after losing their ability 

to be fully represented on the NASD’s board, were 43 percent of 

the—of almost all broker-dealers audited by the NASD within one 

year after signing a petition asking for an NASD investigation 

about threats against members? So that is my third question. 

And finally, if you get a chance to answer it, I also understand 

that mutual fund sale charges have declined significantly since 

12b-1 was adopted at that 12b-1 fees helped finance most of the administrative and other shareholder support functions that were 

previously performed by funds and are now performed by brokerdealers, and the other intermediaries who receive these fees. In 

light of this, what, if any, modification to Rule 12b-1 are necessary? 

Mr. COX. Thank you for those four questions. If it’s all right with 

you, I’m going to answer 1 and 4, and Commissioner Nazareth can 

answer 2 and 3, and we’ll mix it up here a little bit. 

37

You asked what impact our management guidance and the 

PCAOB’s new audit standard under SOX 404 is going to have on 

the efficiency of audits and the relationship between management 

and auditors. It’s a very important question and I’m very pleased 

to give the answer. The guidance and the new audit standards are 

going to make that process more efficient. That’s what we intend. 

We’re going to follow up to make sure that happens, and it’s intended to occur in two ways. 

First, the management guidance is coming from the SEC to the 

company concerning the company’s obligation under the first half 

of 404, 404(a), to do its own assessment of its own internal controls. 

Absent that guidance, before we had it, all there was, was the 

standard for the auditors, and it made it much more expensive. It 

also put the auditors in the driver’s seat when it came to that first 

part of 404, even though that’s not the way the statute is written. 

The second reason that it’s going to be more efficient is that the 

audit standard itself is more efficient. And so the auditors aren’t 

going to be forced to ask management to do things that aren’t material to the ultimate financial statements that the internal controls are supposed to support. They’re going to have an instinct for 

what truly matters, I like to say an instinct for the jugular rather 

than an instinct for the capillary. There will be a top-down approach, materiality-focused, risk-based and scalable for companies 

of all sizes. 

We also want to encourage management and auditors to talk to 

one another, and there is no reason in what we’re doing— 

The CHAIRMAN. To get all four answered, we’re going to have 

move a little quickly. 

Mr. COX. All right. The second, just very quickly, with respect to 

12b-1 fees, we just had a roundtable on these very questions to 

learn from the marketplace and all the participants, investors and 

others, what are the uses, positive and otherwise, that 12b-1 fees 

are put to, whether disclosure is adequate and where we should go. 

So we’re right in the middle of that process, and we will have more 

to report to you on that very soon. 

I will yield at this point to Commissioner Nazareth. 

Ms. NAZARETH. I’ll try to be very brief. I’ll answer the third question first. You know, the NASD bylaws for the newly constituted 

organization were filed with the Commission. The Commission will 

need to consider whether they are fair in that they have representatives on the board for all types of broker-dealers. My understanding is that small broker-dealers are well represented on the 

board, but there’s not one firm, one vote. It’s done on a sort of 

stratified basis, so that firms of different types are equally represented. So I actually think that small broker-dealers are well represented, but they’re not the only voice on the NASD board. 

As to the money market fund parity that you discussed, it’s an 

issue that the Commission is well aware of, and we put out for 

public comment a question on whether it’s something we should address. We know that there have been requests for us to let money 

market funds be used in these ways, but we take these issues very 

seriously, because the provision of the regulations in which this 

comes up relates to the protection of customer funds by brokerdealers, and there’s nothing that really has quite the same protecVerDate 0ct 09 2002 13:07 Nov 06, 2007 Jkt 037560 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\37560T~1.002 HFIN PsN: TERRIE
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tion for customer funds as Treasury securities. There are no specific rules distinguishing among money markets funds or identifying which funds could be used for regulatory purposes. There 

could be issues in certain money market funds that should disqualify a fund from being used for regulatory purposes. 

So, we’re aware of the issue. The proposed rules are out for public comment, and we look forward to what we get back in the public 

comment. 

The CHAIRMAN. The gentleman from Texas. 

Mr. MARCHANT. Thank you, Mr. Chairman. Commissioner Cox, 

recently a Federal appellate court held against the Commission 

concerning the rule that exempts brokers from giving investment 

advice. I understand you did not file an appeal but went ahead and 

asked for some time for the compliance by the brokers. How is that 

process going, and will it be done by October? 

Mr. COX. The reason that we didn’t appeal was simply the legal 

determination that we made, and I believe in which the SG’s office 

concurred, that the case would probably not be considered cert worthy by the U.S. Supreme Court. It was on that basis, not a policy 

basis, that the decision was made. And by the way, that’s the way 

we always handle those decisions. 

Going forward, because of the fact that this has now been dealt 

to us by the Court, we are moving as quickly as we can to deal 

with the real world situation. I’m trying to view this as an opportunity to revisit these issues and make sure that we have the most 

modern approach that most reflects today’s marketplace as we do 

it. To give ourselves some time to do that, we asked the Court of 

Appeals for a stay of 120 days of its decision so that the status quo 

can prevail in the marketplace, and the Court has just recently 

granted that stay. 

Mr. MARCHANT. Okay. On another subject, oftentimes the volatility in hedge funds is a result not so much of the long positions 

they hold, but the short positions that they hold. And my question 

is does this—is there any contemplation on the Commission’s part 

to require the listing of these entities on their disclosures to ask 

them to disclose their short positions as well as their long positions? 

Mr. COX. To the extent that you are speaking of hedge funds, I 

think our ability to require that kind of disclosure is exceptionally 

limited because they tend not to be publicly registered entities. 

And, to that extent, their disclosure that they make to their investors is a matter of marketplace negotiation rather than Federal 

mandate. 

Mr. MARCHANT. What about the entities that file under 13(f), (d), 

and (g)? The entities that are currently filing their positions? 

Mr. BACHUS. I think Commissioner Nazareth was prepared to 

answer the question. 

Ms. NAZARETH. Well, I was just going to— 

Mr. COX. Why don’t you answer. 

Ms. NAZARETH. Okay. As you know, we require the reporting of 

long positions because of concerns about change of control, and so 

we require the reporting of 5 percent ownership. We don’t require 

reporting on short positions, partly because that information could 

39

be used by manipulators, that is, used against the people who are 

holding the short positions. 

One thing that we did, I believe, was recommend and vote to put 

out for comment recently with respect to the concerns about naked 

short selling was the idea of disclosing on a lagged basis information on fails—fail positions, so that investors could see what were 

the securities for which there excessive fails to deliver. But we 

don’t have parity between short reporting and long reporting. 

Mr. COX. And I just confirmed that under 13(d), those who are 

filing under 13(d), the reporting is the same for long and short. 

Mr. MARCHANT. Okay. Thank you very much, Mr. Chairman. 

The CHAIRMAN. Thank you. Mr. Moore? 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman, and thanks 

to the Commissioners for being here. Chairman Frank and Mr. 

Sherman asked questions about the issue of proxy access. I’ve 

heard the SEC might be considering either a threshold amount of 

company holdings or a holding period as a way of conditioning 

proxy access, and I understand the interest in discouraging frivolous proposals by small or short-term holders, but I would—it 

would concern me if the SEC promulgated restrictions that would 

prohibit most shareholders from accessing the proxy. 

Chairman Cox and Ms. Nazareth, would you care to share your 

thoughts on this issue? 

Mr. COX. Yes. Just to remind you of the schedule, we expect to 

propose a rule for public comment, start it on a process that will 

take several months, probably at the end of next month. The Commission is still very much actively engaged in discussing what that 

proposal will look like. I think, just speaking for myself, that I 

would share your concerns about the Federal Government coming 

up with very particularized rules about how things ought to operate when fundamentally they are matters of State law. So a national bylaw, as it were, is not the kind of approach that I would 

favor. 

Mr. MOORE OF KANSAS. Ms. Nazareth, do you have any thoughts 

you’d like to share? 

Ms. NAZARETH. Well, I would agree that a rule that would allow 

shareholders more meaningful participation would foster more responsible behavior by boards and bolster investor confidence in the 

integrity of our markets, and so I also support the notion of addressing the proxy access issue as soon as we can. 

Mr. MOORE OF KANSAS. Thank you. Thank you, Mr. Chairman. 

Mr. PRICE. Thank you, Mr. Chairman. 

The CHAIRMAN. Sorry. Did we not get the gentleman from New 

Jersey? The gentleman from New Jersey first. 

Mr. GARRETT. Thank you. And thank you again. This week, as 

I made reference to in my opening comments, I made reference to 

a bill that I had. But this week I will be offering an amendment 

to the Financial Services appropriations bill. And what that 

amendment will do is what my other legislation would do, and that 

extend the current exemption for small businesses to comply with 

Section 404 of Sarbanes-Oxley. The amendment would in essence 

prohibit the SEC from forcing the small businesses to comply with 

404(a) for the fiscal year 2008. 

40

If any or all of you would just comment on the fact that in light 

of the fact that we’re here in this year with the change in the rules 

and sort of you might say in the middle of the game, why we 

should not be extending this exemption and giving the smaller 

companies who are not—don’t have the wherewithal as the large 

companies do to deal with this issue right at this point in time. 

Why shouldn’t we be extending it at this point? 

Mr. COX. I think we should. I think we need to give smaller companies more time. That’s why the SEC for the fourth time has extended it now all the way into 2009. We’ve broken up the requirement for smaller companies to comply with 404 into two phases. In 

the first phase, they will do only the management assessment 

part— 

Mr. GARRETT. Let me rephrase my question. 

Mr. COX. Yes. 

Mr. GARRETT. Then why shouldn’t we have the continuous extension for the entire element of 404 and not the broken up point as 

far as you’ve done? 

Mr. COX. Well, I think that the expense, as we have judged it, 

comes from the auditor’s attestation to the management’s assessment. As I mentioned earlier, many other countries, including the 

U.K., have the 404(a) piece, but we’re the only nation on earth that 

has 404(b). That’s where the friction has been, and that’s where 

we’re trying to focus our remedial efforts. 

Mr. GARRETT. Any other Commissioners want to—okay. Then 

picking up on your one comment with regard to the expense, apparently—and I apologize for not being able—the chairman knows we 

can’t be at two places at one time on these things. 

Someone else I guess from the committee asked the question as 

far as whether any or all of you are able to pinpoint or within a 

range the actual cost savings that we could potentially see from the 

new rules that are coming down. And correct me if I’m wrong, the 

testimony was that you were not able to give a range for that. Is 

that— 

Mr. COX. I think what we said was with respect to smaller public 

companies, that we have not made a specific dollar estimate, but 

that instead what we hope to do is to base an estimate going forward on the real life experience that we’ll have over the next year 

when the new management guidance and the new audit standard, 

AS5, are actually put in place. 

Mr. GARRETT. And if—first of all, if during that period of time 

and the real life experience comes out but you’re really not seeing 

the savings that you anticipated, then will there be a rollback as 

far as implementation of those rules on the smaller companies? 

And if there is, what would be the threshold that you’d be looking 

at as far as cost savings for these companies? 

Mr. COX. Well, first let me say, that’s not our plan. But, second, 

we have to be open always to the real world evidence that comes 

before our eyes. So we will be very attentive. We’re extremely interested in whether or not we have achieved the intended objective 

here of significantly reducing costs. 

I will say that I’ve gotten some episodic information about companies renegotiating their audit contracts with their auditors using 

the new AS5, even though it’s not in force yet; the SEC hasn’t yet 

41

finally voted on it, but the PCAOB has, and it’s out. The public 

knows what it looks like, and they have reported that they have 

been able to reduce their 404 costs by 50 percent in one case for 

a large company. 

If we get enough evidence like this that we’re successful, then I 

think we would stay on the schedule that we have announced. 

Mr. GARRETT. Well, in your report, you cite a study by CRA 

International that states that the average cost of compliance for a 

small company with market cap between $75 and $100 million—

$700 million is costing $860,000 a year, and of course that’s broken 

down into the second year as opposed to—essentially the second 

year after the first year of implementation. 

Is it also your understanding that you are not required, because 

this is a rule from Congress as opposed to a regulation, to comply 

with SBRFA then as far as if the amount of savings is under 1 percent as opposed to over 1 percent reporting back? 

Mr. COX. No. I think that earlier, I was simply trying to parse 

what it is that we’re accounting for and what we will always estimate is the effect of our rules, the costs and benefits of them, the 

cost, if you will, of management guidance we expect is negative. We 

expect it’s ameliorative. It’s going to reduce the cost of compliance, 

so that the costs that are being imposed are not from the incremental decisionmaking of the SEC to have management guidance 

or the PCAOB to have a new audit standard. Rather, those costs 

are imposed by Section 404 of Sarbanes-Oxley itself. And by changing the way that it’s applied and reducing that expense, we hope 

to have— 

Mr. GARRETT. Does it— 

The CHAIRMAN. I’m sorry. We have too limited time for another 

question. The time has expired. I’m now going to go to, because the 

gentlewoman from New York has been here very faithfully, but she 

had previously agreed to give up her time to the gentleman from 

New Hampshire. She has graciously agreed to give up her time, so 

I will now go to the gentleman from New Hampshire, then we’ll resume the regular rotation. 

Mr. HODES. Thank you, Mr. Chairman, and I thank the gentlewoman for yielding me the time. In looking at the Blackstone deal 

in the IPO, I found some things that were quite confusing. Blackstone seems to be made up of direct and indirect interests in hedge 

funds, private equity funds, and real estate funds. And under this 

arrangement, they claim that their holding company is made up of 

only 22 percent of assets. However, through indirect holdings, this 

appears not to be the case. In fact, it looks as though, as defined 

in the 1940 Act, interests in investment securities constitute 85 

percent of their assets. 

And we put up a chart which I’ve called Chart 1, which is taken 

off the SEC Web site and was in the Blackstone filings. And it appears that Blackstone is a loose association of companies. Investors 

are buying pieces of a limited partnership whose cashflow is derived from pools, which are at the bottom of that chart. And regardless of how it registers with the IRS, it seems to me this is an 

investment company. 

Now it’s important because of issues of transparency, accountability, and fiduciary duty. Because the 1940 Act requires compaVerDate 0ct 09 2002 13:07 Nov 06, 2007 Jkt 037560 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\37560T~1.002 HFIN PsN: TERRIE
42

nies to adhere to fiduciary duties to their public investors. I went 

into the offering documents and looked at Form S–1 filed with the 

SEC at pages 179 and then 182 to 185. In those documents, Blackstone explicitly disclaims any fiduciary duties to investors in the 

IPO that it might otherwise owe under the State law of Delaware. 

Now let’s take a look at Chart 2, which is actually, frankly, a 

simplified version of Chart 1. And I apologize to those to my left 

who are blocked by the chart. Now the cloud in the middle are the 

holding companies, and it’s a cloud which in my view needs to be 

more transparent. I think investors need more information on 

where their money is going. 

I’m also extremely concerned about the potential national security risks of this deal, because the 1940 Act requires companies to 

adopt key investor protections, including mandatory disclosures 

about the nature of their assets, and Blackstone has not disclosed 

what the underlying assets of this entity are in any meaningful detail. In looking at the deal, I was surprised to learn in press reports 

that the Chinese government has bought a 44 percent stake of 

what Blackstone has offered to the public, owning $3 billion worth 

of nonvoting shares at a preferred rate, while Blackstone’s S–1 

forms submitted to the SEC simply talk about a State investment 

company, never mentioning the word ‘‘China.’’ So I have serious 

concerns about China’s ownership of Blackstone’s holdings, because 

the holdings include companies that provide software and applications for use by the military and satellite technology, and I consider the lack of disclosure unacceptable. 

So, given the precedent that this private equity going public filing has, and we expect to see a lot more of these kinds of filings, 

and given the increasing number of Americans who are investing 

in securities, as you point out, the structure of Blackstone looks 

like an investment company, whose disclosures are incomprehensible, and it owes no duty to its investors. The message that 

emerges is, as long as you create a complex enough corporate structure, you can evade the Investment Company Act of 1940. 

Now I hope you agree that this is not how that Act should be 

interpreted and enforced. I’d like to know what steps the Commission is taking to ensure the integrity of the Investment Company 

Act of 1940 in the context of this offering, whether you believe the 

Investment Act of 1940 is adequate for you to regulate, and if it 

is inadequate, to impose fiduciary duties on Blackstone, do you 

agree that legislative action is necessary? Do you want to wait for 

the lawsuits that would be inevitable that my colleagues on the 

other side of the aisle seem to feel so bitterly about? Or are there 

other remedies available to the SEC to deal with the issue? And 

the crux of it is the fiduciary duties. 

Thank you, Mr. Chairman. 

Mr. COX. Thank you, and I think you’ve elaborately laid out a 

great many questions. Let me try and address as many of them as 

I can get at here. First, I am advised that the Chinese stake was 

in fact explicitly disclosed, and that China does appear in the S–

1. It may not have appeared at the portion that you focused on, but 

it is, I am told, plainly disclosed. 

Second, the role of the SEC in doing all of its review of the S–

1 was not to evaluate the merits of the transaction, the propriety 

43

or advisability of the structure of the transaction, but rather determine whether the company’s filing met SEC requirements for disclosure. Those requirements are designed, as you know, to make 

sure that all material information, positive or negative, is presented to investors. When the staff made the decision to grant 

Blackstone’s request to declare the registration statement effective, 

the SEC had no reason to believe that Blackstone’s disclosures 

were not in full compliance with the Federal securities laws or that 

the public was not fully advised about the potential for, for example, a different tax treatment or about the Chinese ownership 

stake, which you mentioned. 

In the process of the Division of Corporation Finance’s review of 

the S–1, we referred it to the Division of Investment Management 

to consider the Investment Company Act questions that you raise. 

They determined under the Investment Company Act that Blackstone doesn’t meet either of the two most relevant tests for determining whether it is an investment company. Specifically, it is not, 

they determined, and does not hold itself out as, primarily engaged 

in the business of investing in securities with its own assets. The 

funds that Blackstone manages are indeed investment companies, 

but the fund manager is not under the law. 

The second test was whether the issuer was engaged in the business of investing in securities and owns investment securities exceeding in value 40 percent of its total assets. Based on the information in Blackstone’s registration statement and additional information that was provided by Blackstone at the Commission’s request, Commission staff determined that the value of Blackstone’s 

investment securities was less than 40 percent of its total assets. 

Mr. HODES. Thank you. 

The CHAIRMAN. The gentleman from Georgia. 

Mr. PRICE. Thank you, Mr. Chairman. I appreciate that. I don’t 

have any charts, so my questions may not be as clear. However, I 

want to talk a bit about settlement extortion and the consequences 

thereof. 

My understanding that over 75 percent of the IPOs that are 

started now are offshore or not in the United States worldwide, 

and there’s a reason for this. There are a lot of reasons for this. 

One of them I believe to be the threat of liability. Settlement figures and security class lawsuits are clearly on the rise. The amount 

of money that was agreed to in settlement over the last 10 years, 

my understanding is, was greater than $43 billion. That’s in settlements. If you exclude Enron and four other mammoth settlements 

in excess of a billion dollars, the average settlement in 2006 was 

$45 million, which is twice the average in 2005. 

Multiple analyses have looked at this. A recent NERA study 

showed that settlements increased with the depth of defendant’s 

pockets, with big claims in deep pockets seemed to be leading to 

larger and larger settlements regardless of the merits of the underlying claims. So my question would be, what do you believe can be 

done, if anything, to ensure that securities class actions provide 

fair compensation to the injured investors rather than simply a tool 

for extortion by plaintiff’s lawyers? 

Mr. COX. Well, it’s a very broad question, and it highlights the 

negative aspect of what also has a lot of positive aspects. ObviVerDate 0ct 09 2002 13:07 Nov 06, 2007 Jkt 037560 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\37560T~1.002 HFIN PsN: TERRIE
44

ously, every shareholder deserves redress, and we want to make 

sure we always have a system in which people can bring their 

claims, have them adjudicated and get what the law says they are 

entitled to. 

There is so much money involved in many of these lawsuits that, 

as in all things in which a great deal of money is involved, as we 

find out to our chagrin every day at the SEC, there is always fraud 

at the margin. We want to make sure that when that occurs, we 

have ways to deal with it. So it starts obviously with the Article 

3 branch. Judges have to be very attentive to this. Congress has 

played a role in this with the Securities Litigation Reform Act, 

which gave judges new tools. We want to make sure always that 

those precepts are followed so that the interests of investors are 

put first. 

Mr. PRICE. Do you believe any action is needed by Congress or 

by the SEC at this point in this area? 

Mr. COX. Well, you know, the SEC did in fact file an amicus brief 

with the Supreme Court in a case that involved the Securities Litigation Reform Act to make sure that the yang of the yin and yang 

here is also always kept uppermost in mind. And we will continue 

to do that. We’ve filed over two dozen briefs since the Securities 

Litigation Reform Act was enacted. That’s part of our charter, because under the securities laws, private litigation is meant to carry 

out the public purposes that the SEC itself is charged with enforcing. 

Mr. PRICE. You would agree that the public purposes are carried 

out when the awards or the monetary settlements reach the investors that have been harmed to the greatest degree, would you not? 

Mr. COX. Precisely. 

Mr. PRICE. Let me move to executive compensation if I may. 

We’ve moved a bill through this committee to address that issue. 

It’s my belief that the SEC’s new disclosure requirements, which 

are being implemented, are a major step in the right direction, and 

I wonder if you might offer an opinion as to whether or not you 

believe any act by Congress is needed at this time until we see the 

results of the disclosure requirements that the SEC has put in 

place. 

Mr. COX. We are, of course, very, very busy ourselves being inductive about what’s going on in the real world with this new disclosure, how are people handling it, is it exactly what we hoped it 

would be, and so on. We don’t know the answers to those questions 

yet, but we’re going to make a full report very, very soon. 

I’m very acutely aware of the difference between my role now as 

one who administers the laws rather than one who makes them, 

and we will be very respectful of any guidance that Congress gives 

us on these subjects. 

Mr. PRICE. I want to quickly move to—and I appreciate that. I 

think it’s important that Congress not act until we see the results 

of the work that the SEC has done. I want to move very quickly 

to the issue of regulation. Dual regulator, we divide our regulation 

into two categories, securities and futures. And I wondered if you 

might have any opinion regarding the ease of efficiency for the SEC 

or elsewhere that might be benefitted by a single regulatory 

scheme. 

45

Mr. COX. Well, such a scheme exists in other countries. I don’t 

know if Commissioner Campos wants to comment on his extensive 

international experience, but it sometimes produces puzzlement 

when we deal abroad, when people have to understand how we do 

it somewhat uniquely in the United States of America. We have, 

on the other hand, very understandable historic reasons for our 

setup, and there are also some very realistic things we have to take 

into account about how difficult it might be even for the Congress 

to try to undertake a revisitation of that jurisdictional allocation. 

So— 

Mr. PRICE. Efficiencies might be gained, though. Would you— 

Mr. COX. I don’t think there’s any question that anything that 

you can do to rationalize the treatment of what should be competitive products across the different markets would be a good thing 

for capital markets and a good thing for investors. 

Mr. PRICE. Thank you. I yield back. 

The CHAIRMAN. The gentleman from Texas, who graciously filled 

in for me. 

Mr. HINOJOSA. Thank you, Mr. Chairman. I wish to address my 

question to Commissioner Campos. I am delighted to see you here 

as a panelist. I happen to represent Harlingen, your home town, 

and I am delighted to see you here as one of our presenters. 

I understand there is a pilot program underway allowing options 

to be priced in the penny increments rather than in nickels. 

I also understand that the results so far have been promising 

and have narrowed spreads for investors, thus, saving money. 

Please share with us your thoughts on expanding the pilot program to additional issues given the savings to investors. 

Mr. CAMPOS. First of all, I know that Harlingen is in good hands, 

Congressman. 

That particular program, that pilot, is going well. I think our 

staff is very busy studying the results. We believe that there will 

be opportunities to expand that pilot further, and we want to do 

it carefully and in a way that is appropriate given the costs, given 

the broadband that is necessary in this particular area. 

Mr. HINOJOSA. Does your budget have enough money to expand 

it, double it possibly, in the future? 

Mr. CAMPOS. I would assume we have enough for that. If not, our 

Chairman is very capable of coming to you and asking for more. 

Mr. HINOJOSA. As many of you may be aware, Congresswoman 

Judy Biggert and I co-founded and currently co-chair the Financial 

and Economic Literacy Caucus. Its goal is to improve financial literacy rates for individuals across the United States during all 

stages of life, and the SEC is a member of that 20 agency strong 

financial literacy education commission. 

As such, I have heard many good things about your financial literacy program as well as those of the Federal Reserve. 

My question then would be to Chairman Cox, what programs do 

you currently have operating financial literacy across the United 

States? 

Mr. COX. It is a pleasure to be able to talk about them and brag 

about them. Our Office of Investor Education and Assistance is 

really the front door to the SEC for many individual investors. Besides handling all of our retail interaction, positive and negative inVerDate 0ct 09 2002 13:07 Nov 06, 2007 Jkt 037560 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\37560T~1.002 HFIN PsN: TERRIE
46

vestor complaints and suggestions and so on, we have investor education initiatives that we take on the road. 

We have almost weekly, certainly monthly programs that we are 

sponsoring or participating in around the country. We have 11 offices, of course. We also go to places where we have no offices at 

all to participate in investor education and financial literacy initiatives. 

We partner not only with other levels of government, but with 

private sector organizations in seminars devoted to adult education 

and school age education when it comes to financial literacy. We 

work with public libraries and schools to put out brochures and the 

sorts of things you can also get directly on our Web site. 

We have a very expansive SEC Web site devoted to financial literacy and beyond the information it contains, it links to still more 

places where investors can get information. 

Mr. HINOJOSA. Chairman, that is a good answer, but let me tell 

you where it is not working. The savings percent throughout the 

country has dropped from a positive 3 percent to a negative 1.5 

percent. 

If we are going to be able to measure how this program is doing, 

it would get a very negative or at least an ‘‘F.’’ We are going to 

need the partners to work with us to see how we can turn this 

around and get back up into the positive. 

Seeing that my time is almost up, Mr. Chairman, I am going to 

yield back. 

The CHAIRMAN. I thank the gentleman. The gentleman from 

Florida is now recognized. 

Mr. FEENEY. Thank you, Mr. Chairman. Welcome to all the Commissioners. I share the concerns that have been expressed by a 

number of my colleagues about American international competitiveness. I have had a good deal to say about it, as Congressman 

Meeks said, we have a bill that would fundamentally and radically 

change the way Section 404 is applied. 

I am concerned that perhaps the lack of willingness to let smaller companies—I have defined that in our bill as $750 million in 

capitalization or less, for example, are under the gun. I think that 

has a lot of unintended consequences. 

Chairman Cox, I know you have concerns as well. I have a lot 

less patience probably than you with respect to what I perceive to 

be the loss of American capital leadership, which is pretty dramatic. 

Before SOX was imposed, something like 90 cents of every foreign IPO that raised money was doing it in the United States capital markets. Just last year, there were 557 non-U.S. company 

IPOs in the London Stock Exchange, and just 28 non-U.S. company 

IPOs in the New York Stock Exchange. 

By a 95 to 5 ratio in that specific instance, we totally flipped the 

odds from nine to one to in some cases nine to one. It is not just 

the—by the way, I talked to Chief Financial Officer Tong in Hong 

Kong, and asked him whether or not a Hong Kong capitalist going 

public would consider listing on the U.S. markets as opposed to 

Hong Kong, and he laughed at me. He said that after SarbanesOxley, they would not even dream of such a thing. 

The evidence is anecdotal. It is significant. 

47

Chairman Cox, as I understood it earlier, you said during the extensive debate on Section 404, that there were no specific estimates 

given about the cost of 404 compliance. 

In fact, and I was not here at the time, but I have gone through 

the record, and there was no debate about 404 in this committee; 

404 was added in the Senate. We did not have hearings over here. 

The SEC actually filed a document in the Senate proceedings 

saying that they estimated the aggregate amount of costs to implement 404(a) of SOX would be around $1.24 billion; in fact, it has 

been on the order of 20 to 30 times that. 

Even by government standards, being off by a factor of 20 or 30 

is not really good work. With all due respect to the Commissioners, 

you have now said that you are going to decline to give an estimate 

of what the compliance costs are likely to be, although finally, we 

are at least looking at costs versus advantages. 

I have a huge concern if we have no idea now what costs are 

going to be that we still have these smaller companies under the 

gun. I have concerns about other aspects. 

Given the Committee’s testimony that we have this brand new 

auditing standard to streamline and improve the audit of a company’s internal controls, brand new, we do not know what the costs 

are going to be imposed, and yet we are insisting that as of 2009, 

we are going to require all these companies—I think you are going 

to continue to see companies by and large flee U.S. markets for 

overseas markets. 

You are going to continue to see companies de-list. The thing you 

do not see is the potential companies that might go public, to their 

advantage and to the advantage of investors. We do not know how 

to quantify that loss to the American economy. 

One study published, not conducted but published, by the American Enterprise and The Brookings Institute says that the indirect 

costs on the U.S. economy for loss of opportunity is on the order 

of $1.1 trillion a year. 

If 100 economists do that study, we will get 100 different answers. If they are even close to correct, it is about a 5, or in that 

case 10, percent tax on the American economy merely because of 

Section 404, which was never even debated in this committee. 

I guess I would like to have your response to that. By the way, 

I want to weigh in on Stoneridge. I am really upset given the universal understanding that litigation burdens in the United States 

is another detriment. That is another matter. 

I will let you respond to my rant and rave on the lack of aggressive reform of 404. 

Mr. COX. I cannot take, as Chairman of the SEC, responsibility 

for the infamous estimate, the cost of 404, because I was in another 

place responsible for Sarbanes-Oxley itself as a member of the conference committee in the House and the Senate, as were many of 

the colleagues here on the committee. 

You are absolutely right that none of us expected that 404, the 

language of which had been borrowed from the FDIC Improvement 

Act, would have dramatically different consequences when applied 

generally to corporate America than it did when it was applied to 

banks. 

48

My diagnosis—and I think this is something that my colleagues 

would probably agree with—is that the big difference was that we 

had a very elaborate audit standard put in place to implement 404 

that did not exist with FDICIA. 

The audit standard itself was not only used for the auditors, but 

it was also used as a proxy by management because there was no 

separate guidance for management on how they should do their 

part under 404. And that made what was already an expensive 

audit standard even more expensive. 

What we have done, including 2 years of work, is for the first 

time provide guidance directly to management that is very simple 

and straightforward and easy for them to understand, that does 

not involve them in having to reverse engineer the long audit 

standard that was meant not for them but for auditors all along. 

Second, the Public Company Accounting Oversight Board, a SOX 

creation, as you know, which promulgated the original audit standard, has completely repealed it and replaced it with something that 

is much shorter, half the length, written in plain English, top 

down, risk based, materiality focused, and scaleable for companies 

of all sizes. 

We expect that the combination of this management guidance 

and the new audit standard from the PCAOB will dramatically improve the ability of companies of all sizes to comply with SOX 404 

in a cost efficient way. 

You are absolutely right that was not the case previously, and 

that is why we needed to do all this work. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLAY. Thank you, Mr. Chairman. I thank the Commission 

for appearing before the committee today. It is good to see the 

Chairman back in this room where he had done so much work. 

Let me first ask Ms. Casey a question. I understand that industry-wide, there are over one million client accounts that will have 

to be transferred. That means one million client contacts, one million clients consenting to changes, and one million headaches. 

Do you believe that October 1st provides a sufficient amount of 

time for affected entities to make contact to their clients, receive 

the necessary consent, and deal with the paperwork and technical 

challenges that are involved in transitioning accounts? 

Ms. CASEY. I appreciate the question, Congressman. As earlier 

mentioned by the Chairman, the Commission is actively working to 

try to address the impact of the Court’s decision and minimize 

what will definitely be a significant dislocation for as you note, a 

million account holders. 

I think that as we noted, the Commission had also anticipated 

some of the broader issues that we would have to contemplate by 

seeking a study by Rand on some of the considerations that we 

should take into account as we look to the changing nature of the 

marketplace as far as investment advisors and broker-dealers. 

In the short term, however, I think that we are very keenly focused on trying to address the issues of dislocation and work with 

the industry to ensure that we are able to adjust to the decision 

effectively, and again, I think the grant of the stay will significantly help us do that. 

49

Mr. CLAY. Thank you for that response. Chairman Cox, you stated in a speech last July regarding the Commission’s soft dollar initiative that, ‘‘Today’s interpretative release brings our guidance up 

to date and removes some of the uncertainties about how this 30 

year old law applies in the current environment.’’ 

You also noted that, ‘‘The release clarifies the rules that apply 

to Commission sharing arrangements among money managers, brokers and third party research providers. 

It gives the industry needed flexibility to structure a variety of 

arrangements consistent with the purposes of the statute. This 

flexibility will contribute to improved efficiencies in the marketplace for research, which will directly benefit investors.’’ 

What has happened in the year since the interpretative release 

to warrant a call for fully repealing the safe harbor provision, and 

are you indicating that there are no further steps the Commission 

can take to add clarity to the provision, or are further changes currently under discussion at the Commission? 

Mr. COX. Thank you. Further changes and further clarifications 

are possible from the Commission, for example, in the disclosure 

area. 

At the same time, what the Commission can do in overall flexibility and freedom of action here is limited by very specific statutory provisions of Section 28(e); and, to the extent that we are 

going to address the fundamental issues of conflicts of interest, potential for higher brokerage costs, difficulties in administration, 

and hindrances generally to the development of efficient markets, 

Congress is going to have to look at that. 

What we do is we administer the laws as we find them in 28(e), 

which as we all know relates back to the situation 30 years ago 

when we unfixed brokerage commissions and is a fixture unless 

Congress addresses it. 

Mr. CLAY. Thank you for that response. I may have time for one 

more question. I am aware that the Commission recently held a 

roundtable discussion on the issue of Rule 12b-1. I understand that 

the rule has proven an extremely effective method of increasing 

mutual fund investor choice and paying for mutual fund distribution. 

Can you tell me what prompted the Commission to hold the 

roundtable? 

Mr. COX. Yes. Since the rule was put in place, a great deal has 

changed. The original context in which Rule 12b-1 was adopted was 

one in which the mutual fund industry was in its infancy. It was 

in fact a period of net redemptions. There was some concern that 

the industry might suffer crib death. 

It was thought important—because mutual funds were thought 

to be a good thing—that there be an allowance made, particularly 

to deal with temporary imbalances, to use fund assets in order to 

promote the sale of shares in the fund to other investors. 

Things are very different now. The industry is very, very mature. 

At a minimum, it is high time that we take a top to bottom look 

of the original purposes of the rule, the way it has morphed into 

something very different, and whether or not we have it right. 

Mr. CLAY. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Illinois. 

50

Let me just say to the Commission, we are very grateful. I know 

we have been here for 3 hours. We only have a few members who 

have been very faithful, and I think we can clean this up in about 

half an hour or so, if that is possible, we very much appreciate your 

indulgence. We want to be respectful to the members who stayed. 

The gentleman from Illinois. Thank you. 

Mr. ROSKAM. Thank you, Mr. Chairman. Long time listener, first 

time caller, this afternoon. 

Mr. Chairman, this past week, I have been to two baseball games 

out at RFK. I saw the Nationals lose to the Detroit Tigers. Last 

night, a far more exciting game, the congressional game. I paid a 

lot of attention to the umpires when they were there. It strikes me 

that your demeanor today transitioning from your role as a policymaker to your role now is, really, you are calling balls and strikes. 

I noticed in the earlier conversation that you had with Mr. Kanjorski from Pennsylvania, your careful use of language. I mean that 

respectfully, not parsing use of language, but careful use of language. How you characterized the American economy as robust and 

dynamic and so forth, and that you would sign onto that characterization, but you also said hey, there is more opportunity for us to 

improve. 

You also used that same admonition to the Congress about well, 

let’s make sure there is a sense of equity between public company 

taxation and private company taxation or private equity taxation. 

Of course, people like me, we all tend to hear in your words what 

we want to hear and I think you will probably see quotations later 

on about how we have interpreted what you have said in different 

debates, and in the months to come, we will all recollect, well, we 

had Chairman Cox here, and he said, and we will have different 

recollections of that. 

One of the things that is interesting to me is your high view of 

what you did not say but what I think is the doctrine of stare decisis, and your decision to move forward with a request in the 

Stoneridge case, to move forward with the amicus brief request and 

so forth. 

Can you just give me your thinking on that? Was that a decision 

that was look, I have this new role, and stability is very, very important here, and I understand that thinking, or alternatively, do 

you believe first and foremost that animating the plaintiff’s bar in 

this class action type of environment helps the SEC to do its enforcement, or is there some rationale in between there? 

Mr. COX. First, thank you for your compliments. I think your interpretation of what I have been attempting to get across here 

today is fairly accurate, including the priority that I place on predictability in rulemaking and enforcement from the Securities and 

Exchange Commission. 

I think it is absolutely vitally important that our actions be 

knowable in advance. Otherwise, there is not law, but something 

else, a lot of government power being exercised arbitrarily. 

I do not think there is anywhere where it could be more important for there to be predictability and clarity in rulemaking than 

when it comes to our capital markets because so much is at stake. 

People have to make big bets whether or not what they are doing 

51

is the right thing to do and they need assurance that they have it 

lined up the right way. 

I think we do a great disservice when we do anything but clear 

and predictable rules based and law based. 

That is not to say this was an easy case or there was an automatic outcome. I think you also put your finger on the fact that 

sometimes getting it right means undoing what you have done once 

before. 

I did not reflexively follow the unanimous decision of 2004, but 

rather looked carefully at what was before me. 

The staff recommended that the Commission request the Solicitor General’s Office to file an amicus curiae brief, as you know, in 

support of the plaintiffs in Stoneridge. On May 29th and 30th—because we have a seriatim process, it occurred over 2 days—the 

Commission voted to approve that recommendation. 

I think it is probably not well known that there were two parts 

to that recommendation in support of the plaintiffs, and, on one 

point, the Commission was unanimous. 

I think all of us paid a great deal of attention to, as you put it, 

STARE decisis, and all of us paid a good deal of attention to whether or not we had it exactly right. We came out slightly different as 

Commissioners, well, exactly opposite in the end, although these 

are closer calls, as you know, then when you push the red button 

and green button, you are completely one way, and that does not 

mean it is always easy. 

I think everyone here, whichever way they decided that case, and 

they are all here, so you can ask them, but I think everyone here 

is concerned that litigation be used to proper ends, and that we not 

open a Pandora’s Box and so on. 

What is going on in that case is that we are focused on when conduct is fraudulent and whether conduct can be fraudulent. I think 

the Commissioners believe it can be, and they also focused on the 

circumstances of the particular case and whether or not that case 

should go forward. 

I hope that provides a little bit more context. 

The CHAIRMAN. I would just add that we can tell you there is 

nothing new about his being very precise in his language. We remember a similar position when he was here. Probably because 

when he was here, precision in language stood out by contrast. 

The gentleman from North Carolina. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

Chairman Cox, one of the great frustrations in dealing with corporate governance issues is the inability of shareholders to hold 

corporate management accountable, the inability of shareholders to 

elect directors who will be truly independent and will look after the 

interest of shareholders and not simply follow the cues of management. 

That is certainly true in executive compensation, but it is true 

on a lot of issues. 

You said in the beginning of your testimony that one of the great 

accomplishments of our economy is that more than half of Americans own stock now, but broker-dealers are the nominal holders of 

70 to 80 percent of stock. It is in their name. It is not in the name 

of the person whose money paid for the stock, the beneficial owner, 

52

and under the current law, they can vote those shares as long as 

they do not have in advance of a shareholder meeting specific instructions from the beneficial owner, the person whose money 

bought the stock. The beneficial owners never provide instructions 

in advance. 

Shareholder democracy advocates say that creates a mismatch 

when there is a shareholder challenge to management like the single protestor standing in front of the tank in Tiananmen Square. 

I know you answered earlier in response to Mr. Watt’s questions 

that the SEC is now reviewing the New York Stock Exchange proposed rule that would change and no longer allow broker-dealers 

as nominal holders of the stock to vote in director elections. 

Apparently, it changed the result in the CVS-Caremark case 

where advocates, shareholder democracy advocates, were trying to 

depose Roger Hedrick. 

I have two questions. One is, do you see a problem that brokerdealers as nominal holders of stock are changing the results of important votes over what the beneficial voters voting their own 

stocks would have decided? Second, should it be transparent? 

The shareholders who tried to depose Roger Hedrick, including 

pension fund managers, including the Treasurer of North Carolina, 

Richard Moore, had been trying to find out how the votes were cast 

and they had been stiff armed. 

If broker-dealers as the nominal holders of stocks are voting on 

directors and if we pass the legislation to require a vote on executive compensation, should we be able to see how broker-dealers are 

voting different from those beneficial holders are voting their own 

interest? 

Mr. COX. Apparently, you heard the response to the earlier question, so I will not go over that old ground with respect to the New 

York Stock Exchange proposal and so on. 

To take your question or the questions in order, first, the propriety of the whole idea of broker voting. As you know, it comes 

about because: First, shareholders decide to hold not in their name 

but in street name; and second, they provide no voting instructions. 

In the case particularly of mutual funds and smaller companies—by the way, this phenomenon tends to be most prominent 

with retail investors and they tend to be more numerous among investors in mutual funds and medium and small companies. They 

have special problems in reaching a quorum. 

To really simplify the analogy, if you have a homeowners association and the neighbors do not send their ballots in, then you cannot 

ever do anything. The proxy solicitation costs go up. That is now 

a shareholder cost. 

There are countervailing reasons that also weigh in the balance 

against the idea that it should be only people who own the shares 

and not their nominees who vote. 

There is some voluntariness in the process, too, because these 

people, as I say, have not provided voting instructions. 

The question then separately of private/secret ballot voting on 

the one hand or public voting on the other hand also has two edges 

to it. People can be very passionate—investors from all quarters, 

large and small—about making sure that their privacy is respected, 

making sure there is a secret ballot. 

53

Other people from exactly the same quarters can make the argument just as strongly that we ought to know, particularly when 

somebody is purporting to vote for someone else, what they are 

doing. I think you have made reference to that argument well here 

just now. 

This is all in the mix of what we are considering as we consider 

not only broker voting but these related questions of empty voting 

and under voting and over voting and so on, all of it relates to the 

proxy mechanism. 

As we come up with new proxy rules this year, we are trying to 

make sure we have a good handle on all of this. 

Mr. MILLER OF NORTH CAROLINA. ‘‘Maybe’’ is the answer to both 

of my questions? 

Mr. COX. I think because it is a work in progress, it has to be 

that. That is the true and faithful answer. 

The CHAIRMAN. There is a lot of interest in this and the question 

of third party voting and public disclosure, we took that step with 

the mutual funds, your successor in Congress, Mr. Campbell, has 

been interested in that. 

I can just say now when that rule is promulgated, the combined 

proxy access broker voting, we will have a full hearing on that. 

There is a great deal of interest. 

Mr. COX. We are considering all of these issues in the context of 

our proxy rules, and we will probably ask questions in the release 

when we put out our proxy rules. I do not know they will be the 

same rule. 

The CHAIRMAN. I appreciate it. We will have a hearing and we 

will address it and answer your questions. 

The gentleman from Georgia. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Mr. Cox, tell me what your definition of ‘‘non-binding shareholder 

proposal’’ is. 

Mr. COX. We are talking, I think, now about State law, and the 

question would be resolved under State law. Do the shareholders 

have the power under the law, the law of the jurisdiction of the 

company in which they have invested, to do something or not? If 

they do not, then the proposal is purely precatory. Otherwise, it 

can bind the company. 

Mr. SCOTT. How do you personally feel about non-binding shareholder proposals? 

Mr. COX. I am not sure I understand your question. Do I like 

them or not? 

Mr. SCOTT. Yes. I want to try to start by getting a feel, and according to my information, at a recent Securities and Exchange 

Commission Proxy Roundtable meetings, there have been discussions about making amendments to your rules to restrict non-binding shareholder proposals. 

That is why I want to get your understanding of them, what they 

are, so that we have a standard of what it is that at these proxy 

meetings that folks are thinking about changing and amending the 

rules to. 

First of all, I want to make sure we get an understanding of 

what they are and then we can better understand why you would 

want to amend the rules regarding them. 

54

Mr. COX. During this roundtable, in fact, a series of roundtables, 

to which you allude, we received a good deal of healthy contribution to our knowledge and understanding of precatory proposals, 

non-binding proposals, and shareholder resolutions in the current 

environment. 

Many of the investor representatives whom we heard from said 

that this is a useful way, and these resolutions are a useful way 

of communicating with management. We want to make sure that 

we have at the SEC a healthy communication at all times between 

management and companies, and, indeed, we are looking for ways 

to enhance that. 

One of the things that we talked about was the opportunity for 

an electronic shareholder form, whether or not more could be done 

with the Internet, and whether or not our proxy rules might stand 

in the way of any of that. 

I think there is concern coming the other way that precatory proposals can be a distraction or a nuisance or sometimes can tread 

on the authority or the sovereignty of the directors or the executives who run the company under State law, and that tolerating 

them is negative. We heard a little bit of that as well. 

Mr. SCOTT. Could you give me an example of that? Could you 

give me an example of how they would be harmful to management? 

Mr. COX. I think the argument goes that management has to respond to these, that the general dichotomy in State law is that 

shareholders get to elect directors. They get certain financial 

rights, but they do not get to run the company. It is not a democracy in that sense. It is much more a republic. 

When shareholders reach into responsibilities that belong under 

law to directors or management, there are costs and consequences 

that are illegitimate. I think that is the argument. 

Mr. SCOTT. But they are non-binding? 

Mr. COX. Yes, indeed. 

Mr. SCOTT. If they are non-binding— 

Mr. COX. They are non-binding and therefore there is a limit. I 

certainly agree with the implication of your question. There is a 

limit to the distraction and the costs that can be involved. 

That is in any case another argument that we heard at the 

Roundtable. 

You asked me how I feel about these things. My view is, as with 

everything else, we want to keep the costs down; and, in this case, 

we want to get all the benefit we possibly can from shareholder 

communication with investors. We want directors to be exceptionally attentive to the wishes of the investors because that is who 

elected them. Their job is to look after the company for the investors. 

The more communication, the better. We are looking for cost effective ways to facilitate that that do not interfere with the running of the company. 

The CHAIRMAN. A quick comment from the gentleman from 

Texas. 

Mr. GREEN. Thank you, Mr. Chairman. Mr. Chairman, because 

so much has been said about lawyers today, I feel compelled to say 

this: This is the greatest country in the world. 

55

One of the things that makes it great is the civil justice system, 

a system wherein persons will respect the rulings of courts and decisions accorded. 

My suspicion is that if we could get the system that we have 

here, in Iraq, it would be a day of great celebration. 

I do not in any way demean hedge fund managers for the enormous amount of money that they make. I do not demean CEOs 

who make more before noon than a minimum wage worker might 

make all year. I just think that the workers ought to make more. 

I think we ought to increase the minimum wage. 

I mention this because I think that we ought to be careful how 

we demean this great system that we have as it relates to the role 

of the trial lawyer. 

Having said that, I would like to talk to you very briefly about 

what I call pre-screening dubiety. Commissioner Campos, if I may, 

I would like to address you for just a moment. 

You have expressed some consternation about this pre-screening 

process as it relates to the lawyers for the Commission having to 

receive some indication from the Commission as to how they should 

proceed with settlement negotiations. 

My first question to you, Mr. Campos, is this: Do you have any 

tangible evidence of a public hue and cry for this new policy? Was 

there any public demand for a change in the policy that you are 

aware of? 

Mr. CAMPOS. I am not aware of any public demand, but that is 

not something we would normally look for. The enforcement process within the SEC is something that we as a Commission and 

through the auspices of the Chairman and the Enforcement group 

have worked out systems and programs. 

Mr. GREEN. Absolutely. 

Mr. CAMPOS. That work well to protect— 

Mr. GREEN. If I may just ask one more question, did the lawyers, 

the lawyers who are there involved and engaged in the process, did 

they ask for this change in policy? 

Mr. CAMPOS. No, but again, that is not normally something that 

the staff would ask for. 

Mr. GREEN. Is there any indication that there has been some 

abuse of the old policy? 

Mr. CAMPOS. Again, no. You should know, and I think you do, 

that this is a pilot situation, and the Chairman is very well aware 

of the concerns that I have. 

Mr. GREEN. May I ask a question about that? With this pilot, 

and perhaps Mr. Chairman, I would ask you this question, with the 

pilot program, could you give me the end date of the pilot program? 

When will it end? 

Mr. COX. It will be permanent if it works. The pilot aspect of it 

indicates that we are going to be completely empirical about it and 

make sure it works as intended. 

Mr. GREEN. With your empirical data, do you have measurements in place such that you will have an acid test to ascertain 

what the performance of the program is or has been? 

Mr. COX. I can state clearly the objectives, and then what we will 

do is assess whether or not those objectives have been achieved. I 

56

think it will be fairly clear to each of us as Commissioners and to 

the Enforcement staff as well. 

The object is to make sure that we have clarity and consistency 

across a national program in implementing penalty guidance that 

unanimously was agreed to by the Commission relatively recently, 

and that, when the staff negotiate penalties, they are doing so with 

the wind at their back because they have the support from the 

Commission for what they are going to do. 

The alternative, of course, is to come back to the Commission 

after a settlement is negotiated and hope for the best. But what 

that does in the private sector is put people in a situation where 

they are negotiating with a negotiating partner who may or may 

not have authority to do what they are entering into. 

We are trying to make sure that finally this process moves quickly, and, if all those objectives are met, then I think the program 

will have achieved— 

Mr. GREEN. One final question. My time is almost up. With reference to the position that you put the lawyers in, does this put 

them in a position such that they are strengthened or are they 

weakened or is this really negotiation that they are now engaged 

in or is it more a dictation from the Commissioners as opposed to 

giving the lawyers an opportunity to negotiate a settlement as opposed to one being dictated by the Commissioners who are appointed? 

The CHAIRMAN. I think we can get to the answer now. 

Mr. GREEN. Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. We will get the answer. 

Mr. COX. This is meant to strengthen the hand of the negotiators 

because they know they have the backing of the Commission for 

what they are doing. It is not meant to hamstring them or to deprive the Commission of good settlement opportunities because 

what generally we will be doing is authorizing a range of outcomes. 

No settlement can be approved under long-standing Commission 

rule and practice except by vote of the Commission itself. The same 

is true for the instigation of litigation or even the instigation of an 

investigation. 

In that sense, the Commission is the client and the normal communication between lawyer and client here would include at least 

a range of acceptable settlement outcomes. 

I think this process is very consistent with all of those objectives. 

The CHAIRMAN. The gentleman from Colorado. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. Mr. Cox, I guess in my 

litigation career, often we liked not to have the client’s okay so we 

could always say to the other side, I have to go talk to my client 

before actually being authorized. 

You might put that as one of your little points to check, does it 

work better for your staff having pre-authorization obviously as opposed to them having to say, I have to go to my client, I have to 

go to the Commission and get their authority. That is not my subject, but I am just giving you that. 

Mr. COX. Just to quickly respond, I think the difference in that 

example that you gave is this: That might be a lawyer’s tactic, but 

there would also be hell to pay if the lawyer went and settled the 

case and forgot to tell the client first. 

57

Mr. PERLMUTTER. Right. Obviously, you want to get your client’s 

blessing at the end of the day. I agree with you. 

I did want to compliment all of you for your stamina and your 

fortitude. By the time you get to this, it means the panel has been 

sitting there for a long time. Thank you for putting up with us. 

Just a couple of comments and then my main question. We have 

heard a little bit, whether it is Blackstone or some of the other conversations, about there does not seem to be as much activity with 

IPOs, etc., it is going offshore, it is going to London, this or that. 

Really, what I see, and it was in the article today in the Wall 

Street Journal, is there is a lot of debt financing going on with respect to corporations. Obviously, that has also happened with the 

subprime lending market, that Wall Street has gotten involved in 

a big way in debt financing. It may be easier for a smaller company 

or whatever to be borrowing money than to be going public. 

I do not know what the Commission has seen or if you have any 

concerns, quite frankly, about sort of this debt financing that is 

then participated out in a big way to various people and pensions 

and everything else. 

Just a comment, if you would, on the debt financing that seems 

to be going on. 

Mr. COX. As you would expect, the Commission is monitoring the 

impact of the subprime lending problems on CSE firms. That is our 

front line responsibility. 

We are not a front line regulator on the other hand with respect 

to subprime lending generally. Our Division of Enforcement, however, is actively on the lookout for possible securities fraud involving the securitized packages of these loans. And we recently formed 

a working group in the Division of Enforcement to focus in specific 

on problems in the subprime securities market. 

Mr. PERLMUTTER. I guess I would say also that would apply to 

the purchase of corporations, whatever they called it in this article, 

CLOs or collateralized loan obligations. Again, there is a lot of 

money out there, whether it is coming from China and Saudi Arabia and being repatriated into the United States or whatever, but 

a lot of money is chasing what appear to be, in some instances, 

lousy loans. 

There will ultimately, if they are securitized, there will be a lot 

of work for your Commission to do, number one. 

Number two, we did not talk about it very much but there is this 

rumor that has been circulating that the Commission is thinking 

about a rule to allow mandatory arbitration of what would be probably 10b-5 or fraud kinds of cases. 

I would ask all of the Commissioners, and particularly you, Mr. 

Chairman, is that rumor true or if not—if it is, I would like to talk 

about it for a second. 

Mr. COX. I think first the rumor got started because there was 

a front page story that said it was so. I had the opportunity to talk 

to a reporter before the story was written to say it was not the 

case. I have said on multiple occasions, including earlier here 

today, that we do not have any pending proposal to do that. 

Mr. PERLMUTTER. I would like to then compliment you on your 

focus on seniors. I would suggest to you and recommend to you because we have had a number of panels come before us, but to also 

58

be talking to the FTC and to the bank regulators because as we 

grow older, baby boomers sort of go into retirement, there is this 

vulnerability/susceptibility to seniors. 

There is so much changing going on, whether it is technology, 

and we each get a different statement. You have your interactive 

proposal up there, a new way to share with people. 

Everything keeps changing. It gets more difficult as you get older 

to keep up with that change. We see both on the banking side as 

well as really with securities lots of things changing. 

I just wanted to compliment you on that. One more statement, 

Mr. Chairman, since I have such stamina myself. 

The CHAIRMAN. Quickly. 

Mr. PERLMUTTER. I wanted to talk about the third party liability 

or bringing in third parties. Generally, I would agree with what 

was said, that you do not want to bring in third parties, but there 

is also a dram shop kind of element, with the third party knowing 

there is something going on or should have known something is 

going on with respect to bad financial information, but still trying 

to turn a blind eye and going ahead and assisting. 

The CHAIRMAN. The gentleman’s time has expired. Now because 

he has been here, the gentleman from Florida. We want to try to 

move quickly. I will tell all the people that we are going to be held 

to very, very strict time standards. 

The gentleman from Florida. 

Mr. WEXLER. Thank you, Mr. Chairman. Thank you, Chairman 

Cox, and the rest of the Commissioners for being here today. 

Six months ago, prior to having this great opportunity to serve 

in the House of Representatives for the State of Florida, I was an 

owner of an investment bank engaged in assisting companies raising capital. 

One of the issues facing the American economy since the last 

market corruption is the difficulty small companies are now facing 

in raising venture capital. 

There are several reasons for this, but one of the major contributors has been the weakness in the IPO market that has made it 

more difficult for venture capital to be invested in small companies 

because the investors in these kinds of funds are not getting the 

expected returns. 

What we have seen is, we have seen an explosion of activity 

where small companies that probably should not be public have 

been finding ways of getting public with 15c-2-11s, reverse mergers, and they have been engaging in a transaction that the industry calls a ‘‘pipe’’ transaction, which is basically selling stock at a 

discount to investors. 

Last year, and I do not have the number, but I know billions of 

dollars have been invested through this transaction. 

The question I have is, I understand that in January, the SEC 

announced a re-interpretation of the Securities Act Rule 415, which 

limits the percentage of a company’s outstanding public float that 

can be registered for re-sell at one time, following a private placement fund raising to 30 percent of the public float. 

The problem that this has is this change, in effect, really impairs 

small companies’ ability to raise capital, thereby endangering the 

59

movement of billions of dollars to small entrepreneurial companies 

here in the United States. 

What I would like to know is what is your view of Rule 415? Is 

anybody paying attention to what is happening to the plight of 

small companies here in the United States in terms of their problems and being able to raise capital, and what can the SEC do to 

improve the IPO market and/or change Rule 415 to encourage the 

movement of private equity to small companies? 

Mr. COX. If I may, let me just consult quickly with the Director 

of the Division of Corporation Finance, who is seated right behind 

me. 

[Pause] 

The CHAIRMAN. While the gentleman is engaged, no further questions will be entertained except by those who were here, and we 

will move very quickly with them. If you are not here, do not come. 

[Laughter] 

Mr. WEXLER. Thank you, Mr. Chairman. 

The CHAIRMAN. This will not come out of the gentleman’s time. 

Mr. COX. I want to be very precise in response to this question 

because we are dealing with a former investment banker. I think 

you will be pleased to know that our proposal that we have out will 

permit up to 20 percent of the public float to be used for an S–3 

going forward. 

There is also, I think, some concern with some kinds of PIPE 

transactions which are thought to be abusive, but the normal PIPE 

transactions would be eligible for that treatment. 

Mr. WEXLER. Just to follow up, it is a big issue. The underlying 

problem is the fact that we do not have—our IPO market is not operating in a way that is efficiently allowing private companies to 

stay private, which is what they should be doing, as opposed to trying to figure out how to get public. 

I would encourage you and the rest of the Commissioners to analyze what we may need to do here to encourage private equity 

going to small companies. It is a crisis, and we as a country need 

to take care of that. 

I appreciate your time. 

Mr. COX. I think our hearts are all in that place. 

The CHAIRMAN. Thank you. We have four left. The gentleman 

from California, the gentleman from Connecticut, the gentleman 

from Missouri, and the gentlewoman from Illinois, and we are 

going to move very quickly. 

The gentleman from California. 

Mr. BACA. Thank you very much, Mr. Chairman. 

The first question is in reference to executive compensation. Last 

July, the SEC unanimously adopted a new executive compensation 

disclosure rule. In addition to requiring the disclosure of the total 

annual compensation for senior corporate officers and directors, the 

rule requires that each company file a compensation discussion and 

analysis. 

I would like you to comment on your reaction to the first disclosure and how you would rate the usefulness of the initial CD&A 

filing. 

60

Mr. COX. I have had the opportunity to personally read through 

several proxy statements, and what I have found is that a good 

deal of the new CD&A is exceptional. It is really good. 

I have also read some really horrid examples. It is not just the 

CD&A in those cases but tends to be that the whole presentation 

does not have the kind of clarity that we hoped for. 

Mr. BACA. What do you do in those cases? 

Mr. COX. What we are trying to do is be very public in our comments. John White, who is sitting behind me, the Director of the 

Division of Corporation Finance, has been speaking publicly about 

this and engaging, as has the rest of his Division, with the private 

sector. 

I think all of us as Commissioners have been out talking about 

this. We have the very best opportunity to get this right now this 

year. 

CD&A is new. There is no boilerplate to copy. To the extent that 

we are trying to get away from boilerplate and we are trying to 

have an honest conversation between management and their shareholders, let them tell their compensation story in a meaningful 

way. If we start doing it that way in the first year, then we will 

have a lot better opportunity to do that going forward. 

If we get into a rut, if we develop some bad habits, then of 

course, it will be a tough bell to un-ring. 

We are viewing right now hundreds of companies, and we are 

going to make a report in the Fall and make that publicly available 

so that we can use some very, very good examples. 

Mr. BACA. You are saying we have not gotten into bad habits 

yet? 

Mr. COX. There has not been time yet to develop these bad habits, and we hope that we never do. 

Mr. BACA. Thank you. The next question goes to all the Commissioners on the PCAOB. I think it is important that we maintain 

our commitment to corporate accountability and transparency. I 

think the independence of the PCAOB is important in that effort. 

The PCAOB’s members are appointed by the SEC and I commend you for working with them and addressing critical issues regarding the ongoing implementation of the Sarbanes-Oxley reform. 

However, I am concerned that future Commissioners could use the 

current oversight authority over the Board’s budget, for example, 

to influence a decision making. 

I would welcome your comments on the independence of the 

PCAOB and on the SEC’s authority to influence the Board’s decision-making process. 

Mr. COX. How would you like us to proceed in terms of order 

here? 

Mr. BACA. Whichever one you feel needs to answer the question 

or who you think will articulate it a little bit better, and if someone 

wants to articulate it a little bit differently, I would like to hear 

that as well. 

Mr. COX. I think anyone can jump in here. I will just say that 

Congress has given us very explicit responsibilities under Sarbanes-Oxley. One of them is not just budget oversight of the 

PCAOB, but overall supervision of the PCAOB. We are taking that 

very, very seriously. We have developed a very collegial relationVerDate 0ct 09 2002 13:07 Nov 06, 2007 Jkt 037560 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\37560T~1.002 HFIN PsN: TERRIE
61

ship with the Board. We have a great deal of respect for the Board 

members and the professional staff at the PCAOB. 

I think the working relationship that we have developed, if you 

had the PCAOB here, would be thought to be a very sound one that 

gives them a great deal of space in which to operate. 

Our operating philosophy is that we do not wish to breathe down 

their necks. We want to let them do their job and supervise it. At 

the same time, on important things—there is nothing more important than Sarbanes-Oxley Section 404 compliance, for example—we 

just rolled up our sleeves and worked with them. 

Mr. BACA. Micro-managing? 

Mr. COX. It is really unique to 404, and, with respect to virtually 

everything else going forward, we have responsibilities to inspect 

them, for example, which we will do, but it is a supervisory relationship, and we do not want to micro-manage them. That is absolutely right. 

Mr. BACA. Anyone else? 

Mr. ATKINS. Yes, sir. I just wanted to add that you have to remember that under Sarbanes-Oxley, we are the people who are 

supposed to oversee them. They are not confirmed by the Senate. 

They are accountable to us. Unlike other independent agencies, 

they are under our supervision. 

Their actions have to be approved by us, and then also people 

can appeal actions that they take. 

Mr. BACA. Mr. Chairman, do you mind if I hear from some of the 

female commissioners? Because of the lateness of the hour, I did 

not want them to be intimidated by the males and not respond. 

Mr. GREEN. [presiding] I understand that. We will now go to Mr. 

Murphy for 5 minutes. 

Mr. MURPHY. Thank you very much, Mr. Chairman. I will be 

brief. I wanted to return for a moment to the issue—I know we covered it in part earlier—I wanted to just present a piece that I hope 

has not been covered. 

I certainly join the chorus of members and members of the public 

who would like to see the exemptions removed. I wanted to also 

talk about the issue of transparency for a moment, in that right 

now, it is my understanding that although there are lists published 

of those different companies where they have short sales and failures to deliver, that right now investors and consumers are having 

a hard time actually getting their hands on the actual numbers of 

those short sales and failures to deliver. 

Right now, I think they have to submit basically a Freedom of 

Information Request to the SEC in order to get that. 

I wanted to sort of ask that general question. I know you are 

looking at the remaining exemptions regarding naked shorting, but 

I wanted to also talk about the transparency issue and to what extent you think there might be some room to talk about some greater transparency and greater ability of investors and consumers to 

get information related to the actual volume of short sales and failures to deliver. 

Mr. COX. I am sure that you know that just a few days ago, we 

voted to eliminate the grandfather provision. We are trying to 

make sure that we actually achieve the intended results. 

62

We are also interested in all the transparency that we can get. 

To the extent that is possible going forward, I think we will be in 

favor of that as well. 

I will let Commissioner Nazareth, who has spent a good deal of 

time with this add to that. 

Ms. NAZARETH. We are, I think, considering—I cannot remember 

whether we proposed it or asked it as a question, but in our deliberations just a few days ago, we discussed adding transparency 

with respect to the sales. We talked about having fail information 

made public on a delayed basis. We are very cognizant of the need 

for greater transparency. 

Mr. MURPHY. I do appreciate your attention to that issue. I wanted to just ask a second question on a much broader basis to bring 

us back a little bit to the issue of fee-based versus commissionbased, also some of the issues that have been discussed around 

some of the restrictions now regarding principal trading transactions. 

It seems to me we are sort of spending a lot of time trying to 

work around the Exchange Act and the Advisors Act, and we are 

having some push back from the judicial system on some of the 

regulatory actions that are being attempted to try to update those 

two acts. 

I guess as a very general question, not that this committee needs 

to put anything more on its plate, given the fairly large burden of 

work that stands before us now, but do you think it makes sense 

in the near future for Congress to take a look at some more general 

and comprehensive reform of both the Exchange Act and the Advisors Act to take into account some of the updates in the market 

that maybe you cannot take care of on your own? 

Mr. COX. Again, being very respectful of our different roles, you 

have invited this comment, and I am going to make it because of 

the invitation. 

Yes. I do think that would be an useful examination, assuming 

that Congress worked in its normal way. You would take the time 

to learn as much as you could before deciding whether or not you 

needed to act. I think it would be very, very healthy. 

After all, these are relatively old statutory enactments, and a lot 

has happened in the marketplace. Things are changing. A good 

part of our job at the SEC is trying to use our regulatory authority 

to stretch onto a procrustean bed things that do not really want to 

be stretched like that. 

Mr. MURPHY. It goes without saying that the market is very different than it was in 1934 and 1940, and although there have been 

updates made, it certainly seems to me it makes sense to take a 

look at that from a legislative standpoint. 

Mr. Chairman, I yield back the balance of my time. 

Mr. GREEN. The gentleman yields back. Mr. Cleaver, for 5 minutes. 

Mr. CLEAVER. I will not take 5 minutes, Mr. Chairman. Thank 

you. 

I have a hedge fund question but I need to ask Mr. Cox one question with regard to Stoneridge. Do you disagree with President 

Bush’s decision to intervene with the Solicitor General and effectively veto your recommendation regarding your regulations? 

63

Mr. COX. I think those who perceive this as ‘‘our decision’’ misunderstand a little bit the way the process works. The Solicitor 

General of the United States files with the Supreme Court on behalf of the United States, not on behalf of the Securities and Exchange Commission. 

It is not uncommon in that process for there to be different agency views expressed for a variety of reasons, including the fact that 

different agencies have different charters. 

Banking regulators looked at this case through a slightly different lens. Our lens is primarily investor protection. Theirs is primarily safety and soundness of the banking system. I think the SG 

properly takes all of these things into account. 

Mr. CLEAVER. You stand with the decision that the Commission 

made and— 

Mr. COX. Yes, given our charter and our responsibility, we were 

certainly within our rights to make a recommendation which we 

made. 

Mr. CLEAVER. Hedge funds. Warren Buffet thinks that the fee 

schedule or the way the managers’ fees are constructed is just obscene. I do, too. Somebody buys a house and then becomes a billionaire in a couple of years as a manager of these funds. That is an 

issue that probably needs to be dealt with at another time. 

What I am concerned about is the Bear Stearns’ issue from 2 

weeks ago. They almost ended up and still may be very shaky as 

a result of the subprime market. 

Are we on the verge of a cataclysm as a result of seeing some 

additional Bear Stearns’ kinds of situations coming up with the 

subprime market? 

Mr. COX. Let me speak first to the four corners of the Bear 

Stearns’ issue itself. With respect to those two funds, we see little 

systemic risk arising from liquidity issues there. 

On an ongoing basis, we are involved in the prudential supervision of all of the CSEs, the five major U.S. securities firms. We 

are regularly in contact with officials at these firms, and they provide us with real time reports of not only what is going on but particularly emerging financial weaknesses, if there are any. 

We also, in addition to that ongoing process, are going to further 

review, using our SEC staff, other issues that investment managers 

for these funds have. 

I do not believe that reporting mechanism thus far has brought 

us any information that would cause us to think that the circumstances you are worried about have materialized. 

Mr. CLEAVER. Thank you, Mr. Chairman. I do appreciate the fact 

that you, God bless all of you with strong kidneys, it has been 

amazing. 

Mr. COX. I have been nursing this one bottle of water here for 

about 4 hours. 

Mr. GREEN. The Chair now recognizes Congresswoman Bean for 

5 minutes. Thank you. 

Ms. BEAN. Thank you, Mr. Chairman. I will be brief, with just 

some quick follow-up questions. I think we have asked you most of 

what we wanted to ask you. It is an honor to have you here, Chairman Cox, and all of the SEC Commissioners. We do not often have 

64

access to your cumulative experience and intellect. We have a lot 

to ask. 

In follow-up to when I was here earlier, Congressman Baker 

asked about the precedent of scheme liability. My question is, if it 

were to be set, do you expect to see a major increase in the amount 

of securities class actions? 

I would address that to Chairman Cox and also to those who dissented, Commissioners Atkins and Casey. 

Mr. COX. I actually do not know the answer to your question. I 

think it would depend a great deal upon how the court annunciated 

the rule, the basis for liability, and certainly from the SEC’s standpoint, our thought would be that liability would be essentially what 

it is today. And that is for principal violators who are committing 

fraud. 

If it is understood in that way, not as something that occurs on 

the margin but someone who is a primary actor, a principal violator, then that is the kind of fraud that our laws should always have 

encompassed. 

Ms. BEAN. Thank you. Mr. Atkins? 

Mr. ATKINS. Thank you. Basically, I think it is important to have 

a test that draws a clear line. That is why I dissented from our 

brief. Based on experience with what was annunciated in the 

Homestore.com brief, I did not think our test works. That is 

through experience at the SEC and then also seeing what the various Circuits came up with. 

I do think, to answer your question, there is a real danger in 

chilling ongoing transactions. Companies will be entering into 

transactions up front worried about what they might be getting involved with later on, things that they have no idea about. I think 

that goes to the competitiveness of our economy. 

Ms. BEAN. Thank you. Ms. Casey? 

Ms. CASEY. I would largely agree with that as well. I think the 

question turns on the issue of clarity and just how clear the standard was that we put forth. I think in my view, I thought the brief 

before us was overly vague and broad in terms of the sweep of conduct that would be included, potentially including conduct that 

would normally be charged as aiding and abetting. 

Again, I think it turns on clarity and that would be my answer 

on that. Thank you. 

Ms. BEAN. Thank you. I have one other question and this is to 

the group, just an easy affirmative if you think so. 

I know you were already asked as a Commission about the 

Court’s order regarding broker-dealers offering fee based brokerage 

until October 1st. My question, and I believe you were already 

asked by some other members today whether you thought there 

was enough time for those affected entities to deal with all their 

customer accounts and make those proper transitions, and I believe— 

The CHAIRMAN. It was asked, and it is late. Unless it is something new, let’s not spend too much time. 

Ms. BEAN. My follow-up question is, are any of you open to consideration of a further stay should it appear they are really not 

able to do that and be compliant? That is the question. 

65

Mr. COX. We asked the Court for the amount of time that we 

thought we needed. I think from the Court’s standpoint, they would 

like us to be very clear on what it is that we think we need. At 

this point, we think we have asked for what we need. 

Ms. BEAN. Thank you. I yield back. 

The CHAIRMAN. The final one, and let me say tomorrow we are 

going to be voting on the Appropriations bill that includes the 

budget, and if you were eligible for overtime, I promise you we 

would have taken care of you tomorrow, but we will certainly be 

very well disposed tomorrow if any question comes up involving 

your budget. 

The gentlewoman from California is recognized for 3 minutes to 

close out the hearing. 

Ms. WATERS. Thank you very much, Mr. Chairman. Thank you 

for your patience. I am sorry I could not be here earlier. 

I just wanted to get here for a minute to say thank you to the 

Commissioners. This is a historic hearing and I am very pleased 

that the chairman organized this hearing so we have an opportunity to see all of you and very seldom, this may be the first time 

that I thank a panel for coming to participate, and I want to tell 

you why I am thanking you. 

I thank you for the vote that you did on scheme liability and the 

vote to recommend the Solicitor General file an Amicus Curiae in 

support of scheme liability. I think that is extremely important. 

I would just like to say that the victims of Enron and the other 

scandals have all but been forgotten by many people who swore to 

do everything they could do to help folks who had been defrauded 

by Enron and WorldCom and the other corporations that were involved in hiding their debt and lying about their profits or having 

people believe they were doing well and they were functioning 

properly. 

It is very important that we know and understand if there is collusion between the banks and other financial institutions who 

know what they are doing and who understand and who are helping them to hide the lies that they are promoting. 

I thank you for the vote that you have taken. I have no questions. I am very pleased that you are here. 

The CHAIRMAN. I thank the gentlewoman. I will take the one last 

minute because I do want to comment on Stoneridge. There is one 

very important distinction I want to make. 

I voted along, with the Chairman, for the Public Securities Litigation Act. It was the one time I voted to override the veto of Bill 

Clinton. I make this distinction, in that the issue was the degree 

of proof, the degree of argument you needed. That seems to me 

qualitatively different than Stoneridge where the question is what 

category of people are eligible. 

The two seem to me distinct in this sense. In the one case we 

were saying, those of us who voted for the Public Securities Litigation Act, you need a certain quantum of evidence before you can 

make a case against anybody. 

In the other situation, we were saying that no matter what evidence you have, no matter how well developed the case, these people simply are outside of it. 

66

People could obviously come to different conclusions on both, but 

I did think it was important to make that conceptual distinction, 

and that is why, having voted for the Public Securities Litigation 

Act, I felt strongly that the Commission did the right thing with 

Stoneridge. 

One is the case of insufficient evidence and the other is a case 

of sufficient evidence against the wrong party, except many of us 

do not think it was the wrong party. 

I really am very grateful, and I do believe this has been a very 

useful hearing. It has not produced any fireworks. It has produced 

some rational and enlightened conversation about some important 

issues. 

I apologize to the press, but I thank the Commission and the 

members. 

We stand adjourned. 

[Whereupon, at 5:53 p.m., the hearing was adjourned.] 

(67)

A P P E N D I X

June 26, 2007

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