U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

95–262 PDF 2004

THE US-EU REGULATORY DIALOGUE

AND ITS FUTURE

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

MAY 13, 2004

Printed for the use of the Committee on Financial Services

Serial No. 108–86

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

DOUG BEREUTER, Nebraska 

RICHARD H. BAKER, Louisiana 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

DOUG OSE, California 

JUDY BIGGERT, Illinois 

MARK GREEN, Wisconsin 

PATRICK J. TOOMEY, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

JOHN B. SHADEGG, Arizona 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

MELISSA A. HART, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

BARNEY FRANK, Massachusetts 

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 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

KEN LUCAS, Kentucky 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

MIKE ROSS, Arkansas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

RAHM EMANUEL, Illinois 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

CHRIS BELL, Texas 

BERNARD SANDERS, Vermont

ROBERT U. FOSTER, III, Staff Director 

(III)

C O N T E N T S 

Page 

Hearing held on: 

May 13, 2004 ..................................................................................................... 1

Appendix: 

May 13, 2004 ..................................................................................................... 27

WITNESSES 

THURSDAY, MAY 13, 2004

Bies, Hon. Susan, Governor, United States Federal Reserve Board ................... 8

Quarles, Hon. Randal, Assistant Secretary for International Affairs, United 

States Department of the Treasury .................................................................... 6

Ross, Samantha, Chief of Staff, Public Company Accounting Oversight Board 10

Schaub, Alexander, Director-General, Directorate General for the Internal 

Market, European Commission ........................................................................... 20

Tafara, Ethiopis, Director, Office of International Affairs, United States Securities and Exchange Commission ........................................................................ 12

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 28

Biggert, Hon. Judy ........................................................................................... 31

Gillmor, Hon. Paul E. ....................................................................................... 33

Bies, Hon. Susan .............................................................................................. 34

Quarles, Hon. Randal ....................................................................................... 47

Ross, Samantha ................................................................................................ 52

Schaub, Alexander ............................................................................................ 68

Tafara, Ethiopis ................................................................................................ 82

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Quarles, Hon. Randal: 

Written response to questions from Hon. Joseph Crowley ........................... 101

(1)

THE US-EU REGULATORY DIALOGUE 

AND ITS FUTURE 

Thursday, May 13, 2004

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to call, at 10:06 a.m., in Room 

2128, Rayburn House Office Building, Hon. Michael Oxley [chairman of the committee] presiding. 

Present: Representatives Oxley, Biggert, Hart, Hensarling, Garrett, Watt, Ackerman, Sherman, Inslee, Moore, Lucas of Kentucky, 

Emanuel, and Bell. 

The CHAIRMAN. [Presiding.] The committee will come to order. 

Two years ago, this committee convened a hearing to address 

‘‘The European Union’s Financial Services Action Plan and its Implications for America’s Financial Services Industry.’’ Today’s hearing explores how the US-EU Dialogue has worked over the last 2 

years and how participants expect it to evolve in the context of a 

united Europe consisting of 25 countries with a wide range of economic strength and development. 

We welcome back witnesses from the SEC, the Treasury, and the 

Federal Reserve to discuss this issue. I look forward to seeing 

whether their expectations 2 years ago were met and what they 

think the future might hold. We welcome for the first time on this 

topic our PCAOB witness who will provide a perspective on how innovative and productive a variety of informal processes can be in 

resolving difficult transatlantic regulatory issues. 

I am particularly pleased to welcome for the first time before this 

committee the European Commission. It is not often that a foreign 

authority testifies before Congress. I understand that Director-General Alexander Schaub will use the opportunity of this hearing to 

present significant new ideas on how the US-EU regulatory relationship might evolve. We look forward to this testimony. 

Two years after our first hearing on this issue, many of the same 

issues remain on the forefront of the transatlantic regulatory debate: The supervision of financial conglomerates, international accounting standards, convergence in accounting standards, transparency in prospectuses, and making consolidated supervision function on both sides of the Atlantic. 

And yet, much has changed. We convene today shortly after the 

historic accession of 10 Eastern European countries into the European Union. This fulfills the dreams of many, including myself, 

that Europe after World War II could one day be united, whole, 

and free. Much of the European financial services agenda, espeVerDate 0ct 09 2002 10:35 Sep 09, 2004 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\DOCS\95262.TXT FIN1 PsN: MICAH
2

cially after the fall of the Berlin Wall, has aimed to create a financial services marketplace to serve a European market nearly equivalent in size to ours. 

The financial markets have also changed. The end of the Cold 

War and a revolution in risk management and telecommunications 

together have created opportunities and enthusiasm for global capital markets to integrate across borders. I believe that transatlantic 

trade in both goods and services benefits consumers and businesses 

on both sides of the Atlantic and helps create a vibrant job market 

here in the U.S.. It generates competition in both markets and 

forces firms to be more efficient, innovative and effective in serving 

customers. These trends place pressure on financial regulators to 

find better ways of working together. 

Following our hearing 2 years ago, the US-EU Financial Markets 

Dialogue was created. It fosters regulatory discussion on emerging 

transatlantic issues and attempts to avoid conflicts. I understand 

that the Dialogue has been extremely successful. In fact, it has 

been so successful that some have suggested it needs to grow and 

become more formalized. Others have suggested that the Dialogue 

should seek to accelerate financial market integration and foster 

convergence of regulatory standards across the Atlantic. Our witnesses today will provide insight into the innovative tools used 

today to increase transatlantic mutual understanding and cooperation. 

This is a very important initiative. Financial firms operating in 

multiple states must comply with multiple, sometimes conflicting, 

regulatory requirements. These requirements reflect government 

efforts to protect consumers and to foster financial system stability, 

safety, and soundness. The Financial Services Committee seeks to 

strengthen the U.S. regulatory framework, permitting it to adapt 

to a world where significant changes in capital market behavior 

and the world around us require new approaches to accounting, 

auditor oversight, consolidated supervision and protection from 

abuse from terrorists and money launderers. 

This committee also seeks to reduce regulatory burdens. Last 

fall, we enacted major banking regulation relief legislation, and we 

are right now working on an insurance regulatory package. I am 

committed to reducing inefficient regulatory burdens for all financial institutions doing business in the U.S. subject, of course, to security and financial stability considerations. 

Relieving regulatory burdens in the U.S., however, is only part 

of the picture. America’s largest financial institutions are major 

players in the European capital markets. Major European firms are 

a significant and growing presence in all three sectors of the 

United States financial services market: banking, securities and insurance. The choices one country makes for how best to protect its 

investors and depositors may not always coincide with the choices 

other countries make. 

Different policies can be driven by differences in market structure. Such differences are legitimate and do not easily lend themselves to calls for convergence. I believe that convergence and 

equivalence in regulatory structures can only make sense where 

convergence is already underway in the markets and where differences in regulation can have a detrimental impact. To endorse 

3

convergence as a goal without considering the needs and views of 

the voters that brought us to Washington to represent their interests would be irresponsible. 

I hope this hearing will help us understand which differences in 

regulatory standards are needed to address different market structures and which differences are inefficient. I am skeptical that 

transatlantic regulatory convergence will occur quickly in all areas. 

While the financial markets continue integrating, national regulators will need authority and a legislative mandate to protect consumers and markets at home. I note that it took Europe almost 40 

years to achieve a legal framework based on mutual recognition, 

and this framework is still under construction. 

Some might question whether the mutual recognition concept can 

operate outside the EU. In addition, the EU’s new framework has 

not yet been fully tested. The Financial Services Action Plan will 

not be implemented until next year, and concerns have already 

been expressed that full implementation may impose unnecessary 

costs or create unnecessary conflicts. Questions also exist concerning how the new regulatory structures in Europe will interface 

with the rest of the world, putting pressure on the execution of consolidated home country supervision. 

Here in the U.S., we have our own regulatory burdens to consider and address. The specter of listed firms needing to provide financial statements using two different accounting standards and 

the prospect of having two different regulatory capital frameworks 

for financial institutions are two examples of areas where regulators on both sides of the Atlantic face common challenges. I believe that practical working relationships such as those created 

through the US-EU Dialogue and other transatlantic discussions 

can help generate a process for differences to be discussed and understood better. 

We will not all agree today on the right solutions for any of the 

issues before this transatlantic regulatory Dialogue. In the future, 

we cannot expect disagreements will disappear regarding how best 

to regulate the very fluid and innovative financial sector. But I 

firmly believe that increased dialogue can lower the temperature of 

our disagreements and can lower the odds that serious misunderstandings can develop. The capital markets will not stop integrating, and it is our responsibility as policymakers to ensure that 

the rules generated to protect consumers and enhance market discipline do not generate excessive and inefficient compliance costs. 

Are there other members seeking for an opening statement? 

[The prepared statement of Hon. Michael G. Oxley can be found 

on page 28 in the appendix.] 

The gentleman from California, Mr. Sherman? 

Mr. SHERMAN. Thank you, Mr. Chairman. No discussion of our 

trade and international economic relationships can be complete 

without a mention of the one-half trillion dollar trade deficit of the 

United States. The world is building a house of cards. It is a beautiful house of cards. They are happy living in the house of cards. 

But every year we add another half trillion dollars of debt of the 

United States to the rest of the world, we build another story on 

the house of cards. 

4

And in a perfect world we could hope that somehow that trade 

flow would be not only—the negative would be slowed but even reversed. We can dream of a world in which the second half of this 

decade involves us sending a Cadillac to Europe for every Mercedes 

they sent us in the first half of this decade. I know of no one in 

the automotive industry planning for that as an eventuality. The 

world is addicted to the United States as importer and as borrower. 

And so in perhaps a decade, individual actors in the economic 

system, whether they be countries, banks or individual investors, 

will probably and unfortunately in a very short period of time suddenly lose faith in the dollar, wonder why the world has lent so 

much to a country that has done so little to repay. 

Now, I would like to think that we can avoid this catastrophe, 

but that would involve a weak dollar. Instead, our Asian governmental friends and trading partners are deliberately and I would 

say illegally or at least wrongfully weakening their own currencies. 

That would involve a U.S. budget surplus. I don’t know of anyone 

who dreams of that at any time in the near future. 

So since we are unlikely to avoid the disaster, the question is 

whether we are building our financial institutional system to prepare for the disaster, to make sure that the panic does not become 

a depression. 

We have, I believe, in our stock markets circuit breakers to deal 

with sudden drops. I hope that our witnesses today will discuss 

with us here or supplement the record with a discussion of what 

we can do to have equivalent circuit breakers for sudden declines 

in the U.S. dollar, for sudden and multi-trillion dollar outflows of 

capital from the United States, and from all the things that you 

would expect will eventually happen, and you can wonder whether 

it happens in 5 years or 15 years, but what eventually happens to 

a country that is almost force-fed like a European goose, import 

after import, consumption after consumption until suddenly it 

breaks. 

I would hope that this international financial system is not just 

the most efficient way to deal with how to live in a house of cards, 

but also that we build in mechanisms to deal for what happens 

when the house of cards falls over. I yield back. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentlelady from Illinois seeks recognition. 

Mrs. BIGGERT. Thank you, Mr. Chairman, and thank you for calling this important hearing today. As you noted in your opening 

statement, the financial services markets in the U.S. and Europe 

are increasingly intertwined. 

I think this hearing is well-timed, coming as it does just 2 weeks 

after the historic accession of 10 Eastern European states to the 

Union. I would like to congratulate you for organizing a hearing 

that includes our key partner in the Dialogue—the Commission of 

the European Union. This is an excellent opportunity for the Financial Services Committee to hear both American and European 

perspectives on the key transatlantic regulatory issues of our day. 

The relationship between the American and European capital 

markets is of keen importance to the U.S., generally, and of particular importance to those of us who come from Chicago. Last 

year, there was a great deal of controversy associated with the proVerDate 0ct 09 2002 10:35 Sep 09, 2004 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 G:\DOCS\95262.TXT FIN1 PsN: MICAH
5

posal for a European options exchange to establish itself as a competitor to the traditional options exchanges in Chicago. The resolution was that the exchange submitted to the jurisdiction of the 

CFTC and established a subsidiary. Along the way, many people in 

my home state began to think in very concrete terms about what 

it means to have such integrated capital markets. 

I am a firm believer in the adage that political friendships follow 

the trade lanes. Free and fair trade fosters competition and communication, benefiting workers and consumers on both sides of the 

relationship. My impression from the testimony submitted is that 

the regulatory Dialogue underway right now between the U.S. and 

the EU contributes to these goals. 

While I support these goals and the accomplishments achieved to 

date within the Dialogue, I think it is important to sound a note 

of caution as well. We must be careful that in our zeal to find new 

and better ways for our regulators to work together internationally, 

we do not lose sight of our own very important domestic policy 

goals. 

In this country, we have over the last century built the deepest, 

most transparent and most liquid capital market in the world. This 

capital market and the economy that it supports are the engines 

of global growth and innovation. One critically important component of that market is the framework of laws and regulations that 

protect investor access to information and provide for rigorous oversight of financial institutions. 

Financial innovation and economic growth in the U.S. have 

thrived under this framework. Growth and innovation have been 

slower in Europe, but are accelerating with a number of reforms. 

On this side of the Atlantic, we must be sensitive to the views of 

the financial markets and ensure that the EU package of reforms 

does not stifle growth and innovation through imposition of significant compliance costs. 

I also believe that policymakers on both sides of the Atlantic 

must consider more carefully the nuts and bolts of how consolidated home country supervision will in fact work. This is especially 

important for the highly complex financial institutions that are at 

the heart of both the American and European financial systems. 

I agree that we can and must work more closely together. I am 

just not so sure that agreeing up front to wholesale harmonization 

of legislative frameworks or treating all regulations as equal is 

wise. I think that a case-by-case determination of where convergence might be necessary to achieve increased market efficiency 

and stability is more appropriate. It is for these reasons that I support the US-EU Dialogue and look forward to hearing testimony 

about it today. 

Thank you very much and yield back. 

[The prepared statement of Hon. Judy Biggert can be found on 

page 31 in the appendix.] 

The CHAIRMAN. The gentlelady yields back. Are there further 

opening statements? 

The gentleman from Washington State. 

Mr. INSLEE. Thank you. I look forward to your discussion about 

coordination in regulatory affairs, because I think we have seen 

some good successes in coordination with the American and EU 

6

regulators, but we have seen some different approaches, temporarily at least, taken by the EU and American regulatory structure, 

particularly an anti-trust issue that provokes my concern from the 

1st district of the State of Washington. 

And we think there are problems that can happen when there 

are obviously inconsistent approaches by the two regulatory 

branches that can force American companies to undergo different 

treatments, has wide implications in privacy issues and piracy 

issues and the like. 

So we obviously are very interested in anything we can do to promote a true coordination, and I just hope that the panel will address the prospects of working on the issues at the upcoming USEU Summit or the G7 meetings in the hopes that we can really 

reach that happy day when we have got total coordination between 

these two regulatory bodies. Thank you. 

The CHAIRMAN. I Thank the gentleman. 

We now turn to our distinguished panel. The Honorable Randal 

Quarles, Assistant Secretary for International Affairs at the United 

States Department of the Treasury; the Honorable Susan Bies, 

Governor, United States Federal Reserve Board; Ms. Samantha 

Ross, Chief of Staff of the Public Company Accounting Oversight 

Board and Mr. Ethiopis Tafara, Director of the Office of International Affairs, United States Securities And Exchange Commission. 

Welcome to all of you folks, particularly Ms. Ross who makes her 

first appearance before our committee as a representative of the 

PCAOB. 

Mr. Quarles, we will begin with you. 

STATEMENT OF HON. RANDAL QUARLES, ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS, UNITED STATES DEPARTMENT OF THE TREASURY 

Mr. QUARLES. Thank you, Mr. Chairman. 

The CHAIRMAN. Get your mike on there, Mr. Quarles. 

Mr. QUARLES. Thank you, Mr. Chairman and members of the 

committee. With your permission, Mr. Chairman, I would like to 

submit my written remarks for inclusion in the record. 

The CHAIRMAN. Without objection, all of the prepared remarks 

will be made part of the record. 

Mr. QUARLES. Thank you, sir. And I want to begin by thanking 

this committee for its support for the US-EU Financial Markets 

Dialogue, which I, at least, think has been really integral to the 

progress that we have been able to make over the last couple of 

years, having that support. 

As you mentioned at the outset, sir, the US-EU Dialogue began 

in March of 2002, and since then we have had technical meetings 

that have been led jointly by the Treasury and the European Commission. That includes active participation of the U.S. regulators, 

principally the Federal Reserve and the Securities Exchange Commission. Those have taken place on roughly a quarterly basis, and 

in addition to Dialogue it is supplemented by substantial interaction of senior policy officials. 

The United States has a keen interest, a self-interest in the success of Europe’s Financial Services Action Plan, because a central 

7

aim of our foreign economic policy is to promote a strong and growing global economy. And we know that strong and efficiency capital 

markets support robust growth. 

Also, U.S. financial institutions are a vital and leading part of 

the European financial landscape, and we want our firms to be able 

to compete globally on fair terms that reward their competitiveness. And so just as the United States is interested in the evolution 

of European capital markets, so Europe is interested in the evolution of U.S. capital markets and some of the recent steps that we 

have taken here. 

Both the U.S. and the EU recognize that our financial, legal, historical and cultural traditional are different. The challenge of the 

Dialogue is to see through these differences and work to achieve 

our common objectives and substance and manage the spillovers of 

these differences into each other jurisdiction. If we are successful 

in this effort, then both sides will win. 

So against this background, the United States strongly supports 

Europe’s Financial Services Action Plan. And in fact we commend 

Europe for the ambition and the progress that they have made to 

date. 

In my written remarks, I cover a broad range of issues, but let 

me mention two of the many key issues that we are discussing 

with Brussels. The Financial Conglomerates Directive requires a 

foreign supervisor regime to be deemed equivalent by Europe for 

firms from that country to operate within Europe without making 

costly changes to their method of operation. While there is always 

room for refinement and improvement, of course, it goes without 

question that the U.S. supervisor regime is a gold standard for the 

world’s capital markets, and all U.S. regulators have cooperated 

closely with Europe in explaining their approaches to consolidated 

supervision. We are confident that a positive equivalence finding 

will soon be made. 

Second, the Prospectus and Transparency Directives initially 

suggested that U.S. firms that would be listing new U.S. securities 

in Europe should prepare financial statements on the basis of 

international accounting standards by 2005, rather than US GAAP 

or they would have to cease issuing in Europe. 

Moreover, the draft directives didn’t make any provision for 

grandfathering previously listed issues. We discussed these matters 

with Brussels for the last year, and the final text of these directives provide for grandfathering of existing issues, and we fully expect that U.S. firms that will be listing new securities in Europe 

will be permitted to continue preparing their statements in US 

GAAP. 

In addition to these specific matters, we applied the increased 

transparency of European rulemaking, growing consultations of 

regulators with market participants. These have improved European rulemaking in the same way that they improve our own rulemaking here in the U.S.. They have created a greater consensus 

and buy-in for proposed regulations, and they have strengthened 

European financial markets. 

I think it is inevitable that there will be compromises in building 

an integrated capital market in light of different European country 

practices. That will be part of the FSAP process. But Brussels, the 

8

parliament, the member states and the commission, in our view, 

are working to instill as liberal a vision as possible for the European capital market. 

The FSAP’s implementation is a work in progress. It will continue to evolve, but it represents an important step forward and 

the extension of this vision at the European-wide level to the socalled passport, and that will contribute to the growth in global 

capital markets. 

Following the selection of a new commission and European parliament later this year, the Dialogue will need to tackle new challenges in promoting a more vibrant transatlantic capital market. 

Among these are promoting convergent accounting standards, improving corporate governance, strengthening investor protection 

and reducing the cost of clearance and settlement in Europe. 

In conclusion, the Dialogue has increased the transparency of 

rulemaking and it is been part of the momentum to European financial market reform. I think that it is rightly credited as having 

helped diffuse transatlantic tensions in an important area that is 

vital to the functioning of the world economy. 

And, finally, if those of us on both sides of the Atlantic can agree 

on financial regulatory standards, then others around the globe 

will follow. I think the potential benefits of this effort are enormous 

and that it is important that the Dialogue succeeds, and I believe 

it will. 

Thank you, sir, very much. 

[The prepared statement of Hon. Randal Quarles can be found on 

page 47 in the appendix.] 

The CHAIRMAN. I thank you for your testimony, Mr. Quarles. 

And, Ms. Bies—it is Bies, right? I am sorry, I had it wrong, but 

we will correct the record. 

STATEMENT OF HON. SUSAN BIES, GOVERNOR, UNITED 

STATES FEDERAL RESERVE BOARD 

Ms. BIES. My husband will appreciate that very much. Thank 

you, Mr. Chairman. I appreciate the opportunity to speak today on 

matters relating to the US-EU Financial Markets Regulatory Dialogue. I am going to comment briefly on the Dialogue’s role in helping us to monitor European-wide regulatory developments in financial services and understand the effects on U.S. banking organizations operating in the EU. 

At the time the Treasury Department initiated the Dialogue in 

2002, the European Union was continuing with efforts to establish 

a single market in financial services by implementing measures 

comprising the Financial Services Action Plan. U.S. regulators 

were continuing to implement provisions of the Gramm-Leach-Bliley Act, and Congress was considering reforms that led to the adoption of Sarbanes-Oxley. 

U.S. and EU financial services firms were and remain major participants in each other’s markets. These regulatory developments 

will impact those firm’s operations for years to come. In the United 

States and internationally, it is generally accepted that a foreign 

firm conducting business in a local market should receive national 

treatment; that is, the foreign firm should be treated no less favorably than a domestic firm operating in like circumstances. 

9

Implementing national treatment can be challenging, as local 

rules must be adapted to foreign organizations that operate under 

different legal and regulatory structures. It is therefore critical that 

supervisors have timely and full information in order to have a 

good understanding of the supervisory and regulatory environments in which global firms operate. 

The Dialogue has served as a useful forum for information sharing among regulatory experts who are responsible for implementing 

rules embodying national treatment. It helps to foster a better mutual understanding of U.S. and EU regulatory approaches, developments and time tables and to identify potential substantive conflicts in approach as early as possible in the regulatory process. 

Although the Federal Reserve has an established program of 

working with foreign supervisors, both bilaterally and multilaterally, the Dialogue is the only venue specifically dedicated to US-EU 

regulatory issues. It complements the Federal Reserve’s ongoing relationships and discussions with EU national regulators. 

The Dialogue provides an efficient and effective forum for discussion of issues across a spectrum of financial services. As such, it 

has great utility for supervisors of large, complex financial services 

organizations. We have been able through the Dialogue to advance 

our views on the application of the EU’s Financial Conglomerates 

Directive to U.S. bank holding companies. 

Under EU rules, foreign financial firms must be subject to supervision at the holding company level by competent home country authority which is equivalent to the supervision provided for by the 

provisions in the directive. In the absence of an equivalence determination, U.S. financial firms with EU operations could be subject 

to higher capital and risk control requirements or be required to 

create an EU subholding company. 

The Federal Reserve and the Comptroller of the Currency have 

provided information regarding the supervision of U.S. banking organizations. We anticipate that the commission will keep us informed of member states’ progress in this regard, and we expect 

that U.S. banking organizations will be found to be in compliance 

with the supervision standards of the directives. 

I would like to comment briefly on the relationship between the 

Dialogue and international developments in the areas of capital, 

accounting, and auditing standards. As you know, the Basel Committee on Banking Supervision is in the process of revising the 

Basel Capital Accord. Dialogue participants have discussed application, implementation, and timing concerns regarding Basel II. It 

has not focused on technical issues that have been under discussion 

within the Basel Committee. Technical issues have been left for the 

experts to work through. 

The Dialogue has served as a useful venue for participants to 

gain a better understanding of implementation procedures that are 

anticipated. This discussion has helped both sides to achieve a better sense of the implementation challenges we all face and the commitment to see the process through. 

The Federal Reserve and U.S. banking agencies are actively involved in the efforts of the Basel Committee to promote enhanced 

international accounting and disclosure standards and practices for 

global banking organizations. For example, an official of the FedVerDate 0ct 09 2002 10:35 Sep 09, 2004 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\DOCS\95262.TXT FIN1 PsN: MICAH
10

eral Reserve Board is a member of the Standards Advisory Council 

that advises the IASB and its trustees. Federal Reserve also has 

been active in supporting the Basel Committee’s project with the 

International Federation of Accountants and other international 

regulatory organizations, such as IOSCO. 

Although we have been actively involved in addressing international accounting and auditing issues primarily through our involvement in the Basel Committee’s projects, the Securities and 

Exchange Commission has had the primary role in discussing these 

matters with the EU representatives in the Dialogue. 

In summary, the Federal Reserve has found the Dialogue to be 

a useful vehicle in monitoring the rapid regulatory developments in 

the EU and exchanging information. At the Federal Reserve, we 

have an obligation to keep apprised of these developments on a 

timely basis in order to fulfill our supervisory functions and ensure 

a level playing field for U.S. banking organizations operating in the 

European Union. We are confident that continuing the Dialogue in 

its present informal form will facilitate these objectives. Thank you. 

[The prepared statement of Hon. Susan Bies can be found on 

page 34 in the appendix.] 

The CHAIRMAN. Thank you, Ms. Bies. 

Ms. Ross? 

STATEMENT OF SAMANTHA ROSS, CHIEF OF STAFF, PUBLIC 

COMPANY ACCOUNTING OVERSIGHT BOARD 

Ms. ROSS. Thank you, Chairman. Good morning. I am pleased to 

appear before you today on behalf of the Public Company Accounting Oversight Board to discuss the regulatory Dialogue between the 

Board and the European Union. 

While we are not part of the official Financial Markets Regulatory Dialogue, under the leadership of our chairman, Bill 

McDonough, we have established a very effective working relationship with the EU related to oversight of the auditing profession. 

Both we and Europe have learned from experience that no borders 

can contain the losses and uncertainty that occur with large corporate failures. 

Beginning with the work of this committee, Congress took steps 

to restore the public’s confidence in our markets with the SarbanesOxley Act. The act created the Board to oversee the auditors of 

public companies and gave it significant powers. 

Among these powers, the Board has the authority to register 

public accounting firms that prepare audit reports for issuers as 

well as to conduct inspections of those firms. The board also has 

the authority to conduct investigations and disciplinary proceedings 

concerning public company audit work. Further, the Board has the 

authority to establish the standards governing the preparation of 

audit reports. 

One of the Board’s first steps was to establish a registration system for accounting firms that audit public companies, including 

non-U.S. firms that issue audit reports for companies that have 

registered securities in the U.S.. This includes the auditors of U.S. 

multinational companies that have significant operations abroad 

and the auditors of foreign companies that have elected to access 

the U.S. capital markets. 

11

Today, 840 accounting firms have been registered by the Board, 

including 35 non-U.S. firms from countries such as the United 

Kingdom, Germany and Hungary. More than 145 additional nonU.S. firms have applied for registration, and we expect that as 

many as 300 may register in the near future. Registration is only 

the beginning of our oversight, however. 

As we prepared for our oversight of non-U.S. firms, we began exploring with international auditing regulators ways to enhance the 

effectiveness of our oversight and minimize duplicative regulations. 

Based in large part on these discussions, the Board has developed 

a cooperative framework that would allow it to gain insight from 

and rely on the inspection by a firm’s home country regulator. 

This approach would permit varying degrees of reliance on the 

home country system of inspections, depending on the independence and rigor of that system. The board would place the greatest 

reliance on those systems that maintain the highest level of rigor 

and independence from the accounting profession. Conversely, the 

Board would participate more directly and rely less on those systems that are less independent or rigorous. 

The European Commission is facing the same issues relating to 

audit quality that we face. The Parmalat scandal, which came to 

light last December, galvanized investors in European securities to 

demand more reliable financial reporting and auditing. With the 

proposed 8th Company Law Directive, European Commissioner 

Frits Bolkestein and Director-General Alexander Schaub have 

taken important steps to restore confidence in European markets. 

Shortly after the 8th Directive was proposed this past March, 

Commissioner Bolkestein and our Chairman held an unprecedented roundtable discussion in Brussels with EU member state 

representatives. Our primary discussion focused on the key objectives of auditor oversight upon which we are all building our new 

regulatory systems. 

The oversight system required by the 8th Directive appears to 

mesh quite well with the oversight system we are putting in place 

here in the U.S.. The 8th Directive would require external independent oversight of auditors in a manner that is transparent, 

well-funded and free from undo influence by auditors or audit 

firms. It would also provide for cooperation with other regulators. 

These provisions should substantially enhance our ability to coordinate with our European counterparts. 

While the assistance of non-U.S. regulators will help us achieve 

our objectives under the Sarbanes-Oxley Act, true collaboration is 

a two-way street. The board has previously stated it is willing to 

assist non-U.S. regulators in their oversight of accounting firms. 

Because the needs of every regulator are different, we plan to work 

out the details of our assistance through direct discussions. 

In conclusion, we still have much work ahead of us to establish 

lasting relationships and working protocols with other regulators, 

and the Board is optimistic. Cooperation among regulators requires 

good will and flexibility. Our experience with the European Commission has demonstrated that European regulators share this 

view. We are confident that with the continuation of our open and 

constructive Dialogue with both the EU and its member states, we 

12

will be able to work together to fulfill our important missions to 

protect investors. Thank you. 

[The prepared statement of Samantha Ross can be found on page 

52 in the appendix.] 

The CHAIRMAN. Thank you. 

Mr. Tafara? 

STATEMENT OF ETHIOPIS TAFARA, DIRECTOR, OFFICE OF 

INTERNATIONAL AFFAIRS, UNITED STATES SECURITIES AND 

EXCHANGE COMMISSION 

Mr. TAFARA. Thank you. Chairman Oxley and distinguished 

members of the committee, I am delighted to have been invited to 

testify about the US-EU Regulatory Dialogue on capital markets. 

The Dialogue is the result of historic changes in the way capital 

markets function and our likely to develop. Today, almost all developed markets and even a considerable number of developing markets have adopted forms of security regulation similar to our own. 

At the same time, capital markets have become global. The result 

is something unique—a truly global capital market but operating 

in a world of expensive domestic capital market regulation. 

At this point, I should say that I firmly believe that the U.S. securities laws and SEC market oversight are two of the principal 

reasons why our markets are as efficient and effective as they are 

at fueling the capital needs of our economy. These laws focus on 

investor protection and have created in investors a certain bedrock 

confidence in the integrity of our securities markets that even sizable financial scandals have not been able to diminish entirely. 

In Europe, the union has promised to create an EU-wide capital 

market and a rationalized coordinated European securities regulatory structure. These initiatives will improve the efficiency and liquidity of Europe’s securities markets, developments that will benefit both U.S. investors and issuers in the long run by providing 

the former with greater investment opportunities and benefiting 

issuers by possibly lowering their cost of capital. 

The U.S. and EU securities markets are too large to be ignored, 

and potential conflicts between the regulatory requirements of 

these markets can have an adverse impact on cross-border flow of 

capital. Some of these conflicts may prove difficult to avoid, stemming, as they may, from differences in regulatory philosophy. 

Nonetheless, some duplicative or even contradictory regulation in 

this cross-border environment may offer little in the way of investor protection and merely place an unnecessary burden on issuers, 

firms and investors. The SEC is committed to avoiding such situations where possible. 

The US-EU Dialogue was created as a form in which to discuss 

such conflicts and other regulatory matters and fulfill several functions. Most importantly, it has served to reinforce our common 

ground. With respect to financial services regulation, the U.S. and 

EU share the same fundamental goals: Protecting investors, maintaining the stability of our markets and allowing free and unfettered competition among all market participants. 

The Dialogue is also proving useful in resolving potential problems by providing an opportunity for both sides to air concerns 

13

about the possible impact of upcoming regulations and to explore 

adjustments. 

Finally, the Dialogue has afforded an opportunity to learn from 

each other’s experiences. The learning process allows us to consider 

possible new avenues of regulation for our own markets which ultimately enriches the regulatory rulemaking process and helps us 

each to better carry out our regulatory mandates. 

We have made a connection with the Dialogue on a number of 

occasions and on these occasions we have discussed a number of 

key issues, including the implementation of the Sarbanes-Oxley 

Act, EU Financial Conglomerates Directive and international financial reporting standards. Although the US-EU Dialogue began 

before the Sarbanes-Oxley Act was signed into law, implementation 

of the act added new significance to the Dialogue. 

As the SEC began to implement the Sarbanes-Oxley Act, it 

quickly became clear in some cases implementing the provisions in 

certain ways could conflict directly with laws and regulations in 

other jurisdictions. The SEC worked very hard to resolve these conflicts in a manner consistent with the spirit and intent of the act. 

The Dialogue played a key role. Through our interactions with 

representatives of the European Commission, the SEC learned 

where potential conflicts lay, while the European Commission came 

to understand the objectives of our proposed rules. These discussions, in turn, led us to consider modifications to our proposed 

rules and avoided putting foreign market participants in the 

unenviable position of being asked to comply with conflicting laws 

while still ensuring that the objectives of the Sarbanes-Oxley Act 

were met. 

The cross-border impact of securities regulation travels both 

ways, as the SEC also had to respond to legislative initiatives in 

the European Union. And one example we had to respond to was 

the EU legislation called the Financial Conglomerates Directive. 

This directive had cross-border implications given that it requires 

non-EU holding companies or financial firms operating in the EU 

to be subject to consolidated supervision. 

Again, the Dialogue played a key role. As the EU went through 

the process of proposing, amending and finalizing the directive, we 

discussed as part of the Dialogue the implications of the directive 

for U.S. broker dealers with operations in Europe. Indeed, the SEC 

provided detailed explanations of the SEC’s form of oversight to EU 

regulators and policymakers and at this juncture expects that the 

European Commission and EU member states will find our system 

of consolidated supervision to be equivalent to the Financial Conglomerates Directive. 

Going forward, the SEC and the European Commission will be 

examining many of the same regulatory issues partly in response 

to very similar financial scandals in both our markets. The Dialogue is proving to be fertile ground for exploring new ideas and 

approaches, as both sides consider whether to introduce new regulation or to strengthen existing regulation to address regulatory 

concerns. 

To complement our discussions with the European Commission, 

I expect that we will in the near future also develop a framework 

for cooperation between the SEC and the Committee of European 

14

Securities Regulators, or CESR. The committee comprises securities regulators from all EU member states and is responsible for 

implementation of EU laws and day-to-day oversight. 

In conclusion, I would note that the US-EU Dialogue is a key element in a web of connections between the U.S. and EU policymaking community. It serves the important function of providing 

a forum for developing greater understanding of each other’s approaches, for airing concerns about actions that either the U.S. or 

EU has taken with respect to financial services and ultimately will 

help us achieve more converged regulations relating to financial 

services while ensuring the highest level of investor protection. 

I believe the Dialogue will lead to better securities regulation in 

the U.S. and the European Union and in the long run better protection and choices for investors. Thank you. 

[The prepared statement of Ethiopis Tafara can be found on page 

82 in the appendix.] 

The CHAIRMAN. Thank you, Mr. Tafara, and we now turn to our 

panel, and I will begin with a series of questions. 

I would first like to ask Mr. Quarles, since the Treasury coordinates the views of the U.S. Federal regulators regarding the issues 

before the Dialogue, one of the most striking differences that I have 

noticed between the Federal regulators until recently has been that 

the SEC did not regulate holding companies and supervise holding 

companies. That appears to be changing. It would seem to the outside observer that the SEC is finally using the Gramm-Leach-Bliley 

authority in order to converge with the EUs legal standard. 

I understand the equivalence determination in Europe regarding 

our state-based insurance regulators could be at least as thorny as 

the determinations in the securities industry. Having said that, 

what is the Treasury doing to help facilitate the equivalency determinations for all sectors of the U.S. financial services industry, and 

where do we go from here? 

Mr. QUARLES. The question of equivalency has been one of the 

central ones that we have been discussing in the Dialogue, and we 

have—what the Treasury has been doing is attempting to deal with 

all of the aspects of that as it arises in the discussion. What the 

SEC is proposing has been helpful. We have been encouraging direct conversations between the commission and the regulators on 

the topic of equivalency and some of the technical issues that arise. 

And on the insurance side, there is a direct Dialogue as well between the commission and the insurance regulators. It is an insurance regulatory Dialogue that is led by the NAIC, the National Association of Insurance Commissioners, which we are monitoring, 

and occasionally representatives of the NAIC will participate in our 

Dialogue on issues related to the Financial Conglomerates Directive and equivalency determination. So we have attempted to 

strengthen their separate Dialogue by including them in ours. 

The CHAIRMAN. Does our system of insurance regulation at the 

State level complicate your efforts? 

Mr. QUARLES. I don’t know that I would use the word, ‘‘complicate.’’ Obviously, because there isn’t a Federal system of regulation for insurance, we have to approach that in a different way 

than we approach the regulation of other financial institutions. But 

that said, I think that the Dialogue that there has been between 

15

the State insurance commissioners and the European Commission, 

which we have been monitoring, has been helpful in addressing 

some of the concerns about varying State regulations that the European institutions face when they come into the United States. 

The CHAIRMAN. When you get into Dialogue sessions, do you 

have a coordinated approach going into those, and that is directed 

by the Treasury, you are kind of the quarterback? Is that how it 

works? 

Mr. QUARLES. Yes. 

The CHAIRMAN. In areas of competency and regulatory structure? 

Mr. QUARLES. Yes. Generally, the technical group when they 

meet, for example, usually will meet in advance, not always, but 

usually will meet in advance to go over the issues that will be presented in the discussion, so that there is a unified view. 

The CHAIRMAN. Thank you. Let me ask all of our witnesses, and 

I am kind of running short of time, so we will try to do our best 

to get some answers. The exercise of consolidated home country supervision in the world of modern finance is going to involve a lot 

of sharing of information across borders—sharing data, verifying 

models implemented properly, even on occasion sharing enforcement and investigative authority. 

Let me start with Mr. Tafara and we will work that way. Do you 

believe that all of these things can be accomplished through the informal networks that exist, such as the Dialogue, or are we going 

to need at some point some more formal arrangements to accomplish our goal? 

Mr. TAFARA. I am not sure that we need something more formal. 

Indeed, today, I mean as we have put into practice our risk assessment program, which involves gathering certain information from 

broker dealers and assessing their exposure and the capital that 

should be charged as a consequence of that exposure, we do meet 

regularly with our counterparts in Europe at the national level, 

particularly with respect to broker dealer groups that have a presence in the major countries, in Europe, Germany and the UK and 

indeed a country outside of the EU, the Swiss. 

We meet with them one to two times a year to share information 

about what we see, concerns that we have identified and to hear 

from them about the same thing. And that process has worked extremely well over the course of the past several years that we have 

been meeting with them. And I expect that will continue going forward, that we would continue to meet on a rather informal basis 

but yet share information relevant to the risks and the risk exposure of these firms that we should be taking into account. 

The CHAIRMAN. Thank you. 

Ms. Ross? Don’t forget that mike. 

Ms. ROSS. Yes. We do plan on establishing working protocols and 

procedures with the various auditor oversight bodies that we hope 

to be able to gain assistance from and rely on in our inspection 

work and our other oversight programs. That is one of the things 

that we are beginning now to get working on. The European Commission has been very helpful in establishing a framework for that 

kind of work through the ACE Directive. 

In addition, the European Commission is now helping us establish relationships with the various member states which will be 

16

forming these new auditor oversight bodies as we are forming now 

so that we can work together. 

The CHAIRMAN. Thank you. 

Ms. Bies? 

Ms. BIES. Mr. Chairman, the Federal Reserve already has legal 

agreements that allow us to share information with all the major 

banking regulators across the world, and where we have specific 

cases of investigations, our experience has shown we work very 

well together under the period where you are sort of under stress 

and have a real problem situation. 

So we are very comfortable we have the authorities that we need 

day-to-day coordinate the activity between the home and host regulators. 

The CHAIRMAN. Mr. Quarles, specifically to you in terms of terrorist financing and anti-money laundering, do we need to go beyond the informal arrangements and look towards MOUs and other 

forms of agreements? I know that based on the PATRIOT Act that 

the Treasury has been quite busy and successful in many cases in 

implementing that law. Could you give us some details? 

Mr. QUARLES. Sure. There obviously are a number of ways in 

which we would want Europe to, again, refine and improve the procedures it has in place for addressing anti-money laundering and 

counterterrorist financing. I don’t know—at this point, I don’t know 

that we would say that it requires something more formal than 

what we have been doing. 

We have a regular interaction with the Europeans on these 

issues, and, for the most part, it is fruitful, and we have had some 

significant successes, for example, in September of 2003 when Europe moved to designate the entire Hamas organization rather than 

attempting to split it up from its charitable arm and its political 

military arm. 

But, for example, in that same vein, they still don’t designate all 

of Hezbollah, and that is something that we are working with them 

to improve. We think they need to streamline the clearinghouse 

process that they have for handling information related to preparing designations and for moving quickly to disseminate information about designations to banks in their jurisdiction. We think 

they need to develop a more flexible standard for designation. It is 

really more of an actual criminal standard as opposed to an administrative standard, and that isn’t flexible enough to be able to act 

quickly enough, and speed is of the essence in this effort. 

So there are clearly issues like that—I think those are the principal ones—there are issues like that we want them to move on 

and are continuing to work with them to move on. But the progress 

that we have had so far, while it is not complete, I think would not 

say that we need a thorough overhaul of the way that we are engaging with them. 

The CHAIRMAN. My time has expired. 

The gentleman from Washington? 

Mr. INSLEE. I was so enthralled with your questioning that I was 

just momentarily rendered speechless, which doesn’t happen very 

often. 

[Laughter.] 

17

The CHAIRMAN. That is true. I won’t start your time running 

until you tell me when you want. 

[Laughter.] 

Mr. INSLEE. Okay. Maybe it goes without saying that U.S. businesses have a huge interest in having consistency between American and EU regulatory structures. And where we have consistency, we frequently have global kind of concurrence, other nations 

follow. And where we don’t, it can give inconsistent results, not 

only in the EU but folks who feel free to start new regulatory 

schemes around the world. 

This was brought home to me. Obviously, frankly, with the 

Microsoft case, it has two different at least potential, and there are 

some good signs, actually, that we may find more coordination in 

those policies, so that is—we have optimism about that. 

But I just wondered what you could tell us, particularly, Mr. 

Quarles, about efforts at upcoming summits, EU-American summit, 

G7 and the effort to really emphasize our need and explore ways 

to improve our consistency across the pond knowing how important 

it is to U.S. business. 

Mr. QUARLES. This Dialogue, for example, is something that 

forms an important part of the discussion at the summit, at the 

US-EU summit. And in the context of the G8 summit that will be 

coming up, a central theme is the agenda for growth, which is to 

say measures that all of the G8 economies need to take in order 

to—we call them supply side measures that improve the environment for economic growth in each of those economies. And an important part of that is the regulatory environment and ensuring 

that business climate is conducive to economic growth. 

We have made that a constant and central theme of our engagement with the developed countries at the summit level, at the ministerial level and in various international forums, and I think you 

can see that it is beginning to bear some fruit, both from the support that the Dialogue has at the heads level because it is always, 

as I say, a central topic of the US-EU summit but also in some of 

the structural changes that European countries are making in their 

economies that are pro-business and pro-economic growth. 

Mr. INSLEE. Well, we encourage those efforts, we hope you are 

successful, because this has enormous ramifications for companies 

that need predictability, need consistency, need to trust one judicial 

system instead of having to go through 100, and we hope you will 

be successful. Thank you. 

The CHAIRMAN. I thank the gentleman. 

Let me ask Ms. Bies and Mr. Tafara, and I am going to be asking 

a similar question to Dr. Schaub when he testifies. It is a complicated issue and it is one that really has enormous consequences 

going forward. Many U.S. institutions have been listing in the Euro 

markets on the basis of US GAAP standards. 

The euro markets are obviously huge. I understand that the new 

EU directives imply that unless US GAAP is soon found equivalent 

for the purposes of listing in Europe, these firms may not be able 

to continue using the Euro markets. It would seem to me that such 

a development would mean lower liquidity and volume in the European capital markets, which would be contrary to the basic purpose 

of the FSAP. 

18

In the meantime, uncertainty in the markets could inhibit 

issuances. Governor Bies and Mr. Tafara, there has been much debate and concern in Europe regarding the IASB’s proposed fair 

value standard for derivatives. What is your impression of how 

that debate is likely to turn out? Do you agree that it could be a 

problem for the balance sheets in Europe and the United States to 

have different standards for evaluating and valuing derivatives? 

Ms. Bies? 

Ms. BIES. Mr. Chairman, the proposal that Europe is debating at 

the moment would bring the international standard closer to the 

U.S. Today, we have a very wide difference between the two accountings. In the United States, several years ago, the Financial 

Accounting Standards Board required all corporations, not just financial institutions, to recognize on their balance sheet financial 

derivatives of all types. Europeans still don’t do that. 

So one of the things in terms of a level playing field and transparency of these complex organizations, we think it is important 

that they do move forward and provide that transparency. 

Now, the U.S. companies, to their advantage, had to adopt all 

these changes one by one because these are in different standards 

in the U.S. and so had more time to implement, and that is one 

of the issues I think the Europeans are struggling with to adopt 

all this at once. But the European firms who are already preparing 

under US GAAP will find that much of the work they are already 

doing will help them. 

And, furthermore, some of the approaches that are in IASB proposals 39 and 32 actually provide some interesting alternatives to 

some of the areas in the US GAAP that we have found problematic 

and might provide an alternative. So I am hoping that we get to 

a closer consistency across the two standards, and I think the Dialogue that is going on now between the FASB and the IASB and 

our work with the other banking regulators in Europe to talk about 

how to look at financial standards in the two countries is very productive. 

I would also add that even if we get comparable standards, the 

issue is going to be whether they are implemented and interpreted 

the same way, and that is going to require some work. We think 

some of the new standards, for example, on loan loss reserve accounting should move us closer than what we have in practice 

today. And, obviously, the work of the PCAOB is important because 

a lot of the issues that we struggle with that we call accounting 

issues, even in this country, are not accounting, they are audit failures. 

The CHAIRMAN. Well, maybe we should ask Ms. Ross then to 

comment on that since you brought her into the equation here. 

[Laughter.] 

Ms. ROSS. Thank you, Chairman. Our board has not taken a position on accounting standards, and I don’t really expect it to, because we really are in the audit area. But, of course, once the accounting standards are established, we do play a very big role in 

helping to ensure that these accounting standards are applied in 

a consistent manner, just as Governor Bies is saying. 

So that will be critically important to us as we move forward in 

our inspections of accounting firms work on public companies, both 

19

those public companies that are the sort of bread and butter companies we have here in the U.S. and then also the foreign private 

issuers that are listed and registered with the Securities and Exchange Commission. So this is something we are very mindful of. 

The CHAIRMAN. Thank you. 

Mr. Tafara? 

Mr. TAFARA. Don’t know that I have much to add to what Governor Bies had to say about IS 32 and 39. We have tried to stay 

outside of the debate that is raging in Europe with respect to 

whether or not they should use IS 32 and 39, as they have been 

currently proposed, other than to note that a financial instrument 

standard is pretty important to add and to note that the conceptual 

underpinnings to 32 and 39 are the ones that are in FASB 133 and 

our institutions have been able to adapt to use the standard. 

With respect to convergence, I want to add on to what Governor 

Bies had to say and say that we have been strong supporters at 

the SEC, at least at the staff level, of the convergence project that 

is taking place between the IASB and the FASB, the exercise of 

identifying the principal differences and trying to eliminate them 

over a period of time, and we think that actually will increase the 

transparency and the comparability of financial statements as investors look to the choices they have for their capital. 

But as Governor Bies pointed out, critical to the acceptance of 

IAS on a cross-border basis will be a robust infrastructure for consistent interpretation, application and enforcement of the standards. Without that, what is supposed to be one standard can quickly devolve into 15, 25, 30 different standards, and that is something we are working with our counterparts across the Atlantic on 

establishing. 

The CHAIRMAN. I would assume that all of the witnesses would 

share the same concerns expressed by Mr. Tafara in terms of having numerous standards and trying to deal with all of those. I see 

everybody shaking their heads. And, of course, one of the purposes 

of the hearing was to get some of those issues out there, and that 

is been enormously helpful, and your testimony has been enormously helpful to the committee in making a record as we move 

forward. 

I think the encouraging thing is that we have made significant 

progress already, and in many ways we are just probably in the 

first inning of this process, but it is quite encouraging, and for that 

we thank all of you and we are now—you can go back to work, and 

thank you for your testimony. 

The committee is now pleased to welcome Mr. Alexander Schaub, 

Directorate General for the Internal Market of the European Commission. 

Mr. Schaub, it is great to have you here to share your expertise. 

The committee is very familiar with your background and your reputation in the European Union, and we most appreciate your coming across the Atlantic to be with us this morning and testify, and 

you may begin whenever you feel comfortable. 

20

STATEMENT OF ALEXANDER SCHAUB, DIRECTOR GENERAL, 

DIRECTORATE GENERAL, INTERNAL MARKET, EUROPEAN 

COMMISSION 

Mr. SCHAUB. Good morning, Chairman Oxley and members of 

the committee. Thank you very much for inviting me to testify on 

behalf of the European Commission and in addition for the first 

time on the informal EU-US Financial Markets Regulatory Dialogue. 

Cooperation in this area is not an option, an extra. It is an economic, political and regulatory necessity. We are economically 

interdependent. In the global markets, our regulations inevitably 

spill over on each other, not only in this area, it was already talked 

about, competition policy where you have exactly the same phenomenon. 

The financial integration that we are undertaking in Europe offers huge opportunities for the U.S.. And we can cooperate. Within 

the EU, we have had to ensure that also in an enlarged union investors in one country can feel secure about the offer of service 

from intermediate in another. We have taken, and we continue to 

take, stringent steps to ensure that high regulatory standards prevail. Such cooperation, which we have been training and practicing 

over 4 decades now within the European Union, must also be possible with our friends in the U.S. 

We have taken a fresh start in our cooperation. That has involved recognizing the need, not necessarily to take identical approaches, but to agree on equivalent approaches. That is, in our 

view, the only viable way forward, and it is based on our practical 

experience over the last 40 years. We have taken a fresh—excuse 

me. 

The Financial Markets Regulatory Dialogue is key to this exercise. There is no magic to the term, it just refers to the fact that 

we are talking to each other frequently. It does not matter whether 

that takes place face to face or by telephone. What matters is that 

it does happen and in a constructive and effective way which removes hurdles and prevents the creation of new ones. 

What makes it tick is its informality, meeting only as on as an 

as and when basis and concentrating on solutions. We are constantly looking at improvements by organizing our discussions better, delegating work to experts, encouraging parallel Dialogues, including that, by the way, between yourselves and the European 

parliament, and we were always pleased to see you in Brussels, 

and between industry, while keeping all stakeholders informed of 

progress achieved. 

One of the key issues will be, as already mentioned, auditing. We 

welcome the excellent and extremely pleasant cooperation with the 

PCAOB, and we hope this will continue. 

On conglomerates, we recognize the need for certainty, and we 

hope to be able to announce guidance shortly, European guidance 

to be applied by the national supervisors. It is vital that we work 

together on the reconciliation of international accounting standards 

with US GAAP, and there are indeed practical questions which 

have to be further clarified. 

It is crucial that supervisors continue to work closely on the implementation of a new capital accord, and I think we can congratuVerDate 0ct 09 2002 10:35 Sep 09, 2004 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\DOCS\95262.TXT FIN1 PsN: MICAH
21

late our negotiators from both sides of the Atlantic on the outcome 

of the latest meeting in Basel. Banks must not find the benefits of 

the new framework undermined by conflicting approaches to implementation and interpretation. 

There are benefits to cooperating on the regulation of securities 

and exchanges and the possibilities of remote excess to trading 

screens of exchanges based in the jurisdictions of the other side. 

We also see benefits in the increased cooperation on the 

collateralization of reinsurance, allowing insurers on both sides to 

diversify risk. 

Finally, there are issues such as credit rating agencies, financial 

analysts, mutual funds and hedge funds which offer real opportunities for more upstream convergence and practical cooperation. 

Mr. Chairman, I welcome the support that you have brought to 

this process, and I ask this committee to support us as we proceed. 

Our citizens, intermediaries and companies all stand to benefit 

from it. Thank you for your attention. 

[The prepared statement of Alexander Schaub can be found on 

page 68 in the appendix.] 

The CHAIRMAN. Thank you, Mr. Schaub, again for—Dr. Schaub 

for appearing before us today and your very positive comments. 

And, indeed, what you say is correct, that our constituents on both 

sides of the Atlantic are depending on policymakers to work together to make certain that the free flow of services and their financial future is well in hand and that we do have the benefits of 

regulation that provide the kind of safety and protection for investors and for savers at the same time. 

Let me begin. The EU’s Financial Conglomerates Directive states 

that the U.S. securities firms operating in Europe must be subject 

to an equivalent consolidated global supervision system which 

would be determined by the relevant Member State regulator beginning in 2005, next year. As you know, the SEC and others have 

been working closely with the European Commission for over 2 

years in order to ensure that the SEC’s regime is determined to be 

equivalent. As a matter of fact, we had some discussions in Brussels about that, I guess, almost 2 years ago. 

And I understand that the Commission will not issue its guidance to start the equivalency determination process until at least 

June of this year. This delay is causing some concern, as you might 

guess, within the U.S. financial services industry. Is there any reason for us to be concerned that the SEC’s new regime will not be 

found equivalent in time for compliance? 

Mr. SCHAUB. First of all, I should underline that this equivalence 

requirement is not a way of torturing unnecessary our friends and 

partners. It is a natural prerequisite before you enter into cooperation in such sensitive, important matters with important partners, 

and we find it perfectly natural that in cases where the U.S. is supposed to cooperate—U.S. supervisory structures are supposed to cooperate with us, that they would naturally first have a look whether the partner, their cooperation partner is at the equivalent quality level. 

Now, on the concrete case, you will understand that I cannot prejudge the outcome of this process, but personally I am very much 

convinced that this exercise, which is a new experience, which has 

22

taken more time also because American companies needed more 

time to present the practical details, I believe that at the end we 

will clearly come to a positive outcome. 

That is my firm, personal expectation, and I can tell you that we 

in the commission, Mr. Bolkestein, in the first place, are following 

closely this process. And if there should be any problem in the further development, because, as it was said, the final decision on 

equivalence is taken by the national supervisors on the bias basis 

of community-wide guidance, on the application of uniform rules at 

community level. But the last word is delegated to the national supervisors, and we will be in very close contact to make sure that 

unnecessary accidents can be avoided. 

The CHAIRMAN. Thank you. Do you think that the insurance 

issues will perhaps create the thorniest problem? What is your 

view just on the overall insurance issues within the scope of your 

jurisdiction? 

Mr. SCHAUB. Well, I think it is not a secret that the insurance 

industry on both sides of the Atlantic is not in the most brilliant 

state of its history and that market participants rightly expect that 

this industry gets its act together. That is what is happening on 

the European side, what is happening certainly on the American 

side, and I believe that we have an interest on both sides to make 

sure that this process is closely followed and that it is pursued over 

time, because the scandals have already created enough doubt and 

hesitations in the marketplace, and it is vital for both sides that 

confidence comes back, and confidence is created in the first place 

by market players who visibly get their act together. 

The CHAIRMAN. And you heard the testimony from our panel. 

Was there anything that the previous panel discussed that you 

would like to comment on? Are there any glaring omissions or differences that you may have noted during that testimony? 

Mr. SCHAUB. I would say on the contrary, what is striking for me 

and what is at the same time very encouraging is that we are 

speaking more and more the same language and that your concerns 

on the U.S. side are our concerns in Europe. 

Let me just take one particularly crucial example, that is the introduction of international accounting standards. We both agree 

that this would be a major step forward, because what is happening at present that big internationally active companies have to 

present their annual results in four, five and sometimes even more 

different techniques with the amazing result that exactly the same 

company in some countries presents losses of $2 billion and in 

other countries comes out with a positive result of a billion. That 

is very amazing and puzzling for the market participants, and it 

undermines, obviously, the credibility of the whole system. 

Therefore, there is deep conviction on both sides of the Atlantic 

that this is certainly one point where we need to come to single 

rules. We don’t need single rules for everybody and for everything, 

but this is a key element where do need, like on capital requirements for companies, we need common single rules. And I share 

the expectation and the strong wish of the U.S. authorities and of 

Congress that this crucial step is done soon. 

As you know, these activities of the International Accounting 

Standards Board is entering now in a dramatic final phase. It 

23

seems to us clear if there is no agreement by mid-June, it will practically be impossible to create the conditions for companies to apply 

the new international accounting standards as of January next 

year, which was foreseen, which was the target date for a long 

time. 

So we are working very intensely with Mr. Bolkestein, personally 

involved with very intensive contacts with Paul Volcker and with 

David Tweedie, the chair of the IS Board, on how to solve the very 

few still open questions. And my conviction is, and I was very 

pleased to see that this is also Paul Volcker’s conviction, that we 

can solve these one or two open points until mid-June in a pragmatic way, which means that we need not on every last detail come 

to solutions which would be considered as solutions for the next 

decade. 

If we come to solutions which are as a provisional solution, acceptable on the condition that a credible process is immediately 

now launched with a target date to further improve the provisional 

results, which, as I see today, will, in any case, imply very significant improvement if such a pragmatic way could be followed, it 

should be possible to terminate mid-June and to assure that as of 

January next year companies will apply these new standards. 

It would be an enormous breakthrough. It would give the signal 

to the world that this target of credibility and of reinsurance for 

the marketplace will be pursued and therefore it is worthwhile that 

all forces are concentrated on this final breakthrough. 

If we would fail, we should have no illusions that this would be 

a major shock for the marketplace, because it would not just mean 

probably that the efforts to go forward are not concluded, it would 

open a major risk that the process could be brought backwards, because there are people in the marketplace who would not be unhappy to work on more regional standards, and the whole dynamic 

towards convergence risks to be undermined and destabilized, and 

we could lose a decade if we can’t bring this now to a positive end. 

We really hope that it will be possible, and I am personally confident that it will be done. 

The CHAIRMAN. And so we are really talking about a month. We 

are already in the middle of May, so we are talking a matter of 4 

or 5 weeks; is that correct? 

Mr. SCHAUB. That is exactly the case. 

The CHAIRMAN. So as we would say over here, it is crunch time. 

Mr. SCHAUB. Yes. 

The CHAIRMAN. Is the likelihood of fair valuation for derivatives 

the key issue to be decided? 

Mr. SCHAUB. This is certainly the most difficult remaining issue, 

and I believe it is crucial that on this point real significant progress 

is achieved, because I would understand that it is not acceptable 

that on such a key point simply nothing happens that would undermine the credibility. 

From my point of view, what is absolutely essential is that at 

least clear transparency is created, that investors in the marketplace have a possibility to get an idea what this hedging exercise, 

which is so complicated that only very few people understand it 

and I don’t belong to these people. 

The CHAIRMAN. Nor do I. 

24

Mr. SCHAUB. But I can understand that the simple human being 

participating in the marketplace wants to know what does this 

hedging exercise mean for my company in January, in June, in December, and the minimum is that such transparency is introduced 

as a compelling element of the future rules. 

The CHAIRMAN. We have had some discussions with private sector folks on this side of the Atlantic that they are concerned about 

what appears to them to be lack of transparency in the EU process. 

To what extent do you take into account those views from private 

sector people that will be affected, obviously, by the rulings? 

Mr. SCHAUB. We are deeply convinced that high quality rules 

cannot be produced without systematic implication of the private 

sector on both sides of the Atlantic, because we are talking about 

rules which should be applicable worldwide. 

Now, it is not a surprise, certainly not for you, that private does 

not appear spontaneously with a common view. So we are systematically exposed to quite diverging views which are reflecting often 

the diverging position of the companies or the association of companies which appear. It is simply a fact that there are—some of them 

are much more affected, and others are much less or not at all affected. So they will not sing the same song when they come, but 

our task is to make a sound judgment what should be taken into 

account of their wishes and what cannot be taken into account 

without endangering the credibility of the new future rules. 

The CHAIRMAN. Thank you. I think we have pretty well covered 

the IASB issues, and, by the way, we have had testimony from Mr. 

Volcker on a couple of occasions, and we could not be better represented than someone with his stature and ability, and we have 

certainly relied on him and leaned on him in many cases to help 

the committee better understand this transformation that is taking 

place across the Atlantic. 

The home country supervision issue, the term, ‘‘home country,’’ 

I just need to get this in my mind, home country supervision, from 

our perspective, means, of course, U.S. supervision. With the EU 

now, we are really talking about an expanded breadth of home 

country supervision, correct? In other words, the European Commission and European Union represent that home country supervision. I am correct, right? In other words, we are not talking about 

individual states here now, we are talking about the entire European Union when we define home country supervision. 

Mr. SCHAUB. Well, in Europe, we do not have the same structure 

than the one you have since very recently. We don’t have one single 

European supervisor. There is a lot of debate about this. We have 

at present a decentralized European supervisory system, and that 

means that there are common European rules, there is a European 

body for security, CESR, and corresponding bodies for banks and 

for insurances, which are closely following the application—together with the commission the application, the enforcement of the 

common European rules by the national supervisors. 

So it is a bit more complicated than your system today, but the 

purpose is to assure, like on the U.S. side, convincing, efficient, 

credible results. And we agree with the Bill McDonough and your 

PCAOB that an intelligent work sharing between the two sides is 

25

only possible if each side has convinced itself that the system on 

the other side offers comparable, equivalent guarantees. 

Now, this is not done just because we like the Americans so 

much or because you like the Europeans so much, it is largely a 

question of efficiency, how are we from London or from Frankfurt 

able to assure the supervision of a Japanese company located in 

Kobi and having a Japanese auditor? That is very difficult. So the 

same is true if you want to supervise an Italian company located 

in Milan and Bill McDonough has certainly highly qualified staff, 

but it is not sure that he has enough Italian-speaking people who 

could really do the job on the spot. 

So the idea is that there is work sharing to the point that it remains credible, that the guarantees of reliability of this joint effort 

is the same. And we believe that this work sharing is probably the 

only way to get out of the problem in an increasingly global system. 

The CHAIRMAN. Dr. Schaub, what is the—just having gone 

through an enlargement now, what commitments do the new countries that have joined the EU, what kind of commitments do they 

make in terms of their regulatory structure and all of the negotiations that are going on currently? 

Mr. SCHAUB. Well, you know, the fundamental requirements, 

preconditions for accession are for each of these 10 new members 

that they introduce as of the 1st of May fully—they introduce fully 

because there are no derogations accepted—the implementation of 

the so-called community acquis that is the totality of European 

Union rules on financial services. And it is the task of the European Commission to make sure that the community rules are effectively respected. 

Now, it is not a secret that we have been working frantically 

until the end of April with some of these countries to make sure 

that they do the very few remaining elements of homework which 

had not been delivered yet. 

So we are now in a situation where they have introduced the 

rules where they do have supervisory structures, and we will now 

be in a much better position than in the past via the multiple committees where the representatives of these supervisory authorities 

from all 25 member states are regularly meeting. It will be much 

easier to assure that all these 25 supervisors are effectively applying the same rules, that they are making the same interpretation 

of these rules, and that they deliver convincing results. That will 

be, of course, an important responsibility for the commission and 

for these Europe-wide committees, but it is an exercise which has 

been applied in many other areas before. 

So it is not something totally new, and it is something which has 

successfully worked in other cases. Personally, I remember particularly the positive experience after the last accession exercise in the 

new member states at the time, and I remember very well in the 

competition area the remarkable efforts the 10 new member states 

have undertaken over the last years to get their own competition 

authorities now, their own financial supervisory authorities into 

the shape required to be part of a convincing European system. 

The CHAIRMAN. Very good. Again, we thank you profusely for 

coming over and testifying before the committee. We know that 

your trip was a brief one here, and for that we are most appreVerDate 0ct 09 2002 10:35 Sep 09, 2004 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 G:\DOCS\95262.TXT FIN1 PsN: MICAH
26

ciative that you did take the time to come over and visit with us 

and impart some knowledge for the committee and make an excellent record. 

So, again, Dr. Schaub, thank you, and the committee stands adjourned. 

[Whereupon, at 11:40 a.m., the committee was adjourned.] 

(27)

A P P E N D I X

May 13, 2004

28


95262.001
29


95262.002
30


95262.003
31


95262.004
32


95262.005
33


95262.006
34


95262.007
35


95262.008
36


95262.009
37


95262.010
38


95262.011
39


95262.012
40


95262.013
41


95262.014
42


95262.015
43


95262.016
44


95262.017
45


95262.018
46


95262.019
47


95262.020
48


95262.021
49


95262.022
50


95262.023
51


95262.024
52


95262.025
53


95262.026
54


95262.027
55


95262.028
56


95262.029
57


95262.030
58


95262.031
59


95262.032
60


95262.033
61


95262.034
62


95262.035
63


95262.036
64


95262.037
65


95262.038
66


95262.039
67


95262.040
68


95262.041
69


95262.042
70


95262.043
71


95262.044
72


95262.045
73


95262.046
74


95262.047
75


95262.048
76


95262.049
77


95262.050
78


95262.051
79


95262.052
80


95262.053
81


95262.054
82


95262.055
83


95262.056
84


95262.057
85


95262.058
86


95262.059
87


95262.060
88


95262.061
89


95262.062
90


95262.063
91


95262.064
92


95262.065
93


95262.066
94


95262.067
95


95262.068
96


95262.069
97


95262.070
98


95262.071
99


95262.072
100


95262.073
101


95262.074
102


95262.075