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30–538 PDF 2006

AMERICA’S CAPITAL MARKETS:

MAINTAINING OUR LEAD

IN THE 21ST CENTURY

HEARING

BEFORE THE

SUBCOMMITTEE ON 

CAPITAL MARKETS, INSURANCE, AND 

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

APRIL 26, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–87

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

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 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

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 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair 

CHRISTOPHER SHAYS, Connecticut 

PAUL E. GILLMOR, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SUE W. KELLY, New York 

ROBERT W. NEY, Ohio 

VITO FOSSELLA, New York, 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

MARK R. KENNEDY, Minnesota 

PATRICK J. TIBERI, Ohio 

J. GRESHAM BARRETT, South Carolina 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

JIM GERLACH, Pennsylvania 

KATHERINE HARRIS, Florida 

JEB HENSARLING, Texas 

RICK RENZI, Arizona 

GEOFF DAVIS, Kentucky 

MICHAEL G. FITZPATRICK, Pennsylvania 

JOHN CAMPBELL, California 

MICHAEL G. OXLEY, Ohio 

PAUL E. KANJORSKI, Pennsylvania 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

ARTUR DAVIS, Alabama 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

April 26, 2006 ................................................................................................... 1

Appendix: 

April 26, 2006 ................................................................................................... 53

WITNESSES 

WEDNESDAY, APRIL 26, 2006

Carter, Marshall N., Chairman of the Board, NYSE Group, Inc. ....................... 12

Copland, James R., Director, Center for Legal Policy, The Manhattan Institute ........................................................................................................................ 42

Evans, Donald L., Chief Executive Officer, The Financial Services Forum ....... 10

Franko, Lawrence G., Professor of Finance, University of MassachusettsBoston, College of Management .......................................................................... 45

Gingrich, Hon. Newt, former Speaker, U.S. House of Representatives .............. 14

Pinelli, Maria, Americas Strategic Growth Markets Leader, Ernst & Young, 

LLP ........................................................................................................................ 41

APPENDIX 

Prepared statements: 

Baker, Hon. Richard H. ................................................................................... 54

Brown-Waite, Hon. Ginny ................................................................................ 58

Hinojosa, Hon. Ruben ....................................................................................... 59

Carter, Marshall N. .......................................................................................... 61

Copland, James R. ............................................................................................ 77

Evans, Donald L. .............................................................................................. 90

Franko, Lawrence G. ........................................................................................ 98

Gingrich, Hon. Newt ........................................................................................ 102

Pinelli, Maria .................................................................................................... 130

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Feeney, Hon. Tom: 

The Sarbanes-Oxley Debacle—What We’ve Learned; How to Fix it ............ 140

Hinojosa, Hon. Ruben: 

HESTEC Documents ........................................................................................ 277

(1)

AMERICA’S CAPITAL MARKETS: 

MAINTAINING OUR LEAD 

IN THE 21ST CENTURY 

Wednesday, April 26, 2006

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, 

AND GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:10 a.m., in the 

Rayburn House Office Building, Hon. Richard H. Baker [chairman 

of the subcommittee] presiding. 

Present: Representatives Baker, Gillmor, Lucas, Kelly, Feeney, 

Hensarling, Fitzpatrick, Campbell, Kanjorski, Hooley, Meeks, 

Moore, Capuano, Hinojosa, Israel, McCarthy, Baca, Lynch, Miller 

of North Carolina, Scott, Velazquez, Watt, and Davis. 

Chairman BAKER. We have the good fortune of having a distinguished panel with us this morning. I very much look forward to 

hearing their opinions on the issue of global competitiveness. 

The ability to have the world’s most efficient capital markets is 

not an American birthright, but rather a position earned through 

hard work over the years. If the U.S. capital markets are to retain 

this distinction, there must be a continual recognition of the principles that enabled our historic success. Further, for those who regulate, and for those of us who legislate, these markets must necessarily undergo reform from time to time, to maintain this position of primacy, or we stand to inherit consequences of our own inaction. 

Over the last 5 years, both legislators and regulators have spent 

a great deal of effort in responding to the identified crises and the 

consequential erosion of investor confidence. Enron, WorldCom, 

Global Crossing, and Tyco—all of those related matters—caused 

the Congress to act as a result of the dotcom bubble bursting. 

It also brought home the reality that there were material weaknesses not only in the way the companies operated, but perhaps 

more importantly, in the manner in which the regulatory structure 

was organized. As a result, Congress enacted a series of reforms, 

creating the PCAOB, enabling SEC with new actions, and creating 

other new courses for business management to follow. 

As a result of these actions, investor confidence has improved. 

And with 95 million American households now invested in the markets, investor confidence has never been more important. 

2

Restoring fairness and enhancing transparency in the markets 

requires continued vigilance. However, I believe our markets are 

now facing an even greater challenge in order to retain their supremacy in the form of global competitiveness. If the NYSE/Archipelago and the NASDAQ/Instinet mergers were not enough proof of 

the changing nature of our markets, NASDAQ has just purchased 

14 percent of the London Stock Exchange, while the NYSE has expressed interest in gaining a share of a European exchange as well. 

Innovations in technology have had dramatic impact on both 

trading and capital formation. And such innovation has resulted in 

great strides in increasing market efficiency. Today, U.S. markets 

are the most sophisticated and technologically advanced in the entire world. But why are so many companies, therefore, choosing to 

list abroad, in other exchanges, as well as taking IPO’s overseas? 

I have come to the conclusion there are three basic areas for us 

to be concerned about: number one, the irresponsible attitude to 

litigate, and the cost it imposes on businesses, shareholders, and 

consequently, consumers; number two, inefficiencies in our current 

regulatory structure of capital markets; and number three, the historical lack of progress in addressing accounting complexities. 

These domestic issues, combined with the increasingly efficient 

and liquid foreign markets, pose significant challenges to our continued supremacy. If unaddressed, these barriers to attracting capital will continue to put the United States at a growing disadvantage in a very competitive marketplace. 

Investor protection and global competitiveness, however, are not 

necessarily contradictory goals. Congress must ensure that the regulatory system is effective, while enabling innovative and profitable 

activities in the marketplace. 

Responsible tort reform is essential to combat the high cost of 

frivolous lawsuits. Class action suits oftentimes do little to provide 

restitution to injured investors, but all too often, only enrich a few 

legal representatives. There is a need for rebalancing justifiable actions vs. frivolous lawsuits. Such review and reform is essential. 

As an aside, I would point to actions taken in Sarbanes-Oxley, 

with the creation of the fair fund, enabling the SEC, through its 

own legal counsel, to pursue wrongdoers, and to retain and regain 

control of ill-gotten gains. 

Since the passage of the Act, over $7.5 billion has been identified 

by the SEC for recovery. This is an effective way to respond to unprofessional conduct. 

Also, a comprehensive review of the manner in which securities 

transactions are regulated is essential. Smart and efficient regulation increases the value of a market for both companies and investors. Duplicative and unnecessary regulation does little other than 

to raise costs and lower returns. Many of the redundant and outdated regulations are within the authority of regulators to address 

administratively. However, aggressive oversight is still necessary 

at the Congressional level, and I intend to do so. 

Finally, our current accounting environment is being hindered by 

a rules-based, retrospective view of financial reporting. As we have 

heard from witnesses in recent hearings, fostering transparency 

through technological advance is absolutely a necessity. Projects 

such as XBRL, known as Extensible Business Reporting Language, 

3

will help provide participants in U.S. markets with relevant data 

more quickly, enabling all market stakeholders to understand and 

make more informed decisions, moving away from quarterly earnings statements. 

And the time reporting will also help to serve minimizing market 

volatility, while diminishing the need, or incentives, for management to be creative in managing their earnings. This will also assist toward an international convergence of accounting standards, 

enabling capital to flow more easily at the international level. 

For many years, the capital markets were considered by investors to be, in the United States, alone at the top. However, while 

we have been tying our own markets down with more regulatory 

rope, China, Europe, and other foreign markets have been pursuing 

the risk-based model that made our markets great. 

The foreign markets have now gained significant ground in the 

competition for capital. Of the last and most significant IPO’s, 23 

out of 25 have been issued in foreign markets. Many large companies now prefer to list in London or Tokyo, as opposed to New 

York. These facts should serve as a wake-up call to all of us. 

While we should be very concerned that capital is leaving, we 

also have an obligation to American investors. With over half of 

working Americans now invested in U.S. markets, we have a high 

standard of responsibility to ensure that markets are efficient, but 

also transparent to these investors. When necessary, there should 

be regulatory action taken against those who fail to discharge their 

fiduciary duties. 

This is not really a complicated task. The balancing of equities 

with investor protection and efficient market function just makes 

sense. When investors have confidence, capital flows freely. A free 

flow of capital means innovative products and job creation. This is 

the essence of a balanced capital market. This is what makes 

America work. We cannot accept anything less. Mr. Kanjorski? 

Mr. KANJORSKI. We meet this morning to examine how we can 

maintain America’s lead in our global capital markets. This is an 

important issue, and I commend you for convening this hearing. 

The United States has the strongest, most liquid capital markets 

in the world. As one of our witnesses comments in his prepared testimony, ‘‘With just 5 percent of the world’s population, and 25 percent of its gross domestic product, the United States has captured 

more then 50 percent of the global capital markets.’’ We need to 

work in Washington to ensure that we continue to maintain that 

lead to the maximum extent possible. 

In my view, we can preserve our lead by continuing to protect investors. About 1 year ago, then SEC-chairman Donaldson delivered 

a speech in London. At that time, he noted that efforts to promote 

transparency for investors and the fiduciary duties of corporate 

leaders are helping to raise standards throughout the world. He 

also observed that there are still distinct advantages to listing on 

the U.S. exchange, and registering with the SEC. 

He went on to draw a parallel to the United States Marine 

Corps. Of all of our military organizations, the Marines are known 

as the best of the best. Because individuals want to be a part of 

that elite corps, the Marine Corps has traditionally had few problems in meeting its recruitment goals. We want our U.S. capital 

4

markets to be like the Marines, viewed as the elite, and attracting 

the best companies and the best investors. 

The many requirements of the Sarbanes-Oxley Act demonstrate 

our commitment to maintaining the highest standards in the 

world’s capital markets. Many existing companies have stepped up 

to, and met, this challenge. Many emerging companies are doing 

the same. In fact, according to research by SME Capital Markets 

in 2005, a record 881 small companies registered with the SEC to 

raise more than $16.3 billion in capital. 

That said, we must do more to ensure that small companies are 

not discouraged from entering the marketplace. Arthur Levitt, another former SEC chairman, recently wrote in the Wall Street 

Journal that we need to work within the framework of the Sarbanes-Oxley Act to identify ways to make compliance easier and 

less expensive. I agree with his assessment. 

We must also ensure that investors are protected with access to 

accurate accounting information, regardless of the size of the public 

company. While it is somewhat off-the-subject for today’s hearing, 

which deals with publicly-traded companies, we must also remember that there are many smaller private companies seeking access 

to venture capital. 

I would be remiss if I, therefore, did not maintain that we must 

ensure that these fledgling businesses have access to the money 

needed to grow and thrive, so that one day they can register as a 

publicly-traded company on a U.S. exchange. 

Additionally, many of the participants in today’s hearing will 

doubtlessly observe that we live in an increasingly global economy. 

Some others may point to one variable or another, like excessive 

regulation, frivolous litigation, unwarranted taxation, or lagging 

education as a reason why the U.S. capital markets may lose their 

competitive edge. 

In reality, we live in a multi-dimensional world, and no one factor alone is likely to contribute to America’s continuing success or 

decline as the world’s leading capital market. To ensure that we 

maintain that dominant role, we need to adhere to the principles 

of making sure that we have the quality of capital markets with 

appropriate investor protections. 

In closing, Mr. Chairman, today’s hearing should help us to better understand what we need to do to make sure that our capital 

markets continue to lead the world. We should, in my view, remain 

on the cutting edge of quality regulation, ensure that every corporation plays by the rules, and make certain that all investors 

have access to reliable information needed to make prudent decisions. 

We must also strive to ensure that each party who violates our 

security laws is held appropriately accountable. I look forward to 

hearing from our distinguished witnesses on this matter. 

Chairman BAKER. I thank the gentleman. Are there further 

opening statements? Mrs. Kelly? 

Mrs. KELLY. Thank you, Chairman Baker, for holding this hearing. I believe that keeping the United States competitive is vitally 

important. While today’s hearing is going to focus on regulatory 

and legal barriers to competitiveness, the greatest threats to our 

competitiveness right now are the continuing rise in energy prices 

5

and the threat of terrorism backed by the specter of an Iran that 

may be building nuclear weapons. 

Our financial markets, no matter how well managed and regulated, will not be global centers of excellence if the economy they 

support is ravaged by declining production from high energy costs, 

or decimated by terrorist attacks. I look forward to asking each of 

the witnesses to address what we can do to protect our markets 

against these twin threats that we currently face. 

I appreciate you holding this hearing, and I yield back the balance of my time. 

Chairman BAKER. I thank the gentlelady. Ms. Hooley? 

Ms. HOOLEY. Thank you, Chairman Baker and Ranking Member 

Kanjorski. Thank you for scheduling today’s timely hearing. I hope 

it marks just the beginning of a critical debate about what actions 

should be taken to maintain, and even grow, the competitive advantage that our capital markets have earned in this last century. 

As the policymakers, it is critical that we work proactively to 

avoid losing our dominant role in global capital markets, rather 

than being forced to play catch-up after our advantage has been 

significantly diminished. 

At the same time, we should not act too hastily, and become engaged in a race to the bottom against our global competitors. Confidence is king, and we should not sacrifice investor confidence for 

a quick fix. While some will say IPO trends in the past year indicate a down turn in the fortune of our markets, I would note that, 

after closer examination, many of last year’s largest IPO’s were a 

result of emerging capital markets, the listing of state-owned enterprises, geographic barriers, and increased global competition. 

In fact, I believe it is somewhat disingenuous to argue that many 

of these companies would have listed in the United States if only 

regulations or litigations were lessened. Many simply listed on 

their more natural markets. 

I believe our markets maintain a significant advantage due to 

their well-earned reputation for transparency, good corporate governance, and appetite for innovation. These pillars of our markets 

continue to lead to significant valuation of U.S. offerings, valuations that are unmatched throughout the globe. 

Our markets remain pre-eminent in effectively raising capital. 

With leadership in our investment community and among policy 

makers, we will maintain our status as home to the world’s strongest capital markets. In short, the sky is not falling, but we can do 

better. 

I look forward to working with members of this committee and 

with our investment community in a thoughtful way to facilitate 

the strongest and most innovative capital markets possible. And I 

yield back the remainder of my time. Thank you. 

Chairman BAKER. I thank the gentlelady. Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman, and thank you for 

holding this hearing. With the noticeable exception of high gasoline 

prices, we are clearly enjoying one of the best economies that we 

have enjoyed in quite a number of years. Over five million new jobs 

have been created, and in a little less than 3 years we have one 

of the lowest unemployment rates we have enjoyed in 3 decades. 

We have the highest rate of home ownership that we have had in 

6

the entire history of the United States of America. Household net 

wealth is up, income is up. These are the benefits of capitalism. 

But you can’t have capitalism without capital. And clearly, there 

are a number of worrisome trends that we see. They may be 

trends. But I was looking ahead, for example, to Speaker Gingrich’s 

testimony, and learning that recently the London Stock Exchange 

had recorded 129 new listings by companies from 29 different countries. And in the United States, NASDAQ gained a net 14, and the 

New York Stock Exchange, net 6. 

Clearly, there are some facts out there that should worry us, including 23 of the top 25 largest IPO’s being registered outside of 

the United States. 

So, again, as I talk to members of—people who are actually out 

in the real world, rolling up their sleeves and creating jobs, talking 

to them about capital markets, I hear the same refrain over and 

over and over, and that is too much regulation, too much litigation, 

and too much taxation. 

And although it doesn’t make a sexy sound bite, it was good that 

our committee would actually engage in looking into some cost benefit analysis, and looking very carefully—although we know the 

benefits of much of what we do, and obviously Sarbanes-Oxley was 

a terribly important law, and needed to restore confidence in the 

investor marketplace, too often we know, Mr. Chairman, that we, 

as Members of Congress, collectively do excel in unintended consequences, and it is good that we should look at these unintended 

consequences, and ensure that we do not imperil our global leadership in the capital markets, and do something that would undermine our great dynamic economy today that is helping to lift so 

many families and so many members of our Nation out of what 

would otherwise be low economic circumstances. And with that, I 

yield back. 

Chairman BAKER. I thank the gentleman. Mr. Moore, do you 

have a statement? Mr. Moore? Mr. Capuano? Are there any further 

opening statements? Mr. Baca, then we are going to go to Mr. 

Hinojosa, and then Mr. Scott. Anybody else? Okay, we have one 

here on the side, too. Mr. Baca, please proceed. 

Mr. BACA. Thank you very much, Mr. Chairman, and Ranking 

Member Kanjorski. I am pleased to be here today to discuss the 

global competitiveness and how to maintain our lead in the global 

economy. 

While the United States still leads the world in economic power, 

our percentages are dropping, and we must be on guard to prevent 

further erosion. A number of factors can explain why our dominance is decreasing. 

For starters, corporate abuse continues to harm our economy and 

erode public confidence. CEO salaries have gone through the roof 

into hundreds of millions of dollars, where the Federal maximum 

wages haven’t increased since 1997. We must do more to rebuild 

public trust and protect the American investors, and we must hold 

executives accountable. 

I know that Sarbanes-Oxley has not been popular with business 

communities. And as a former small businessman, I am sympathetic. For some small businesses, the burden of complying with filing requirements has been very burdensome. Some small busiVerDate 0ct 09 2002 16:14 Nov 29, 2006 Jkt 003538 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 F:\DOCS\30538.TXT HFIN PsN: TERRIE
7

nesses—the small business is the engine that sustains America and 

creates jobs. So we must make sure that Sarbanes-Oxley is implemented in a way that makes sense. 

But if we are serious about keeping America strong, we must put 

our priorities in order. We must train our workforce for tomorrow’s 

jobs. Today, fewer than 4 in 10 students who graduate high school 

will go on to college. At this rate, the United States will face a 

shortage of up to 12 million in the college-educated workforce by 

the year 2020, and we must close the gap. Closing the gap could 

add $250 billion to the Nation’s GDP, and $85 billion in tax revenue. 

We must ensure that the American companies compete in a level 

playing field, and we must break barriers in corporate America. 

Hispanics are the largest minority group and the fastest growing 

consumer segment. Hispanics remain unrepresented in the workforce and corporate boards and investment world. 

As chair of a corporate American task force, I have led the fight, 

along with my colleagues, to ensure that qualified Hispanics are 

positioned for corporate America; to increase procurement for Hispanic-owned businesses; and to increase diversity in corporate senior management and corporate boardrooms. Removing these barriers will contribute to higher innovation and more productivity, 

and will enhance the American position in the global economy. 

With that, I look forward to hearing what our witnesses have to 

say about this issue, as well. Thank you very much, Mr. Chairman. 

I yield back the balance of my time. 

Chairman BAKER. I thank the gentleman for yielding. Mr. 

Feeney? 

Mr. FEENEY. Thank you, Mr. Chairman. And I really appreciate 

our distinguished panel. I will be brief, because I am excited to get 

to them. I am very interested in, now that we have some history 

with Sarbanes-Oxley, in the imposition, sometimes unnecessary imposition, that is put on the United States economy. 

According to one set of experts from the American Enterprise 

and the Brookings Institute, Mr. Butler from Chapman University, 

Larry Ribstein from the University of Illinois, the indirect costs of 

Sarbanes-Oxley compliance can be estimated at about $1.1 trillion 

to the United States economy. 

Sarbanes-Oxley did an awful lot of good, in terms of providing for 

accountability and transparency, conflict management, and internal controls. But I am very interested, if the witnesses can, in addressing what is good about Sarbanes-Oxley, what is unnecessary, 

redundant, and bad about Sarbanes-Oxley, and what fixes they 

think can be done by the SEC and the accounting oversight board. 

And then ultimately, is there a legislative fix that is necessary? 

So, I am thrilled to have this distinguished panel with us, and 

very interested—since this committee has direct responsibility for 

the Sarbanes-Oxley compliance issues—in how we can be helpful in 

protecting investor confidence, keeping what’s good, but reforming 

what needs to be reformed. And with that, I yield back, Mr. Chairman. 

Chairman BAKER. I thank the gentleman. Mr. Hinojosa? 

8

Mr. HINOJOSA. Thank you, Mr. Chairman. I want to thank you 

and Ranking Member Kanjorski, and to express my sincere appreciation to you for holding this hearing today. 

The United States is currently at a crossroads. We can either decide to move toward a more responsible, effective form of government than we presently have, or we can continue down the road 

that has led to the rise and fall of great nations. Today’s hearing 

is entitled, ‘‘America’s Capital Markets: Maintaining our Lead in 

the 21st Century.’’ 

I find it an interesting title, since some naysayers contend that 

we have already lost our lead in the capital markets, or at least 

are sliding down a slippery slope towards such a loss. I am not 

going to go into all the ins and outs of arguments that say we are 

still the lead country, in terms of capital markets, the lead economy, or the true sole superpower in the world. I will leave that to 

those who will testify here today: Secretary Donald Evans; Mr. 

Marshall Carter; and the Honorable Newt Gingrich. I look forward 

to hearing their presentations. 

Mr. Chairman, what I am most interested in is ensuring that our 

markets do remain competitive, and I believe that this requires an 

intensive and comprehensive investment in our children and their 

education, particularly in the stem careers of science, technology 

engineering, and math. 

To address this situation, I collaborated with The University of 

Texas—Pan American to develop Hispanic Engineering, Science, 

and Technology Week, known as ‘‘HESTEC week.’’ It’s a year-round 

leadership program that emphasizes the importance of science literacy to thousands of pre-K to college students and teachers 

through professional development workshops, presentations by 

world-class speakers, competitions, and hands-on activities. Participants are encouraged to prepare for studies in math, engineering, 

technology, and science. 

Mr. Chairman, at this point I would ask that all of these documents pertaining to HESTEC be included in the record. 

Chairman BAKER. Without objection. 

Mr. HINOJOSA. Trying to bring this to a close, I want to say that 

the importance of HESTEC has never been greater. Statistics show 

that the United States is falling behind in the number of students 

excelling in those areas that I mentioned. During HESTEC, we 

give children and teachers the necessary tools, and encourage them 

to reach for new heights. HESTEC allows students and educators 

to interact with some of our country’s top CEO’s, engineers, scientists, astronauts, and designers. 

Events like Educator Day, the Hispanic Science Leadership 

Round Table, Latinas in Science, Engineering and Technology, Robotics Competitions, and Community Day allow students and educators the opportunities to meet top role models, and learn valuable 

leadership lessons. 

HESTEC is a key ingredient to ensuring that our Nation continues its entrepreneurial spirit, and that our capital markets remain competitive and world class markets. Mr. Chairman, I cannot 

stress enough how important it is for the United States to produce 

additional scientists and engineers. We need to do so in order to 

continue to be able to compete with our overseas counterparts, 

9

much less to remain a superpower. It is my hope that all of those 

present at today’s hearing will review information on the HESTEC 

program at www.hestec.org. Mr. Chairman, I yield back the remainder of my time. 

Chairman BAKER. I thank the gentleman. Mr. Israel, did you 

have a statement? 

Mr. ISRAEL. Thank you, Mr. Chairman. I will be very brief. I just 

want to point out to everyone that I am particularly pleased to see 

Mr. Carter here. We had a good meeting yesterday. 

And Mr. Carter and Speaker Gingrich may not be aware of this, 

but they have something in common, other than the fact that they 

are on the panel today, and that is that they are both Civil War 

historians. Mr. Carter was in my office yesterday, saw a photograph I have of Joshua Chamberlain, and we debated, Mr. Speaker, 

whether Little Round Top really was a turning point in the Civil 

War, or, as some of my friends call it, the War of Northern Aggression. 

So, I appreciate you being here. I know this isn’t about Civil War 

history. I just wanted to point that out, and I am looking forward 

to your respective comments. 

Chairman BAKER. I am pleased to have a cessation of hostilities, 

Mr. Israel. Thank you. 

Mr. Miller? Mr. Scott? 

Mr. SCOTT. Yes. Thank you very much, Mr. Chairman. I, too, 

want to congratulate you and Ranking Member Kanjorski for holding this very, very timely and important hearing today on the 

strength of America’s capital system in the global marketplace. 

The American financial system remains the vanguard of world 

markets, without a doubt. And we must maintain that strength. 

The high standards that we have continue to give respect and status to the companies that list in the United States. And even 

though we have the best capital system, we must not be too comfortable with our position. 

The American markets continue to face strong competition from 

foreign markets. And I am very concerned with the wide number—

as to why a large number of companies are delisting from American exchanges. We have to ask why companies would choose to remove themselves from American exchanges. 

I am concerned about the impact of the financial services sector 

now moving to replace manufacturing as the dominant income-generator and money-maker in our system. What does that portend to 

the future of our country and our position in capital markets? 

I am also concerned about our overwhelming debt, and the deficit, and the impact of having so much of our debt in the hands of 

foreign nations and foreign institutions. What does that portend for 

us? The complexity of our tax code, and that is driving many of our 

foreign partners away from us. 

I also want to talk about—a little bit about—the need to invest 

in human capital, as well as our infrastructure. It has been mentioned before, but our failure to properly address, and give the incentives and encourage our young people to go into math and into 

sciences, and put the rewards systems there. Further attention and 

resources are certainly needed for our science and math education. 

And we must also consider, of course, revisions to our regulatory 

10

and our tax structure so it is consumer-friendly for our foreign 

friends. 

But as we discuss the global marketplace, I just want to take one 

moment to welcome my good friend from Georgia, former speaker 

Newt Gingrich, as a witness today. Speaker Gingrich has been a 

bright and shining light, an illuminating source of fresh and bright 

ideas on how we can keep our American economy and our economic 

system at the forefront. And I welcome you here. You continue to 

be a source of global innovative thinking. 

And Speaker, as you may know—I don’t know if the rest of 

America knows—but I am honored and privileged now to soon be 

representing a great part of your former district in the House of 

Representatives, in Cobb and Douglas County. So we are glad to 

have you, as a fellow Georgian, and I am sure you will add so much 

to our hearing today. 

As this subcommittee discusses the future of our markets, we 

must keep in mind the need to have an efficient system that provides the best prices and information for a wide variety of investors. I look forward to our meeting, and I yield back the balance 

of my time. 

Chairman BAKER. I thank the gentleman. I welcome each of our 

witnesses here this morning. The committee is particularly excited 

to have such a distinguished panel on this most important subject. 

And as you can tell, members’ interest is significant, and the expression of concerns about our current posture in international 

markets is prevalent. And we are not clear as to the steps we 

should take to enhance our competitiveness, but we are greatly interested in hearing each of your perspectives and your recommendations. 

As each of you are quite familiar—I just say it for the purpose 

of saying it—your entire statement will be made part of the official 

record. Please feel free to proceed as you would like. We request 

that you try to keep your remarks to 5 minutes to enable what I 

believe will be a lengthy question period. 

And at this time, I would welcome our first witness, Secretary 

Donald L. Evans, currently the chief executive office, The Financial 

Services Forum. A pleasure to have you here, sir. 

STATEMENTS OF DONALD L. EVANS, CHIEF EXECUTIVE 

OFFICER, THE FINANCIAL SERVICES FORUM 

Mr. EVANS. Thank you, Mr. Chairman. Let me join the chorus of 

thanks to you for holding this hearing, and for your focus on America’s competitiveness. I have certainly enjoyed our discussions on 

the subject, as well as discussions with other members of this committee on the subject. It was certainly a focus of the President’s 

State of the Union Address, and I compliment you and the entire 

committee for staying very, very focused on this most important 

subject for America’s ongoing leadership in the global economy. 

Chairman Baker, Vice-Chairman Ryun, and Ranking Member 

Kanjorski, thank you for the opportunity to participate in today’s 

hearing on ways to preserve the competitive position of the U.S. 

capital markets. Today’s hearing is both important and timely. 

America stands at a critical crossroads in our history as a Nation. 

11

Faced with the realities of globalization and international competition, will the United States retreat behind a wall of self-delusion and the false protections of tarriffs and trade barriers, pretending the world hasn’t changed fundamentally and permanently, 

or will the United States embrace and meet the challenges of competition, to the betterment of all Americans, and the world? 

By calling this hearing today, Mr. Chairman, you have signaled 

that you understand that America must not turn inward. The financial services industry thanks you for your vision and your leadership. Not only would such a course be very damaging to the U.S. 

economy, the world at this critical juncture in history continues to 

need the United States to lead by example. 

Mr. Chairman, you are correct when you say that being the 

world’s premier capital market is not our birthright. We earn that 

distinction by working to make the United States the marketplace 

of choice. In that regard, I think it’s important to emphasize that 

preserving the international competitiveness of the U.S. capital 

markets begins with preserving the strength and vitality of the 

United States economy. 

The 20 members, CEO’s of the Financial Services Forum, meet 

twice a year, our most recent meeting occurring earlier this month. 

At that meeting, for the first time, we conducted a survey of our 

members regarding their outlook on the U.S. global economies. As 

part of the survey, we asked our CEO’s to rate, in order of seriousness, a dozen potential threats to the U.S. economy. 

The four most important threats, according to our CEO’s, or the 

four most serious threats, according to our CEO’s, were: one, energy prices; two, health care costs; three, terrorism; and four, U.S. 

Government’s unfunded entitlement liabilities. Rated closely behind were complex regulations and frivolous litigation. 

We also asked the CEO’s to rate a number of the potential actions taken by Congress to reflect their importance to keeping the 

United States competitive in a global economy. Our CEO’s rated 

each of the following actions very highly: promote free trade; improve U.S. education; address unfunded entitlement liabilities; address litigation reform; extend tax cuts on capital gains and dividends; and address general tax reform. 

Clearly, our financial sector leaders believe that Congress has 

much important work to do to keep the United States competitive 

in an increasingly global economy. As you know, capital is the life 

blood of any economy’s strength and well-being, enabling the research and risk-taking that fuels competition, innovation, productivity, and prosperity. 

The foundation of any competitive capital market is investor confidence. When investors put their hard-earned capital at risk by 

purchasing shares in a company or its debt securities, they must 

have faith that the company is telling the truth about its business 

and its finances. 

We all want an equity listing in the United States to be what it 

has been for nearly 80 years: the global gold standard. But it is 

also true that successfully competing for scarce capital is becoming 

more difficult by the day. Simply stated, the United States is no 

longer the only game in town. It is entirely in keeping with the 

principles of our corporate governance standards to re-evaluate 

12

whether the rules and regulations written to implement those principles are effective and appropriate. 

Do they impose unnecessarily high and costly burdens on regulated firms, particularly small businesses? Do the costs of meeting 

the requirements outstrip the acknowledged benefits of listing in 

the U.S. markets? Are there steps that can be taken to alleviate 

some of the burden and cost, without undermining investor confidence? 

Asked another way, do certain of our securities laws make it 

easier or harder to compete in the global economy? These are reasonable, prudent questions to ask. And preserving a strong and 

vital capital marketplace is too important to the future of the 

United States not to ask them. Thank you very much for the opportunity to appear before your subcommittee, Mr. Chairman. 

[The prepared statement of Secretary Evans can be found on 

page 90 of the appendix.] 

Chairman BAKER. Thank you, Mr. Secretary. Our next witness is 

Mr. Marshall N. Carter, chairman of the board, the New York 

Stock Exchange Group. Welcome, sir. 

STATEMENT OF MARSHALL N. CARTER, CHAIRMAN OF THE 

BOARD, NYSE GROUP, INC. 

Mr. CARTER. Thank you. Chairman Baker, Ranking Member 

Kanjorski, and members of the committee, thank you for inviting 

me to testify on this issue of the competitiveness of U.S. financial 

markets. Chairman Baker and the committee are exercising strong 

leadership to address this issue at this time. 

For the past 50 years, global leadership of U.S. capital markets 

has been unmatched. Our markets are the most open, honest, liquid, and also the deepest in the world. They have enabled the 

United States to remain at the center of global capitalism, as the 

world’s leading engine for capital formation, job creation, and economic growth. 

U.S. capital markets are still the world’s best. However, we are 

facing stiff challenges. Let me outline the challenges, and discuss 

the reason why our leadership is being contested. I will conclude 

with a proposal to strengthen U.S. competitiveness, and enable 

U.S. markets to regain the initiative. 

First, the challenge to U.S. financial markets is real and growing. Despite a welcome resurgence in global IPO’s, fewer are listing 

in the United States. In 2000, 9 of the top 10 IPO’s were registered 

on U.S. exchanges. By 2005, only 1 of the top 25 global IPO’s were 

registered in the United States, and none of the top 10. Even with 

privatization and mergers, that’s a significant drop, as Congresswoman Hooley mentioned. 

In addition, more companies qualified to list in the U.S. markets 

are listing overseas. And some currently listing on U.S. markets 

are actively delisting. Capital formation, though, is still robust. $86 

billion was raised through 224 IPO’s for non-U.S. companies last 

year. However, this capital was raised privately through 144A 

IPO’s, which are not registered. 

Unfortunately, when capital is raised privately, millions of U.S. 

investors cannot participate, and accepted standards for corporate 

governance and transparency do not apply. 

13

The landscape is changing for four reasons. First, there is a rising perception abroad that litigation in the United States has run 

amuck. Increasingly, the United States is seen as a place where individual companies can be bankrupted by a single lawsuit, and 

their executives and directors placed at personal risk. Facing such 

threats, companies are saying, ‘‘No thank you,’’ and opting out. 

Second, we lack convergence in international accounting standards at a time when the realities of globalization mandate we need 

it the most. European companies are moving to a common standard. They wonder why they must meet the U.S. requirement for a 

separate reconciliation of their accounts, which is costly and redundant. Again, they are saying, ‘‘No thank you,’’ and are choosing to 

raise capital elsewhere. 

Third, overseas markets, especially in Europe, are growing deeper and more liquid, and benefitting from the success of the Euro. 

As foreign markets become better capitalized, and offer a greater 

choice of products, including the ability to trade across countries, 

they are taking away U.S. market share. It is happening from London to Hong Kong. 

Fourth, while Sarbanes-Oxley has strengthened investor confidence and reformed corporate governance, many companies believe the additional costs of annual section 404 reviews outweigh 

the benefits. To be sure, some of these costs are coming down, and 

that’s good news. 

Nevertheless, when companies who recently listed IPO’s on the 

London Exchange were polled, 90 percent responded that London’s 

rules of corporate governance were more attractive, meaning less 

costly and burdensome. Section 404 is often cited. However, audit 

firms are also criticized for requiring a one-size-fits-all approach, 

and for raising fees for certification. 

Mr. Chairman, we are not here to complain, but to propose a 

course of action. Our solution is not to replace or reopen SarbanesOxley, which we believe has strengthened investor confidence and 

the integrity of corporate governance. We believe that three common sense reforms can stem the erosion in listings, and re-invigorate U.S. capital raising competitiveness. 

First, we would urge Congress to move forward with meaningful 

tort reform. Second, we would move rapidly to harmonize accounting standards. We strongly support SEC Chairman Cox’s drive to 

eliminate the requirement for foreign issuers to reconcile their 

internationally accepted accounting standards to U.S. standards. 

Third, we would initiate a risk-based approach to annual 404 certification. Companies and their auditors would annually review the 

internal controls of only the most risky of operations in finances, 

those that would have a material and significant impact on the 

company’s earnings or operations. 

Let me be clear about what I am suggesting. Guidelines for what 

constitutes risk-based activities would be determined by the accounting oversight board and the SEC. A company would have to 

pass the annual audit of these risk-based materially significant criteria. Then, and only then, consideration should be given to permitting the company to undergo a full baseline 404 audit every third 

year. We believe a pilot could easily be done on this concept by the 

SEC. 

14

I would like to point out that the accreditation of hospitals and 

audits occurs only every 3 years. Ensuring that our hospitals are 

safe for patients is arguably more critical to the safety and wellbeing of the American people. 

Should the United States fail to act to reverse the trends we 

have heard here today, U.S. investors will follow the flight of capital to overseas markets, and we will become more vulnerable. 

They risk losing the protection of the U.S. regulatory regime, the 

gold standard, and a regime that offers greater transparency than 

any other in the world. Our financial markets will become less liquid, and their preeminence and leadership will be in doubt. 

The U.S. economy, deprived of precious capital, risks becoming 

less innovative, dynamic, and prosperous, and we could face substantial job losses in the financial services sector. 

So, in conclusion, let me say that, despite the resurgence in global equity financing, the U.S. financial markets are losing the competition for these new listings. We clearly cannot afford to be passive and do nothing. We look forward, Mr. Chairman, to working 

with our regulators and the members of your committee to bring 

about that desired result. Thank you. 

[The prepared statement of Mr. Carter can be found on page 61 

of the appendix.] 

Chairman BAKER. Thank you very much, sir. And our next witness is the Honorable Newt Gingrich, former Speaker of the House. 

Welcome, sir. Please proceed as you like. 

STATEMENT OF HON. NEWT GINGRICH, FORMER SPEAKER, 

U.S. HOUSE OF REPRESENTATIVES 

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

both you and Ranking Member Kanjorski for hosting us, and allowing us to come and talk about a very, very important topic. 

You have heard from the former Secretary of Commerce, and 

from the chairman of the board of the New York Stock Exchange, 

that we are concerned about whether or not we will retain our 

leadership role. And this leadership role is very important, because 

it divides both the capital for our new businesses, and the opportunity for the kind of wealth creation which has made us, for the 

last 160 years, the most successful society in the world. 

I am not going to repeat the concerns that they had. I just want 

to start by saying that I do think there are some parts of SarbanesOxley that need to be significantly revisited. The work that has 

been done by both Alex Pollock and Peter Wallison of the American 

Enterprise Institute—I outlined some of that, and I submitted that 

for the record as part of my written testimony. 

I would say, in particular, that the Congress should consider 

making the section 404 voluntary. In recent House subcommittee 

hearings, Representative Gregory Meeks of New York described the 

experience of an unidentified 65-employee New York biotech company with a market cap of $99 million, specializing in Multiple 

Sclerosis and spinal cord injury products. They spend $4 million a 

year on clinical trials, and $1 million for section 404 compliance. 

The entire issue of BioCentury for April 24th is devoted to this 

problem. And the work that Pollock and Wallison have done, I 

think, shows overwhelmingly that 404 is clearly very anti-small 

15

business, very anti-entrepreneur, and very anti-start-up in the way 

it’s been exercised. And the easiest way to deal with it would be 

to make it a voluntary act, and then the market will decide. 

If people think it, in fact, is an extra layer that they want to pay 

for, they will invest more in companies that have that procedure. 

If, in fact, they think it’s not protecting them, they’re not going to 

invest in it, and companies won’t do it. But make it a marketplace 

opportunity, don’t make it a government mandate. I think that part 

of Sarbanes-Oxley was both over-reach, and frankly, has turned out 

to be something like 50 times more expensive than the original estimates. 

So, Congress ought to recognize that this did not work the way 

people thought it would. It is not the right thing to do. And you 

have to fix that. You are going to hear from James Copland that 

the Center for Legal Policy, the Manhattan Institute, and I think 

that he will give you a strong feeling for this, but Marshall Carter 

has already testified that—about the problems of litigation. Let me 

offer you a set of reforms. 

One, I think that Congress should hold hearings on the impact 

of State attorneys general, and the way in which they have been 

using, frankly, criminal blackmail in which attorneys general in 

New York and elsewhere say to corporations, you know, ‘‘Cut this 

deal, or you’re going to risk going to jail.’’ And very often involving 

cases they can’t possibly win in court, but where the risk of going 

to jail is so great that they are creating economic havoc. 

And attorneys general in the United States are becoming a major 

problem. As a side part of that, Congress should also look at the 

degree to which attorneys general who are supposed to be instruments of the State are now hiring private sector trial lawyers to 

engage in, basically, a form of blackmail in which the private sector 

lawyer gets a large share of the recovery, the State gets a large 

amount of money, and companies are basically held hostage, because they’re not in an equity fight. They’re in a fight where 

they’re going to go to jail if they lose. 

And so, it’s a total abuse of the power of government. I also 

would urge Congress to pass a law instructing the Executive 

Branch that any interstate compact that is not approved by the 

Congress be filed in court automatically as being a violation of the 

Constitution. 

You have a number of attorneys general around the country who 

are now routinely cutting deals that have a direct effect on the 

United States economy. That is a clear violation of the Constitution, which requires that interstate compacts be approved by the 

Congress, or they be null and void. 

In terms of litigation reform, the system needs to be reshaped to 

favor arbitration over litigation. We should have the British losers 

pay model, where people who file phony claims would have to pay 

back not just the cost of litigation, but if it’s truly phony, would 

have to pay 3 times the cost. The caps Congress has tried to bring 

to bear on malpractice and other kinds of litigation is exactly right. 

In addition, I would argue that law firms should be prohibited 

from bringing class action suits. If a class action is formed, the 

judge should allow the class to apply to law firms to file, and then 

pick the law firm which has the lowest bid. What we have created 

16

today is an engine of self-aggrandizement and greed on the part of 

law firms that are machines for encouraging litigation. 

I also would strongly recommend that you explore banning lawyer advertising. I think the rule on that is, frankly, wrong. That’s 

not a First Amendment right, and it strikes me as stunningly destructive to the country. 

You should look carefully at the Sarbanes-Oxley litigation time 

bomb, which is going to presently swamp the courts, because Sarbanes-Oxley sets up two great burdens. In addition to the regulatory burden, which accounting firms, obviously, enjoy and support, it also sets up the burden of many more lawsuits, and it sets 

up a burden that bond holders may have a cause of action for the 

simple failure to comply on time. And this is going to lead to a morass of lawsuits and of liability, and further drive businesses outside the United States. 

Three last things I just want to mention as it relates to what 

you’re doing. There is a project to create a much more effective 

business language, and I would strongly—apparently, we have 

been doing some research on this—it apparently involves about 

$3.5 million to finish this. It’s very important in creating the kind 

of language—XBRL is the title of it—which enables us to have a 

very, very sophisticated ability to compare financial data at very, 

very low cost. 

It is absurd that this is sitting out there being worked on, I think 

currently, by one person, because it’s essentially a voluntary 

project. For $3.5 million, the Congress could bring that online, and 

enable the United States to have a modern system of transparency. 

Chairman Cox, who is certainly very entrepreneurial in his own 

right, should be encouraged to really transform the Securities and 

Exchange Commission into a model 21st Century Federal agency. 

There is a paper I produced—you can see it at Newt.org—on 21st 

Century entrepreneurial public management. But the essence of it 

is very simple. Entrepreneurship focuses on outcomes. Bureaucracies focus on process. Every time we have a scandal, we have a 

new set of process reforms which add another layer of burden to 

the next scandal, and we have another layer of process reforms. 

That is, in fact, a very obsolete model of trying to play catch-up. 

And I would strongly—I would encourage you to encourage Chairman Cox to look at a very dramatic proposal to rethink the way 

the SEC operations. 

Lastly, I would urge the Congress to revisit the question of stock 

options. It seems to me that particularly for small companies and 

for start-ups, there is an alternative model of being able to account 

for the dilution of stock value by the author of an options in a way 

which is much less discriminatory against giving options—stock options, historically, were a major method of attracting energetic talent to work very long hours for very small pay, because they had 

a huge upside. 

By requiring the kind of expense accounting we do today, we are 

dramatically limiting that kind of incentive. And over the next 

quarter of a century, that is going to substantially lower the 

amount of innovation and then start-ups that we have. 

And I would encourage you, for new businesses and for small 

capitalization companies, to strongly revisit how we deal with stock 

17

options. So I appreciate very much the chance to offer these observations. 

[The prepared statement of Mr. Gingrich can be found on page 

102 of the appendix.] 

Chairman BAKER. Thank you very much, Mr. Speaker. And I 

must say, I appreciate each of your thoughts and considerable contribution to our hearing this morning. 

I want to maybe take in steps what I believe, based on your comments, may be an advisable process to engage in over the foreseeable future. It was not something that would happen tomorrow. 

Starting with Mr. Carter’s proposal relative to the 404 pilot, that 

would be enabled by the SEC administratively, without the necessity of Congressional action. But that should be, I think, a precursor to a more long-term examination of the 404 requirements, 

if not increasing the requirements that trigger compliance—in 

other words, get some of the smaller companies now subject to the 

requirements exempted, or even a longer period of re-examination, 

as the pilot may demonstrate is feasible to accomplish—and then, 

over time, move to the Speaker’s recommendation as to the advisability of a voluntary compliance. 

I think the market has already voted, to some extent. The disclosures you have made today, relative to IPO’s and the flow of capital, is already occurring. We need to understand the mechanisms, 

why this is the case. I think each of the reasons you have outlined 

are contributors, but we really need to understand the market decision-making process that causes a company to choose to avert our 

regulatory system. 

For example, another step would at least be to require a loser 

pay mechanism necessary for—to stem the flow of frivolous litigation. 

Another step would be to accelerate the pilot already completed 

at the FDIC on the implementation of XBRL, and make it applicable to all depositories, insurance depositories, within the next year. 

And assuming the taxonomy can be developed properly, then deploy it to all public operating companies with a view toward a more 

principles-based real time disclosure, and in my view, eliminating 

the quarterly earnings report, which I think contributed vitally to 

the—to managerial interest in creative accounting to beat the 

Street. 

If we couple that with logical tax code revisions to enable people 

to keep the money they make, maybe we’ve got a chance. But I will 

say that I am very concerned about what I see happening not only 

in India, but soon to come in China, and that unless there are some 

basic structural changes from where we stand today, vis a vis our 

foreign competitors, we are going to be the victims of our own ideology. 

We have always, as Americans, said, ‘‘We are proud to stand up 

and compete with anybody, because we can outproduce, make a 

better product at a lower price; just get out of our way.’’ I am afraid 

that we have created a box, intended for good purposes, to protect 

investors from manipulative action, and the consequence of that 

system is to establish a bureaucracy which does not enable efficiencies to be realized in a competitive marketplace. 

18

And I left out a couple of the things that the Speaker brought 

up that I have footprints on my back to know they’re controversial, 

relative to attorneys general. 

In the Clinton Administration, the Congress prevented State legislatures from, in any way, affecting market structure in the securities world. I tried a couple of years ago to provide that same standard for State attorneys general—not to preclude them from pursuing wrongdoing, but where they were to require a market remedy 

that affected structure that they should at least consult with the 

SEC before proceeding, and obtain their agreement. It turned out 

to be more controversial than I first estimated. 

And with regard to expensing of options, I have agreed with you, 

and I have the voting record to prove, that I was not right, either. 

But I do believe those issues are things we need to return to over 

time, not precipitously, and lay out an agenda for a competitiveness 

that I think is highly defensible. 

Now, I have made more of a statement than asked a question, 

but can you add on individually to the list? I know, Mr. Evans, Secretary Evans, that the CEO’s have identified their priorities. Would 

that agenda be responsive to your CEOs’ concerns? 

Mr. EVANS. Mr. Chairman, I think in great deal it would be. I 

don’t think—let me say this. I have seen some studies that have 

asked a question as to whether or not Sarbanes-Oxley has been a 

reason other countries have—other companies have chosen to invest and list outside of the United States, as opposed to in U.S. 

capital markets. 

To me, Sarbanes-Oxley has become kind of a metaphor for all of 

the various elements that we’re talking about here, where Federal 

Government gets in the way of productivity, gets in the way of corporate boards making good decisions. And one of the most important areas—I don’t think you can emphasize it enough—is in frivolous litigation. 

I think that is an issue that has been around for many, many, 

many years. And as I talk to CEO’s across the country, I think that 

is at the top of the list. I mean, some of the issues that we’re talking about with respect to Sarbanes-Oxley I think are important to 

look at and review, particularly 404. I think maybe it’s putting too 

heavy a burden on the small and medium-sized companies, and 

that needs a serious look. Maybe there are some adjustments that 

can be made there, and maybe it’s a volunteer kind of program, or 

whatever it might be. 

But I don’t think you can put enough emphasis on the importance of tort reform, the litigation reform, frivolous lawsuit reform 

in this country. This is—among the CEO’s, among corporations 

around the country and around the world, they view America as a 

very litigious society. And so, as they hear more about that, they 

see more of the disasters of companies being closed or shut down, 

they say, ‘‘I don’t want any of that.’’ 

And so, I think if I was going to pick an area that I would really 

put a lot of emphasis on, and a lot of focus on, it would be the 

whole area of tort reform, litigation reform, and frivolous lawsuit 

reform. I think that can do more to kind of restore the confidence 

of companies here in America, and continue to kind of move this 

19

country in a direction that has made it so strong in a global economy, which—we’re not afraid to take risks. 

When you put kind of—when you have—when you’re worried 

about being sued around every corner, then you become riskaverse. And if you’re not taking risks, you’re not being innovative. 

And if you’re not being innovative, you’re not being productive. And 

if you’re not being productive, the economy is not growing. 

So, I just—I think it puts a chilling effect within the board rooms 

of America, and with small business owners, that they are less 

likely to take risk, for fear of being sued, fear of having a frivolous 

lawsuit. 

And so, I mean, as I look at all these issues that we’re talking 

about, I think they’re all important to address. But if you want me 

to put one at the top of the list, that’s one that I would put at the 

top of the list. 

The other thing I would say that I don’t think has been mentioned here, what happens in board rooms and businesses across 

America, they are spending far too much time dealing with these 

kind of process issues, and governance issues, and jurisdiction 

issues, and not near enough time on the strategy of their company, 

and where to invest, and where to take risk, and where to place 

capital. 

So, it’s a big time drain. It’s a big energy drain on the leaders 

of businesses, small, medium, and large, across America. So—and 

that’s something that doesn’t get mentioned. Congressman Feeney 

talked about it costing $1.1 trillion. I’m not sure where that number came from, but the only place I could see it coming from would 

be all of the time it cost these boards and businesses, in terms of 

just dealing with this over-regulation, and worrying about lawsuits, 

etc. 

My time is way expired. I will come back in the next round and 

follow-up on my questions. Mr. Kanjorski? 

Mr. KANJORSKI. Thank you, Mr. Chairman. I want to make two 

observations before I start. I am really proud to be—and Mr. Israel 

pointed out that the Speaker and Mr. Carter are Civil War veterans, and I’m proud to be in your presence. 

[Laughter] 

Mr. KANJORSKI. But I want to make a second observation regarding my home State of Pennsylvania. We have two characters here, 

one on the committee, Mr. Scott, who was born in Scranton, Pennsylvania, and had to go south to Georgia to get elected to Congress, 

and Mr. Gingrich, who was also born in Pennsylvania, Harrisburg, 

and had to go south to get elected to Congress, which may indicate 

the flexibility and mobility of the American society. And I would 

tend to think that maybe that speaks well for our society in the 

past, coming up to the future, since we sent two of our great sons 

and bright candles south to help out the— 

Chairman BAKER. Careful now, careful. 

Mr. KANJORSKI.—and lessen the retardation of the South. 

[Laughter] 

Mr. KANJORSKI. All that having been said—nastily, but in a 

friendly spirit—Mr. Gingrich, I appreciate your comments. But you 

know, it’s interesting that you make this observation about SarVerDate 0ct 09 2002 16:14 Nov 29, 2006 Jkt 003538 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 F:\DOCS\30538.TXT HFIN PsN: TERRIE
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banes-Oxley at this point in time, when the Enron trial is in process. 

And listening to your argument, you would think that we all sat 

up here a number of years ago, and said, ‘‘How can we jab a stick 

in the eye of American corporations?’’ And as you recall well, in 

history, that’s not what happened. American corporations became 

abusive, to huge extents—particularly Enron—costing believing, innocent investors billions of dollars of their savings. And I think 

there is a responsibility of the government, as a last resort, to step 

in when there is irresponsible corporate activity. 

To listen to your argument, and the Secretary’s argument, well 

by golly, we should just go back to laissez faire, because 4 years 

is a great time that’s past, we no longer need these protections. It’s 

corporate America that caused Sarbanes-Oxley to be enacted, not 

the reverse. We didn’t want to do it. 

And I guess I worry about as much the protection, not only of 

the investor, but also the worker. I didn’t hear anything arguing 

to whether or not we have a fair return to the average worker in 

American industry, even though we have had this great productivity and all this efficiency that has occurred over the last decade 

or two. When you look at the numbers, to how that has squared 

to the average working American, they haven’t been too successful. 

But let’s look at the real facts of Sarbanes-Oxley. The Stanford 

Law School did a study on security law filings. And they found that 

they dropped from 213 in 2004 to 176 in 2005, below the average 

of the 8-year period from—in 1996 to 2004, of 195 cases a year. 

They attributed that dropping to the success of Sarbanes-Oxley. 

And in—the drop that continued even occurred when there were 

1,200 restatements in the year 2005, and that the errors found in 

those restatements wouldn’t have been found, except for SarbanesOxley. 

Now, we are not dealing with a few errant executives or boards 

here, we are dealing with a pervasive activity in American corporate life that have forgotten fiduciary responsibility and responsible accounting processes, maybe as a result of competition, or 

whatever is out there. I can understand that. 

But it astounds me to hear you argue that, ‘‘Let’s go back to laissez faire with corporate life,’’ when we have just come off, and are 

in the process of a trial now that is horrendous. 

I don’t even like to listen to that trial, because to hear a CEO 

sort of give the German alibi that, ‘‘It wasn’t my responsibility, I 

didn’t know, I was just following orders,’’ and only this one guy out 

here is responsible, even though the chairman and the CEO ran 

the corporation, but it was so important and so well run that they 

didn’t know that somebody was stealing money and cooking the 

books, and that caused the collapse of, I think what, the fifth largest American corporation in the United States. How many other 

corporations there are, we really don’t know. 

I would say that I would always favor and would look at—and 

I think Mr. Carter’s suggestion that we evaluate how often we have 

to review 401 areas and how often we have to go, that’s something 

reasonable to look at. We should understand that if something happens every 365 days isn’t necessarily the Golden Rule. Maybe it 

21

could happen every 1,000 days. I don’t know. We should examine 

that. 

But we should have some sort of an indictment, it seems to me, 

of corporate activities in the heydays of the 1990’s and the early 

2000’s, because corporate executives and corporate boards did not 

carry the fiduciary burden that the American investor expected. 

And certainly, even today, they don’t carry the responsibility to the 

American worker. And I think anybody who argues against that 

just is looking with a jaundiced eye toward everything for capital, 

and nothing for the participants of capital in our system. And I 

would just hesitate to think that should be our world. 

The other point I would like to make is I have heard so much 

about this litigation. You know, again, I am aware, and I would examine litigious activity in our system. But you know, it’s very 

funny. I didn’t hear anybody talk about advertisement of drugs, 

and the horrendous expenditure of the pharmaceutical industry in 

selling drugs. 

But, Mr. Gingrich, you referred to maybe stopping the advertising of litigation or lawyers. I may indicate to you that that was 

Chief Justice Warren Burger, who was appointed by Republican 

President Richard Nixon, who came up with that brilliant idea. I 

never did support it, and think it was a foolish decision, and I 

would reverse it tomorrow if we want to get, again, another layer 

of government into this system. 

As far as—as the trial bar and litigation, you know, if somebody 

comes up with a better system of protection, I would certainly look 

at it. But doing away with the trial bar, outlawing class actions, 

putting them aside, that’s only going to turn the less responsible 

in corporate life loose to carry on. 

I appreciate your testimony. I think you—certainly, Mr. Speaker, 

you always give great ideas, and we appreciate them. Mr. Secretary, I know from whence you come, philosophically and politically, and we appreciate your activity now in your new role. Mr. 

Carter, as a former Marine, we sort of give him special reaction 

here, the best of the best. And I shouldn’t say that, because I don’t 

know what you—you look like a Marine too, so maybe I’m not 

being a fair guy. 

But I think that one of the things I’m proudest about with the 

chairman of this committee, subcommittee, and this committee as 

a whole, is it’s one of the most bipartisan committees of the Congress. We do not try and politicize these issues. I, for one, have 

really searched my 20 years here on this committee, to do what is 

right, and appreciate the magnificence of the American capital system. 

But I always understand that there is a tendency—I think Mr. 

Carter and I talked about it yesterday—sometimes greed occurs. 

And I don’t know how we cut it out, how we contain it. But we 

have to watch it, because the money, Mr. Secretary, that you are 

talking about today of investors, is basically pension and 401(k) 

money of American workers. And we just can’t afford to cut irresponsible leadership loose. 

So, if you have suggestions of what we can do, and get the same 

standards that the Stanford study indicates the success of SarVerDate 0ct 09 2002 16:14 Nov 29, 2006 Jkt 003538 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 F:\DOCS\30538.TXT HFIN PsN: TERRIE
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banes-Oxley has brought, I am all for it. But unless we find that, 

I am not for laissez-faire corporate activity. Thank you. 

Chairman BAKER. The gentleman’s time has expired. Anyone 

care to make a response? 

Mr. CARTER. To your list, I would add two things. We need to set 

a date starting when we can harmonize accounting standards right 

now. Something is supposed to happen in 2009, but I do not believe 

that 3 years from now is going to be sufficient. 

And second, I would urge the committee to ask the accounting 

oversight board and the SEC to determine the feasibility of our 

proposal, which is to have materially significant risk items put into 

the 404 requirement. 

Chairman BAKER. Thank you. Anyone else? Mr. Speaker? 

Mr. GINGRICH. Two things. First of all, since I am not up for reelection, on behalf of Mr. Scott I want to say he is an able representative of Georgia, and should not be viewed in his campaign 

for re-election as being an export from Pennsylvania. I think you 

are running a very delicate line there. 

I say, although I am proud to have been born in Harrisburg, 

there is a delicate line in the South, as I am sure the chairman will 

be glad to share with you in detail. 

Second, the only observation I make about Sarbanes-Oxley is if 

you go back and look at the original estimates of what it would cost 

small businesses to implement section 404, I believe they are off by 

a factor of 50. And that is the one section of Sarbanes-Oxley I specifically thought is really worth your looking at, and either finding 

a carve-out for small businesses below a certain size, or doing 

something—and then the suggestion of making it optional below a 

certain size. 

And then the market would say to those small businesses either, 

‘‘I understand I am taking a slightly greater risk because you’re not 

complying with 404, and I will buy the stock,’’ or, ‘‘I am not going 

to buy the stock, so you better comply with 404.’’ But as it currently exists, it’s a very anti-entrepreneur, very anti-start-up. 

The only other comment I would make, Mr. Kanjorski, is that to 

the degree we kill jobs, whether it’s through litigation or through 

other devices—you know, France now has, for people under 30, the 

French have a 24 percent unemployment rate. And if you don’t 

have jobs, you can’t help workers. 

One of the reasons I so strongly favor your looking at stock options again is because stock options, historically, have been one of 

the ways that everyday workers suddenly become very successful. 

And you see this in a number of parts of American life, where over 

a 10 or 15-year period, they are dramatically rewarded for having 

invested in a small company. Again, I’m talking about stock options 

for start-ups, and for relatively small companies, and not for large 

corporations. 

But thank you so much for engaging us today. 

Chairman BAKER. I thank the Speaker— 

Mr. EVANS. Yes, let me just—I hope in my remarks I didn’t suggest that I am ready to go back to a laissez faire kind of attitude. 

I mean, in terms of Sarbanes-Oxley, I think it accomplished some 

great things, which—one of the main ones is it put a white hot 

light on the boards of directors of companies all across the country, 

23

and gave them a clear, clear message as to what their fiduciary responsibility is to the people who own the company, which are the 

shareholders and the workers, and the people you talk about. I 

couldn’t agree with you more. 

I think one of the attitudes that too often gets into the management structure of companies is that they own the company. They 

don’t own the company, the shareholders own the company. The 

workers own the company. And I want a white hot light on the 

boards of directors, knowing that they have the responsibility to 

protect those shareholders’ interests who own the company. 

So, agreeing with Speaker Gingrich, I couldn’t agree more. I 

mean, what—you know, I am here talking about steps I think we 

can take to make sure our economy does continue to grow and create jobs for young men and women across this country, because I 

don’t think we have any more important responsibility than to do 

that. 

But in terms of Sarbanes-Oxley, I think it has accomplished 

some great things. There is this one area of 404. As to what it does 

to stifle entrepreneurship and small businesses because it puts 

such a heavy burden on them, I think that’s an area that can be 

looked at. 

Chairman BAKER. I thank the gentleman. Mr. Feeney? Excuse 

me, is it—Mr. Hensarling, I’m sorry, is next. 

Mr. HENSARLING. Thank you, Mr. Chairman. Gentlemen, each of 

you, in your testimony, I believe raise the specter of the loss of 

global competitiveness of the American capital markets. But I am 

curious what the implications of that loss of competitiveness is. 

If we do not change the way we do business here, what does 

America look like in—15 years from now. Not unlike Dickens’ 

‘‘Christmas Carol,’’ the Ghost of Christmas Yet to Come, just how 

healthy is Tiny Tim 10 years from now? What does this mean for 

job creation, entrepreneurship, creation of family wealth, and our 

standard of living? 

And I believe, starting with you, Mr. Carter, I think you actually 

raised the specter that we could actually see greater risk and less 

transparency among investment opportunities for average Americans if they choose to diversify their portfolios with overseas holdings, if I read your testimony right. So why don’t we start with you, 

sir? 

Mr. CARTER. That’s correct, you would see that because you are 

not protected with our set of rules and regulations when you invest 

outside the United States. 

This is especially important as we shift the pension burden away 

from companies to find benefit plans to the individual. We have 93 

million Americans who own stocks and bonds, and they must be 

given a wide choice of flexibility for their investments. As we narrow that, we hurt our ability to have people set aside money for 

their retirement in adequate investments. 

Mr. HENSARLING. Let me turn now to my fellow Texan, Secretary 

Evans. Do you have a view on this? 

Mr. EVANS. Well, you know, I think it is important for us to create the environment here so that the investors of this country have 

the opportunity—vast opportunities. 

24

One of the trends that does concern me is the one that Marshall 

referred to. Lately, we are seeing more and more capital go into 

these private equity funds, and those private equity funds are typically for the larger investors and more sophisticated investors, and 

it takes away from the opportunity for the average worker to have 

a wide array of investment opportunities. 

So that is another reason I think it is so important that we kind 

of maintain a friendly kind of environment here for companies to 

list on our public exchanges. So anything that we can do to accomplish that, I think, is wise. 

Mr. HENSARLING. Speaker Gingrich, let me turn to you, and let 

me first say for a number of us here, that you continue to enlighten 

and inspire. And for that, we appreciate you, sir. Your views on 

this question? 

Mr. GINGRICH. Well, look, I think you are raising a very important question. And I do think hearings matter. And I would encourage, on a couple of the topics that may not be right for legislation, 

that this subcommittee look at very aggressive hearings. Because 

they do set a record that matters. 

And let me pick up your observation about 15 or 20 years from 

now. I believe we are actually entering a period of enormous challenge to this country. And several people mentioned at the beginning of this hearing comments about worker training, comments 

about education, comments about return to the folks who are working all their life, in terms of their pension funds. 

And I think we have to recognize that the system we inherited 

from the Second World War is not going to carry us through a 

world in which China and India and Japan are direct and aggressive competitors. When you get to a real-time, worldwide, global financial system, money flees risk. And so, if you have a high-risk 

litigation system, money is just going to leave. If you have a system 

in which you have rules that are so burdensome that it’s not the 

right place to build the next factory, the next factory is not going 

to go there. And one of the tests that Congress should set for itself 

on a regular basis is, ‘‘What are the ground rules?’’ 

And let me give you an example out of today’s headlines. We 

have spent 30 years making it harder to build oil refineries in the 

United States. And now we are shocked to discover that we don’t 

have refineries. Well, at some point we should have had Congressional hearings that raised your kind of question, which is if we 

keep doing this, what’s the net result going to be on the price of 

gasoline? Oh, it’s going to be a lot higher. 

Now, nobody offered the Higher Gasoline Amendment, but they 

created that by the way in which they established an entire series 

of energy patterns which have made it harder to produce energy, 

harder to refine energy, harder to move energy in the United 

States. 

I just want to say what you are doing in this hearing is the forerunner in the financial services world, of the energy mess we’re in 

right now. Because if we continue to assume that the United States 

is going to continue to inherit the most successful economy in the 

world, there is going to be a point in the not-too-distant future, 

when we’re going to have our lunch eaten by our competitors. 

25

Mr. HENSARLING. Specifically on page 11 of your testimony, you 

reference that, ‘‘Congress needs to assess how to pre-empt any Sarbanes-Oxley litigation time bomb,’’ which is fairly strong language. 

Can you add a little more detail to what you see in your crystal 

ball, as far as this time bomb is concerned? 

Mr. GINGRICH. Well— 

Chairman BAKER. And let me just add, for process purposes, it’s 

the gentleman’s last question, as his time has expired. But please 

respond. 

Mr. GINGRICH. Okay. Since you have cited my testimony, I have 

to comment. Let me just say again, I want to encourage you to look 

at Peter Wallison and Alex Pollock’s works at the American Enterprise Institute on this topic. And you are presently going to have 

James Copland talk to you along the same lines. 

The point that has been made is, for example, securities class ac- tion settlements increased on an inflation-adjusted basis from $150 

million in 1997 to $9.6 billion in 2005. Sarbanes-Oxley creates an 

entire new series of presumptions of sue-ability, and sets an entire 

new series of benchmarks. And anybody who has watched—and 

these things become—they are evolutionary. So whatever happens 

this year is not going to happen the same next year. 

There are a set of trial law firms who are engines of litigation, 

who have strategic sessions that say, ‘‘Here is how, over the next 

5 years, we will maximize our number of lawsuits.’’ 

If you take that track, and then you follow it up with the fact 

that one of the rules in Sarbanes-Oxley allows the bond holders to 

go after the equity value of the stock holders for any non-compliance, and that there is an emerging industry of exploiting any technical mistake in filing late in order to exert the ability to basically 

swap capital from the equity holder to the bond holder. That’s 

going to lead to an entire second round of litigation on top of the 

current litigation. 

So, I do think that it is worth your while to hold some hearings, 

specifically on the degree to which Congress is about to inadvertently dramatically increase the amount of litigation. 

Mr. HENSARLING. Thank you, sir. 

Chairman BAKER. All right. The gentleman’s time is expired. Mr. 

Meeks, did you have a question? 

Mr. MEEKS. Thank you, Mr. Chairman. I am sorry, I was in another committee, and I didn’t get a chance to hear all of the testimony. I am just trying to catch up by reading some real quick now, 

so I am not repetitive. 

So, I guess I will first ask Mr. Carter, being that you are a great 

New York Stock Exchange, with the recent merger of the New York 

Stock Exchange and Archipelago, I am wondering—you formed a 

nice group. Is the company now—do you believe it’s well positioned 

so that you can compete with other international competitors? 

Mr. CARTER. It will be, over the next 6 weeks, as we do a secondary offering of stock, and produce the capital that we need to 

compete in the world market as the stock exchanges around the 

world consolidate. My answer would be yes, we are positioning ourselves to be a player. 

Mr. MEEKS. Right. And let me ask to anyone in particular—to 

anyone, and maybe to Speaker Gingrich, since you brought up secVerDate 0ct 09 2002 16:14 Nov 29, 2006 Jkt 003538 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 F:\DOCS\30538.TXT HFIN PsN: TERRIE
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tion 404—I, along with Congressman Foley, have been running 

around, and trying to get the word—and hear from businesses in 

regards to, particularly, section 404. 

One of the sections—I think it might have been as NASDAQ—

it was an offer with maybe some of the small businesses, of having 

a random audit, as opposed to everyone being—they thought that 

that might drive down some of the costs, in a similar style that 

maybe the IRS does random audits now. 

So, I would wonder—I direct the question to you, Speaker Gingrich, but then I would like to hear the comments from Secretary 

Evans and Mr. Carter, also. 

Mr. GINGRICH. Thank you. I think I actually quoted you earlier 

in this hearing on the—my only observation is that there is a huge 

difference in public risk between a multi-billion dollar corporation 

which, if it goes sour, carries enormous risk with it, and a very 

small—you cited a company whose market cap was $91 million in 

another subcommittee, and pointed out that they are spending $4 

million in trials for drugs, and $1 million in compliance. 

When you are at a $91 million risk level, the level for certification—particularly in a setting where, as I said earlier, the original estimates of cost were off by a factor of 50. And so, I would either look for some special carve-out for smaller businesses, or some 

kind of ability to get to a much more simplified, much less onerous 

process, or, as has been proposed, making it voluntary for smaller 

businesses, because the market will then test and say either, ‘‘I 

trust your current level of accounting, and I will invest in your 

stock,’’ or, ‘‘I won’t.’’ But there is not a huge risk there. 

And so, we have sort of taken a gigantic hammer to a very small 

business, when in fact, what you may need at that level is a much 

easier and simpler process. 

Mr. EVANS. The only thing I would add to that—and I think 

those are some excellent ideas—is that I think that we can give 

some thought to stepping over the accounting firms and going directly into the companies, and telling them what is—what represents appropriate internal accounting controls. There is too much 

dialogue between the accounting firms and the oversight board, 

and not enough dialogue between kind of the oversight board and 

companies. 

If the companies are hearing directly from the oversight board as 

to, ‘‘Here is what would encompass internal accounting controls,’’ 

it seems like, to me, they could get themselves in better position 

to make sure they have those internal accounting controls, as opposed to the oversight board saying, ‘‘Okay, accounting companies, 

here is what represents internal accounting controls,’’ and then the 

accounting companies trying to go in and say, ‘‘Okay, here is what 

we understand our internal accounting controls.’’ 

Mr. MEEKS. Let me just ask one quick question that—it’s off the 

Sarbanes-Oxley just for a second, just a trend that I am noticing 

that affects—because I’m trying to make sure that we get as many 

minority financial companies involved, also. 

There seems to be a trend, where there are private equity firms 

that are taking—that are buying out public firms, and then they 

are going private again. And there was a period of time where I 

saw there was a growing trend among smaller minority investment 

27

banking firms, but with this new trend, it seems as though there 

are less minority firms being able to get involved in the financial 

markets. I was wondering whether anyone had any comments in 

regard to that, and how we could fix that, if at all, so that we could 

have more minority firms that are involved in the financial services. 

Mr. CARTER. Well, some of the major minority firms, like Blalock, 

generally get into most of the underwritings, and most companies 

now realize that they need to have these firms in their 

underwritings. But I don’t know—I have no solution to the issue 

of private equity or venture capital excluding those firms. 

Chairman BAKER. Unless there is further response, the gentleman’s time is expired. Anyone else wish to speak to that issue? If 

not, Mr. Campbell, did you have a question? 

Mr. CAMPBELL. Yes, if I may, Mr. Chairman. 

Chairman BAKER. Please proceed. 

Mr. CAMPBELL. A brief question. I, at one time, owned dozens of 

securities. And last year, at one point, I—the post office actually 

had to call and come by and deliver about a 2-foot stack high of 

lawsuit things, shareholder lawsuits where I was—and I was looking at all of these, versus the number of securities that I owned, 

and realized it was something like 60 or 70 percent of every security I had ever owned in that period of time had been sued. Getting 

to—and obviously, as a—on my behalf, as a shareholder, without 

my knowledge or consent. 

You have all talked about it. And it is clearly an issue. What do 

you—what specifically do you—and I think you addressed this a little bit, Mr. Speaker, but what do you think will enable shareholders to still redress grievances when they have genuine, legitimate grievances, but will stop all this—where every single company seems to get sued at one point or another for a manipulation, 

or some other—just simply because there appears to be there is 

something in it for the trial bar? 

Mr. CARTER. My view would be a loser-pays type of tort reform 

would put a big dent in frivolous lawsuits. 

Mr. CAMPBELL. Anyone else? 

Mr. EVANS. No, I would support that, too. And I think that’s a 

very good option to consider. 

Mr. GINGRICH. And I would just say, first of all, that this is a 

topic—you should look at what Missouri has done recently, because 

they passed very extensive litigation reform. One of the things they 

did that is most important is they do not allow the plaintiff to shop 

for the right jurisdiction. 

Because, as you know, there are some counties in the United 

States which you could almost guarantee that you are going to lose 

the case to the plaintiff. And they now require that the case be 

filed in the county in which the incident occurred, unless both parties agree to move. That, by itself, has begun to change things. 

And I couldn’t agree more on loser pays. I would simply add 

that—to go back to—there was an experiment run by a Federal 

judge in San Francisco, who said to the law firm that brought in 

the case, the class action suit, that he was going to put it up for 

bid, because he thought that since the law firm had formed the 

case, it clearly had a vested interest. 

28

At that point, when they put it up for bid, the entire case disintegrated, because in fact, law firms didn’t want to be involved in actually bidding to provide this service on behalf of the people who 

sue. 

I just want to make an observation that is probably obvious to 

all of you, but I think we make it more complicated than it should 

be. The Chinese are graduating vastly more engineers than we are, 

and we are graduating vastly more lawyers. And the reason is, we 

have designed a system which incentivizes young people to think 

that if you want to some day own a baseball team, being a trial 

lawyer is a reasonable road to achieve that. 

As long as it is profitable for these firms to behave in a purely 

commercial manner—this is not about the profession of law anymore; this is about the manufacturing of money by the creation of 

conflict for the purpose of increasing incomes. Nobody should be 

surprised that we are going to have a rapidly growing litigation industry in America, and that the cost is going to be killing jobs, diverting money away from workers, and diverting money away from 

stockholders to lawyers. 

And as a result, other companies are going to look and say, ‘‘Why 

would I want to go to the United States and get sued?’’ 

Mr. CAMPBELL. Thank you. I yield back. 

Chairman BAKER. I thank the gentleman for yielding back. Mr. 

Hinojosa? 

Mr. HINOJOSA. Thank you, Mr. Chairman. I have listened attentively to the information that the panelists have given us, and I 

want to address one of Secretary Evans’ concerns whereas $9 out 

of every $10 raised by foreign companies through new stock offerings were raised in the United States in the year 2000, the reverse 

was true by 2005: $9 out of every $10 raised by foreign companies 

through new company listings occurred outside the United States, 

principally in Europe. 

Also of concern, Secretary Evans points out that in 2005, 23 out 

of the 25 largest IPO’s did not list in the United States. It seems 

to me that this trend is going to have a negative impact on the 

stock market. 

Mr. Carter, with the recent merger of the New York Stock Exchange and Archipelago to form the New York Stock Exchange 

Group, is the new company well-positioned to compete with your 

international competitors? If yes, why? If no, why? 

Mr. CARTER. Yes, it is, because prior to our becoming a public 

company and merging with a company called Archipelago, we only 

had a single product, which was equities. Today, we will be able 

to offer derivatives, options, and fixed income instruments through 

our own floor, or through our electronic crossing network. 

So, one of our strategic objectives was to increase our product offerings, which traditionally had not been offered through the New 

York Stock Exchange. 

Mr. HINOJOSA. Thank you. Mr. Evans, you served as the chairman of the board of regents at the University of Texas, and I remember the tremendous leadership that you showed, helping us 

create more engineers and technicians. So some of your comments 

seem to lean toward education, which I like. 

29

What do you think we could do to encourage more ventures between the public and private sector? Would you support a line item 

in the budget to ensure that we invest both in the K–12 programs 

and then our universities, in order to meet the Administration’s 

goal of an additional 100,000 engineers in the next 5 years. We 

need your help. 

Mr. EVANS. Well, Congressman, you do bring up a very, very important issue. I mean, in my judgement, in terms of America’s competitiveness and global leadership in this global economy as we 

move into the next generations, there is not any issue that is more 

important than the development of scientists and mathematicians 

here in our own country. That’s where innovation is, that’s where 

problem-solving comes from, that’s where creativity is, it’s what is 

driving this economy today, the great focus we put on it in the 

1960’s and 1970’s, and we need to renew that focus. 

I have been to your campus, the University of Texas—Pan American, and you have one of the finest engineering facilities, quite 

frankly, in the country. I compliment you on your HESTEC program. I think that spotlights it well. 

This is, I think, a national debate, a national dialogue, that is 

critical to our economic future and leadership, and it needs to be 

a dialogue between the public and the private sector. And I think 

corporations are, indeed, engaged in this dialogue. 

When I went to the University of Texas—Pan American, I can 

remember many, many, many Dell computers that were in the engineering labs there, and so I think you have companies like Dell, 

and Exxon, and others, that are getting very much involved in 

what they can do to promote science and engineering all across 

America. 

What we do further? I mean, it’s just something we ought to talk 

about and discuss, because as I look at—you know, another issue 

that was brought up—I think it was Congressman Feeney, earlier—I mean, the two single most important issues, in my judgement, for our future are the development of scientists and engineers and mathematicians. The most important problem they have 

to solve is the delivery of affordable available clean-burning energy. 

And so, those two issues are the biggest issues in my mind challenging our competitiveness and the future global economy, and it 

ought to be a joint venture between the public sector and the private sector. Some of that exists today. Can we do more of it? Yes, 

we can. I would suggest more—I would suggest hearings on it, 

quite frankly. What are the additional ways we can get the private 

sector more involved in promoting the education across campuses 

in America? 

Mr. HINOJOSA. I personally want to thank each one of you three 

presenters, because I think that you bring forth a lot of good information. And I just hope that Congress can take it and do something with it. Thank you, Mr. Chairman. I yield back. 

Chairman BAKER. I thank the gentleman. Mr. Feeney? 

Mr. FEENEY. Thank you, Mr. Chairman. Earlier I referred to a 

study entitled, ‘‘The Sarbanes-Oxley Debacle: How to Fix it and 

What We Have Learned.’’ I would ask permission to insert this in 

the record. 

Chairman BAKER. Without objection. 

30

Mr. FEENEY. On page 18—or 11—of that study, by the way, I 

quote the authors, ‘‘A conservative estimate is that the indirect 

costs of SOX are great than $1.1 trillion, and that is before we have 

imposed it on a lot of the smaller companies.’’ 

I really appreciate all three of your testimonies with respect to 

litigation abuse, and the competitiveness of America’s world markets, and would hope that my Chairman Sensenbrenner would invite all of you to come back to the Judiciary Committee, where we 

have primary jurisdiction over those issues. 

But today, I am interested in the regulatory burdens imposed by 

Sarbanes-Oxley, in particular. As Congressman Meeks said, I have 

actually—sometimes with my good colleague—I visited all three of 

the major exchanges in Chicago. As Mr. Carter knows, I have visited both of the major exchanges in New York. I have come to the 

conclusion that Sarbanes-Oxley sections 1 through 403 are, on balance, a huge net plus for confidence in American capital markets. 

It’s just 168 words in section 404 that have resulted in the $1.1 

trillion indirect cost to our economy. 

And I am afraid that, because of those 168 words, we are 

outsourcing America’s world leadership in capital markets. Roughly 

a century ago, that leadership shifted from London to the United 

States. I’m afraid it’s going to the—in the opposite direction. 

Also, private equity is, as Mr. Carter suggested, a very inefficient 

way to raise equity. I wonder, if 404 had been in place, whether 

individual American investors would have ever had an opportunity 

to invest in a company like Dell, or Microsoft, or any of these others that have grown so exponentially, in large part, because of their 

access to competitive markets. 

And when I look at the fact that pre-Sarbanes-Oxley, 90 percent 

of money raised by foreign entrepreneurs in the public forum was 

raised in America, and now 90 percent is being raised overseas, 

when I look at the London stock market that is advertising itself 

throughout the globe, including in America, as a Sarbanes-Oxleyfree zone, I met with Mr. Tsang, the chief financial officer in Hong 

Kong, and asked him whether a Hong Kong entrepreneur would 

consider listing, as he went public, on the American stock exchange. 

He actually laughed at me. Not in an impolite way, but he said, 

‘‘Congressman, there is no way.’’ And I said, ‘‘Is that because their 

lawyer or accountant would advise them not to do so?’’ He said, 

‘‘Nobody would have to talk to their lawyer or accountant to know 

that the burdens of Sarbanes-Oxley would preclude consideration of 

America as a place to raise capital.’’ 

That being said, section 404 is 168 words. Mr. Carter, do you 

know whether Standard & Poors, or Moody’s, the most important 

rating services in the country, avail themselves, or use 404 on a 

regular basis? 

Mr. CARTER. You mean for their own operations? 

Mr. FEENEY. Yes. 

Mr. CARTER. I am— 

Mr. FEENEY. No, no, I’m talking about—evaluate the health of a 

company. Do they rely on 404 in a big way? 

Mr. CARTER. Well, only to the extent, in the annual proxy or the 

annual report, if they saw that the company failed to meet 404 

31

standards, as reported by their auditor, I think it would certainly 

impact their— 

Mr. FEENEY. But they don’t actually pull the 404 report, to your 

knowledge? Actually, I have talked to them, and they say they 

don’t—they have never looked at a 404 report. 

Mr. CARTER. I don’t believe that would even be accessed by them. 

Mr. FEENEY. Another question I have about the burdens that 

have been imposed. Last year, I am told, we had roughly 1,200 restatements of—by corporations in the public arena in America. The 

standard for restatements is that if it’s something that would affect 

investor confidence, there ought to be a restatement, which, of 

course, is expensive, requires a new auditing procedure. 

My understanding is that less than five of those restatements 

had any impact on investor behavior in the markets. And is the restatement proliferation that we’re seeing, in part, imposed because 

of 404 and Sarbanes-Oxley requirements? Really, for any of the 

panelists, if you know. I don’t know. 

Mr. CARTER. I would think it would be more in line with the companies and the CEO’s and CFO’s are concerned about litigation if 

they failed to describe some change in accounting procedures, even 

though it was below the materiality standard, which might be 5 

percent. 

Mr. FEENEY. And finally, Mr. Speaker, you talked about the litigation explosion that’s about to occur, in part, because of SarbanesOxley. 

Do you think it’s not just public companies that are threatened, 

but because of a—trial lawyers will assert that even privately-held 

companies, and even charities—I have them in my office all the 

time—they are terrified that they are going to be the next victims, 

once we set these impossible-to-meet accounting standards that privately held firms and, indeed, charities may be subject to some of 

the same litigation abuses we now see in the public markets? 

Mr. GINGRICH. I think we have managed, over the last 30 years, 

to create a culture in which there—you have to think of it as an 

organic growth. There is a system evolving in which there is a permanent need to find new reasons to sue. Because, otherwise, you 

can’t expand the pool of money flowing into the litigation industry. 

Just think of it as an industry. This is an industry that is in a 

growth curve, designed to find more and more—they’ve got very 

bright, new lawyers that show up at their law firm, and they say, 

‘‘Find the next four reasons to sue.’’ And every year, there is a 

slight expansion of that. 

And part of the reason that I suggested that this subcommittee 

hold hearings on the impact of State attorneys general is the combination of State attorneys general who have criminal power, working with private law firms to, in effect, hunt down and blackmail 

companies, is a very chilling long-term prospect in this company, 

and is an intervention in the national economy by lawyers usurping Congress’s role. 

And I think it’s a—for big corporations, whether public or privately held, for big corporations and for fairly successful people, 

that is a very serious long-term threat if it continues to metastasize into a sort of a cancerous assault on the system at large. And 

it has grown dramatically in the last 10 or 12 years. 

32

Chairman BAKER. The gentleman’s time has expired. I do understand that some of our panelists may have time constraints. We—

don’t let the committee arbitrarily hold you if there is a time obligation, but just let us know, as appropriate. Mr. Speaker has to 

leave at noon, or a little after noon? Mr. Israel, we will go with 

him, then. 

Mr. ISRAEL. Thank you, Mr. Chairman. I would like to follow up 

with Mr. Carter on Mr. Feeney’s concerns about section 404. I understand the notion of trying to exempt small firms from the—what 

some would argue are the onerous burdens of section 404. 

One of the concerns I have is that if you look at the tech boom 

several years ago, small firms became big firms. And I wonder 

whether your suggestion of applying a risk-based review to all 

firms is the answer, and would provide for more consistency and 

reliability. 

As I understood your testimony, this will provide for a 3-year 

benchmark with intensified annual reviews on specific criteria in 

the interim. And I noted from your testimony that you have a very 

good analogy. You talk about the joint counsel on the accreditation 

of hospitals, auditing hospitals every 3 years. Their work is vitally 

important to the protection of U.S. citizens, and their very survival, 

and yet hospitals don’t get audited on an annual basis. 

So, I wondered if you could just help us kind of flesh out the details of the proposal as you— 

Mr. CARTER. Well, I am also—one of my other retired duties is 

that I am the chairman of the Boston City Hospital, which is the 

old St. Elsewhere, from TV days. 

If, in fact, the hospital has some serious lapses in treatment, patient deaths and things like that, then they do get audited, absolutely, every year. 

The proposal that we make, or the suggestion, is that if a company could establish the materiality criteria—that is, something in 

their operating environment, or their business model that produces 

serious risk—those particular items—and it might be anywhere 

from 10 percent for a small company, to 25 percent for a big, multinational company, would be audited every year. 

If, in fact, that audit produced a satisfactory result of internal 

controls, then there would be no 404 baseline audit done that year. 

So that would be year one. Year two, you would do the same thing. 

If, in fact, on year two they flunked that test, they would do a baseline 404. If they passed it, they would still do, at the third year, 

the baseline 404. 

But these are very specific criteria. For example, in a commercial 

bank you might look at the loan losses. And if the company was 

providing less loan losses than their loss experience told them to 

do over 10 years, that would be a materially significant risk, which 

is if loan losses go up, it will impact the revenue. 

The advantage of this, of course, is that it can be done by the 

SEC and the Oversight Accounting Board; it does not require reopening the legislation. 

Mr. ISRAEL. Thank you. And before I yield my time, Mr. Chairman, let me just say that I have an interest in running the traps 

on this with you, and seeing if we can create a dialogue with some 

33

of my constituents in New York, who have complained to me consistently about the straight-jacket approach of section 404. 

Mr. SCOTT. Would the gentleman yield? 

Mr. ISRAEL. Yes, I yield to my colleague. 

Mr. SCOTT. Thank you very much, Mr. Israel. I wanted to get 

this question in, and I appreciate your courtesies before the Speaker has to leave. 

I am very, very much concerned about our debt and its implications on our capital markets for the future. And as you know, I 

would like all of your opinions on this, but I certainly want to get 

to the Speaker before he has to leave. 

As an historian, Mr. Speaker, you fully realize that history is replete with those civilizations and great nations who have gone 

down, and have collapsed for three basic reasons: one, global overreach; the other one is because of a loss of resources at home; but 

the most glaring one is a ballooning debt, especially in the hands 

of foreign governments and institutions. 

On all three of those criterion, it points to that the United States 

is in serious, serious trouble. But nowhere are we in as great a 

trouble as with our ballooning debt, and with that debt, nearly 50 

percent of our debt in the hands of foreign countries and foreign 

capital markets. 

And I want to try to put our hands around this, especially given 

the fact that in the—in this last 5-year period, under the President, 

this present Administration, and under this Congress—couldn’t 

have been without the collaboration of both—we have borrowed, in 

the last 5 years, more money from foreign governments and foreign 

institutions, than all of the preceding 41 Presidents and Administrations in the history of the United States. 

Chairman BAKER. Mr. Scott, you are going to need to give him 

a chance to respond, because he is going to have to get out the door 

here in just a— 

Mr. SCOTT. Right. Would you please give me your response on—

in terms of the significance of this debt, and the peculiar perilous 

position it is placing our country in? 

Mr. GINGRICH. Well, you picked a heck of a question to close out 

my opportunity here. But it’s an important question, and it’s worth 

taking a minute on. 

First of all, I believe, both as a practical long-term matter, and 

as a moral matter, that governments ought to balance their budget. 

And I was very proud of the fact that, in the late 1990’s, we did 

get 4 straight years of a balanced budget, and we paid off $405 billion in debt. And I think that’s a useful—strategically, the Congress should try to get back to that. 

And to do that, frankly, you have to transform the health system, 

because health is 26 percent of all Federal spending, and the fastest growing section. So if you’re serious about getting to a balanced 

budget, you have to really think through transforming health. 

Second, I worry a fair amount about the international debt and 

the degree to which we are spending more overseas than we are 

selling. There are some technical reasons, but that’s partly a function of our strength, because a lot of people around the world want 

to send money here because we’re the best place to invest in the 

world. 

34

But I would say this reinforces Secretary Evans’ point that there 

is no single topic, other than transforming health, that Congress 

could take up that would be more important than the energy issue, 

because a substantial portion of our total balance of trade problem 

is the degree to which we now borrow—buy huge quantities of oil 

overseas, and basically ship the money out. 

So, if you had—if you were back to where we were 30 years ago 

on energy, and if you had transformed the health system, you 

would be very close both to balancing the Federal budget, and having a dramatically healthier—long-term balance—so it is an important topic, and it’s one worth—certainly worth pursuing. 

Chairman BAKER. The gentleman’s time is expired. And let me 

express appreciation to you, Mr. Speaker, for your time and appreciation here today. It has been most helpful. And we will be calling 

on you as we go forward. Thank you very much, sir. Mr. Lynch? 

Mr. LYNCH. Thank you, Mr. Chairman. I want to thank the ranking member as well, for holding this hearing. 

One of the hats that I wear on another subcommittee is on the 

Committee on Government Reform, Subcommittee on Regulatory 

Affairs. And while this committee is looking at a whole set of 

issues, that subcommittee is looking specifically at 404. And I appreciate the Secretary and also Mr. Carter, with their suggestions 

earlier in the hearing. 

It seems like we’re in general agreement on the fact that the effect of 404, generally, is negative upon small and medium-sized 

businesses, which are principally the source of our innovation and 

competitive edge. 

However, being mindful of what the Speaker said earlier about 

the pendulum of scandal, and then the pendulum of reform, it 

comes back the other way. And sometimes it overswings, if you 

will. 

I would like to talk about what our subcommittee thinks might 

be a consensus view. We’re concerned about exemption, and that 

the idea of exempting companies from filing under 404 may be 

overswinging the pendulum a little bit. And we are also concerned 

about what might happen on the voluntary compliance, or random 

auditing scenarios, not that those have been dismissed—I think we 

have an open mind toward it—it’s just that there is some concern 

that we may be eliminating some of the benefits of Sarbanes-Oxley, 

and eliminating some of the transparency and the accountability, 

by going that route. 

But one thing that I think we are hearing from both the panel 

and some members up here is that, first of all, the idea that rightsizing this section 404 so that we perhaps go to the materiality 

standard, and we’re not asking for a full-blown—what I call the full 

employment act for accountants approach, which we have right 

now. If we went to a materiality standard, and went to a biannual 

compliance, rather than every year—and I know, Mr. Carter, you 

suggested every third year; I’m a little worried about that, about 

having 36 months go. Would we be losing some of the accountability and some of the transparency that we’re getting right now 

from Sarbanes-Oxley by moving the reporting out 3 years? 

But if you take those two initiatives in conjunction, one, adopting 

a materiality standard, instead of the everything out of the sun 

35

standard, and you make it every other year, it would seem that 

that step alone would reduce the cost by 50 percent, roughly speaking. Would those two steps, in your mind, be enough to have a significant impact on the cost right now, and the burdens on small 

and medium-sized businesses? 

Mr. CARTER. Well, we would not support exemptions, nor would 

we support voluntary compliance. I think the—don’t be confused 

about the biannual nature and the third year. In each of the years, 

if the materiality criteria were met, you would not have to do the 

in-depth 404 audit. If they weren’t met, you would. And these materiality criteria would be the ones that would impact more than, 

say, 5 percent of the revenue. 

So you certainly could start it on a biannual basis. You get a free 

year, and then you do the 404. I don’t think that would relieve the 

burden as much as the third year approach would. 

Mr. LYNCH. And what about your concerns regarding transparency or accountability? You think it’s still there with— 

Mr. CARTER. Well, it would still be there for those material 

items. We’re talking about material items that are going to significantly impact investor confidence, because they would impact the 

expenses and the revenue. 

Mr. LYNCH. I guess what we’re concerned about is that if something were to slip through the cracks on the materiality standard—

something is at 4 percent, not 5 percent, it falls through, and then 

over 3 years it balloons into something that, a couple of years ago, 

would have been material but you don’t catch it because you’re 

waiting every third year. We’re concerned about things percolating 

up over that 3-year interim, I guess. 

Mr. CARTER. Well, if they didn’t meet the materiality criteria in 

the intervening years, you would, of course, do the full 404 audit. 

This is why a pilot program would be nice, to look at—you could 

sort of crank that up in 6 or 8 months. 

Mr. LYNCH. Yes, okay. Mr. Secretary, your thoughts? 

Mr. EVANS. Well, I don’t have a lot of the facts as to how much 

it would save or wouldn’t save. But let me just say this. I mean, 

the benefits of Sarbanes-Oxley, to me, have been enormous. And 

they have been enormous because the one thing that was lost in 

2001 was trust in the markets. 

Mr. LYNCH. Right. 

Mr. EVANS. I mean, as I travel around the world, people ask me 

all the time, ‘‘How has America been so successful?’’ And I always 

tell them, ‘‘Well, it’s our freedoms, it’s our democratic, capitalistic 

system that creates this incredible environment for competition, it 

leads to innovation, our productivity, and all of that.’’ 

And third, I tell them, it’s ‘‘the American people are good people. 

They’re honest people, they’re decent people, they tell the truth.’’ 

And so, when that last tenet is violated, it hurts the character of 

the country, and it shakes the trust and confidence of the investors. 

And that’s what happened. 

And so, Sarbanes-Oxley stepped in, and however many pages it 

is, and however many items it is, the main thing it did is it restored trust in the markets. And so, now what we have to do—but 

it also, at the same time, created a lot of uncertainty. And that’s 

what I am sure caused a lot of other companies angst as to, ‘‘Do 

36

I want to really get into the middle of that, not knowing really 

what it means to me yet,’’ as a company or as a CEO? ‘‘So maybe 

I will just go to some other exchange until I more clearly understand the impact of Sarbanes-Oxley on my company if I wind up 

listing there.’’ 

So, you have to—you know, you have the trust that I think it restored, and I think that’s evidenced by the remarkable results of 

the stock market over the last 3 or 4 years since then—not all attributable, of course, to Sarbanes-Oxley. We have a strong economy, but the market is up about $5 trillion in value. 

But at the same time, it created some uncertainty, and we have 

got to work through these various areas of it that seem to be somewhat troublesome, like 404. And I don’t have enough of the facts 

to tell you, Congressman, you know, how I would do it, whether I 

would have, you know, every other year review, or make it voluntary, or what I would do with it, but it seems to me that is an 

area that is stifling innovation, it’s stifling entrepreneurs, it’s 

draining energy away from where we ought to be directing energy 

in this country for innovation, and creativity, et cetera. 

So, you know, without the facts, I have a hard time, you know, 

telling you exactly what I would do with it. But I would look at it 

hard, and probably do something with it. But don’t, by any means, 

underestimate the power of Sarbanes-Oxley and what it did to restore trust in our markets at a very, very important time. 

Chairman BAKER. The gentleman’s time is expired. 

Mr. LYNCH. I just want to thank both of the gentleman for helping the committee out with its work. Thank you. 

Chairman BAKER. I thank the gentleman. And Mr. Scott is going 

to be recognized now on his own time for other members. He was 

yielded time by Mr. Israel, so he is entitled to his own time. Mr. 

Scott? 

Mr. SCOTT. Thank you very much, Mr. Chairman. I appreciate 

your courtesies. I would like to ask both of you a question. First, 

let me start with you, Mr. Carter, in terms of the health of the 

New York Stock Exchange. 

Have any New York Stock Exchange-listed companies left the 

Exchange this year? And if so, what were the reasons that the cited 

for leaving? 

Mr. CARTER. There have been a number of foreign countries, nonU.S. companies, companies like Vivendi and Kohl, a company in 

Australia, who left. And they left because of those four reasons: the 

litigation; atmosphere; 404; the depth of their own markets allowed 

them to raise plenty of capital. 

Mr. SCOTT. How would you describe this problem? Do you see 

this as a trend? Do you see this as just a blip on the radar, or do 

you see this as presenting some serious problems for the future of 

the Stock Exchange? 

Mr. CARTER. We don’t view it as an anomaly just for 1 year, we 

view it as a trend, starting in 2000, where we had 9 out of 10 IPO’s 

registered here in the United States, and last year we had 1 out 

of 25. This year I think we need a few more months in the year 

before we see what’s going to happen. 

37

Mr. SCOTT. Now, have any New York Stock Exchange-qualified 

companies that might, in the past, have listed on the market decided to list elsewhere? 

Mr. CARTER. Yes, they have. I think the most significant is the fact that about—almost 200 offerings, raising about $80 million, 

listed—raised the money here, but did not list on a U.S. Stock Exchange. They raised the money through the so-called 144A offerings, which are not available to the average investor. So this is all 

part of a trend. 

Mr. SCOTT. What were the reasons that they decided for that decision, for their decision? 

Mr. CARTER. It was the same— 

Mr. SCOTT. The same? 

Mr. CARTER. Yes. 

Mr. SCOTT. Going to our tax code, outside of the regulations and 

the four reasons you’ve cited, do you believe that our current tax 

code is too complex and cumbersome for foreign companies to navigate? And did the President’s commission on tax reform provide 

any helpful ideas on improving the system? And do you have any 

ideas on how to have a more fair tax decision? One, is it a factor 

in making it more difficult for foreign companies— 

Mr. CARTER. The complexity is a factor, but it doesn’t measure 

up to the top four that we have talked about here today. 

Mr. SCOTT. Okay. Mr. Evans, let me turn to you, please. You recommend that we evaluate whether rules and regulations are effective and appropriate. Can you evaluate the current regulatory 

structure, including Sarbanes-Oxley, on whether they are achieving 

their intended objectives? 

Mr. EVANS. Well, Congressman, I think probably some are, many 

are, and probably many are not. Much of the regulatory structure 

was put in place in the 1930’s. Our economy, obviously, has 

changed dramatically since the 1930’s. So I think there is a variety 

of regulations that do need to be reviewed and thought through. 

We have a tremendous amount of duplication, in terms of jurisdiction, a lot of jurisdictional overlap that I know a number of our 

members have to deal with. We have members that—in the financial services forum—that would have to deal with the OCC and the 

FDIC and the Federal Reserve Board, and the SEC. Others would 

have to deal with the Federal Reserve and the SEC, and then State 

regulatory bodies. 

And so, there can be a tremendous amount of overlap. And in 

some instances, just conflicting regulations. So, you know, I just—

I think it is a regulatory structure that was, as I said, put in place 

back in the 1930’s, and there are elements of it that probably need 

some serious review. Do we need four or five different agencies regulating the same institution? 

Mr. SCOTT. Do you feel that they impose unnecessarily high cost 

burdens on the regulated firms? 

Mr. EVANS. Indeed I do. Now, I can’t tell you—you know, I don’t 

have any specific studies. I can just tell you that, indeed, they create inefficiencies in the marketplace. 

Mr. SCOTT. And you would agree especially on smaller businesses? 

Mr. EVANS. Indeed I would. 

38

Chairman BAKER. And the gentleman’s time has expired, if I 

may, Mr. Scott. 

Mr. SCOTT. All right, thank you, Mr. Chairman. 

Chairman BAKER. I thank the gentleman. Ms. Velazquez? 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Mr. Carter, I heard 

your answer to the question raised by Mr. Meeks and Mr. Hinojosa 

regarding the merger of the New York Stock Exchange with Archipelago, and how you feel that you are in a better position today to 

compete in the ever changing global capital markets. 

The second part of that question is, do you believe, giving as an 

example, the bid that was put out by NASDAQ to purchase the 

London Exchange, do you believe that for U.S. exchanges to remain 

competitive globally, it is necessary to pursue mergers with foreign 

exchanges? 

Mr. CARTER. Well, a merger applies—two companies come together, and a single company is the result. It could very well be 

that some of the strategic advantage could be done by a minority 

participation. And we certainly want to participate in that on a 

global basis. 

Many of the markets in Asia are owned by the government, so 

they are probably not going to allow a merger. But we still have 

plenty of opportunity in this country, too. 

Ms. VELAZQUEZ. Okay. In order, Mr. Carter, to go public today, 

small companies must be more sophisticated and more mature 

than ever before, and they must employ a sizable administrative 

work force to comply with the many regulations they face. 

In addition, other factors have increased the challenges that 

these firms face in accessing the public markets, such as the liquidity demands of institutional investors, as well as consolidation 

within the underwriting industry. Do you believe it is harder for 

small firms to go public today than it has been in the past? 

Mr. CARTER. It certainly is harder, administratively. But any increased difficulty that causes smaller companies to not go public 

has been more than replaced by the large amount of cash available 

through private equity, hedge funds, and venture capital that will 

allow our smaller company to develop the capital resources they 

need in order to expand. 

So, we do see, though, a reluctance of the venture capital people 

to take a company public, and sometimes there is no need for it, 

because they can generate plenty of capital for that company to expand. 

Ms. VELAZQUEZ. Okay. Thank you, Mr. Chairman. 

Chairman BAKER. The gentlelady yields back. Mr. Davis? 

Mr. DAVIS. Thank you, Mr. Chairman. Let me thank the gentleman for being so indulgent with us. Mr. Secretary, as you recall 

from your days in the cabinet, the way these hearings typically 

work is that the people you’re really responding to have long left 

by the time you get to ask your questions. 

So I regret the Speaker is not here, the former Speaker, and that 

Mr. Feeney is not here. And in a sense, my questions would probably be better directed to them. But I do want to get your response. 

Mr. Gingrich and Mr. Feeney talked a good deal about the litigation climate and the securities world in the past several years, and 

they painted a rather dire picture of companies having to spend 

39

enormous amounts of money on legal resources. They painted a 

rather dire picture of our competitiveness being diminished because 

of rising lawsuit and tort presence in the world of securities. 

Every now and then I think it’s always helpful to let facts sometimes get in the way of a good rhetorical argument. If I understand 

the data correctly, we had fewer lawsuits last year for securitiesrelated claims than we did in the average in 1996 to 2004, around 

190-some suits a year to as many, in some years, as 215 or 216, 

down to apparently 175 last year. 

As I think both of you are aware, the Supreme Court issued a 

ruling, I think several years ago, which made it dramatically harder, if not impossible, for litigants to go into State court in securities 

fraud cases. The Supreme Court recently issued a ruling tightening 

the standard of proof in a fraud case by strengthening the causality 

requirement. 

As I understand it, empirically, the damages awarded in these 

cases are less than they were during the period 1996 to 2000. And 

of course all of you are aware of the Securities Litigation Reform 

Act, or something similar to that, was passed in 1995, which made 

its own substantive changes limiting executive liability, and limiting large accountant liability. 

So, the facts do seem to get in the way of an argument. I have 

no doubt whatsoever that every company in America spends a lot 

of its resources on litigation. I practice plaintiff side and civil defense side, so I am certain of that. 

But let me—I should just ask you, Mr. Carter. As you talked to 

investors in the market, as you talked to large companies in the 

market, what’s your response to what I just said, the fact that, in 

many ways, the litigation climate has dramatically improved in the 

last several years? 

Mr. CARTER. I think most people would not agree with you on 

that. They would not feel that the litigation climate has improved. 

The statistics I see show that more institutional investors are 

suing, as opposed to individuals, and second, that the settlements 

have been larger over the last few years. But I would say the average investor would not necessarily agree that the litigation situation has gotten better. 

Mr. DAVIS. Put it in some perspective for me, though, because 

I’m trying to get a sense of exactly what those individuals would 

have Congress do, and what they would have the courts do. 

Congress and the courts have made it harder to bring these 

kinds of cases, from a substantive standpoint and from an interpretive standpoint, by the court. So, what dramatic acceptable direction is there for Congress and the courts to go, given all the things 

I have described earlier, and all the reductions in the scope of liability? 

Mr. CARTER. Well, I would say two things. I think the chairman’s 

idea about loser pays will certainly decrease the number of individual lawsuits. I go back about 20 years to when Senator Dole and 

Senator Kassebaum got tort reform for aircraft manufacturers that 

put a 19-year limit on the fact that you could sue somebody that 

made an airplane that you crashed in. And they tied that litigation 

reform to jobs. I— 

40

Mr. DAVIS. Let me ask you—and I cut you off simply because I’m 

last, and my time is limited. The only problem I have with that, 

Mr. Carter, those of us who have been in the litigation world, there 

are meritorious cases that sometimes lose. And I assume you would 

agree with me, that there are meritorious cases that, for whatever 

reason, still sometimes are not successful. Do you agree with that, 

Mr. Secretary? 

Mr. EVANS. I do—to a certain degree I agree with that. I think— 

Mr. DAVIS. Mr. Carter, I assume you also would agree there are 

certainly meritorious cases that sometimes end up being unsuccessful. 

The reason that I make that point is the notion of losers pay 

sounds attractive to people. But that presumes that a losing claim 

is a frivolous claim and a non-meritorious claim. We know that’s 

not always the case. And we know that a losers pay scenario makes 

it very, very difficult for all but the most well-heeled investors. 

And Mr. Carter, I think you made this point. Claims arising by 

large classes of investors, but smaller classes of investors, the ones 

who would be particularly deterred, it would seem, would be the 

real victims of this losers claim scenario. 

Mr. EVANS. Yes, but the other side of that, Congressman, is 

many, many, many suits are filed that companies are obliged to go 

ahead and settle before they really go through the process, because 

they can’t afford to destroy their image— 

Mr. DAVIS. I agree, it’s a balancing act, and I am just trying to— 

Mr. EVANS. And that’s the other side of it. 

Mr. DAVIS. Right. 

Mr. EVANS. I mean, there are many who say, ‘‘Look, I can win 

this case, there is no question about it.’’ 

Mr. DAVIS. Right. 

Mr. EVANS. ‘‘But I can’t afford to have my company’s name on 

the front page of the New York Times.’’ 

Mr. DAVIS. Yes. I make my last 5 seconds’ observation. I don’t 

dispute that the other side exists, I am simply making that point, 

in the interest of balance. The job of this institution is to realize 

that there is no perfect world, there are legitimate interests on 

both sides of that argument. Mr. Chairman, I think my time is up. 

Chairman BAKER. The defense counsel’s arguments have been 

most educational, but I hesitate to admit that they were not totally 

persuasive as of the moment. I thank the gentleman for yielding. 

Let me express to each of you the committee’s appreciation for 

your participation. I have not had occasion to visit with Mr. Kanjorski, but it comes clearly into view that over the coming months 

we would be well served by a task force of folks of your stature, 

working with the committee on identifying the top 8, 10, 12 items 

on which we might be able to reach agreement—as, for example, 

pursuit of the pilot program that you have suggested here today. 

And so, at a later time, subject to consultation with Mr. Kanjorski, we may get a letter out to you indicating a desire to meet 

more informally. We have done this on the subject of insurance reform in the nature of roundtables, and we found them very helpful 

for our members to be able to get thoroughly engaged in understanding the need and justification for some of the things you have 

41

suggested doing here, with an eye toward perhaps some sort of legislative program for perhaps early next year. 

But we look forward to working with you, we appreciate your 

contributions, and thank you for your time. And when appropriate, 

we will get our second panel of witnesses forward. 

Let me welcome you, and express appreciation for your patience. 

Our hearing has gone much longer than we had anticipated. As you 

know, we will make your full statement part of the official record. 

We ask that you try to keep your remarks to the 5 minutes customary. 

And with that, I would call on Ms. Maria Pinelli, representing 

the Americas Strategic Growth Markets Leader of Ernst & Young. 

Welcome. 

STATEMENT OF MARIA PINELLI, AMERICAS STRATEGIC 

GROWTH MARKETS LEADER, ERNST & YOUNG, LLP 

Ms. PINELLI. Good afternoon, Mr. Chairman. My name is Maria 

Pinelli, and I am the Americas Strategic Growth Market leader for 

Ernst & Young. I am here today to present the key findings from 

Ernst & Young’s third annual global IPO report. I have submitted 

our full report, along with my written testimony. 

Today, I will highlight the major global IPO trends that we 

found. Trend number one: globalization of the capital markets continues. 2005 was a very strong year for the global IPO markets. 

The total capital raised increased by over one-third, from $124 billion in 2004, to $167 billion in 2005, the largest amount raised 

since 2000. 

Although the United States is the dominant player in the global 

capital markets, there are over 50 exchanges competing for $46.8 

trillion of capital around the world. Six exchanges dominate the exchange market: The New York Stock Exchange; NASDAQ; London; 

Euronext; Tokyo; and Hong Kong. But the United States maintains 

the lead in both the amount raised, and number of IPO’s. 

The New York Stock Exchange and NASDAQ alone represent 38 

percent of the total global market cap. For the 10-year period 1995 

to 2005, the New York Stock Exchange grew almost 200 percent, 

and NASDAQ grew almost 250 percent. In spite of this U.S. 

growth, there is legitimate attention focused on the growth of other 

exchanges, such as the Hong Kong stock exchange, which increased 

135 percent in the same 10-year period. 

There are many reasons for the recent growth of non-U.S. exchanges. For one thing, many exchanges are engaging in highly aggressive marketing campaigns to attract new listings. We have to 

remember that these exchanges are businesses, competing for a 

share of a $46.8 trillion market. 

Trend number two: state-owned enterprises tend to list on local 

exchanges. Only one of the top 10 global IPO’s of 2005 listed in the 

United States. The five largest IPO’s were state-owned enterprises 

from China and France. They listed on regional exchanges close to 

their home markets. We predict this trend will continue in the future, driven by emerging capital markets such as China and Russia. 

The largest global IPO in 2005—and ever—was China Construction Bank’s $9.2 billion offering on the Hong Kong stock exchange. 

42

A large investment by Bank of America for $3 billion represents 

the largest single foreign investment into a Chinese company. This 

demonstrates that global and U.S. investors are comfortable investing on less regulated foreign stock exchange, which is an emerging 

trend in the global capital markets. 

Trend number three: America’s reputation as a safe, transparent 

economy results in a higher valuation premium for listed companies. Issuers and investors recognize that U.S. capital markets demand compliance with a gold standard of corporate governance regulations, which result in higher valuations than on foreign markets. 

The New York Stock Exchange states in our report that motivation for most companies listing in the United States is the valuation premium. On average, 30 percent. That accrues as a result 

of adhering to high standards of governance. Foreign companies 

will continue to list in the United States due to this valuation premium, and also because of unparalleled investor sophistication. 

This is one of our strategic competitive advantages over other 

capital markets. And any temptation to lower these standards in 

competition with foreign exchanges needs careful consideration. 

Let me give you an example that says it all. Baidu.com, a Chinese search engine company much like Google, cited market maturity, investor understanding of their business, regulation requirements, and the ability to achieve a corporate identity as an international company as the most notable criteria in deciding to list in 

the United States. 

Our future reports will continue to monitor the trends and activities of IPO’s around the world, and Ernst & Young will share these 

reports with the committee in the future. Thank you for this opportunity to testify, and I look forward to your questions. 

[The prepared statement of Ms. Pinelli can be found on page 130 

of the appendix.] 

Chairman BAKER. Thank you, Ms. Pinelli. Mr. James R. Copland, 

Director, Center for Legal Policy, The Manhattan Institute. Welcome, sir. 

STATEMENT OF JAMES R. COPLAND, DIRECTOR, CENTER FOR 

LEGAL POLICY, THE MANHATTAN INSTITUTE 

Mr. COPLAND. Thank you, Chairman Baker. And it’s my pleasure 

to speak before your committee today. It’s an honor for me to follow 

the distinguished panel we just heard from. And I would like to say 

that I would echo many of the sentiments expressed by all three 

of the panelists, and the suggestions that were there raised, in 

terms of litigation reform being a priority by Secretary Evans, the 

schema for obstacles that were raised by Mr. Carter, and the multitude of ideas suggested by Speaker Gingrich for improving our 

litigation system. I would, with one or two slight exceptions, I 

would agree with every one that was raised. 

I direct the Center for Legal Policy at the Manhattan Institute. 

We have been working on civil litigation reform for about 30 years 

now. And last night we had our annual Hamilton Awards dinner, 

where we honor people who are—who have made a long, significant, lasting contribution to New York. It’s named after our first 

Treasury Secretary. So I think it’s appropriate, in the spirit of AlVerDate 0ct 09 2002 16:14 Nov 29, 2006 Jkt 003538 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 F:\DOCS\30538.TXT HFIN PsN: TERRIE
43

exander Hamilton, to consider what’s going on with the U.S. capital 

markets today. 

And we definitely see some disturbing trends. I certainly would 

say that the United States has been and probably, for the immediate future, will continue to be the leader in this area. But in 

terms of initial public offerings, as has been alluded to, there has 

been a precipitous decline in recent times, in terms of overseas offerings here in the United States. 

In Europe last year, the IPO’s were double those of the United 

States, in terms of float, three times those of the United Staes, in 

terms of total offerings, and five times those of the United Staes, 

in terms of the number of overseas offerings, i.e. offerings out of 

the area actually being listed there. So this is a disturbing trend. 

And I think a number of the points made by Mr. Carter are valid 

in looking at the reasons here, particularly new reporting standards here in the United States under Sarbanes-Oxley, and especially the prosecutorial environment involving many of the State 

attorneys general offices. 

But I also don’t want us to neglect the area of litigation. It has 

been highlighted consistently today as an important area. Specifically, from the bankers’ perspective, if you look at figure three on 

page eight of my written testimony, you will see the long-term 

trend lines of filings in securities class actions. There is a large uptick in 2001, with the collapse of the dot-com bubble. What is driving that is a lot of IPO allocation suits. So bankers themselves are 

finding themselves much more in the hook in the U.S. market than 

they used to be. 

And then, secondly, the so-called litigation time bomb that 

Speaker Gingrich alluded to was referenced in the report by Henry 

Butler and Larry Ribstein that was entered into the evidence by 

Mr. Feeney. There certainly are a lot of new avenues for suit that 

have been entered into the risk factor for being listed on an American exchange in the last year. 

I would like to just briefly run over some of the broad tort statistics and securities statistics before I run into the few specific ideas 

I raise in my written comments for consideration by the committee. 

The tort tax in the United States is $260 billion, annually. That’s 

2.2 percent of GDP. You can see the trend lines on figure one on 

page three of my written testimony. And basically, you see that 

since 1950, there has been a four-fold increase relative to GDP, and 

the percentage of our economy consumed by tort from 0.6 percent 

to 2.22 percent. And this is the equivalent of a 5 percent wage tax 

on the economy, bigger than the entire corporate income tax. So it’s 

a very sizable tax burden that we place on businesses and individuals in our society. 

Internationally, if you look at the comparison on page four of my 

written testimony, figure two, Germany, we have about twice the 

tort tax of Germany, three times that of France or the UK. So it’s 

a serious competitive disadvantage. 

Now, in terms of securities filings, as was raised in the previous 

panel, there has been an effort—many of you were, doubtless, involved. If you were here in 1995 in the Private Securities Litigation 

Reform Act, it’s been partly successful, but it certainly hasn’t lived 

up to its full promise for reasons I will explain as I go into the 

44

ideas, I think, that we could really focus on, particularly in the securities area, in getting ourselves improved, in terms of our competitive environment. 

First of all, I would reiterate the notion that a loser pays system 

could be a useful reform. I think many of the concerns raised about 

that system, in terms of access to the courts, are simply not applicable in the securities context, because these involve large litigation industry shops that Speaker Gingrich was alluding to that are 

well financed and diversified. 

I would also add that I think it would be even more useful in a 

mass torts context than in a securities context. I know that’s outside the scope of this committee, but that’s where you really see the 

proliferation of large numbers of individual weak claims overwhelming defendants’ ability to defend against those claims. 

The second thing I wanted to bring up is the failure of the lead 

plaintiff provision of the PSLRA to control abuse. In particular, I 

focus in my comments on the potential that we have seen for public 

State employee pension funds to use those provisions and act as 

lead plaintiffs. 

And because these are often controlled by political actors who are 

influenced by or receiving money from the trial bar, the potential 

for mischief that I outline in my report is great. We have seen it 

in New York. The Louisiana Fund that I mention in my report has 

been notorious, as has been CalPERS, and several others. 

So, I think we need to look at keeping employee pension funds 

out of the lead plaintiff business and/or secondly, doing what 

Speaker Gingrich alluded to. This is the practice formerly employed 

by Vaughn Walker, district judge in San Francisco, and that is 

having auctions for class counsel in securities class action cases. 

I can discuss this more under questioning, but I think it’s an 

idea that deserves a lot of attention. It was ruled not in compliance 

with the PSLRA by the ninth circuit. Judge Alice Kazinsky wrote 

that opinion. So I think he has probably got a pretty good case, in 

terms of the language of the statute of the PSLRA, but I think an 

auction process deserves serious scrutiny. 

And then, finally, the pleading standard that was heightened 

under the PSLRA has been adopted inconsistently across the circuits. We have seen the higher standard that was used in the ninth 

circuit being effective in weeding out frivolous suits, and conversely—and adding a higher percentage of strong suits. 

Unfortunately, a lot of the securities cases have started moving 

into other jurisdictions, as you would expect. So adopting that 

heightened pleading standard specifically in the statute could go a 

long way, I think, to deterring some of the weaker securities suits. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Copland can be found on page 

77 of the appendix.] 

Chairman BAKER. Thank you very much, sir. I appreciate your 

comment. Our next witness is Mr. Lawrence G. Franko, professor 

of finance, University of Massachusetts, Boston College of Management. Welcome, sir. 

45

STATEMENT OF LAWRENCE G. FRANKO, PROFESSOR OF FINANCE, UNIVERSITY OF MASSACHUSETTS-BOSTON, COLLEGE OF MANAGEMENT 

Mr. FRANKO. Thank you very much, Chairman Baker and committee members, for the opportunity to testify. My name is Lawrence Franko. I am the author of a recent study on U.S. competitiveness in the global financial services industry, which is referenced in my written testimony, and is available on the worldwide 

web under that title. 

We have heard today discussion of many threats and concerns 

about U.S. competitiveness in global financial services. I don’t 

think we should forget about these threats and concerns, but my 

view is that we should also not forget our strengths, and the remarkable position from which we start. 

As Representative Kanjorski mentioned earlier, the importance 

of American firms in the world financial services industry is really 

quite remarkable. Indeed, the U.S. position in the most dynamic 

and rapidly growing segments of the industry is even more so. 

There have been many references to IPO’s, and how some of 

those—many of those recent ones—have taken place outside of the 

United States. But it is worth noting that U.S. investment banks 

and brokerage houses dominate not just U.S., but international 

capital market transactions, globally. U.S. investment banks easily 

account for two-thirds of the worldwide underwriting of these 

IPO’s. 

Our money management institutions and mutual funds manage 

well over half of the world’s pension fund and personal financial assets. Far more than half of the world’s hedge fund—indeed, 85 percent or so of the world’s hedge fund, venture capital, private equity, 

derivatives, and risk management activities are conducted by 

American-owned and managed firms. 

And again, even when these activities occur overseas, as in London, frequently they are conducted by American enterprise. 

The numbers would be even greater were one to count not just 

U.S.-owned institutions, but the major U.S. activities, some of 

which are of global scope in their own right, owned by foreign, predominantly European, banks and insurance companies. The United 

States has global leaders in traditional banking and insurance, but 

it is noteworthy that U.S. global dominance and capital markets 

has arisen and accelerated as a result of the move toward new 

modes of financial intermediation, asset gathering, and risk management in our domestic markets. 

I list a number of driving forces of this development in my testimony. Let me just highlight a few of them. First, we should not forget the post-World War II development of the prominence of the 

U.S. dollar in international transactions. Part of the development 

of trust in the United States and U.S. capital markets is the brand, 

the U.S. dollar, and the fact that people have confidence in the U.S. 

dollar that they do not have in other currencies. 

Is it not somewhat ironic that when Saddam Hussein was pulled 

out of his spider hole, he was carrying a briefcase filled with pieces 

of paper that had the picture of Benjamin Franklin on them? 

Franklin is probably the most viewed American of all time, well 

46

ahead of even Colonel Sanders, even in places like Japan and 

China. 

Second, I think we should note the early U.S. encouragement 

given to funded pension plans, as opposed to relying primarily on 

government pay-as-you-go transfers. There was much mention of 

U.S. debt earlier. But by far the largest elements of U.S. debt are 

the unfunded liabilities of programs like social security and Medicare. And I would hope that, at some point before my children and 

grandchildren have to start paying much higher taxes, that Congress would revisit how private pension plans might be given even 

more encouragement. 

Third, we had an early development of the securities culture 

here, where regulation and competition interacted to produce a 

large domestic market in which publicly quoted, professionally-governed, transparency-oriented firms are the norm, rather than the 

exception. 

I have lived and worked in many countries around the world. 

And one of the major differences between the United States and 

many other countries is that we do not have large numbers of family firms, State firms, who are entrenched and secretive, and who 

do not provide the kind of transparency that our markets do. I 

think it makes a big difference, in terms of why we have been so 

successful as an economy, as opposed to other countries. 

I will mention the public policy implications, the regulatory implications. Other people have stressed this. We should do nothing 

that moves us back and away from the confidence of the publicly 

quoted transparent, professionally governed business model, which 

we have more than any other country in the world. 

I might also mention the declining protection given to incumbent 

banks and insurance companies from capital markets competition, 

compared to other countries, another element of our business environment that makes us rather distinctive. And I also want to mention skills, knowledge, which has been mentioned earlier. 

There is a good deal of talk about people training for science and 

engineering and mathematics. As a professor of finance who is all 

too aware that some of my brighter colleagues came out of much 

more mathematically-rigorous traditions and training than I did, 

just because one has studied physics doesn’t mean one can’t make 

a contribution to risk management. Quite the contrary. And that 

matters a lot for our position. 

The United States has often been the first market for financial 

innovations ranging from mutual funds, to hedge funds, to big 

bangs, to public security offerings on a large scale, to providing 

rights for minority shareholders and many others. Other countries 

gradually realized that they needed those capital markets, and 

their capital markets developed in a way that was similar to a pattern that the United States had experienced earlier. One of the reasons for the dominance of U.S. investment banks and securities 

firms is that by the time other countries realized they needed a 

capital markets culture, our companies had already developed unassailable strengths. 

What does this mean for regulation? Well, I would echo many of 

the conclusions and recommendations that have been made earlier 

today. We should not get bogged down by the complaints about 

47

Sarbanes-Oxley. Perhaps there are parts that need to be refined, 

but we should remember goals, even when we are preoccupied by 

details. 

Congress makes laws, and many laws are highly detailed and 

complex. Ultimately, however, maintaining and strengthening the 

U.S. global capital market position means maintaining our reputation. Our brand is not just transactions, efficiency, knowledge, and 

skill, it is also honesty, transparency, and good corporate and capital market governance. We cannot gain the benefits of this reputation without incurring some costs. 

Secondly, though this item hasn’t been mentioned explicitly 

today so far, I would argue that regulations should look out for the 

interests of consumers and share and bond stakeholders, not for 

those of managers and firms who may wish to entrench themselves 

against competition. 

Had our big bang not occurred first, or had our banks been able 

to continue to shut out out-of-State or non-bank competition, we 

would not have the thriving capital market actors we do today. 

Firms hone their global competitive skills by first competing at 

home. Regulation that protects today weakens firms in the long 

run. We should promote the future, not the past. Thank you for 

your interest and attention. 

[The prepared statement of Mr. Franko can be found on page 98 

of the appendix.] 

Chairman BAKER. Thank you very much for each of your testimonies. I want to start with you, Mr. Franko, relative to your closing comment, and that is the competition is what breeds a domestic 

company’s skills to compete internationally. 

I come at this issue believing that much of our regulatory constraints preclude that type of head-up competitiveness, and to some 

extent, discourages entry into the market by smaller and start-up 

companies. 

Now, I am not expressing the view—an outright repeal of Sarbanes-Oxley. That’s not where I am going. What I am suggesting 

is that the government should never be the determinant of winners 

and losers. That has to come from market-driven forces. Where we 

can identify areas where government rule is, to a great extent, precluding that competitive opportunity, we need to get out of the 

way. 

Not on this topic, but on a related matter, insurance sales. There 

is no reason on earth why a life insurance policy sold in Florida 

can’t be sold in Maine without going through 50 different State approval processes. A clear case where regulatory barriers preclude 

product development which precludes competition, and the result is 

very abhorrently high insurance rates in some States because of 

their local jurisdictional constrictions. 

I think the same can be said of our securities environment. Much 

of the body of law that governs activities was written in the 1930’s. 

I don’t care how bright they were. They couldn’t possibly have predicted a derivatives transaction, or understood counterparty risk in 

1934. 

Going forward, what I am hopeful for is an ability to have an 

arms-length examination of every component of market function, 

determining what regulatory aspect is perhaps not working as inVerDate 0ct 09 2002 16:14 Nov 29, 2006 Jkt 003538 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 F:\DOCS\30538.TXT HFIN PsN: TERRIE
48

tended, or worse yet, a regulation which only adds to cost, therefore 

taking it out of the shareholder pocket, ultimately, and serves no 

public benefit. 

Am I in territory that you agree with, or is that a view that you 

find inconsistent with what you have testified to here today? 

Mr. FRANKO. You are more than in territory that I agree with. 

I completely agree with your sentiments. I empathize with Members of Congress who wish to maintain our competitive system in 

the face of lobbying for privileges and exemptions. Many people in 

the banking and insurance world are surely eagerly lobbying to use 

regulation as a means of maintaining or raising barriers to entry. 

I think the more that we can promote competition, the better. 

Speaker Gingrich mentioned work by Peter Wallison. Peter and 

I were college classmates, and I keep track of Peter’s articles and 

comments regularly. In an op ed about 2 days ago in the Wall 

Street Journal, in which he argued that Wal-mart should not be 

prevented from offering banking services, he came up with the 

wonderful sentence, ‘‘People who think they are building walls are, 

in the long run, building coffins.’’ 

One of the reasons I think we do not have more major leaders 

in global banking and global insurance is that for far too long our 

banks and insurance companies were much more interested in 

building walls than they were in innovation and dynamism, and I 

think it has come back to haunt them, because they have lost 

major ground, both to domestic capital market firms and to foreign 

competitors. 

Chairman BAKER. Well, it seems to me rather rudimentary capital markets philosophy that if you have money and you wish to deploy it and create a product or a service and sell it at whatever 

price you may choose, your success is determined by the consumer’s 

willingness to pay that price for that product or service. And if they 

don’t, you are not going to prevail very successfully. And if somebody figures out a better way to make your product at a lower 

price, you are still in trouble. 

Anything that skews that market function from occurring is not 

ultimately healthy for your long-term economy. And Ms. Pinelli, in 

your prepared statement, I was noting that you indicate that the 

U.S. markets represent about 30 percent of market cap, while Asia 

Pacific is at 28 and Europe is at 27. I don’t find great comfort in 

that lead. That’s—in polling terms in a political world, that’s within the margin of error. 

I was taken by—the tone of your testimony seems to indicate 

that things aren’t really that bad, that if you take out the stateowned enterprises that were made private, and take that out of the 

IPO offerings, that really it’s not that big a deal, and that you place 

great value in the regulatory seal of approval on U.S. businesses 

that you believe enables the flow of capital to come into our marketplace. Is that a correct characterization of your testimony? 

Ms. PINELLI. Mr. Chairman, I think, if I can summarize what 

you’re trying to ask me, is we are seeing growth in foreign capital 

markets. That is of concern to us. Yes, it is. 

Keep in mind, the United States, we have capitalized the financial services industry: resources, utilities, and transport industries. 

These organizations in China: the banking system, the energy sysVerDate 0ct 09 2002 16:14 Nov 29, 2006 Jkt 003538 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 F:\DOCS\30538.TXT HFIN PsN: TERRIE
49

tem, they are coming to market for the very first time. If you take 

out the state-owned enterprises in China in the last year, their IPO 

activity is not as compelling as we might think. 

And I believe the question that you are asking is what about the 

traditional businesses, non-state-owned products and services that 

a willing consumer would pay for, how do we stand competitively 

in that area, in that market segment? 

I can tell you that Suntech, for example, the largest entrepreneurial Chinese company, chose to list on the New York Stock Exchange this past year, in 2005, with a $500 million offering. I gave 

you the example of Baidu. 

And I support your comments that that area does need further 

examination, and it’s a trend that we continue to monitor. 

Chairman BAKER. So your—to wrap up your summary of my 

question, that although we should be concerned about market 

dominance, that we are not in a death fight quite yet, that if we’re 

attentive, maintaining appropriate regulatory oversight, do this examination and reduce those things which don’t have public value, 

enabling the free flow of capital to where it can be most efficiently 

deployed, those outside U.S. markets will list in U.S. markets principally because that gives them credibility in the worldwide market 

that they are able to meet our listing standards. 

Ms. PINELLI. And, of course, there is valuation premium. 

Chairman BAKER. Yes. 

Ms. PINELLI. They will come to market and immediately—if, you 

know, we understand the New York Stock Exchange—have a 30 

percent premium. 

But I don’t have the answers, and I share your concerns, and I 

congratulate you on this special committee. The question for me is 

how many more state-owned enterprises, how large will they be? 

Bank of China is coming to market in 2006. It will be massive. It 

will be bigger than the $9.2 billion China Construction Bank. The 

Hong Kong Stock Exchange will then have a large pool of capital. 

They will strengthen their capital market. 

Then the question becomes will traditional businesses outpace—

will that growth outpace that of the United States, and when they 

choose to go to market in the public arena, will they choose the 

United States? Well, today we do have a valuation premium standard. We are seeing signs of very good companies coming to the 

United States because of our investor sophistication, valuation premium, very good corporate governance— 

Chairman BAKER. So the observation would then be as the Asia 

Pacific exchanges grow, and they become perhaps even larger than 

the U.S. capital markets, does an individual need to come to the 

United States to get the valuation premium, or can they list in 

their own marketplace and achieve the same end? 

Ms. PINELLI. Well said. 

Chairman BAKER. Thanks. Last thing, Mr. Copland. I don’t want 

to ignore the observations about litigation reform. I share your 

view, so I don’t necessarily want to replow that ground. 

I want to perhaps discuss with you just a little bit accounting 

generally, and the concerns about the foreign-owned company coming to the United States, and in order to become GAAP-compliant, 

50

having to spend an inordinate amount of time and resources—and 

that’s another weight in making the decision not to come. 

I am an advocate of Extensible Business Reporting Language, 

XBRL, which has now undergone a pilot at the FDIC, and has been 

a successful pilot, and hope to encourage the deployment of that to 

all insured depositories in the near term. 

Assuming we can develop the appropriate taxonomy for private 

operating companies to utilize this—and I understand the SEC has 

encouraged data tagging in its reporting methodologies—that that 

could be a very good way to slide into an international standard 

where you have more real time disclosure of things which are not 

required now by the SEC to be disclosed, but which are of value 

to the investor. 

And secondly, it enables the Mom and Pop investor to be able to 

do comparisons so we don’t get Mr. Campbell’s 14 pages of documents, 14 feet of documents, but rather what you wish to get to 

compare with another entity you wish to compare it with. 

So, it’s, I think, a very helpful tool, not only for the knowledge 

of the investor, but also, ultimately, to enable us to do away with 

quarterly reporting so that you don’t have this internal pressure on 

management to beat the Street every 90 days, which I think has 

been an insidious force in why we got into all these accounting manipulations in the first place. 

Do you have a view of that set of issues? And how do you feel 

we can move, as a committee, in going forward, not necessarily just 

to reach a single international standard, but to enable that capital 

to flow more freely to us, by reducing the accounting concerns? 

Mr. COPLAND. I agree with you, Mr. Chairman. I think the accounting compliance issues are very important, and the ability to—

you know, the extra cost of following the different accounting 

standards is high. 

I also agree with you that the artificiality of the 10Q, 10K sort 

of process is—creates perverse incentives for management that 

aren’t necessarily aligned with shareholders. And— 

Chairman BAKER. Well, for my purposes, we now have a rulesbased retrospective system. And as long as you play by the rule, 

you’re going to be okay. 

Mr. COPLAND. Right. 

Chairman BAKER. I learned that a telecommunications company 

booked its revenue in a current operating quarter the sale of 

broadband capacity on a broadband system which had not yet been 

built. And that was legal. And I knew we were in deep trouble. 

At the same time, if I knew that a company was selling widgets, 

and 9 out of 10 were being returned, or customer satisfactions surveys said I would never walk in your door again, I know which information I would rather have about a company’s performance. The 

old rules-based retrospective, or the customer satisfaction survey? 

I think getting that kind of disclosure to the markets—we seem 

to requite disclosure of an inordinate amount of detail which the 

market has no interest in reading. And I don’t know how we got 

mismatched so badly, but— 

Mr. COPLAND. Yes. I agree with you. I think, frankly, the litigation climate is a large reason why the—this kind of information 

51

comes out there for protective reasons, as well as just excessive 

regulatory compliance. 

In terms of Mom and Pop Investor, I think it’s very difficult for 

the mom and pop investor. You know, I have investments as well. 

I get the piles of statements. You can’t read them, you can’t make 

anything of them, you just try to have a diversified portfolio, and 

hope that the system itself is sound. 

I do think that, you know, that big hedge fund managers, mutual 

fund managers, etc., do read these. And I do think that, therefore, 

you know, there is definitely value there. There is informational 

value, and you want to maximize the ability to get that out on the 

market at the minimal cost. 

And you know, I don’t think we have the equation quite right 

yet, so I think, you know, some of these substantial reforms, over 

time, the real-time ability to disclose information could be very useful. You know, I think we do have to have concerns about what the 

litigation implications might be for companies that are doing that, 

and that’s something I think that we always ought to keep in mind 

in this environment. 

But I do think that, you know, a lot of what you’re saying makes 

a lot of sense to explore further— 

Chairman BAKER. Well, we don’t want to encourage forward-looking statements that encourage litigation. We need to have disclosure without liability. 

Mr. COPLAND. Right. 

Chairman BAKER. For making what is intended to be a good faith 

projection of business direction. But as we go forward, I indicated 

earlier that—to the other panel—that it is my intention, over the 

next several months, to investigate what the agenda ought to be, 

to identify those half-dozen or dozen issues that really need to be 

focused on that would make a significant difference in our future 

competitiveness, because I do have concerns that, despite the fact 

that we are still at 30 percent, we need to be widening the gap, 

not watching it shrink. 

And to that end, we certainly are going to be calling on you for 

your professional insights to help create that agenda. It’s not something that—you know, I’m not going to run out and suggest repealing Sarbanes-Oxley, I don’t want to get folks all excited, but we 

need to look at every aspect, and make an informed judgement 

about, you know, what is warranted and what is justified, in light 

of our current market conditions. 

Mr. Campbell, I didn’t mean to exclude you from our discussion, 

but I want to express appreciation to each of you for your contribution. We will be back to you in writing over the coming weeks. And 

thank you for your participation here today. Our meeting is adjourned. 

[Whereupon, at 1:08 p.m., the subcommittee was adjourned.] 

(53)

A P P E N D I X

April 26, 2006

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