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THE US-EU REGULATORY DIALOGUE:

THE PRIVATE SECTOR PERSPECTIVE

HEARING

BEFORE THE

SUBCOMMITTEE ON 

DOMESTIC AND INTERNATIONAL 

MONETARY POLICY, TRADE AND TECHNOLOGY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JUNE 17, 2004

Printed for the use of the Committee on Financial Services

Serial No. 108–95

(

(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)

SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL MONETARY POLICY, TRADE AND

TECHNOLOGY

PETER T. KING, New York, Chairman

JUDY BIGGERT, Illinois, Vice Chairman 

JAMES A. LEACH, Iowa 

MICHAEL N. CASTLE, Delaware 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

DOUG OSE, California 

JOHN B. SHADEGG, Arizona 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

TIM MURPHY, Pennsylvania 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

CAROLYN B. MALONEY, New York 

BERNARD SANDERS, Vermont 

MELVIN L. WATT, North Carolina 

MAXINE WATERS, California 

BARBARA LEE, California 

PAUL E. KANJORSKI, Pennsylvania 

BRAD SHERMAN, California 

DARLENE HOOLEY, Oregon 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

RAHM EMANUEL, Illinois 

CHRIS BELL, Texas 

(V)

C O N T E N T S 

Page 

Hearing held on: 

June 17, 2004 .................................................................................................... 1

Appendix: 

June 17, 2004 .................................................................................................... 25

WITNESSES 

THURSDAY, JUNE 17, 2004

Oldshue, Paul, Immediate Past President, Bankers Association for Finance 

and Trade .............................................................................................................. 6

Scott, Hal, Nomura Professor of International Financial Systems, Harvard 

Law School ............................................................................................................ 7

Thornburgh, Richard, Chairman, Securities Industry Association ..................... 4

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 26

Oldshue, Paul .................................................................................................... 28

Scott, Hal ........................................................................................................... 45

Thornburgh, Richard ........................................................................................ 57

(1)

THE US-EU REGULATORY DIALOGUE: 

THE PRIVATE SECTOR PERSPECTIVE 

Thursday, June 17, 2004

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON DOMESTIC AND

INTERNATIONAL MONETARY POLICY, 

TRADE AND TECHNOLOGY

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 10:02 a.m., in Room 

2128, Rayburn House Office Building, Hon. Judy Biggert [acting 

chair of the subcommittee] presiding. 

Present: Representatives Biggert, Feeny, Maloney and Hooley. 

Also present was Representative Bachus. 

Chairwoman BIGGERT. [Presiding.] This hearing of the Subcommittee on Domestic and International Monetary Policy, Trade 

and Technology will come to order. Without objection, all 

members’s opening statements will be made part of the record. I 

will recognize myself for 5 minutes for an opening statement. 

Good morning. It is my pleasure to chair this hearing on the USEU Regulatory Dialogue: The Private Sector Perspective. I want to 

thank Chairman Oxley for his leadership on this issue and for focusing attention on the growing dialogue between financial regulators on both sides of the Atlantic. There is no doubt that increased interest in the dialogue reflects the growth in economic and 

financial activity on both sides of the Atlantic, and the interdependency of those growing markets. 

It is because of that increased interest and interdependency that 

we are conducting this second hearing today. Held at the full committee level last month, our first hearing featured those who are 

official parties to the dialogue. Government officials from both the 

U.S. and the EC had the opportunity to share their views on the 

status and outstanding challenges that the dialogue will address in 

the near future. 

Today, we hear from those who are not official parties to the dialogue, but who nonetheless have much to add to its future success. 

It is the private sector’s turn today, and representatives from the 

banking and securities markets, as well as academia, will have the 

opportunity to voice their views on how the dialogue should evolve. 

One of the great strengths of our capital markets in the United 

States is the active engagement of our private sector in the shaping 

of emerging laws and regulations. Their involvement can help us 

ensure that our system responds quickly and efficiently to market 

2

developments, while at the same time preventing abuses. We look 

forward to hearing those views today. 

As we seek to work more closely with our economic partners in 

Europe, some in the private and public sectors have increased their 

calls for greater trans-Atlantic harmonization in regulatory standards. I continue to believe that case-by-case determinations make 

more sense than would a wholesale commitment to harmonize, regardless of topic or market structure. I agree with Chairman Oxley 

that convergence for convergence’s sake is not a wise public policy 

choice. I also doubt that one must endorse convergence up front in 

order to achieve greater comparability and mutual understanding. 

The success of the dialogue to date has proven this. 

Besides addressing the issues of convergence, next steps, and inclusion of other parties in the dialogue, there is an issue whether 

the U.S. government is structured appropriately to represent our 

best interests in the dialogue. I look forward to testimony from our 

witnesses on whether the dialogue, our EU counterparts, or other 

mechanisms for US-EU cooperation are adequately open to views 

from the private sector. I look forward to considering whether the 

U.S. Treasury structure in Europe, with attaches in Paris and 

Frankfurt, but not Brussels and London, is consistent with the 

shifting centers of economic power in Europe during the 21st century. 

Specifically, London and Brussels represent the financial and political capitals of Europe, yet our Treasury Department still posts 

representatives in Frankfurt, the location of the European Central 

Bank, and Paris, the location of the Organization for Economic Cooperation and Development. As important as these missions may 

be, times have changed and centers of influence and activity have 

changed, yet our resource allocation apparently has not changed. 

Financial markets are the engine for economic growth in any 

economy. The U.S. and the EU mutually benefit from economic integration as consumers and businesses find new products and services available to finance their productivity activity. Government’s 

role is not to stand in the way of productive activity. Its role is to 

find a way of ensuring that minimum common standards protect 

the system from abuses. 

Our witnesses will provide perspective on whether an appropriate balance is being struck in Europe and what the U.S. government can do to better address our goals. I look forward to hearing 

suggestions and to advancing the dialogue that is so important to 

our economic future. 

With that, I would recognize the ranking member for 5 minutes. 

Mrs. MALONEY. I thank the gentlelady for yielding. I request permission to put my opening statement in the record in the interest 

of time. 

I would like to take this opportunity to welcome a fellow New 

Yorker who will be testifying today, the chairman of the Securities 

Industry Association, Richard Thornburgh. Mr. Thornburgh is the 

chief risk officer for Credit Suisse Group and a member of the 

Credit Suisse Group executive board. The Credit Suisse Group 

through CSFB may be the quintessential trans-Atlantic firm with 

operations in Europe and the United States. It has global capabilities, with offices in 35 countries. 

3

It is clear from Mr. Thornburgh’s background that he has a great 

deal of experience and expertise on the issues before us today. I 

look forward to his testimony. I would also like to congratulate 

Credit Suisse on celebrating 70 years of service in our country. 

Founded on June 15, 1934, it was the first public securities firm 

after the creation of Glass-Steagall and they are an outgrowth of 

the First Boston Group. 

I might also add that Credit Suisse is a major civic leader in the 

city that I am proud to represent, employing over 6,000 New York 

residents and participating in the civic fabric of our city. We thank 

him for being here and for your service to safety and soundness in 

our financial institutions, and we look forward to your testimony. 

Thank you. 

Chairwoman BIGGERT. Thank you very much. 

Does the gentlewoman from Oregon have an opening statement? 

Ms. HOOLEY OF OREGON. I do not, Madam Chair, but I would 

like to introduce one of the panelists, if this is the time you want 

me to do it. 

Chairwoman BIGGERT. Please proceed. 

Ms. HOOLEY OF OREGON. Thank you. 

Thank you, Madam Chair and Ranking Member Maloney for 

holding this hearing today on the European Union-United States 

regulatory dialogue. It is important that we address issues that are 

facing U.S. financial firms doing business in the EU, and to make 

sure that there is an ongoing and healthy dialogue between the 

United States and the EU officials. 

I am honored to be joined by a fellow Oregonian who is testifying 

today on behalf of private enterprises. Paul Oldshue has been living in Portland, Oregon since 1978. He has been a productive and 

energetic member of our community. He is the executive vice president and manager of U.S. Bancorp’s International Banking Group. 

Prior to joining U.S. Bancorp in April of 1991, Mr. Oldshue headed 

PacifiCorp Financial Services Broker-Dealer, led Security Pacific 

Bank’s Oregon Commercial Lending Group, and served as treasurer of Orbanco Financial Services Cooperative. 

Mr. Oldshue has a BA degree from Williams College and an 

MBA from New York University School of Business Administration. So he is from your area, Ranking Member Maloney. He is past 

president and director of the Arc of Multnomah County, immediate 

past president and director of the Bankers Association for Finance 

and Trade. 

I am very happy that you have decided to join us today, and look 

forward to your perspective on the ongoing regulatory dialogue between the EU and the United States. Thank you for being here. 

Chairwoman BIGGERT. Thank you very much. 

I guess I am left to introduce the final witness here. Professor 

Hal Scott is the Nomura professor and director of the Program on 

International Studies at Harvard Law School. Mr. Scott is the author of several books, including one recently published on international financial policy and regulation. Professor Scott is also a 

governor of the American Stock Exchange and a member of the 

American Enterprise Institute Shadow Financial Regulatory Committee. 

4

There is some tie to my home State of Illinois. In fact, he has 

been working with Ken Dam, who is the Max Pam professor of law 

at the University of Chicago. So I guess I will say that we have 

somebody that is within this realm. 

With that, let me just say that without objection, your written 

statements will be made part of the record, then you will be each 

be recognized for a 5-minute summary of your testimony. Following 

that, then we will recognize for 5 minutes each the members of the 

committee to ask questions. So we will begin with Mr. Thornburgh. 

You are recognized for 5 minutes. 

STATEMENT OF RICHARD THORNBURGH, CHAIRMAN, 

SECURITIES INDUSTRY ASSOCIATION 

Mr. THORNBURGH. Madam Chair Biggert and members of the 

subcommittee, thank you for your continued interest in the US-EU 

financial markets dialogue and the EU financial services action 

plan. My testimony today will stress the following points: 

One: The EU capital markets are a critical source of capital for 

U.S. companies and vital to U.S. investors seeking portfolio diversification. 

Two: a U.S. action plan is needed to complement the FSAP implementation. 

The US-EU financial markets dialogue is working. We need to 

build on what is now in place. We commend the Treasury Department for opening a specific dialogue on financial services issues. 

The US-EU relationship provides the U.S. securities industry and 

its clients with tremendous opportunities. The EU offers U.S. investors alternative investment options for portfolio diversification. 

For example, U.S. investors own more than $1.3 trillion in foreign 

stocks, of which over $700 billion or 53 percent are EU shares. U.S. 

holdings of EU bonds total more than $227 billion, or 45 percent 

of total foreign bond holdings. 

The EU also offers U.S. companies an alternative pool of capital 

for raising debt and equity. Last year alone, U.S. companies raised 

$164 billion in debt and almost $7 billion in equity in the EU. 

Looking forward, we suggest a coordinated U.S. interagency effort, or otherwise known as a U.S. action plan to fully and effectively engage EU governments and regulators at all levels about 

the need for open and competitive markets. Our action plan includes, one, the establishment of a Brussels attache; two, increased 

Treasury coordination with the State Department; three, further 

U.S. Congress-EU Parliament contacts; and four, coordinated SECCESR focus on regulatory conversions. 

First, we strongly believe that the U.S. Treasury Department 

should place a financial attache in Brussels. Such a post would advocate U.S. industry interests and support the dialogue. In this regard, we support additional funding to bolster Treasury’s ability to 

advocate U.S. interests in the global marketplace. The expected 

pace of change in the EU financial market over the next years justifies this type of focused presence at the center of the newly expanded EU. 

Second, Treasury clearly has the leadership role in the dialogue. 

We believe, however, the U.S. State Department through its embassies and consulates in all 25 member states can enhance and 

5

support Treasury’s efforts. This activity is essential because individual EU member states can and often do play a pivotal role in 

key EU legislative decisions. 

Third, we firmly endorse the further development of greater understanding and closer relationships between key financial services 

legislators in the U.S. Congress and the European Parliament. We 

believe these efforts should encourage constructive discussion of existing extraterritorial issues such as Sarbanes-Oxley and the EU’s 

financial conglomerates directive; facilitate and encourage mutual 

prior consultation on legislation with potential extraterritorial effects to help prevent future conflicts; and identify common future 

legislative goals and common solutions wherever possible. 

Finally, we welcome the new SEC-CESR effort for cooperation 

and collaboration. SIA’s support of this regulatory dialogue is consistent with the industry’s goal to minimize regulatory differences 

and improve the efficiency of the trans-Atlantic markets through 

regulatory convergence. To this end, SIA has proposed a number of 

issues that could be resolved in the near term to mutually benefit 

the marketplace. The areas in which we have suggested that the 

SEC and CESR study convergence are, one, public offering documents beginning with nonfinancial disclosure; two, broker-dealer 

registration requirements; three, rules relating to credit rating 

agencies; four, international anti-money laundering standards that 

not only promote uniformity and cooperation and efficacy, but also 

allows for reliance on financial intermediaries across borders; and 

five, corporate governance standards. 

Lastly, the U.S. securities industry still has significant concerns 

about the implementation of the EU’s financial conglomerates directive. We urge the subcommittee to monitor the situation carefully. 

The U.S. securities industry plays a vital role in the EU capital 

markets and is fully committee to the integration of those markets. 

We look forward to working with the EU, the administration and 

this subcommittee in achieving a European capital market that is 

transparent, open and efficient. 

Thank you. Madam Chair, please allow me one personal comment. I also want to take this opportunity to thank the members 

of the committee on the fine work that you have done on the Basel 

II capital accords. The public discussion of these issues in both the 

House and the Senate has had a tangible impact that has moved 

the Basel Committee to a place where a large portion of the overwhelming problems we faced 18 months ago have been resolved. 

The House Financial Services Committee was the first to publicly 

discuss those issues. My firm and the industry are appreciative of 

your efforts. 

[The prepared statement of Richard Thornburgh can be found on 

page 57 in the appendix.] 

Chairwoman BIGGERT. Thank you very much. That is nice to 

hear. 

Our next witness is Mr. Oldshue. 

6

STATEMENT OF PAUL OLDSHUE, IMMEDIATE PAST PRESIDENT, BANKERS’ ASSOCIATION FOR FINANCE AND TRADE 

Mr. OLDSHUE. Chairman Biggert, Ranking Member Maloney and 

members of the committee, I am pleased to be with you today to 

discuss the banking industry’s views regarding the financial markets dialogue between the United States and the European Union. 

Regulation of financial products and services imposes additional 

costs on financial firms and affects their customers’ cost of capital. 

Unnecessary regulatory conflict, inconsistency and duplication 

can only add to those costs, and those of us in the financial services 

business strongly support the efforts of U.S. and EU officials to 

limit regulatory dysfunction. We are grateful for this hearing and 

for the full committee’s earlier hearing on May 13 to examine this 

important subject. 

I am testifying today as the immediate past president of BAFT, 

the Bankers’ Association for Finance and Trade. BAFT is an affiliate of the American Bankers Association and its membership includes most of the major American banks that are active in international banking, and also many of the major international banks 

chartered outside of the United States. 

My employer, U.S. Bancorp is the seventh-largest financial services holding company in the United States. Our principal bank subsidiary, U.S. Bank, operates in 24 states throughout the Midwest 

and West. We maintain correspondent relationships with more 

than 2,000 banks in 125 countries. 

The United States and the European Union have a close economic relationship, and close cooperation should be good for both 

of us. There is no doubt that the US-EU financial markets dialogue 

has been a constructive exercise and that it has accomplished a 

great deal simply by establishing new lines of communication. 

Moreover, since the dialogue began in March 2002, discussions between U.S. government and EU officials have contributed to resolution of a number of important issues arising in the context of the 

EU’s financial services action plan. 

We think that this is a good start. We believe that the value of 

the dialogue will increase as it continues and as relationships deepen and issues are added. But more can be done, and we think the 

dialogue can be improved in several respects. 

We feel that the dialogue should be more transparent. It would 

be a big improvement if U.S. participants made a greater effort to 

consult with U.S. banks, securities firms and other financial firms 

early in the process and on an ongoing basis. This would give us 

a chance to provide our views as to what should be on the agenda 

and what the priorities should be, in our view. 

We also think that participation in the dialogue should be broadened. The dialogue should include financial regulators and also 

members of Congress and staff, particularly those who are on this 

committee. We think much could be gained if the members of Congress and their staffs engaged in a continuing dialogue with appropriate officials in the EU, again with input from the private sector. 

We would also like to recommend that the U.S. Treasury Department consider putting more of its people on the ground in Europe. 

In my experience, there is nothing like local knowledge in order to 

anticipate, understand and react to new developments in particular 

7

markets. Treasury should seriously consider adding staff in various 

locations in Europe, particularly in Brussels. 

I would like to mention several specific issues that concern the 

banking industry that are or should be on the dialogue’s agenda. 

They include implementation of Basel II. Bankers are concerned 

that there could be significant differences in the application of 

Basel II from country to country, and that these differences could 

impede banking across national borders. To address our concerns, 

we recommend that the US-EU financial markets dialogue include 

a discussion of how to coordinate the application of the new capital 

standards. 

We are also concerned about convergence between the U.S. 

GAAP and international accounting standards. In this respect, we 

recommend that the dialogue focus on three particular areas: first, 

lack of transparency in the IASB’s rulemaking process; secondly, 

the potential shortcomings of principles-based accounting, which 

can become inconsistent if the principles are interpreted differently 

by those who apply them; and last, weighing the costs and benefits 

of convergence of existing accounting rules. 

Another issue that merits attention is privacy and data protection. Specifically, we are concerned about the potential impact on 

U.S. banks and other financial institutions arising out of the European Union’s directive on data protection. A stand-still agreement 

between the EU and the United States expired on July 1, 2001, 

leaving U.S. banks and other financial firms vulnerable to action 

by government authorities in the EU countries. EU restrictions on 

information-sharing across corporate affiliates would affect U.S. financial firms more than their European counterparts because financial organizations in the United States tend to have more separately incorporated entities than the European universal bank 

model. We are eager for the EU to acknowledge that the GrammLeach-Bliley Act and other financial privacy laws such as the recently enacted Fair and Accurate Credit Transactions Act provide 

adequate privacy protection for personal financial information. 

In conclusion, we strongly support the US-EU financial markets 

dialogue, but also believe it can be improved in various respects. 

We also have specific issues that we would like the dialogue to address. We are very encouraged by the progress that has been made 

so far, and enthusiastic about the potential that the future holds. 

Thank you very much for holding this important hearing and allowing us to participate and provide our input. Thanks. 

[The prepared statement of Paul Oldshue can be found on page 

28 in the appendix.] 

Chairwoman BIGGERT. Thank you very much. 

Professor Scott, you are recognized for 5 minutes. 

STATEMENT OF HAL SCOTT, PROFESSOR OF INTERNATIONAL 

FINANCIAL SYSTEMS, HARVARD LAW SCHOOL 

Mr. SCOTT. Distinguished members of the committee, thank you 

for permitting me to testify today on matters relating to the informal US-EU financial markets regulatory dialogue. I will be reading 

from a statement prepared by myself and Kenneth Dam. 

Let me summarize our views. While the dialogue has made a significant contribution to better relations with the EU, it has failed 

8

to resolve the most important issue confronting the two markets: 

whether or not the U.S., like the EU, will accept international accounting standards. We also believe the dialogue should be more 

proactive in removing obstacles to the development of what we call 

an efficient trans-Atlantic market in financial services. Its work 

should not be limited to firefighting. 

Finally, we believe that the dialogue needs to include additional 

government participants and to become more transparent. The 

most successful result of the dialogue has been to temper the application of Sarbanes-Oxley to foreign firms, some of which had great 

difficulty in simultaneously complying with the new Act and their 

own laws. The SEC sought to accommodate these firms by adopting 

a flexible approach to the Act’s requirements. 

The dialogue had no formal role in this regulatory process. However, we believe the presence of the Treasury’s broad perspective 

on US-EU relations and its deep concern with the health and efficiency of capital markets may have contributed to the willingness 

of the SEC to react sympathetically to EU concerns. In this sense, 

the dialogue is as much an internal process among U.S. regulators 

as it is an external process with the EU. 

The most noteworthy shortcoming of the dialogue is its failure to 

resolve a potential crisis that may be precipitated by the EU’s anticipated adoption of international accounting standards in 2005. 

Currently under SEC regulations, foreign firms may only issue securities or have their securities traded in the U.S. public markets 

if such firms either state their accounts in or reconcile their accounts to U.S. GAAP. 

Absent a change in SEC policy, EU firms which state their accounts in IAS will be unable to access the U.S. public market. This 

could lead the EU to take the position that U.S. firms could no 

longer use U.S. GAAP in the EU market. This could have a severe 

effect on U.S. firms issuing capital abroad and further increase the 

segmentation between the U.S. and EU markets. This is an important issue that must be resolved. 

We believe the dialogue should be broadened beyond solving particular problems, to embracing the positive agenda of creating a 

single trans-Atlantic market in financial services. The goal of this 

effort would be to remove barriers to cross-border transactions, particularly in capital markets where significant barriers remain. The 

EU is now in the process itself of adopting a common prospectus 

and a common approach to continuous disclosure through the implementation of two new directives. Further, it has created a new 

body, the Committee of European Securities Regulators, CESR, to 

facilitate these efforts. The SEC should start working with CESR 

to harmonize disclosure rules so that the two sides could develop 

a common trans-Atlantic prospectus and ongoing disclosure rules. 

There is also much to be done in creating common distribution 

rules and a coordinated approach to market structure. Finally, 

there is also a need for further thinking on ways to resolve enforcement differences between the two sides of the Atlantic. A joint 

SEC-CESR committee could also work on these matters. 

In our view, an effective trans-Atlantic market in financial services would be best achieved through common regulatory rules and 

enforcement throughout the U.S. and EU. We do not believe the 

9

equivalence alternative offered by the EU is workable for rules pertaining to the offering of securities. The equivalence approach 

would require the U.S. to allow EU firms to offer securities in the 

U.S. under EU rules, which include the rules of various member 

states as well as the EU’s own rules. This home country approach 

for securities offerings has not even worked within the EU, and is 

in the process of being replaced by harmonized rules in the form 

of the common prospectus. 

We conclude with a few thoughts on process. The U.S. and EU 

should consider including the Commodities Futures Trading Commission, CFTC, and state insurance commissioners on the U.S. 

side. The EU also needs to have some member state representation. While EU financial regulation is significant, many important 

areas, like enforcement, are still left entirely to member states. We 

should also consider whether this should be a US-EU dialogue or 

a U.S.-Europe dialogue. If it is the latter, states like Switzerland 

and even Russia may need to be included in some fashion. 

Thank you very much. 

[The prepared statement of Hal Scott can be found on page 45 

in the appendix.] 

Chairwoman BIGGERT. Thank you very much. 

We will now proceed to questions. I will begin. 

The first question that I would like to ask is, Mr. Oldshue and 

maybe the other witnesses would like to give some answers on this 

also. Mr. Oldshue, I think that you present good arguments for increased transparency and participation among policymakers in Europe. However, I understand that a great deal of informal consultation and information exchanges already occur between members of 

the private sector and participants in the US-EU regulatory dialogue. Are you suggesting that a more formal structure is needed 

for these consultations? 

Mr. OLDSHUE. I do not know that a more formal structure is 

needed. There have been conversations. There has been dialogue. 

I think from our perspective it has taken too much work to stay 

informed about the process. So an encouragement of continued 

openness and transparency and open dialogue and proactive dialogue in anticipation of problems is really what we are suggesting 

here. 

Chairwoman BIGGERT. Concerning the transparency, what is the 

likelihood of the EU developing what we have here with the public 

comment period and publishing in the Federal Register? How important is the difference in taking public comment? 

Mr. OLDSHUE. I think we are really not looking for there to be 

an identical process to what we have here. I think what we are 

looking for is an encouragement from your chair and from comparable chairs in Europe of an openness in dialogue in conversation 

on these points. 

Chairwoman BIGGERT. I think you indicated that the US-EU regulatory dialogue should squarely address the privacy issues regarding the sharing of personal information within affiliates in Europe, 

especially after the passage of the FACT Act here. 

Mr. OLDSHUE. Right. 

Chairwoman BIGGERT. What reaction have you received from the 

U.S. and European regulators? 

10

Mr. OLDSHUE. This is a fairly thorny issue. It really boils down 

to very different philosophies on how our financial organizations 

are structured and set up. We tend to conduct financial activities 

through separate and distinct subsidiaries of our holding companies that under U.S. law have restrictions on how they can share 

financial information from one to the other. European banks tend 

to be universal banks with everything under the same umbrella. 

The sharing of information is not similarly restricted or discouraged. 

The difficulty a U.S. firm has in competing in that environment 

is that clearly as you are marketing financial products, it is a significant impediment to not be able to use information gathered in 

one part of the firm to market your products in another. This is 

not an issue that has an easy solution. I think from a regulatory 

perspective, it is going to boil down to allowing U.S. firms to share 

information across corporate entities so that they function in the 

same way as a European bank within its own corporate structure. 

Chairwoman BIGGERT. Professor Scott, would you have anything 

to add to that? 

Mr. SCOTT. I do not see the need to make the dialogue more formal than it is. But I think that we need to know more about what 

it is doing. I think that, as Paul has said, and it is my understanding that the U.S. participants widely consult the private sector before determining their positions, and that is good. I do not 

think that needs to be formalized, but I do think that it would be 

useful to have some regular reports, at least to the Congress, about 

what is going on in this dialogue. There is no formal process for 

reporting results, basic information, what are the issues on the 

table, what progress have we reached with respect to these issues. 

I think that that kind of transparency would be good to have, that 

kind of enhanced transparency. 

Chairwoman BIGGERT. Thank you. 

Mr. Thornburgh? 

Mr. THORNBURGH. I guess there are really two parts of Paul’s 

recommendation. I think one is that our own regulatory agencies 

and administrative agencies should reach out to our collective industry to seek input, as opposed to us trying to find the shadows 

in the closet. The second is the Lamfalussy process, which I think 

has made some good progress in Europe once it was put in place, 

which does call for more consultation. I think the UK regulatory 

law-setting process also has a very good consultation process which 

is equivalent to the U.S. But I think we would encourage our own 

agencies to seek out our input and we would complement the 

Lamfalussy process. 

Chairwoman BIGGERT. Okay, thank you. My time has expired. 

The Ranking Member, Mrs. Maloney from New York, is recognized for 5 minutes. 

Mrs. MALONEY. Thank you. 

I believe it was Richard Thornburgh who said in his opening 

statement that Brussels and London are important financial centers. I would like to add that we want to keep the United States 

as an important financial center. I am concerned about any rules, 

regulations, accords that in any way limit the ability for American 

business to compete and win in the world economy. 

11

I am proud to have authored a bill that required Basel II to come 

back to the Congress for approval. It did not pass. It probably will 

not pass, but it got everybody’s attention. We had several hearings 

on this important accord that is going forward. Some members that 

have testified before us believe that it will apply not just to our 

large international banks, but once you start a standard it starts 

applying to everyone. There is some concern from some of our financial institutions and businesses that the capital requirements 

will be stronger and harder on America than it will internationally. 

Also, our regulators are very tough and they are very experienced and they are very good. Usually, it is a crook, when you have 

these scandals, it is someone who is just not following the regulations; it was an enforcement issue more than a regulation. So my 

point is, I am very concerned about Basel II. I think our regulators 

will enforce it. I am not so sure that Europeans and other countries 

will enforce it. We are going to be having a hearing, I think it is 

next week, on Basel II? Or is it Tuesday on Basel II? I hope that 

the leadership, the majority party, will invite the two gentlemen 

who made strong statements about their concerns to come back and 

testify at that hearing, too, so we can get their input. 

I just would like to hear the comments from the industry representatives on Basel II and your concerns. Do you think it is fair? 

Do you think the capital requirements are going to be tougher on 

American firms? Your comments on that. The enforcement issue, it 

will be enforced on Americans. Will it be enforced in Europe. And 

also, I think your comments are very well taken that we need professionals in Brussels, in London, in the EU, really advancing and 

being part of the discussion so that we are in on the ground. 

Thank you for your testimony and what you do for the country. 

On Basel II? 

Mr. THORNBURGH. If I may make three comments, I think the 

first comment is it is very important that the FSA representing the 

European Community recognize the SEC as an equivalent regulator. I think the SEC’s CSE proposal, which is put out for comment, clearly establishes an equivalent regulator and we have to 

keep our eyes on the fact that the FSA needs to make that determination this month in order for our firms to be able to comply 

with the capital directive. 

Two is our concern would be on the whole area of operational 

risk. It has yet to be implemented. The allocation of operational 

risk among countries and subsidiaries will be a very tricky issue. 

That then leads to the whole home host issue in making sure that 

there is appropriate guidance so that the home regulator would 

have predominance over the host regulator. 

I think, Paul, you have some more specific comments? 

Mr. OLDSHUE. I would share your concern, Congresswoman, 

about the difficulties ensuring that the regulation is even and fair 

and consistent across borders. We do have capital standards in the 

U.S. that in many cases are more stringent than would be called 

for under Basel II. As Basel regulations are applied and regulated 

across borders, there is a risk that the standards could be different 

from country to country and bank to bank, and put our institutions 

at a competitive disadvantage. 

12

We have recommended that the principle of lead supervision by 

a home country regulator be an objective. It would require that we 

defer to home country regulators, but I think it is a way of ensuring that information is shared across borders, that there is dialogue 

between the regulators, that we make every effort possible so possible that the regulations are the same and are applied consistently. This is the key issue from our perspective. 

Mrs. MALONEY. I have asked this question at several hearings, 

and I have never gotten an answer that answers what I am really 

concerned about. Who is really looking out for American interests? 

In a sense, I do not think you really understand unless you have 

done the job yourself, no matter how good a regulator is. They do 

not know what it is like to be a major institution that is supplying 

capital in this country and across the world. Who is there to make 

sure that our interests are taken care of and that what you two are 

saying actually happens? Because the people there are not the real 

people in the field that understand what it is really like. Do you 

understand what I am saying? 

Mr. OLDSHUE. Exactly. The Federal Reserve is the point agency. 

Mrs. MALONEY. I know who is the point agency, but I think that 

they do not have the experience that someone like yourself has. 

Mr. OLDSHUE. I think it is an issue. Our concern is that there 

be constructive and continuing and regular contact on these points. 

I think there is dialogue going on. Our concern is not so much that 

the Federal Reserve does not have an understanding of what our 

concerns are. Are concerns are really across borders and making 

sure that the things they do not really have direct control over are 

negotiated and implemented so that the various governments in 

the EU and other parts of the world are applying standards in the 

same kind of way. 

I think they understand. It is a very thorny political issue. 

Mrs. MALONEY. But how do we make sure that that happens? 

Mr. OLDSHUE. I think it is cheerleading from your chair; it is an 

awareness that it is a significant issue. It is an awareness that as 

difficulties arise in implementing——

Mrs. MALONEY. How do you structurally work it into the format 

of the whole program? 

Mr. OLDSHUE. I think it ends up needing to be an agreement between the regulatory authorities in the major financial markets. I 

do not know that you can legislate it. 

Chairwoman BIGGERT. The gentlelady’s time has expired. 

The gentleman from Florida, Mr. Feeney, is recognized for 5 minutes. 

Mr. FEENEY. Thank you, Madam Chair. I appreciate the testimony from the witnesses. 

Mr. Scott, this is a hearing primarily about U.S. and European 

Union financial regulatory issues. You mentioned Switzerland and 

Russia for example as being European countries that are not currently part of the EU. Can you give us some perspective about our 

relationship with the EU and trying to break down some of the regulatory burdens and hurdles in terms of the global capitalization 

markets. Can you talk to us a little bit, even though this is a hearing about the EU relationships, about the Far East, for example, 

and the Mideast and other places where we have a significant 

13

amount and growing percentage of our commercial market interchange. 

Mr. SCOTT. You have a number of questions there. Let me start 

with the last one. Actually, I just got back from a symposium that 

I helped organize with Chinese counterparts on U.S.-Chinese financial relations. It is a major place in Asia, and I have done similar 

symposiums with Japan. 

Interestingly, this term ‘‘dialogue’’ and ‘‘financial markets dialogue’’ has gotten over to China. This committee may be aware that 

the Secretary of Treasury has appointed a special emissary, I think 

unprecedented, to China, Ambassador Speltz, who also represents 

us with the Asian Development Bank. He is engaged in a financial 

markets dialogue with Chinese counterparts on solving specific 

issues in China. 

So I think, while we are focused here on the US-EU, the Congressman is quite right to point attention to the importance of the 

Far East, China and Japan in particular. I think that the Treasury 

has been taking a productive lead in trying to resolve issues in 

those areas in which there are a number. 

In terms of the question of the EU and Europe, the EU itself, 

Switzerland is obviously a major factor in Europe, as Mr. 

Thornburgh can readily attest. 

Mr. FEENY. Especially when it comes to markets and transparency, right? 

Mr. SCOTT. Yet, Switzerland is not part of the EU. The EU itself 

has had a number of outstanding issues with Switzerland, trying 

to resolve issues between them. Switzerland is an important part 

of the world’s capital markets, an important part of the banking 

system, particularly in private banking. 

So I think it would at least be worthwhile thinking about whether some kind of inclusion of the non-EU countries like Switzerland 

and Russia, which is going to be and is becoming a factor in world 

capital markets, need to be folded into this. Now, of course, then 

that raises the issue as to why are we doing this on a regional 

basis at all; why isn’t this a worldwide effort; why US-EU; why not, 

U.S.-world. 

I think that in the end, that is what we will try to achieve. But 

each region has its set of special issues. So I actually think that 

this kind of regional approach makes a lot of sense, but all the participants have to keep their eye on the bigger picture, which is the 

world capital market, and I believe they do. I think the people that 

we have participating from the U.S. side clearly are not just knowledgeable about Europe, because the Federal Reserve Board and the 

Treasury and the SEC are also concerned about the rest of the 

areas of the world. 

Mr. FEENY. Thank you. 

Another thing that you said that really interested me is that you 

suggested or implied there were some problems with what you 

called the ‘‘equivalence’’ approach where we sort of just acknowledge a home country’s rules and regulations. But it seems to me, 

particularly a professor at the University of Chicago Law School, 

may see some advantages to having regulators compete. Maybe you 

can touch on how we get the best of both worlds so we have standards, but we also are not adopting the most onerous and rigorous 

14

and anti-competitive standards available. Because often that is the 

way we descend as governments and regulators. 

Mr. SCOTT. I should point out that I am the Harvard part of this 

team. 

[Laughter.] 

But lest you despair, I went to the University of Chicago Law 

School. 

Mr. FEENY. Very good. 

Mr. SCOTT. So I think Ken Dam and myself would share a common perspective, also being part of the Shadow Financial Regulatory Committee at the AEI. We are not generally in favor of more 

and more regulation and think markets should have the major role 

in determining what financial institutions do. That being said, I believe that in the area of securities offerings that this idea of regulatory competition is kind of theoretically attractive, but it just 

does not work. 

Most financial firms would tell you that they would like common 

rules across all borders to do business. It is highly efficient. The 

question then becomes, well, if we have harmonized rules, where 

is the competition? How does the system change? I believe that 

there are always going to be ideas in competition. You do not need 

regulation in competition. As long as ideas are in competition, regulations can be changed. 

Both sides of the Atlantic can continue to make very good suggestions about how those harmonized rules should evolve, but I 

think that the efficiency of our trans-Atlantic securities markets 

would be greatly aided by a common set of rules. 

Chairwoman BIGGERT. Thank you. 

The gentleman from Alabama, Mr. Bachus, is recognized for 5 

minutes. 

Mr. BACHUS. I thank the Chair. 

Mr. Thornburgh, you have expressed a desire for a structured 

program of interaction between U.S. congressional members and 

their staffs, and their EU counterparts. What particular benefit do 

you think that type of exchange would provide that the current exchange of information does not? 

Mr. THORNBURGH. The benefit that that kind of exchange acknowledges or allows for is a better understanding of why certain 

rules and regulations are being proposed, so that the rhetoric can 

be removed when people get caught off-guard. We clearly made 

some great compromises on Sarbanes-Oxley and the PCAOB, but 

if we would have had better discussions before those items came 

to the forefront, they could have been resolved with a lot less emotion and heat in the media and the press and in the marketplace, 

which I think can create some inefficiencies in competition and in 

markets. 

Mr. BACHUS. Would you explain in detail your suggestion, I think 

you made a request for the placement of a Treasury financial attache in Brussels. How would that benefit the financial services industry here in the United States? 

Mr. THORNBURGH. Thank you for the opportunity to address that 

question. I take this really from the perspective of the role that I 

have played. I moved to Switzerland in the late 1990s to become 

the CFO of a European company. My predecessor had lived in LonVerDate 0ct 09 2002 11:17 Nov 05, 2004 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 G:\DOCS\96291.TXT FIN1 PsN: MICAH
15

don and commuted between London and Zurich to perform that 

function. What I learned from my personal experiences is to be an 

effective participant in shaping public policy and having an impact, 

one needs to live in the community. I think that the sign that the 

U.S. would make by moving the attache from Frankfurt to Brussels 

would acknowledge that Brussels is the heart of the EU legislative 

community. By having that permanent presence there, it shows a 

commitment and involvement in the community. 

More importantly, it supports U.S. industry, not just the financial services sector, but U.S. industry. I think that ability to be 

around for the informal conversations which you all recognize 

much better than I do, would have a major impact in furthering 

the agenda for our economy and our companies. 

Mr. BACHUS. Okay. You proposed in your statement a U.S. action 

plan. Would you explain why that is important and how we would 

formulate such a plan, what the mechanism would be for coming 

up with a plan? 

Mr. THORNBURGH. The action plan really has four components. I 

think the first, as we have just talked about, is the Brussels attache. The second, which we have not really talked about, is Treasury coordination with the State Department. There are 25 EU 

member states and the new member states will have a major impact on how votes and decisions are made in the EU community. 

We have found out in the past in the financial services directive 

that although rules and regulations were proposed to the Parliament, they were voted down by a number of member states’s 

ministries of finance. 

So I think that ability to use the diplomatic corps to help us 

watch out for ourselves is a good attribute and addition to the 

treasury’s coordination. We have talked about Congress and Parliament, and of course the last component is getting more communication, dialogue and action out of the SEC and CESR, which the 

professor I think has adequately addressed. 

I would add, though, to the question from the Congressman from 

Florida, that I think accounting equivalency is important. We may 

not need equivalency in laws and maybe that is the wrong way to 

go, but I think accounting equivalency is extremely important to 

attracting foreign issuers to our markets. 

Mr. BACHUS. Okay. What were some of the lessons learned from 

the ISD debate on market structure? There were some problems 

there that the private sector had. How do you think that could be 

resolved more successfully with this United States-EU dialogue? 

Mr. THORNBURGH. Actually, the excellent lesson there was in fact 

that there was a group of southern core states of the European 

Union which took a different position from the more developed capital market states of the UK and Germany. What we found there 

is had we been using the State Department to be working on some 

of these issues, better progress would have been made, especially 

as it related to some protectionist aspects of the proposal, which 

really preserved the local stock exchanges in the southern states as 

opposed to helping create a more global European stock exchange 

or marketplace. 

Mr. BACHUS. Okay. I see my time is up. I thank you. 

16

Chairwoman BIGGERT. Thank you very much. We will start another round. Just briefly, I assume, Mr. Thornburgh, that the EU 

has assigned someone to our capital, an attache? 

Mr. THORNBURGH. Yes. 

Chairwoman BIGGERT. Thank you. 

Professor Scott, do you believe that financial regulators in the 

U.S. and Europe currently have the legal authority to undertake 

the sharing of information and responsibility suggested not only by 

your testimony today, but also by some of the government witnesses at last month’s committee hearing on the issue. 

Mr. SCOTT. I think that most of the measures that I am focused 

on have to do with capital markets. The question would then be 

whether the SEC, which is our primary regulator, would have the 

legal authority to enter into agreements. 

Chairwoman BIGGERT. It seems like each of the regulators’s authority is based on laws enacted by their physical jurisdiction. So 

can they delegate or converge standards without seeking additional 

authority from the legislatures of the various countries? 

Mr. SCOTT. Your focus is on the EU side as opposed to our side? 

Chairwoman BIGGERT. Really on our side, too. 

Mr. SCOTT. I have not looked into this in any detail, so I preface 

my remarks with that, but I would think that the SEC could not 

basically enter into any agreements, changing our basic approach 

to securities regulation, which might be required in an effort to 

harmonize the rules on both sides of the Atlantic, without authority from Congress. 

So in that sense, the SEC could certainly entertain discussions, 

but at the end of the day if our securities regulations were to 

change in some ways that were different from what we currently 

have in our laws, there would be a need for additional congressional authority. 

On the EU side, it is complicated by the fact that there is a split 

of authority between the EU and the member states with respect 

to a number of issues. I think I have already testified, for example, 

that enforcement is left almost entirely to member states in the 

EU. So the EU cannot really negotiate about enforcement without 

making some changes in the EU with respect to their authority to, 

at the European level, deal with enforcement. As I am sure you can 

appreciate, enforcement is what this is all about at the end of the 

day. We have already discussed that issue with respect to Basel. 

The same will be true with respect to securities regulation. 

So I do not think that the EU is particularly well set up today 

to implement as opposed to discussing agreements that might be 

reached between the U.S. and EU. So some changes in legislative 

authority would be required on their side as well. 

Chairwoman BIGGERT. Okay, thank you. 

In today’s testimony, we have heard recommendations that the 

US-EU regulatory dialogue be expanded to include the CFTC and 

members of Congress and the private sector. Would such an expansion make such a forum unwieldy and unable to reach decisions, 

if it gets too big? 

Mr. SCOTT. At the risk of being unpopular here, I do not think 

I was advocating that the Congress participate. 

[Laughter.] 

17

Chairwoman BIGGERT. Okay. That is all right. We have enough 

work to do already. 

Mr. SCOTT. I certainly think that the Congress should be kept 

fully informed and there should be regular reporting to the Congress, but I find it hard to envision how the Congress could actively 

be involved in these discussions in meetings. I just do not think 

that is particularly workable, but I think that the Congress needs 

to be fully informed. 

I think it is very important that the insurance sector in particular, which is not represented here on this panel, get some inclusion in this process because I think that there are beginning to be 

a number of EU initiatives in the insurance sector which are already affecting U.S. insurance firms, and yet insurance regulators 

do not have any standing. As you know, this is a matter of state 

regulation, but I think we could try to find some ways, either 

through the trade associations or supervisors association of the insurance regulators, to get some representation on insurance. So I 

think that would be a very important expansion. 

CFTC, I think, it also seems to me that they should be included. 

They are on the President’s Working Group on Financial Markets, 

which is our internal attempt to coordinate regulatory activity. 

That being the case, I see no reason why they should be omitted 

from the informal dialogue with the EU. 

Chairwoman BIGGERT. Okay, thank you. 

Mr. Thornburgh, I believe in your testimony that you seek convergence across the Atlantic regarding anti-money laundering 

strategies, and that the trans-Atlantic business dialogue of which 

you are a member is making a similar recommendation. Could you 

provide us with a better sense of what kind of convergence you are 

recommending and how it could be achieved? 

Mr. THORNBURGH. When we talk about convergence, I think we 

are talking about common rules and reporting requirements of 

those people who act as financial intermediaries. One of the complications, I understand, in the current setup is the inability to rely 

on a financial intermediary in another country to make a representation. 

For example, at Credit Suisse First Boston we have to deal with 

the Swiss money laundering rules, the EU money laundering rules, 

and the PATRIOT Act. We deal with a client across borders so we 

may deal with a hedge fund based in Bermuda who wants to do 

a transaction with us in Switzerland; wants to do a transaction 

with us in the UK; and do a similar transaction with us in the U.S. 

There may be three legs of that transaction, so it is one transaction 

with three different booking centers. 

The ability to allow us to rely on our own representations to ourselves is very important. I know from personal experience in a 

project we had to do for the FSA in the UK, we spent roughly $50 

million to adhere to some standards in the UK, and after we did 

it the FSA told us, you know, we know realize it is too expensive; 

we will not make any of your other competitors go through the 

same process. 

So we are all for the goal of catching the terrorists, catching the 

drug lords, but there should be some practical understanding of 

how institutional companies, dealing with institutions, might be 

18

able to ease up the rules to get to the same result. Hopefully, that 

is enlightening. 

Chairwoman BIGGERT. Thank you very much. My time has expired. The gentlewoman from New York, Ms. Maloney. 

Mrs. MALONEY. Professor Scott, will you please send my regards 

to Larry Summers? 

Mr. SCOTT. I will do so. 

Mrs. MALONEY. We miss him. Okay. 

You mentioned that the insurance industry in America may be 

affected somewhat by EU initiatives. Could you forward to the committee or speak about examples of certain initiatives that are impacting on the insurance business? 

Mr. SCOTT. Yes. The EU has taken a European-wide initiative 

about regulation of insurance companies in general, and particularly with respect to capital adequacy. This is both at the level of 

insurance firms, as well as reinsurance firms. The question looming 

on the horizon is similar to the one that is raised by the conglomerates directive, which is well, if they are requiring all these kinds 

of controls on their own insurance firms, under what conditions are 

they going to allow American insurance firms to come into the EU. 

Are they going to require that there be some kind of equivalent 

regulation of insurance firms by us? 

So I think those broad terms are the kind of issues that are 

going to be confronting the insurance industry in the near future, 

or are already confronting them. 

Mrs. MALONEY. You mentioned how helpful you believe Secretary 

Snow’s initiative of a special financial envoy to China is, which basically is the same idea of Mr. Thornburgh to have a special envoy 

in Brussels. Where else do you think we should have special envoys, ideally? We are in a world community and a world market, 

and the points that both of you raised are important. 

Mr. SCOTT. I actually think this China initiative goes beyond 

what Mr. Thornburgh is suggesting. 

Mrs. MALONEY. He was just Brussels. 

Mr. SCOTT. But he is I think asking for a Treasury representative in the embassy in Brussels. 

Mrs. MALONEY. Yes. 

Mr. SCOTT. I think what we have done in China goes a step beyond that. The Secretary of the Treasury himself has an emissary 

from the Treasury Department there, not part of the State Department’s operation in China, to give a direct link between Mr. Speltz 

who is his emissary and the Secretary with respect to ongoing negotiations with China on loosening up capital controls or preparing 

for more flexible exchange rates and things like that. I think that 

that signifies the special importance that the Treasury attaches to 

ongoing issues with China at the moment. 

I think one could ask, what is more important in the big picture? 

Is Europe less important than China? Why should China have this 

kind of special status? I think that it is probably because China is 

in a more delicate stage. In our relationships with China, we are 

building a series of relationships there. We already have these relationships with the EU. I do not think I could recommend a proliferation of special emissaries. 

19

Mrs. MALONEY. But you said a regional approach would be useful. 

Mr. SCOTT. Right. I would support Mr. Thornburgh’s idea for representation in the Brussels embassy of a Treasury attache. 

Mr. THORNBURGH. May I make a comment? 

Mrs. MALONEY. Sure. 

Mr. THORNBURGH. We did meet with Under Secretary of Treasury Taylor at the Treasury. What we found out is that there are 

two budgets. This is classic. There is a budget for the permanent 

representatives which have gone down from 230 employees to 165, 

and then there is the budget for assistance slots which allow for 

special assistants in special countries, and that actually gets a little bit of the State Department foreign aid money. So what we may 

have is the classic problem of the pot going down on one side and 

going up on the other side, although it is still the same taxpayers’s 

pool of dollars and perhaps we could be a little more efficient in 

how that money gets spent. 

Mrs. MALONEY. You testified you felt that it was very important 

to the financial interests of America to have representations in 

Brussels and possibly other countries to be on the ground with the 

information. I am not going to suggest that. 

I want to really ask you about capital. You testified, Mr. 

Thornburgh, that we are thriving very much on foreigners buying 

American securities and investing in America. I am concerned, we 

just 2 weeks ago, maybe it was 3 weeks ago, raised the debt ceiling 

an additional $2 trillion. The deficit now is galloping towards $600 

billion or $500 billion, the numbers are huge. At what point do you 

think foreigners may decide they do not want to invest in America 

because of the huge debt that we have? We have always been in 

a stronger financial position than foreign countries, but now they 

may be concerned about our mounting debt. 

Do you see that, any ramifications from that? Is that an issue or 

it is a non-issue? I am concerned about it for my grandchildren and 

my children, but I am also concerned about how far can we go in 

this direction before other countries may not want to invest in 

American securities and other investments. Are you hearing anything in your world community in which you interact with 35 countries every day, any concern about the growing debt of America for 

our financial strength? 

Mr. THORNBURGH. That is a pretty loaded question. Luckily, I am 

not Alan Greenspan. I think the dollar will continue to be a reserve 

currency around the world. What we need to worry about, and the 

implication of your statement, which is a very serious question, is 

one about the cost of capital and about the value of the dollar. So 

the implications really come out to the strength of the dollar and 

what will the dollar buy 5 years from now versus what goods and 

services a dollar can buy today, and what will the cost of capital 

be for U.S. corporations and those corporations raising funds in dollars. 

So I think the concerns that we would hear about the deficit really speak to the value of the dollar and the level of interest rates. 

I do not personally worry about the dollar losing its reserve currency status, although we should acknowledge that the EU now is 

the second-largest economy in the world, and a lot of us 10 years 

20

ago did not think that countries would give up their local currency 

to exchange it for a common currency, and that of course has happened. 

Mrs. MALONEY. Okay. My time has expired. 

Chairwoman BIGGERT. Thank you. 

Mr. Bachus? 

Mr. BACHUS. Thank you. 

Mr. Oldshue, I appreciate your endorsing this idea of a Treasury 

attache office in Brussels to advocate U.S. interests, and it may be 

that Congress needs to fund such an office. I think Mr. Thornburgh 

mentioned maybe relocating the attaches office in Frankfurt, which 

should not cost additional funds. 

Let me ask this about the financial markets dialogue. There is 

a broad array of issues being discussed, but I ask all three of you 

gentlemen, are there other issues that ought to be included that 

are not? I will just start with Mr. Thornburgh and go down the 

line. Maybe also while you are answering that, any issues that 

should be included, what do you consider the most pressing issues? 

Mr. THORNBURGH. I think for me the most pressing issue is making sure that the EU acknowledges U.S. GAAP as an equivalent accounting standard; two, that under the financial services conglomerate, that the SEC is acknowledged as an equivalent supervisor, 

because although Basel is not fully implemented until 2008, for 

capital regime purposes in the EU a new law comes into place in 

2005, where equivalency of the home supervisor is very important. 

That impacts our U.S. securities firms doing business overseas. 

An added issue that we would add to the list on the dialogue 

would be issues around the European clearance and settlement system. I think there have been recent articles that acknowledge that 

the cost of setting a securities transaction in Europe is roughly 97 

cents and cross-border 35 cents, whereas in the U.S. that is 10 

cents. So I think there are some inefficiencies in the European 

rules and regulations around clearance and settlement that do impact the cost of investing in the EU. 

Mr. BACHUS. Okay. Mr. Oldshue? 

Mr. OLDSHUE. I think I would reiterate the three issues that are 

our principal concerns. Certainly, the fair and consistent application of capital standards across foreign borders is one of three 

major issues for us. Secondly, and this goes beyond the financial 

industry, ensuring that convergence of accounting principles between Europe and the United States is managed in an intelligent, 

logical and useful way. Lastly, it is ensuring that the sometimes 

conflicting regulations governing the sharing of financial information, within our very different corporate structures in Europe and 

the U.S. are done in a way that is fair and consistent across borders. Those would be our three major issues. 

Mr. BACHUS. Okay. Mr. Scott? 

Mr. SCOTT. I think the issue of GAAP equivalence, as Mr. 

Thornburgh mentioned, is very important, but recognize that this 

is a two-way street. Unless the U.S. allows foreign firms to come 

in here, especially European firms under IAS. It seems to me unlikely the Europeans are going to allow our firms in the future to 

go in there under U.S. GAAP. This is an issue that is right around 

the corner. It is coming up in 2005. As I have testified, I do not 

21

think that this point, and this is the most important issue between 

U.S. and Europe today, and it has not been resolved by this dialogue and needs to be resolved. I think anything Congress can do 

to help this get resolved would be a good idea. 

In terms of adding things to the process, my testimony has focused on the fact that we need to be more proactive and not just 

react against particular problems. I would set the dialogue’s agenda to create a trans-Atlantic market in financial services. When 

you look at it in that respect, you are not just fighting problems. 

You are saying what needs to be done in order to make this happen. 

For instance, I think if you look at that as an objective, you start 

focusing on common rules for the distribution of securities on both 

sides of the border, which is not really an active point today in the 

dialogue. Accounting standards are, but beyond accounting standards, just general questions of what elements of disclosure must be 

made in a prospectus; how securities need to be distributed; how 

we enforce our rules with respect to distribution of securities. 

All these issues would come up if one had an objective of establishing a trans-Atlantic market in financial services. 

Mr. BACHUS. Can I have one follow-up question? You have all 

mentioned accounting standards, international accounting standards. Within that is a single set of international accounting standards. That brings to mind the IASB 39, Italy, Spain, France, and 

Belgium have all objected to. I would be interested in hearing from 

you about their reported objections to IASB 39. I think that is 

right. 

Mr. SCOTT. We had quite a to-do when we were dealing with the 

same kind of issue in the U.S. In fact, many of our banks had problems with this. Indeed the Chairman of the Federal Reserve was 

not sure that he liked the idea of constantly marking the securities 

of financial institutions because it introduced volatility. So in a 

sense, it is no surprise that this same issue is being actively debated there. 

It may turn out that they do not accept IAS 39. I think if that 

occurs, that does not mean the end of IAS in the U.S., even though 

that would be a key missing part. I think what the U.S. could then 

do is say, okay, you can come in here under IAS, but you have to 

put in a 39 as well. That is, if we have some important differences 

between IAS and U.S. GAAP in 2005, I do not think we need to 

say, oh, we cannot have IAS. We can have IAS with some additions 

or some modifications. I think we need to start thinking in that direction. 

Mr. BACHUS. Okay. Mr. Thornburgh, would you like to comment 

on the IASB 39 and some of the Europeans’ objections to that? 

Mr. THORNBURGH. Fortunately, Congressman Bachus, I might be 

viewed as the fool at Credit Suisse who moved Credit Suisse to 

U.S. GAAP. I started that project when I was the CFO in 1998. It 

took us until 2003 to actually be able to move from Swiss accounting standards to U.S. GAAP. It cost us over $150 million to do it. 

When we got there, we had to deal with FAS 133, which is the 

equivalent to IASB 39. 

I must say this is a quite problematic issue. It is very costly for 

firms to reconcile to a different accounting standard. It is very exVerDate 0ct 09 2002 11:17 Nov 05, 2004 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 G:\DOCS\96291.TXT FIN1 PsN: MICAH
22

pensive to convert accounting standards, especially in the financial 

services industry. FAS 133 is actually more restrictive than IASB 

39. We are, and I think most of us in the financial services industry today, dealing with the type of volatility issues that the Europeans are concerned about. But IAS 39 actually allows for more lenient accounting to take some of that volatility out. So I think it 

is a very serious issue. If there is too much of a gap between the 

two of them, we may not be able to achieve the professor’s goals, 

which I think are the right goals. 

The last thing I would say is, then you go to Basel II. If you have 

a number of internationally active European banks using one accounting standard for treating derivatives, and U.S. banks using 

another accounting standard, we will have an unlevel playing field 

as it relates to the application of market risk capital under Basel 

II, and we will have an unlevel playing field as it relates to the 

ability of firms to compete around the globe. Frankly, I am not too 

sure the investors in securities really can tell you the difference between the two accounting standards and would make an investment decision based on the difference in the accounting standards. 

So anything that Congress could do to knock these two folks together to agree on acknowledging equivalency of accounting standards, it is hugely important to the capital markets. 

Mr. BACHUS. If these objections block the adoption of a single set 

of accounting standards, how critical is that to impeding or blocking this trans-Atlantic market that we are talking about? 

Mr. THORNBURGH. I think it is absolutely fundamental to the 

functioning of these markets. It is the underlying data and information on which financial markets depend. I do not think there 

could be anything more important to trans-Atlantic financial markets than common accounting rules. 

Mr. OLDSHUE. I concur. I think they do not necessarily have to 

be the same in every aspect, and there may well be costs of convergence that are not worth the trouble in some of its details, but I 

think the general theme here is entirely correct. 

Mr. BACHUS. But a single set that may allow for some differences. Mr. Thornburgh, do you agree? 

Mr. THORNBURGH. I think it is usually important to companies 

like GE Capital, Ford Motor Credit, General Motors Credit, banks, 

the agencies. If they have to reconcile or adapt to IAS to have access to the European pool of capital, that could be very restrictive 

because it will take a while to make that conversion which I talked 

about. In the interim period of time, our corporations will not have 

access to a huge pool of capital around the world. 

Mr. BACHUS. All right. Thank you. 

Chairwoman BIGGERT. Thank you very much, Mr. Bachus, for 

those questions. I think we are just about out of questions, but I 

have just one quick question. That is, should the Office of the U.S. 

Trade Representative be involved in the US-EU regulatory dialogue? If not, why not? And if yes, why? I guess that would be the 

alternative. 

Professor Scott? 

Mr. SCOTT. I will take a stab. I think traditionally we have not 

put financial regulatory issues into the WTO. I think that the reason for this is a good one. Certainly, WTO has dealt with financial 

23

issues, insofar as they have been access issues, access to foreign 

markets. But with respect to regulation, it has been left out. There 

is a so-called prudential carve-out in fact, it is called a prudential 

carve-out from WTO. 

I think this is a good idea that regulation be separate. I think 

financial issues are different from trade issues. Certainly, the agencies in the United States that have responsibility for this are different from the parts of the government that have responsibility for 

trade. So I think that it would not be good to try to fold this into 

WTO. 

WTO also has, as I know you are aware, a large panoply of processes, formal processes that take place with respect to resolving 

disputes, panels, issues. It is a very legalistic, kind of setup. Perhaps I should be in favor of that as a law professor, but I really 

am not for financial issues because I think financial issues tend to 

be not quite so legalistic; tend to deal with more general policy 

issues. So I think we have it right that the USTR should not be 

dealing with these kinds of issues. 

Chairwoman BIGGERT. Anyone else? Okay. 

Is there anything else that you think we left out that you would 

like to comment on? 

Mr. OLDSHUE. I do not think so. We really appreciate the opportunity to speak with you today. It has been good for us. 

Chairwoman BIGGERT. We really appreciate your being here. The 

expertise that you all have has been most, most helpful and I hope 

that you will be back again sometime. We really appreciate it. 

The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

With that, this hearing is adjourned. 

[Whereupon, at 11:23 a.m., the subcommittee was adjourned.] 

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A P P E N D I X

June 17, 2004

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