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23–166 PDF 2006

S. Hrg. 109–563

WHO’S WATCHING THE WATCHDOG? EXAMINING

FINANCIAL MANAGEMENT AT THE SEC

HEARING

BEFORE THE

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT 

INFORMATION, AND INTERNATIONAL 

SECURITY SUBCOMMITTEE

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JULY 27, 2005

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs

(

(II)

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND 

INTERNATIONAL SECURITY SUBCOMMITTEE 

TOM COBURN, Oklahoma, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

THOMAS CARPER, Delaware 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey

KATY FRENCH, Staff Director 

SHEILA MURPHY, Minority Staff Director 

JOHN KILVINGTON, Minority Deputy Staff Director 

LIZ SCRANTON, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Coburn ................................................................................................. 1

Senator Carper ................................................................................................. 10

WITNESSES 

WEDNESDAY, JULY 27, 2005

Hon. David M. Walker, Comptroller General of the United States, U.S. Government Accountability Office ............................................................................. 3

James M. McConnell, Executive Director, U.S. Securities and Exchange Commission .................................................................................................................. 5

ALPHABETICAL LIST OF WITNESSES

McConnell, James M.: 

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 43

Questions and responses for the Record ......................................................... 54

Walker, Hon. David M.: 

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 25

Questions and responses for the Record ......................................................... 59

APPENDIX 

Charts submitted by Senator Coburn: 

‘‘SEC Building Costs’’ ....................................................................................... 23

‘‘Vision’’ .............................................................................................................. 24

(1)

WHO’S WATCHING THE WATCHDOG? 

EXAMINING FINANCIAL MANAGEMENT 

AT THE SEC 

WEDNESDAY, JULY 27, 2005

U.S. SENATE, 

SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT,

GOVERNMENT INFORMATION, AND INTERNATIONAL SECURITY, 

COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:32 p.m., in room 

562, Dirksen Senate Office Building, Hon. Tom Coburn, Chairman 

of the Subcommittee, presiding. 

Present: Senators Coburn, and Carper. 

OPENING STATEMENT OF CHAIRMAN COBURN 

Senator COBURN. The hearing will come to order. This is a hearing of the Federal Financial Management Oversight Subcommittee 

of the Homeland Security and Governmental Affairs Committee. 

The Securities and Exchange Commission (SEC) plays a crucial 

role in ensuring the continued health of the U.S. capital markets 

by administering the Federal laws that govern U.S. securities markets. In 2004, the Commission took an aggressive agenda, with the 

implementation of rulemaking projects under the Sarbanes-Oxley 

Act, including supervision of the Public Company Accounting Oversight Board and its regulation of auditors of public companies, such 

as the former Arthur Anderson, PricewaterhouseCoopers, and other 

auditing firms. 

The Commission is expanding its role. For instance, we have 

seen increased promulgation of regulation to identify abuses in the 

mutual fund industry and requiring hedge funds to register. These 

rules have shown the agency’s commitment to maintaining integrity in the U.S. markets and, more importantly, investor confidence 

within the United States. Without a doubt, the Securities and Exchange Commission has a difficult job, but also a very vital role in 

the U.S. economy. 

I would reference a poster which is their vision statement. It 

would read and note that, in its own words, the Commission ‘‘aims 

to be the standard against which Federal agencies are measured.’’ 

If this is the vision, we have a long way to go. 

Similarly, its rigorous reform agenda, coupled with its ability to 

continue expanding its regulatory role, raises the question of SEC’s 

ability to maintain effective examination and enforcement of the seVerDate 0ct 09 2002 14:28 Sep 11, 2006 Jkt 023166 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\23166.TXT SAFFAIRS PsN: PAT
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curities industry while making necessary internal control changes. 

These goals deserve candid discussion. 

The Accountability for Tax Dollars Act of 2002 expanded the requirement to conduct annual audits of agencies’ finances from the 

original 24 CFO Act agencies to all Executive Branch agencies in 

the Federal Government. Since then, the SEC has been required to 

prepare and submit to Congress and the Office of Management and 

Budget (OMB) audited financial statements. Fiscal year 2004 was 

the first year SEC prepared its first complete set of financial statements. 

GAO performed this initial audit, and though the SEC received 

a clean audit opinion on its financial statements, GAO found three 

very significant material weaknesses in the areas of appropriately 

preparing financial statements, keeping track of penalties owed to 

the government and to harmed investors, and finally, an insecure 

information system which makes sensitive data vulnerable. Such 

disturbing audit results are inexcusable for the financial watchdog 

of corporate America. 

I am reminded of the unique indignation you feel when you are 

passed on the highway by a trooper or policeman who doesn’t have 

his lights on and is just going home, or the outrage that America 

felt when a longtime Federal forest ranger started a forest fire that 

destroyed 30 homes and 100,000 acres in Colorado. What I am getting at here is that those most entrusted with enforcement authority cannot be above their own standards. Americans will not and 

should not tolerate that sort of hypocrisy. 

In addition, due to poor budgeting, the Commission understated 

by $50 million the cost for new buildings in New York City, Boston, 

and Washington, DC. The original cost estimate for these three 

new buildings, which was estimated in fiscal year 2005, was approximately $22 million. In fewer than 3 years, the cost has more 

than tripled. I am also aware that rather than absorbing the cost 

of this budgeting problem, in fiscal year 2006, SEC plans to heap 

the financing burden on these buildings on generations down the 

road. 

Four years ago, the Global Research Analysts Settlement required the firms involved to pay $875 million in penalties and 

disgorgement, including $80 million dedicated to investor education. Fifty-two-point-five million of this was supposed to establish 

an investor education fund to develop and support programs designed to equip investors. While $27.5 million of these monies were 

directed to State securities regulators for investor education, the 

transfer of $52.5 million to the NASD Foundation has raised legal 

questions and I anticipate solid explanations for this decision. 

I look forward in this hearing to find the progress that the SEC 

has already made with regard to strengthening internal controls 

this year. I also look forward to discussing their intent for reform 

of an agency that must maintain shining standards of financial reporting, given the important role that it plays in regulating public 

companies and the U.S. securities market. 

I want to thank our witnesses, the Hon. David Walker, Comptroller General of the United States, and James McConnell, for 

being with us. 

3

1The prepared statement of Mr. Walker appears in the Appendix on page 25. 

David M. Walker has been Comptroller General of the United 

States since November 1998. He serves as the Nation’s chief accountability officer and head of the U.S. Government Accountability Office. Mr. Walker has extensive executive-level experience 

in both government and private industry. He is a Certified Public 

Accountant, has a degree in accounting from Jacksonville University and a Senior Management in Government Certificate in Public 

Policy from the John F. Kennedy School of Government at Harvard 

University, as well as honorary degrees in both business and public 

service. 

Jim McConnell, Executive Director of the Securities and Exchange Commission, is our second witness. Mr. McConnell was appointed Executive Director of the U.S. Securities and Exchange 

Commission in October 1990. Prior to his role as Executive Director, Mr. McConnell served as the Commission’s Chief Management 

Analyst, where he was primarily responsible for preparation of the 

agency’s budget and authorization request, as well as the agency’s 

internal control program. Today, as Executive Director, he is responsible for achieving efficiency and economy in the Commission’s 

operations as well as for developing and executing overall management policies within the policy framework established by the 

Chairman. In 1991, Mr. McConnell received the Chairman’s Award 

of Excellence, recognizing his performance in improving the management and budget operations of the SEC. Prior to joining the 

Commission, Mr. McConnell worked at the Department of Labor, 

where he received a Distinguished Career Service Award, that 

agency’s highest honor. He holds a B.S. in business administration 

from Virginia Tech. 

I would like to thank each of you for being here. General Walker, 

if you would start. Your written testimony will be made a part of 

the record and we won’t have any time limits. 

TESTIMONY OF HON. DAVID M. WALKER,1 COMPTROLLER GENERAL OF THE UNITED STATES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. WALKER. Thank you, Mr. Chairman. It is good to be back before this Subcommittee today to talk about the results of our first 

audit of the Securities and Exchange Commission for the fiscal 

year ended 2004. 

As you noted in your opening statement, this was the first ever 

audit of the Securities and Exchange Commission, which resulted 

from recent legislation that expanded the audit requirements that 

previously applied to most major Federal Government agencies. I 

think it is important to note that our report was issued on May 26, 

2005. It has been made available to you as well as to the public. 

There were mixed results from that initial audit. First, the SEC 

did earn a clean opinion on its financial statements. That is quite 

an accomplishment. The fact of the matter is that most of the agencies in the Federal Government who undertook their first audit did 

not earn a clean opinion the first time out. 

At the same point in time, as you properly pointed out, the SEC 

plays a critically important role with regard to the securities marVerDate 0ct 09 2002 14:28 Sep 11, 2006 Jkt 023166 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\23166.TXT SAFFAIRS PsN: PAT
4

kets and also with regard to overseeing the public accounting profession through the Public Company Accounting Oversight Board 

(PCAOB). Therefore, it is important that the SEC lead by example 

with regard to its own financial management activities. 

While the SEC received a clean opinion on its financial statements, it received an adverse opinion on internal control. There 

were three material control weaknesses which we highlighted, the 

first dealing with preparing financial statements and related disclosures; the second dealing with recording and reporting of 

disgorgements and civil penalties; and the third dealing with information security. 

It is important to note that these weaknesses were as of the date 

of our opinion. SEC management and leadership has agreed with 

the vast majority of our recommendations, and they have taken a 

number of steps to try to address these recommendations. Furthermore, it is also important to note that there are a number of other 

Federal agencies that have similar material control weaknesses, especially with regard to information security. 

But as you pointed out in your opening statement, the SEC has 

a very visible and prominent role in promoting and enforcing accountability for corporations whose equity and debt instruments 

are traded on our securities markets, and therefore, it is critically 

important that it lead by example. 

In its 2004 Performance and Accountability Report, SEC leadership noted its intention to do so and to try to serve as a model for 

other Federal agencies. I believe that they were sincere when they 

made that commitment. I know that they are taking steps to try 

to deliver on that. But that is not going to be accomplished overnight. 

Mr. Chairman, it is important for the SEC to lead by example 

for a variety of reasons, not just to make sure that we have proper 

accountability over these funds, but also to maintain the credibility 

of the agency, given its mission, and to make sure that its regulatory enforcement activities have full force and effect not only in 

law, but also in substance and as they are viewed by those that 

they regulate to. 

Last thing, there are two issues that I would like to raise for 

your attention that I think are noteworthy, one of which is the fact 

that if you look at the SEC’s financial statements, which I am sure 

you have, you will see there is about a $4 billion balance with the 

Treasury. Of that $4 billion balance with the Treasury, about $3 

billion of that represents the accumulated positive results of operations for the SEC throughout its history. This is shown as a restricted asset on the balance sheet of the SEC. It is eliminated in 

consolidation when you come up with the consolidated financial 

statements of the U.S. Government, but as you probably noted, Mr. 

Chairman, those funds are not available for use by the SEC unless 

the Congress appropriates such funds. It has done so on occasion 

in the past. I believe at least once in the past. This amount also 

serves to note that these has been a self-sustaining organization 

over many years. However, there are ongoing discussions and debate about whether and to what extent the current accounting 

treatment should be continued in the future. 

5

1The prepared statement of Mr. McConnell appears in the Appendix on page 43. 

Second, I would also note that of the roughly $4 billion that was held by the Treasury as of the end of last fiscal year, that $863 million represented two fiduciary funds from disgorgements that were 

being held for the benefit of others. Up until November 2004, those 

funds were not earning any interest. They were not invested actively. They were just in an account of the Treasury. While reasonable people can debate about who should invest it and how they 

should be invested, I believe that since these are fiduciary funds, 

it is important that they be invested for the benefit of those who 

would ultimately receive payment. 

I thank you, Mr. Chairman. I look forward to hearing from my 

colleague here today at the panel and answering your questions 

thereafter. 

Senator COBURN. Thank you, General Walker. Mr. McConnell. 

TESTIMONY OF JAMES M. McCONNELL,1 EXECUTIVE 

DIRECTOR, U.S. SECURITIES AND EXCHANGE COMMISSION 

Mr. MCCONNELL. Thank you, Chairman Coburn. My name is Jim 

McConnell. I am the Executive Director of the SEC. The views I 

express today are my individual views and do not necessarily reflect the views of the Commission or the commissioners, including 

the acting chairman. 

I appreciate the opportunity to testify today about the SEC’s audited financial statements and facilities budget estimates. Given 

the SEC’s regulatory responsibilities, it is critical that the agency 

maintain strong financial management practices and that we use 

our funds efficiently and effectively. 

Like many private companies, the SEC has invested tremendous 

time and energy on our financial management practices and internal controls. As the regulator overseeing the financial markets and 

the accounting industry, it is entirely appropriate that we do so. As 

you know, these efforts have uncovered some weaknesses that we 

are working aggressively to resolve. 

Although the audit and internal controls program have presented 

challenges, we believe that the process will pay dividends in the 

form of stronger and more effective financial management at the 

SEC and as an important government-wide initiative. 

I would like to begin by discussing the first ever audit of the 

SEC’s financial statements. The release of our fiscal year 2004 Performance and Accountability Report in May was the culmination of 

2 years of hard work by Commission staff and our GAO auditors. 

I want to thank them all for their efforts. 

The good news is that the GAO found that our financial statements were presented fairly in all material respects, in conformance with U.S. Generally Accepted Accounting Principles. Clean financial statements are quite an achievement for a first-time audit. 

When the 24 major Federal agencies began issuing audited financial statements in 1996, only six received unqualified opinions on 

their first audit and many agencies still have not achieved unqualified opinions. 

The GAO also performed an audit of the SEC’s internal controls 

over financial reporting and the report concluded that our controls 

6

in three areas were not fully effective. Specifically, the report identified material weaknesses in the areas of recording and reporting 

of disgorgements and penalties, preparing financial statements, 

and information technology security. Two of these weaknesses, IT 

security and disgorgements and penalties, are weaknesses that the 

agency has been working on for some time and that have been reported previously under the Federal Managers Financial Integrity 

Act. 

The first material weakness relates to the controls over our accounting for disgorgements and penalties ordered by courts as a result of SEC enforcement actions. While the judgments awarded by 

the courts are for specific amounts, the collection is frequently uncertain and requires efforts over a period of years. Let me emphasize that all fines and penalties are accounted for and no payments 

have been lost. Instead, the GAO found that the SEC did not have 

a sufficiently comprehensive policy governing the accounting for 

these amounts and found inadequate internal controls in the procedures and systems for recording of judgments and the allowance for 

uncollectible accounts. 

The GAO found a second material weakness related to the SEC’s 

internal controls over the process for preparation of financial statements. This was the SEC’s first audit and the procedures used to 

prepare our statements involved significant manual effort by SEC 

staff. As a result, the policies, practices, and procedures had not 

been fully documented and integrated into the agency’s operations. 

Finally, GAO’s audit confirmed weaknesses in the SEC’s information technology security that had been reported in prior years 

through our FMFIA program. These weaknesses include insufficient access controls, network security, and monitoring of securityrelated events. However, I should also note that GAO found we had 

taken the right set of initial steps to address the weaknesses, including hiring a new Chief Information Security Officer and establishing a centralized security management program. 

Because of the SEC’s regulatory role, we believe the agency must 

lead by example through handling of internal control weaknesses. 

Just as with private companies, we believe it is critical to forthrightly disclose our weaknesses and work to mitigate them as completely and quickly as possible. Full disclosure is entirely appropriate for the Federal sector as it is for the private sector. 

With respect to our facilities budget estimates, and as you know, 

the SEC recently discovered it had underestimated tenant buildout costs for new agency facilities in Washington, New York, and 

Boston by about $48 million over the next 3 years. These areas are 

serious and reveal the need to improve our facilities management 

and budget planning functions. However, I should note that there 

have been no cost overruns on existing contracts. These mistakes 

pertain to estimates of future cost. Also, the SEC will be able to 

deal with these costs within existing funding levels and has submitted a reprogramming request that will correct our budget allocations. As you know, Representative Wolf has asked the GAO to 

review the actions that led to this change in estimates and the actions the SEC has taken in response and we welcome their involvement. 

7

The SEC has taken action to rectify the conditions that led to 

these project management and budget planning failures and ensure 

they do not recur. The agency has removed several staff from these 

projects, added new project staff, and is working to strengthen our 

budgetary formulation, internal controls, and oversight capabilities. 

Among other improvements, the SEC recently created several new 

budgeting and project oversight positions in administrative services 

and added budget formulation staff in our Office of Financial Management. The SEC is also planning a new budget formulation activity-based costing system that will greatly enhance the quality and 

timeliness of the data related to our administrative and operational 

costs. 

We believe that strengthening our internal controls and financial 

management practices will have significant benefits for the SEC 

and will allow us to be more effective in fulfilling our mission to 

protect investors. 

I would like to thank the Subcommittee for your interest in and 

commitment to these important topics. I would be happy to answer 

any questions. 

Senator COBURN. Thank you very much for your testimony. 

General Walker, are there specifics outside what Mr. McConnell 

mentioned in terms of the recording and reporting disgorgements? 

I mean, how is it that you don’t account for those? How is it possible that you don’t have a system to properly account for that? 

Mr. WALKER. I think what is fair to say, Mr. Chairman, is that 

the amount of disgorgements has increased dramatically in the recent years because of some of the failures in the private sector. One 

of the things that we found in this and a couple of the other areas 

which resulted in material control weaknesses was that there was 

a lack of comprehensive and documented policies and procedures 

with regard to how to handle these matters. 

There were also issues with regard to our dated and non-integrated information systems that need to be addressed, and part of 

this was exacerbated by the fact that, due to the increased activity 

with regard to disgorgements in the last several years, it was quite 

a challenge for the SEC staff to deal with that increased volume——

Senator COBURN. But what you are really saying is they didn’t 

have good systems and control to begin with, because had they had 

the systems in, even with increased volume, if you have a system 

in, you are going to be able to handle it. 

Mr. WALKER. That is correct, and they are taking steps to document their policies and procedures, deal with the staffing issues, 

and provide for enhanced responsibility and accountability. Ultimately, they are going to have to do some more on the systems 

side, but that is going to take more time. 

Senator COBURN. In your testimony, you listed 13 actions that 

the SEC could take in order to improve controls over the financial 

reporting process. In their response to your statement, the SEC 

stated they plan to increase their financial reporting staff and formalize policies and procedures, much as what you had recommended. Are you aware of the progress the SEC has made on 

any of these recommendations? 

8

Mr. WALKER. They have made some progress. I think one of the 

SEC’s biggest challenges right now, is the agency is in a time of 

transition. As you know, Chairman Donaldson has now left the 

SEC. We have the pending confirmation of Congressman Cox as 

the President’s nominee to serve as Chairman. I think one of the 

biggest challenges with regard to a number of these recommendations is to make sure that the SEC’s leadership continues to be 

committed to these types of changes and continues to hold people 

responsible and accountable for making progress on these various 

recommendations. So yes, they are making progress, but it is this 

transition in leadership that is probably the biggest risk at the 

present point in time. 

Senator COBURN. Should the SEC, given the onus of their responsibility in terms of all the other markets, all the other people 

whose debt and equity trade in this country who have to have outside audited financial statements, should they be subjected to the 

same groups that audit their customers? In other words, why 

wouldn’t we want a PricewaterhouseCoopers doing the audit at 

SEC? 

Mr. WALKER. With all due respect, Mr. Chairman, I would suggest several things. First, we do as good or better of an audit than 

one might be able to obtain from one of the private sector firms. 

Second, there are certain potential conflicts that would exist if 

one of the major private sector firms were to do the audit for the 

Securities and Exchange Commission. As you know, the SEC has 

to oversee the PCAOB, the Public Company Accounting Oversight 

Board, which has the responsibility to oversee the major accounting 

firms, and so the SEC was rightly concerned about a potential conflict of interest. 

I also would note, Mr. Chairman, that to the SEC’s credit, while 

they are not required under current law to obtain an opinion on 

their internal accounting control system dealing with financial reporting, that is a standard practice we perform for the entities we 

audit, even though it is not required by law. We conferred with 

SEC management and they agreed that would be an appropriate 

thing to do for the SEC. Frankly, not just because it passes a costbenefit test, but because of the issue that you talked about before, 

to lead by example and to demonstrate that they are subjecting 

themselves to the same type of audit procedures that those they 

oversee and regulate are subjected to. 

Senator COBURN. Mr. Walker, are you aware of a time estimate 

that SEC has given to implement a new system as far as the 

disgorgements and the control of those? In the meantime, what can 

SEC senior management do to mitigate the risks related to the systems and data and penalties for payments and disgorgements? 

Mr. WALKER. We have made a number of specific recommendations, Mr. Chairman, as to things that we think they should do, 

many of which are outlined in my detailed testimony. Several relate to interim steps recognizing that building this new integrated 

system is going to take some time. Therefore, there are interim 

steps that need to be taken to provide for enhanced controls in the 

interim. 

Mr. McConnell may have a better answer on when they expect 

to be done. 

9

Mr. MCCONNELL. We expect to have each of these internal control weaknesses fixed in 2006, for that audit. 

Senator COBURN. So that is the audit for fiscal year 2006? 

Mr. MCCONNELL. That is the audit for fiscal year 2006. 

Senator COBURN. So it won’t be fixed when you are audited this 

year? 

Mr. MCCONNELL. That is correct. 

Senator COBURN. OK. I think you should be congratulated for the 

accomplishment of getting a clean audit as far as your numbers. 

That is a hard thing to do. 

Describe for me the sources of SEC’s funding and what happens 

to the surplus. General Walker talked about the $4 billion surplus 

that you paid into the Treasury, of which 25 percent is roughly 

money waiting to go back out in terms of penalties or disgorgement. What is the source of the funds? 

Mr. MCCONNELL. We are an appropriated agency. Our appropriation, however, is entirely offset by the fees that we collect. Let me 

give you an example, for fiscal year 2006, the budget that we are 

working on now, we estimate that we will collect $2.1 billion in 

fees. Those fees go to the general fund of the Treasury and are accumulated in an account in our name. We are then appropriated 

through the regular, normal appropriations process, and our appropriations for 2006 is right now intended to be $888 million. 

Senator COBURN. Eight-hundred-and-eighty-eight million. 

Mr. MCCONNELL. So the remainder of that $2.1 billion is then 

available for—it offsets the entire CJS appropriation and is available, then, to use elsewhere. But the money that we get is actually 

subtracted from the amount and the remainder is held in that account. 

Senator COBURN. Right. 

Mr. WALKER. They reduced the deficit, Mr. Chairman. 

Mr. MCCONNELL. Yes. 

Mr. WALKER. Last year, they reduced the consolidated deficit of 

the U.S. Government by, on an accrual basis, by about $575 million. 

Senator COBURN. And if they are more transparent, more results 

oriented, more competitive oriented, more priority setting oriented, 

more responsive and more spending discipline, they can increase 

that. That is what I am after. It is great that they are there, but 

they are in a position with which they collect a lot of money based 

on the fact that people aren’t doing the right things. 

The interesting thing would be is what would your budget be net 

of appropriations if we had 100 percent compliance and we didn’t 

see the fines and penalties that were coming. 

Mr. MCCONNELL. What would our budget be in——

Senator COBURN. In other words, there wouldn’t be any net difference. In other words, you would be appropriated what you needed if there, in fact, were not compliance fines and penalties. 

Mr. MCCONNELL. I think maybe I have confused things here. The 

fees that we collect I am talking about are transaction fees on exchanges and the registration of securities. That $2.1 billion has 

nothing to do with fines and disgorgements. That is a total separate amount. 

10

Senator COBURN. Right. But there are penalties, though, that go 

into that, is that not correct? 

Mr. MCCONNELL. Well, yes. Those are the result of enforcement 

actions. None of those monies are available to the SEC or to the 

Federal Government at all for the purpose of appropriations. 

Senator COBURN. So when we talk about you are going to collect 

through fines, penalties, assessments, and fees in excess of $2.1 billion——

Mr. MCCONNELL. It is actually more than that. 

Senator COBURN. OK. 

Mr. MCCONNELL. The $2.1 billion is strictly the amount we collect in fees placed upon transactions on exchanges or public companies registering securities. 

Senator COBURN. OK. The penalties and fines——

Mr. MCCONNELL. The fines, penalties, and disgorgements, you 

can’t anticipate exactly what they are going to be, but $800 million, 

let us say, is a number that I think is currently in the Treasury 

accounts. So that is a totally separate amount. They are not additive for purposes of appropriation——

Senator COBURN. Right, and they are set aside. 

Mr. MCCONNELL. Yes. 

Senator COBURN. All right. 

Mr. WALKER. Basically, Mr. Chairman, just to reiterate, the fines 

and penalties go directly to the Treasury and, therefore, they don’t 

affect the appropriated amounts for the SEC. These amounts serve 

to directly reduce the Federal deficit and related public debt needs. 

Senator COBURN. Transaction fees, the tax on every time I buy 

a stock——

Mr. WALKER. That is exactly right. 

Senator COBURN [continuing]. Comes in at $2.1 billion. 

Mr. WALKER. When you get your confirmation statement, you oftentimes see a little SEC——

Senator COBURN. I have seen it. I have seen it. [Laughter.] 

Senator COBURN. Let me defer to Senator Carper, our Ranking 

Member, for a statement and I will let you ask questions. 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. Thanks very much. Gentlemen, welcome. How 

are you? 

Mr. WALKER. It is good to see you, Senator. 

Senator CARPER. It is good to be here. First, I will just start with 

a short statement. 

In addition to the responsibilities that I share here with Dr. 

Coburn, I also serve on the Senate Banking Committee and I know 

fairly well, then, that we have given the SEC a big job, a couple 

of big jobs to do in the last several years in trying to make sure 

that firms in the private sector are more accountable and live up 

to the standards that we have established in a wide variety of 

areas. 

I am really pleased that given that role—and the hearing today 

is to hold the SEC accountable—but also to recognize that you are 

holding yourselves accountable, and GAO’s audit of you would seem 

to suggest that is the case. 

11

Based on what I have been able to learn so far, it appears that 

the SEC is doing about as well as could be expected at this point 

in time. I think we passed the law in 2002 that added the SEC to 

the list of agencies that had to be audited and I think you went 

through your first one in 2004 and came away with a qualified 

audit. I think you are to be commended for that. I think I heard 

Dr. Coburn commending you all already. 

I would just note that I think that some other agencies—every 

now and then, you hold a hearing and the idea is to put a spotlight 

on folks that aren’t doing their job very well and that could do a 

whole lot better. In this case, this hearing is really more akin to 

putting a spotlight on folks who have done a good thing and to, 

rather than to say, get on the stick, just to say we are glad that 

you are providing a good model for others. Everything we do, we 

can always do better, but I think what you have done is certainly 

commendable. 

We have actually had some discussion on the issue of improper 

payments at an earlier hearing. I think General Walker was here 

for the discussion on one of those. I think it is about $45 million, 

is the number that we have heard, mostly in overpayments, in 

some cases underpayments, but that is what we are told at least 

is the magnitude of the problem. I would like to learn, maybe before we leave today, from the SEC about how you feel you have 

benefited from GAO’s audit of your internal controls and, if possible, to explore whether other agencies might benefit from a similar kind of audit. 

Agencies need to have the internal capability to detect and to 

prevent improper payments before they happen, but it is my understanding that most don’t receive audited opinions of their internal 

controls, and as a result, they don’t have maybe as good a sense 

of how well they are doing on that score. 

As far as I can tell, the SEC doesn’t have a problem with respect 

to improper payments, but I would just note for the record again 

that every dollar that is spent unwisely, whether it is accidentally 

or fraudulently misspent, is one more dollar that is taken away 

from a worthwhile program or that could go back to our taxpayers. 

With that having been said, let me just ask a couple of questions, 

maybe one or two for General Walker and then maybe a question 

or two for you, Mr. McConnell. 

Let us talk about the scope of the audit that was done at the 

SEC, if we could. The scope of the audit included internal controls, 

and as I said earlier, as far as I know, neither the SEC nor other 

agencies are required under the law to have an independent audit 

of their internal controls. In fact, I think the only major problem 

that you found at the SEC may have centered on internal controls. 

How could the kind of internal control audits that you conducted 

at the SEC help other agencies to detect and to prevent improper 

payments? 

Mr. WALKER. Senator, you are correct in noting that the SEC is 

not required by law to have an audit dealing with its system of internal accounting control and to have an opinion expressed by its 

external auditor. In our case, we do that on every entity that we 

audit. We proposed that when the SEC approached us about doing 

their audit. We helped them understand what we felt the benefit 

12

was, including reducing the possibility of improper payments, but 

in addition to that, to provide reasonable but not absolute assurance to help facilitate economy, efficiency, and effectiveness as well 

as the fair reporting of financial information. The SEC agreed. 

My personal view is that requiring an audit on the system of internal accounting control is not something that makes sense for 

every government audit. However, I think there are circumstances 

based upon value and risk, and one of the factors that might be 

considered is the possibility of improper payments where it does 

make sense to have an audit of the system internal accounting controls. But I believe that should be something that should be done 

on a facts and circumstances basis rather than saying every government agency should automatically have to do that. 

Senator CARPER. I think you said on the basis of facts and risks? 

Talk a little bit about that——

Mr. WALKER. Value and risk. 

Senator CARPER. Value and risk? 

Mr. WALKER. In other words, how much money is involved? What 

is the potential for abuse? To what extent has work been done to 

ascertain the likelihood of improper payments or other types of activities that one could seek to effectively avoid through having a 

stronger system of internal accounting controls? 

This is an element that needs to be more directly considered, and 

one of the things that I have asked for the Joint Financial Management Improvement Program Principals to address, namely the Secretary of the Treasury, that Director of OMB, myself, and the head 

of OPM. Specifically, that group will discuss whether and under 

what circumstances Federal Government agencies should be required to have an opinion on their system of internal accounting 

controls. This is an active topic and I hope that we can gain some 

consensus among that group. 

It could be done, arguably, without legislation if OMB decided 

that it was something that should be done. We can report back to 

you on what the progress is on that if you would like. 

Senator CARPER. Give me some idea what the time line might be 

for doing that. 

Mr. WALKER. I have asked for a meeting of the principals to be 

held within the next 2 months. I don’t know if it has been scheduled or not yet. From a practical standpoint, if this was going to 

be required, it would be for next year’s audit, not this year’s audit, 

if a consensus can be reached. 

Senator CARPER. Sure. 

Senator COBURN. Are the firms that the SEC oversees, are they 

not required to have in their audit opinion their internal controls? 

Mr. WALKER. Sarbanes-Oxley requires public companies to undergo an audit of their system of internal accounting controls relating to their financial reporting requirements, and so, yes, public 

companies are required to obtain such an opinion. However, private 

companies are not, not-for-profit entities are not, and government 

agencies are not at the present point in time. 

Senator CARPER. A follow up to this issue of internal controls. 

With respect to the recommendations and your findings at the SEC 

and any recommendations that you may have made, how were they 

received by the SEC, and I would ask both of you to answer. 

13

Mr. WALKER. I would echo the comments that were made earlier. 

Specifically, there was a serious and sustained undertaking for 2 

years to achieve the results for this first audit by the SEC staff as 

well as the GAO staff. Top management at the SEC took this very 

seriously, and that goes right up to former Chairman Donaldson. 

He understood that this was an important issue and there was a 

need for the SEC to lead by example in this regard. I believe he 

took it very seriously. 

The SEC’s response to our recommendations has generally been 

very positive. The key now is to make sure that continues through 

the transition in leadership. As you know, there is a pending transition in leadership at the SEC. My understanding is, under the 

statute, it is the chairman who has the responsibility and authority 

for these types of matters. So the chairman’s commitment is key 

to continued progress in this area. 

Senator CARPER. Mr. McConnell, do you want to add anything to 

that? 

Mr. MCCONNELL. Yes. It is really part of the fiber of the SEC to 

have undertaken an internal control audit. We would never have 

considered doing otherwise. In speaking with GAO at the outset of 

this undertaking, it sounds trite, but we really do want to be the 

gold standard. We want to have all these boxes checked and we expected their audit to treat us as if we should be the gold standard 

and we wanted them to give us everything. We view the findings 

that they submitted to the SEC as a way in which we can achieve 

that and we intend to do so. 

We think it has been an incredibly valuable experience. Personally, I have just been very pleased with the response throughout 

the agency to a recognition that these material weaknesses and the 

financial audit that we undertook is among the highest priorities 

the agency has. 

Senator CARPER. One last question, if I could, for you, Mr. 

McConnell, and the question is about your budgeting related to the 

construction of your new headquarters. If you all have already gotten into this, just tell me, but I appreciate your honesty about it 

and your efforts to address the cause of these concerns. 

It seems to me that the problem is related to what may be a communications breakdown almost. What I am told is that may have 

occurred. Let me just ask, what steps have been taken to ensure 

that the lines of communication between folks on your staff, the 

SEC staff who are working on projects like this, and those in your 

budget office, to make sure that those lines of communication are 

open? 

Mr. MCCONNELL. We have done a number of things already and 

additional items are planned. Basically—and communications is a 

good way to put it. It is absolutely essential that the needs that 

we provide funds for throughout the agency, the administrative 

needs, the support and management needs, start with good communications from the programs so that we know exactly—and we are 

working in that area—what the programs need, so that in enforcement, in market regulation, in investment management, we have 

dedicated people—and we are dedicating those people now—to 

identifying their needs. And then they come to administrative services and we have the people there that will understand their needs, 

14

work with them, and turn them into budget estimates for supplies, 

materials, buildings, whatever it is they need. 

Then the administrative services people have to have the ability 

to analyze budgets. They haven’t had that in the past and they are 

going to have that now. We have put a branch together that will. 

So it is not just an accumulation function of everybody’s wants and 

needs. It is communication and gathering information, but then it 

is analyzing and understanding it. 

And we also intend to have our Financial Management office 

beefed up to have similar oversight capabilities. So it is an iterative 

process of asking questions about budget estimates, what they 

need, and are these meeting their needs. 

And then when it comes to the top of the agency, we will have 

the ability to really see the record, know who did what, who was 

responsible, and that they, in fact, did the job and will understand 

fully the entire process from beginning to end for how those budget 

estimates were developed. 

Senator CARPER. Could I ask maybe one more? 

Senator COBURN. Sure. 

Senator CARPER. Thanks. I understand that the Secretary has 

known for some time about some of the information security problems at the agency that GAO has, I believe, now highlighted. I also 

understand that you hired someone fairly high-ranking with the responsibility of tackling those problems and developing some, I 

guess, agency-wide security guidelines. What I would like to ask is, 

why has the problem been such a difficult one to tackle and can 

you just give us some idea what this new person, this new official 

is supposed to do to assure that the secure financial information is 

protected from tampering or from some other kind of potential 

problems? 

Mr. MCCONNELL. Information system security is, I think as Mr. 

Walker indicated, a government-wide problem. Every agency is 

grappling with how to make sure its systems meet the test that 

has currently been established for information security. That is 

part of the issue. This has been a developing area. It is not a 

science, but it is a developing sort of a regimen for how security 

ought to be employed in each agency. 

So each year, it has improved. We understand better how to 

make things secure, what level of security you ought to achieve. So 

it has been very hard to keep up with that. I think that now we 

have had a maturation of sort of the security posture that agencies 

ought to be and we really know very well what we have to achieve 

and how to get there. 

The new person we have brought in, we are very enthusiastic 

about. She knows how to do it. She has done it in the private sector 

and we are very enthusiastic that we have both the people now, we 

have the resources. As a member of the Banking Committee, you 

know fully well that we have had substantial funding increases, in 

large part due to Sarbanes-Oxley. So we have had the resources to 

apply to this problem and I think we have the right kind of plans 

in place to get there. We are confident that in 2006, we can achieve 

eliminating this as a material weakness. 

Senator CARPER. Mr. Walker, do you want to add anything? 

15

Mr. WALKER. Yes, if I can, Senator, just to reinforce, this is a 

government-wide high-risk area. It is an area that we believe the 

SEC is taking seriously. I would note that there are a number of 

major departments and agencies that have a similar challenge, including some of the largest ones in government, like the Department of Defense, the Department of Homeland Security, etc. But 

I believe that they are on the case. 

Senator CARPER. Great. Gentlemen, thank you very much. 

Senator COBURN. Mr. McConnell, I want to go back for a minute 

to a couple of things. I am trying to figure out the relationship between your office and the Chairman. You have been there since 

1990, 15 years. You have had administrative responsibility for this 

agency that entire time. How is it that you can have a $50 million 

overrun on buildings and you not be aware it has happened? How 

does that happen? Chairman Donaldson had his performance dashboards in there. Are they not working? They don’t work? Is somebody not talking to anybody? 

Either this system was gamed or somebody is totally incom- petent. It is one of those two. You can’t be $29 million off on a $5 

million building. You can’t be $17 million off on a $14 million building. And you can’t be $8 million off on a $2 million building. How 

does something like that happen? 

Mr. MCCONNELL. Well, first, maybe I should deal with the numbers first. We have been interacting with your staff on these and 

it is a fairly complicated situation. We are talking about four different sites over multi-year periods. It actually started in 2002 and 

extends out to 2007. The costs that you are identifying here are actually those that are mostly associated with what we are trying to 

achieve with respect to our reprogramming in 2005 and some of the 

actions we need to take in 2006 to finish up these projects. 

Senator COBURN. Well, but reprogramming is another word for 

taking money from somewhere else to use in a different direction. 

Is that true, that the original 2005 estimate on the New York City 

building was $5 million? 

Mr. MCCONNELL. That is not correct. 

Senator COBURN. What was the original estimate? 

Mr. MCCONNELL. Well, there actually was no original estimate 

for the New York City build-out. 

Senator COBURN. So we built a building without an estimate? 

Mr. MCCONNELL. We obtained a new leasehold in New York that 

was going to require a build-out, but there was a mistake made, 

and competency is clearly an issue here. 

Senator COBURN. What was the mistake? 

Mr. MCCONNELL. A mistake was made that—it was an omission 

in developing estimates for how much money we needed to build 

out new leaseholds in New York City. We were moving from one 

building to another. During that transition, that cost was not estimated. The $5 million cost is, in fact, what was needed to repay 

our former tenant for build-out work that we were going to be 

doing there. 

Senator COBURN. So what was the 2005 true estimate for the 

New York City building? 

Mr. MCCONNELL. At the time that the 2005 budget submission 

was made, there was no estimate for the build-out——

16

Senator COBURN. When you all made the decision to go ahead 

and said, we are going to do this, what was the estimate? 

Mr. MCCONNELL. Well, that is the point. The decisions were 

made to go ahead, but the lease wasn’t actually signed until March 

and these budget estimates were done in February. At the time 

these budget estimates were done in December—excuse me—no 

number was put in for tenant improvement work for the new lease 

for our new space in New York. It was an omission. 

Senator COBURN. OK. Did somebody know a number at some 

time before now? 

Mr. MCCONNELL. We only this spring have developed numbers, 

and those numbers are what is reflected in our reprogramming request and the budget estimates we are currently working on. 

Senator COBURN. Would you tolerate that from somebody you 

regulate? 

Mr. MCCONNELL. I am not tolerating it from the SEC at all. 

Senator COBURN. Let me ask you about the reprogramming, because you are financing this at 9 percent? 

Mr. MCCONNELL. Well, there are two items here. Any time you 

do tenant improvement work for your leaseholds, you have a buildout, you can do that either of two ways. You can amortize it with 

your rent, which is the common practice, or you can pay for it up 

front in a one-time payment. 

The SEC generally tries to do a combination because it does 

lower your out-year costs and it is somewhat more efficient. You do 

borrow that money essentially at 9 percent from a building owner 

to have that tenant improvement allowance as part of your lease. 

You also borrow it from the government when you initially make 

an up-front payment. That is right now about 5.5 percent. So it is 

somewhat more expensive to extend those costs out. That is the 

common practice——

Senator COBURN. But why would we spend more money to do 

that, especially when you all have reserve funds that you could 

come to the Congress and say, we would like to use these—you are 

talking 3.5 percent on $69 million in total, which over the life of 

the lease is a lot of money. Why would we not opt to save that 

money for the American taxpayer? 

Mr. MCCONNELL. Well, it is two questions. We did approach our 

appropriations staff about the possibility of adding monies for our 

2005 budget. That was not possible at the time. In the reprogramming, we clearly identified two different options, either do it up 

front or we can do it through an amortization, which is the normal 

way of doing it. It is a standard practice to have as part of your 

lease the costs of tenant improvement, because then you pay for 

those tenant improvements over the course of the life of the lease. 

Senator COBURN. Is that standard practice in GSA? 

Mr. MCCONNELL. It is. In fact, GSA has the clauses for these 

types of——

Senator COBURN. So it is standard practice when we have money 

sitting in the Treasury or we can borrow from ourselves at, right 

now, 30-year notes under 6 percent—it is five-point-some-odd percent——

Mr. MCCONNELL. Correct. 

17

Senator COBURN [continuing]. For a 30-year note. So we would 

go and pay 9 percent rather than borrow at 5 percent what we can 

borrow, and that difference, that 3.75 percent, we are just going to 

let the American taxpayer pay, and that is standard practice. That 

is what you are telling me, government-wide——

Mr. MCCONNELL. It is entirely normal practice for us to use in 

leases, and it is throughout government and in the commercial sector. 

Senator COBURN. Let me go back. Mr. Walker, do you find anything wrong with that picture? 

Mr. WALKER. Mr. Chairman, part of the issue is how the government keeps score. You are correct in noting that to the extent that 

the government ends up financing it, the cost of capital is less. We 

can borrow from the public at much less than 9+ percent. 

What ends up happening is when the government ends up spending the money up front, and therefore de facto financing it through 

the cost of capital for the Federal Government, it means that the 

Federal deficit goes up. In addition, the amount of money that is 

at the Treasury in the X account for the SEC is not readily available to the Securities and Exchange Commission. What would have 

to happen is they would have to make a business case, which I 

think is what you are saying they should make——

Senator COBURN. It wouldn’t have to come to that, because they 

are going to have an excess this year. It would be just a difference 

in their allocation from the appropriations bill. 

Mr. WALKER. Well, there are two ways you could do it, Mr. 

Chairman. One way you could do it is to seek a reprogramming request from the appropriators to be able to use funds that otherwise 

would be excess funds. If you did not have enough money in your 

current year appropriation, then theoretically you could seek authority from the appropriators to be able to tap into that X account, 

which is the accumulated surplus, to be able to use that in lieu of 

building it into the lease. 

Candidly, I believe this is symptomatic and symbolic of a bigger 

problem that government has. The Federal Government makes decisions based upon cash flows rather than discounted present values on sound economic concepts. We need to rethink that. 

Senator COBURN. Yes, because borrowing that money at 5 percent and paying it back 30 years from now, the real value of the 

cost to you is actually going to go down, versus a 9 percent loan. 

You are going to lose some of that time value of money advantage 

by paying it ahead of time. In other words, financing at the lower 

rate, borrowing from ourselves, is cheaper than financing it 

through your lender at 9 percent. 

Mr. WALKER. There are many decisions that the Federal Government makes that do not make economic sense. They are made primarily because of the way we keep score. For budget purposes, it 

is largely a cash basis rather than an accrual basis. 

Senator COBURN. I wonder if you might be willing to look at that 

government-wide for us in terms of the cost of financing when we 

are doing it this way and what that total cost is to the Federal 

Government in terms of build-out leases and everything else where 

we are financing through a landlord building improvements. 

18

Mr. WALKER. I would be happy to talk to our staff about whether 

or not we are doing anything and what might make sense there. 

Senator COBURN. OK. I want to go back to, did we sign a lease 

without knowing what the cost was going to be? 

Mr. MCCONNELL. We signed a lease in March, and then subsequent to that, you work on how much you are going to spend and 

how much the budget will be for the actual tenant improvement 

work associated with that lease. 

Senator COBURN. Why would we not wait to sign a lease until 

we knew what something was going to cost? 

Mr. MCCONNELL. Well, that would be the much preferred way of 

doing it. 

Senator COBURN. Well, I am saying, why wouldn’t we? I would 

never sign a lease until I knew what it was going to cost me. Why 

would the government sign a lease when it doesn’t know what it 

is going to cost them? 

Mr. MCCONNELL. We know what the lease is going to cost in 

terms of the rental payment. 

Senator COBURN. I am talking the cost. There is no difference. 

Our grandchildren are going to pay for this one way or the other. 

The total cost, what is it going to cost in terms of financing the 

leasehold improvements, which we are going to pay for, the landlord is going to get the benefit. Why would we sign a lease if we 

didn’t know what it was going to cost? 

Mr. MCCONNELL. We generally do know what it is going to cost, 

or we have very good estimates as to what it is going to cost. You 

don’t really know finally what it is going to cost until you execute 

the lease, you select your build-out, you do the construction drawings, you bid it out to the trades, and then you get the final cost. 

Senator COBURN. Well, I want to tell you, I do a lot of commercial real estate and I am the owner of the buildings and I never 

will sign a lease until I have presented to them what it is going 

to cost and what my return is. And I can’t believe that we think 

it is common practice, nor financially sound, to sign a lease without 

knowing what the cost is. I mean, where was the time pressure to 

sign leases on this without knowing what it is going to cost? 

Maybe somebody made a mistake in terms of the follow-through 

on this. That can happen. I am not critical of that. I am critical 

that we didn’t know it was happening because the dashboard obviously—this is happening and nobody knows it is happening until 

it has already ballooned on you. You have a degree in accounting. 

I have a degree in accounting. If you look at cost accounting, or financial controls, you would never do it. Why is that standard policy 

in the SEC? 

Mr. MCCONNELL. This issue is not standard policy. This was a 

failure on our part, and I readily admit that. We had a serious 

breakdown in our budget estimating process for tenant improvement work. That is what this is. 

Senator COBURN. Do we have the option on these leases to prepay that leasehold improvement? 

Mr. MCCONNELL. We do. When we exercise our lease, we have 

the ability to either take that tenant improvement work from it or 

pay it up front. We still have that option. 

19

Senator COBURN. Do you know what the difference in cost is 

going to be if we pay it up front, and based on these numbers? 

Mr. MCCONNELL. I would have to——

Senator COBURN. Can you give that to us? 

Mr. MCCONNELL. Yes, we could. 

Senator COBURN. If you take $50 million versus, let us say $45 million, and the difference is 3.75 percent over 30 years on $45 million, that is $50 million. That is the difference in cost that we are 

going to ask our grandchildren to pay back. That is the difference 

just on the interest rate differential. So if you can take a 30-year 

note and borrow the money from the public and pay them at 5 percent and pay this thing off, why would we not want to save that 

$50 million over the next 30 years? 

Mr. MCCONNELL. I would much prefer to have these payments 

paid for up front. It is much efficient. It is a better way of doing 

business. 

Senator COBURN. Do you have to do this process through GSA? 

Mr. MCCONNELL. We have independent leasing authority, but we 

work in coordination with GSA, usually through a Memorandum of 

Understanding. 

Senator COBURN. You would have had an interesting time at our 

hearing yesterday with the GSA. 

Mr. MCCONNELL. Is that right? 

Senator COBURN. Yes. The same problems. 

Let us go back to the money that you have for the disgorgement 

accounts. Why is it not earning interest? 

Mr. MCCONNELL. I actually believe that you are not well served, 

Mr. Chairman, by me answering that because it is really an issue 

that the Enforcement Program is leading, but my understanding is 

that we have moved that over to interest-bearing accounts. 

Senator COBURN. OK. That is great news. 

Mr. WALKER. Mr. Chairman, it is my understanding that as of 

the financial statement date, which was September 30, 2004, that 

it was part of the X account at the Treasury. It was not earning 

interest. However, it is also my understanding that subsequent to 

that date, that General Counsel within the SEC determined that 

the SEC had the authority to invest those funds and now has 

moved those funds out of Treasury and, I think, are now actively 

investing them in some way. 

Mr. MCCONNELL. That is my understanding, as well. 

Mr. WALKER. I am trying to follow up on that. I do believe that 

since those funds are held in a fiduciary capacity, that it is important that they be invested. 

Mr. MCCONNELL. There is a fiduciary obligation that goes along 

with that. 

Mr. WALKER. Correct. It is one thing to not give credit to the X 

fund that deals with the accumulated results of operations of the 

SEC because that is part of the consolidated government and ultimately, the taxpayers are going to bear the related cost. But in this 

particular case, it is somebody else’s money. 

Senator COBURN. Let me go back to Mr. McConnell for a minute. 

I want to understand the relationship between your position and 

the SEC Chairman, and you tell me if I am wrong. You are the 

hands-on management guy for the SEC, is that correct? 

20

Mr. MCCONNELL. That is correct. 

Senator COBURN. And so the leadership role is in terms of true 

leading to make sure the direction is the direction that the chairman and the Commission want the SEC to go, and you are submissive to their direction, is that correct? 

Mr. MCCONNELL. I work for the chairman. The chairman is effectively the CEO of the agency. I am essentially the principal management official. 

Senator COBURN. So with an acting chairman now, without a 

permanent chairman, you have the ability to continue all these reforms that you are wanting to put forward even if we don’t have 

another chairman for another year, is that correct? 

Mr. MCCONNELL. That is correct. 

Senator COBURN. And that is in process. 

Mr. MCCONNELL. That is correct. 

Senator COBURN. And is that going to happen? 

Mr. MCCONNELL. I intend for it to happen, yes. 

Senator COBURN. I know you intend to. I am asking you, is it 

going to happen? If you are sitting in the board room of a corporation and you give that answer, nobody is going to accept it. They 

are going to say, are you going to get it done or are you not going 

to get it done? And what I want to know for everybody’s grandchildren in this country, is it going to happen? 

Mr. MCCONNELL. Well, I fully expect it to happen. Again, we are 

in a transition period and I have every reason to believe that a new 

chairman will follow through on these. They make sense. They are 

the right thing for the SEC and government to do. They are the 

right thing for the agency. I believe very strongly that we will continue this aggressively. 

Senator COBURN. With a $1.3 billion excess this year, or close to 

excess in fees over costs, are the fees and charges, too high? I 

mean, it is a tax, right? The fee is a tax. 

Mr. MCCONNELL. Well, the best way for me to answer that is 

there has been lots of discussion both within the SEC and on the 

Hill with respect to making the fees more closely associated directly with the amount of money the SEC needs. So that is being 

discussed. It has been discussed. And I fully expect that issue will 

be dealt with in the 2007 budget discussions. It is an issue, I think, 

that is important, and I think it makes a lot of sense to try and 

move in the direction of making sure the SEC presents a budget 

that is sound, is exactly what it needs, and that then the Congress 

would fund it with fees that are matched to those needs. 

Senator COBURN. And that is as it should be, right? 

Mr. MCCONNELL. I think that is a good way to go. 

Senator COBURN. When was the last time a committee of Congress had a true oversight hearing on the SEC? Was that associated with the Sarbanes-Oxley reform or——

Mr. MCCONNELL. I can’t directly answer that. 

Senator COBURN. Does any of your staff know that? Does anybody know? 

Mr. MCCONNELL. Because I really don’t deal with the oversight 

committees that much. I deal with the appropriators personally, 

but——

21

Senator COBURN. I have some questions I am going to send you, 

I am going to give to your staff, and it has to do with the Global 

Research Analysts settlement. I know that is in litigation, but I 

would appreciate very much if you would answer those the best you 

can for us to look at that. 

The only question I have is how did we ever let it get to where 

a court had to tell you to do that? 

Mr. MCCONNELL. That is a good thing to put in the letter, Mr. 

Chairman. 

Senator COBURN. All right. Fair enough. 

I want to thank each of you for being here. There isn’t one area 

of the government in the next 6 years, if I am Chairman of this 

Subcommittee, that we are not going to look at, and we are going 

to be back talking about this in 6 to 9 months, after the first of 

the year to see where we are, after we get this next report from 

General Walker. You are well intentioned, we know you are, we 

want to help you get there, and transparency is a very key thing. 

I want people to be able to get on a computer and find out where 

you spend your money, any citizen in this country, and you ought 

to want that, too. 

Mr. MCCONNELL. We do. 

Senator COBURN. All right. General Walker and Mr. McConnell, 

thank you very much. 

Mr. WALKER. Thank you, Mr. Chairman. 

Mr. MCCONNELL. Thank you, Mr. Chairman. 

Senator COBURN. The Subcommittee is adjourned. 

[Whereupon, at 3:34 p.m., the Subcommittee adjourned.] 

(23)

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Æ


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