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31–036 PDF 2006

PROTECTING INVESTORS AND

FOSTERING EFFICIENT MARKETS:

A REVIEW OF THE SEC AGENDA

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MAY 3, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–90

(

(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)

C O N T E N T S 

Page 

Hearing held on: 

May 3, 2006 ....................................................................................................... 1

Appendix: 

May 3, 2006 ....................................................................................................... 49

WITNESSES 

WEDNESDAY, MAY 3, 2006

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

Commission ........................................................................................................... 7

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 50

Ackerman, Hon. Gary L. .................................................................................. 52

Kanjorski, Hon. Paul E. ................................................................................... 53

Cox, Hon. Christopher ...................................................................................... 54

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Cox, Hon. Christopher: 

Responses to Questions from Hon. Deborah Pryce ........................................ 67

Responses to Questions from Hon. Emanuel Cleaver ................................... 70

Responses to Questions from Hon. Vito J. Fossella ....................................... 72

(1)

PROTECTING INVESTORS AND 

FOSTERING EFFICIENT MARKETS: 

A REVIEW OF THE SEC AGENDA 

Wednesday, May 3, 2006

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:05 a.m., in room 

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

Present: Representatives Oxley, Leach, Baker, Pryce, Castle, 

Royce, Lucas, Ney, Kelly, Paul, Gillmor, Biggert, Shays, Fossella, 

Kennedy, Feeney, Hensarling, Garrett, Pearce, Neugebauer, 

Fitzpatrick, McHenry, Campbell, Frank, Kanjorski, Maloney, 

Gutierrez, Velazquez, Watt, Hooley, Sherman, Meeks, Lee, Moore 

of Kansas, Capuano, Clay, Israel, Baca, Matheson, Scott, Green, 

and Cleaver. 

The CHAIRMAN. The committee will come to order. Consistent 

with Rule 3(f)(2) of the Rules of the Committee on Financial Services of the 109th Congress, the Chair announces that he will limit 

recognition of opening statements to the Chair and ranking minority member of the Full Committee, and the Chair and ranking minority member of the Subcommittee on Capital Markets, Insurance, 

and Government Sponsored Enterprises, or their respective designees, to a period not to exceed 16 minutes, evenly divided between the majority and minority. 

The prepared statements of all members will be included in the 

record. The Chair will make an exception for the gentleman from 

California in this case. The Chair recognizes himself for an opening 

statement. 

Good morning. We are here today to hear from a former colleague and good friend, Securities and Exchange Commission 

Chairman Christopher Cox. Nine months ago, Chairman Cox was 

sworn in as the 28th Chairman of the SEC, and he assumed the 

responsibility of directing the Commission in its responsibilities of 

overseeing the capital markets and protecting investors. 

As a former securities lawyer, Chairman Cox was a natural selection for that post, and an excellent one. And in making this appearance to discuss the priorities of the Commission, Chairman 

Cox returns to our hearing room, where he once sat as a member 

of this committee. 

Chairman Cox takes the reigns of the Commission through a dynamic time for our capital markets. The New York Stock Exchange 

2

has merged with Archipelago Holdings. The NASDAQ has merged 

with Instinet, and has taken a 15 percent stake in the London 

Stock Exchange. Retail investors are investing in a wider range of 

security products than ever before. And by almost all barometers, 

the American economy has recovered well from the corporate scandals that shook investor confidence several years ago. 

In the wake of these scandals, this committee shepherded 

through the House legislation to reform corporate governance and 

accounting oversight. One of the goals of the Sarbanes-Oxley Act 

was to strengthen the financial reporting of our public companies. 

Although it is difficult to quantify the benefits of this legislation, 

it is clear that investors once again trust our capital markets. The 

Dow Jones industrial average hit a 6-year high just yesterday. 

I must commend the efforts of the Commission in overseeing the 

execution of the mandates contained in the Act. It is true that the 

implementation of the Act’s internal control requirements has been 

more onerous than originally predicted. However, it is critical that 

we allow our regulators to rectify the implementation difficulties 

that public companies and their auditors face. 

In this regard, I am encouraged by the efforts that Chairman 

Cox and the Commission have made, and continue to make, in engaging in discussions with public companies and auditors about 

these internal control requirements. 

Following up on last year’s roundtable, next week the Commission and the Public Company Accounting Oversight Board will be 

hosting a roundtable on internal controls to discuss second year experiences with these provisions. Following that initial roundtable, 

both regulators issued additional guidelines relating to the internal 

control reporting requirements. 

The Commission will also soon be taking into consideration the 

recommendations of its Advisory Committee on Smaller Public 

Companies, created by the Commission to assess the regulatory 

burdens smaller public companies face. Again, I am pleased by the 

proactive efforts of the Commission. 

I also want to commend Chairman Cox for his recent initiatives 

to enhance the financial reporting in our public companies. Realizing that the heart of our capital markets is timely and accurate 

disclosure of financial information, Chairman Cox decided to make 

this financial information more understandable and accessible to 

investors. 

This past December, Chairman Cox, along with Robert Herz, 

Chairman of the Financial Accounting Standards Board, announced an initiative to reduce the complexity in financial reporting. This effort includes revising outdated and complicated accounting standards, as well as working towards the convergence of international accounting standards. 

In addition, Chairman Cox’s advocacy of the use of Extensible 

Business Reporting Language, or XBRL, has the potential to empower millions of investors with better financial analysis. 

And finally, I would like to mention one area of reform which 

this committee has championed since the corporate scandals a few 

years ago. The credit rating agency became a focus of Congressional interest because the dominant rating agencies had rated 

WorldCom and Enron investment grade just prior to their bankVerDate 0ct 09 2002 16:59 Dec 07, 2006 Jkt 031036 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 F:\DOCS\HBA123.000 HFIN PsN: TERRIE
3

ruptcy filings. This committee and the capital markets subcommittee, under the leadership of Chairman Baker, have held a 

series of hearings focused on the lack of competition, accountability, and transparency in the credit rating industry. 

Congressman Fitzpatrick has introduced legislation, H.R. 2990, 

that would bring more competition, transparency, and oversight to 

this industry. I am hopeful that this committee can work in a bipartisan manner, and with the Commission, to make this reform 

a reality. 

We had our field hearing in Philadelphia that was, I think, very 

instrumental in moving this issue forward. I look forward to hearing from our distinguished witness, the Chairman of the SEC, on 

these and other Commission initiatives. And I yield to the gentleman from Massachusetts for an opening statement. 

Mr. FRANK. Thank you, Mr. Chairman, and I am pleased to welcome our former colleague, and to express my admiration for the 

work he has been doing. I think that he has shown how you can 

be an effective and very admirable chairman. It is a body that had 

some fractures before, and I think he has provided a useful kind 

of continuity, and has been faithful to his mandate as a law enforcement officer, which is, of course, one of his primary jobs. 

I want to begin by expressing my agreement with you, Mr. 

Chairman, on the Sarbanes-Oxley law. I believe that it is appropriate that we look to the Commission for any kind of improvements that you would expect. No one passes a law, particularly a 

law breaking new ground, and one that deals with a lot of complexity, and expects it to remain unchanged. 

And I would hope that—I know that the chairman understands 

this—if there are changes that he and his fellow commissioners 

think appropriate, I think—I believe that there is now authority for 

them to make appropriate changes, in terms of the administration. 

If they wouldn’t, they should obviously feel free to come to us, and 

we can work in a cooperative manner. 

I do not think we should be correcting—and I don’t think this 

committee would be inclined to go in wholesale exemptions, but improvements in the method, taking into account the impact of entities of different sizes, that would seem well within the scope that 

the Commission has, and I would hope that they would exercise it, 

and I expect that they will. 

The next issue I want to get to, Mr. Chairman, is the question 

of executive compensation, and as you know, we have discussed 

this. I have a letter that has been signed by all of the Members 

of the minority, which invokes Rule 11 of the House Rules. Under 

Rule 11, when a hearing has been called on a particular subject, 

the minority, if it is not given a chance to have other witnesses, 

can invoke Rule 11, and have an additional day of hearings with 

witnesses that it wishes to call on a subject related to the hearing. 

And we are exercising our right to do that, specifically with one of 

the matters where the Commission is in the process of taking some 

very important steps, and that is executive compensation. 

I have written in support—as have many others—of the proposed 

rule by the Commission on executive compensation. I have sponsored legislation which parallels what the Commission does. In 

4

some respects, goes beyond what the Commission would do in other 

respects. And it’s not clear that they have the statutory authority. 

And it is clear that we have the statutory authority, although 

under this Administration, it is not always clear that when we 

have statutory authority and exercise it, anything will result from 

that, because the President may just decide to ignore it. But that 

is probably less likely to happen where the SEC is involved. 

And what we have done is to say that there should be, published 

by every public corporation, all the information relevant to judging 

the compensation of the top number of executives—depending on 

the size of the corporation—including what happens in case of a 

bail-out, including what happens in case they get incentive pay and 

it turns out—as, for instance, happened with Fannie Mae—that the 

incentive pay appeared to have been granted inappropriately, because the targets that were supposed to be hit were not really hit. 

We ask about pensions. We want all that information made public. And that—we are very close to what the SEC is proposing—

they haven’t acted on it yet—but we also ask that it be put to a 

shareholder vote. 

We are not proposing in our legislation that any corporation be 

told by the Congress or anybody else what it can pay the chief executive. If the stock holders of Corporation X want to buy the newspapers of some billionaire in perpetuity, they can do that. Maybe 

if we get a particularly modern billionaire, they can pay for his or 

her Internet subscriptions, and finance his or her blogs. That’s all 

up to the stockholders. We just think they should know that they 

are doing it. 

We have had problems in this country where we have seen buyouts, mergers, and payments to the CEO’s followed by a reduction 

in workforce. We have seen problems where CEO’s get large 

amounts of money while pension funds are underfunded. I think 

those things are in grave error in a number of ways, but one of the 

things we should be very clear about—and this is one of the things 

that affects this committee—I think most of the people on the Financial Services Committee think that there is in the country 

today too little trust in the economic system, too much resistance 

to trade, too much suspicion about the implementation of information technology, and too much resistance to international involvement in our economy. I agree with some of those views, and it’s 

gotten too far. 

But people need to understand it’s not simply that this descended on the American people. It is a reaction to trends in this 

economy of growing inequality. And when people read that the 

economy is doing well, but their wages in real terms have not gone 

up, and their pensions have been put at risk, when their health 

care may be declining in what they get, when they get laid off, and 

then they read not only that the economy is doing well, but a handful of people are doing extraordinarily well, receiving far more 

money, almost in perpetuity, than anybody ever thought was necessary, and when this appears to be, as it does look like, by virtue 

of every metric, unconnected to the success of the underlying institution, then those fears are greater. 

5

So, for that reason, Mr. Chairman, we ask that we have this 

hearing, and we hope that we can proceed to action on the legislation that I have talked about. 

The CHAIRMAN. The gentleman’s time has expired. The gentleman from Louisiana, Mr. Baker. 

Mr. BAKER. I thank the chairman. I am delighted to welcome 

Chairman Cox back to the committee. I am very pleased to have 

someone of his abilities and philosophy exercising the responsibility 

of Chairman of the Commission. Someone might translate that into 

I think he agrees with me on a lot of issues. That’s okay. 

But, in any event, I am delighted that he has taken on this responsibility, and to make the point that in the current environment, household wealth is at an all-time high. More than half of 

all homeowners are invested in the markets. And this is despite 

the fact that much of the rules that govern securities activities 

were written in 1933 and 1934. So, I know that the chairman 

shares the view that there is much work to do. 

And although it would appear to some that the goals are not necessarily cohesive, enhancing investor protection while enabling 

markets to function more efficiently are not mutually exclusive. 

I am very pleased to hear of the chairman’s interest in the deployment and broad utilization of XBRL. I am confidant that, as we 

examine our general accounting system, which is now a retrospective rules-based system, that we can work toward a more principles-based forward-looking system. Because the current methodologies require the expenditure of significant resources to provide 

the markets with a great deal of information they, in fact, may not 

use. 

I do believe that holding those accountable for the opportunity to 

become a corporate official is important. I am pleased that the 

Commission has exercised its responsibilities, pursuant to creation 

of the fair fund in Sarbanes-Oxley. I am told, as of today, that the 

collections identified as ill-gotten gains that the Commission personnel are now pursuing exceeds $7.5 billion, with approximately 

$5 billion already having been collected in those enforcement actions. 

That’s a Commission activity that is, I think, extraordinary, and 

is rarely noted. But it’s an instance where governmental officials 

are actually working on behalf of the investors by seizing ill-gotten 

gains, and ironically, giving them back to the people from whom 

they were taken. What a great idea. 

And finally, I want to speak to the need for a broad and ongoing 

continual review. It is clear that in our internationally competitive 

marketplace, that we are slipping in our ability to maintain our 

primacy. The number of IPO’s that have chosen to move offshore 

is a signal, I think, that regulatory review is not only appropriate, 

but significantly warranted. And I do not speak specifically to Sarbanes-Oxley, but the general regulatory world. 

And how we can ensure that, going into the next decade, the 

United States maintains that role of primacy is something I look 

forward to working with the chairman on in the coming years, and 

believe it to be a vital role for our long-standing economic health 

within our great country. And with those remarks, I am pleased to 

be here, and to hear the chairman’s words today. I yield back. 

6

The CHAIRMAN. The gentleman yields back. The gentleman from 

Pennsylvania. 

Mr. KANJORSKI. Mr. Chairman, I join with my colleagues in welcoming the Securities and Exchange Commission Chairman Christopher Cox to our panel. 

While many things in this room may look familiar to him and to 

us, he is now sitting on a different side of the table, and serving 

in a different role. We should, therefore, expect him to have a different perspective on the issues that we once actively debated together. 

I want to commend Christopher Cox for his hard work during his 

first months at the Commission. Like a number of his predecessors, 

he has taken over the helm of the Commission during a challenging time. I have been particularly impressed with his desire to 

improve financial disclosures for investors. 

He has also, himself, faced and overcome personal adversity. I 

hope that he now continues to enjoy good health for many years to 

come. 

As I just mentioned, the Commission presently has before it a 

number of important issues. One of the key issues that Chairman 

Cox is addressing is the implementation of section 404 of the Sarbanes-Oxley Act. I will be particularly interested in hearing his 

thoughts today about how we can improve the ability of companies 

both large and small to assess the accuracy of their internal controls without adding unnecessary costs. 

Another issue that I hope that we will examine today concerns 

the evolving structure of our capital markets. The Commission has 

now approved many regulatory modifications to our national market system and our security markets are now working to implement those changes. 

In addition, a number of our exchanges have gone public in recent months. These privatizations raise questions about the ability 

of exchanges to continue to protect investors at the same time as 

they work to maximize shareholders’ profits. 

As Chairman Cox also knows, the other side of credit rating 

agencies has recently been the subject of considerable discussion on 

Capitol Hill. The Commission has before it a proposed rule to address these matters. It is also discussing a voluntary agreement 

that would improve transparency and oversight of the credit rating 

industry. 

Because we may soon consider a bill in this area, I would, therefore, like to learn more about the status of these actions. The successful and speedy resolution of both rule-making and the voluntary agreement would, in my view, likely preclude the need for 

us to legislate on rating agencies. 

One final issue that has attracted my attention in recent weeks 

concerns exchange-traded funds. These funds are increasingly popular with investors, growing nearly 200 percent between the end of 

2002 and the end of 2005. It seems, however, that the process to 

review and approve ETF applications has not kept up with investor 

demands. 

In fact, I have heard that some applications have remained unresolved for years. I thus want to know what the Commission is 

7

doing to address these matters, consistent with its investors’ protection responsibilities. 

In closing, Mr. Chairman, I look forward to hearing from our 

former colleague. I also hope that he will specifically advise us as 

to what the Commission is doing about the oversight of the rating 

agencies, and the process for approving exchange-traded funds. 

The CHAIRMAN. I thank the gentleman. The gentleman from 

California, briefly. 

Mr. ROYCE. I thank you, Mr. Chairman. I would just like to welcome our good friend, Chris Cox, back to this chamber, my former 

Orange County colleague. And Chris, while your presence in this 

chamber is sincerely missed, your insights and leadership at the 

SEC are invaluable. 

I would just say that I think, on behalf of all of us, we realize 

that for the United States of America, our capital markets in this 

world economy are the niche that’s most important as we compete 

globally, and there are probably few jobs as important as the regulation at the SEC over our capital markets, and your quest to 

achieve proper investor protections and to achieve transparency. 

And so, I think I speak for many when I say this Nation is very 

fortunate to have you at the helm of the SEC, and when I say we 

all look forward to what you have to say here today, Chris. Thank 

you very much for being with us. I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman yields back. We now turn to the 

distinguished chairman, and former member of this committee. 

Welcome back, and we are glad to have you back. 

STATEMENT OF THE HONORABLE CHRISTOPHER COX, CHAIRMAN, UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

Mr. COX. Thank you very much, Mr. Chairman, Ranking Member 

Frank, and members of the committee. I want to thank you very 

much for your gracious words. I want you to know that, on leaving 

the Congress, the most difficult thing for me, the hardest part of 

the transition, is losing contact with the people with whom I 

interacted every day, and it’s very nice to be back among you. 

Thank you for inviting me. 

As you know, this is my first formal appearance in the House 

since I became Chairman of the Securities and Exchange Commission. I am pleased to have the opportunity to report to you on the 

new initiatives that the SEC is taking to protect individual investors, and specifically to improve the financial disclosure that they 

receive. 

Of course, my brief testimony this morning is necessarily focused 

on just some of the top priorities of the Agency. I assure you that 

it does not cover the entire panoply of important issues that the 

SEC is dealing with on a day-to-day basis. For that reason, I am 

happy to be here, not only to answer your questions, but also to 

learn from you about your priorities. 

As a member of the House for 17 years, I was constantly reminded by my constituents of the real world impact of the decisions 

that you make in the Capitol here, every day. Like you, I learned 

the importance of being a good listener, and of remembering that 

8

the common sense of ordinary Americans is the essence and the 

strength of our democracy. 

Most of your constituents are not investment bankers. They are 

not lawyers or accountants. But most of them are investors. It’s a 

stunning fact of life in the 21st Century that a majority of Americans now own stocks. It’s chiefly to serve these people that the SEC 

exists. Our mission, to protect investors, promote capital formation, 

and maintain orderly markets, must always put ordinary Americans first. 

Since making the transition from the halls of Congress to the 

SEC, I have set out to rededicate the Agency’s ongoing efforts in 

virtually every area to the service of the individual investor. 

In keeping with this important focus, I am very pleased to announce this morning that, thanks in major part to the efforts of 

Chairman Oxley, Representative Frank, Chairman Baker, Representative Kanjorski, Representative Fossella, and many members 

of this committee, the SEC is cutting fees on securities transactions 

by $1 billion, starting October 1, 2006. That money will stay in investors’ pockets, exactly as Congress intended. 

This is great news for investors. It means individual Americans 

will have more money for their retirement, for college, for medical 

expenses, and many other important savings objectives. 

As you know, the Investor and Capital Markets Fee Relief Act 

made this dramatic fee reduction possible. On behalf of the Commission and our Nation’s investors, I would like to offer all of you 

who serve on this committee our sincere thanks and gratitude. 

In a well-ordered market, educated consumers can choose from 

a number of competitive products, and find what they want at a 

price that they are willing to pay. But, in order to educate themselves, investors need comparative facts. So, while investors must 

bear the responsibility of learning what they can about their investment choices, the correlative duty of sellers of investment products is to provide the relevant information, and to do so in a way 

that makes that information accessible to, and understandable by, 

the individual investor. 

To more closely match the theory of a well-ordered market with 

today’s reality, the SEC is currently pursuing a number of initiatives to improve the quality and usefulness of disclosure for individual investors. 

These initiatives include: first, moving from long, hard-to-read 

disclosure documents to easy-to-navigate Web pages that let investors click through to find what they want; second, moving from 

boiler plate legalese to plain English in every document intended 

for retail investment consumption; third, reducing the complexity of 

accounting rules and regulations; and fourth, focusing our antifraud efforts, in significant part, on scams that target older Americans. 

The first of these initiatives, making the SEC’s mandated disclosures actually useful to individual investors, is the reason that we 

are so energized about interactive data. I know that interactive 

data is a long standing interest to many on this committee, including, in particular, Chairman Baker. Under my predecessor, Bill 

Donaldson, the SEC got the ball rolling by launching an internal 

effort to investigate the technology. 

9

Since then, we have launched the XBRL voluntary filing program 

as a first step toward getting every company to file its financials 

in an interactive format. 

Consumers of financial data, particularly individual investors, 

have a great deal at stake here. Properly implemented, the move 

to interactive data can dramatically improve the information available to investors about their investment decisions. Mechanically, 

it’s a relatively simple concept. Computer codes tag each separate 

piece of financial information and tell us what it is: operating income; interest expense; and so forth. That way, every number in 

a report or a financial statement is individually identified, both 

quantitatively and qualitatively. 

For individual investors, the result of this innovation is that they 

will be able to quickly search for any information that they want, 

without slogging through an 80-page document. Investors will be 

able to get information fast, easily, and all in one place. And, instead of long, hard-to-read annual reports and proxy statements, 

investors could have easy-to-navigate Web pages that let them click 

through to find what they want. 

With today’s SEC reports, an investor or analyst who is looking 

to compare data on, say, annual capital expenditures of two companies, has to search through hundreds of pages of the filings of each 

company, page by page. Not surprisingly, this time-consuming task 

has created a cottage industry in re-keyboarding the information in 

SEC reports, which are essentially static; that information is tied 

to the page that it’s written on. 

So, that information now is re-keyboarded by commercial vendors, some in this country, some overseas in India and in China, 

so that it can be downloaded into spreadsheets and software. And 

either individual investors or, more likely, their intermediaries 

have to pay in order to get the benefit of the mandated SEC disclosures. 

One hates to think of the human error and the data corruption 

that inevitably occurs in this process. I can tell you because we 

have examined it at the SEC, that the number is unacceptably 

high. Interactive data is a way to fix these problems, and to connect investors directly to the information in a company’s filings. 

Today, the SEC has over 800 different forms. It has been estimated that the SEC might instead have need for no more than a 

dozen. The key to achieving that objective is looking at the data on 

the forms independently from the forms themselves. That’s another 

opportunity presented by interactive data. 

The SEC is strongly committed to interactive data and has taken 

major steps to promote it. We have offered significant incentives for 

companies to file their financial information using interactive data, 

including expedited review of their registration statements and 

their annual reports. 

A number of well-known companies—the list is now 17 and growing—have already begun to lead the way and are filing their reports using interactive data. And, starting in June of this year, the 

Commission will host a series of roundtables focused on the move 

to interactive data. Revolutionizing the way that the world exchanges financial information is a worthy goal, and we intend to 

achieve it. 

10

When it comes to giving investors the protection that they need, 

information is the single most powerful tool that we have. It’s what 

separates investing from roulette. But, if the SEC is truly to succeed in helping investors with more useful information, we will 

need one more ingredient: an all-out war on complexity. 

It’s the SEC’s job to see to it that financial data and qualitative 

information about the issuers of securities are fully and fairly disclosed. But we can’t say that we have achieved that objective if the 

information is provided in a way that isn’t clearly understandable 

to the men and women for whom it’s intended. 

Empowering investors doesn’t just mean better access to information. It means access to better information. Simply put, the 

question is, once that SEC-mandated information is available, is it 

understandable? The answer all too often is a resounding and frustrated ‘‘No’’. 

Exhibit A when it comes to convoluted disclosure is today’s regime for reporting executive compensation. Ordinary American investors have a right to know what company executives are paid, because these investors own the companies. The executives work for 

them. But how can an investor judge whether he or she is getting 

the best executive talent at the best price? 

Too often, the most important parts of total executive compensation are not even disclosed at all until after the fact. 

Three months ago, the Commission voted unanimously to propose an overhaul of the executive compensation rules. The proposal 

would require better disclosure on several fronts. First, companies 

would report a total figure, one number, for all annual compensation, including perquisites. Companies would also outline retirement benefits and payments that could be made if an executive is 

terminated and would fully disclose all compensation to board 

members for the prior year. 

In addition, a new compensation discussion and analysis section 

would replace the compensation committee report, and the performance graph which now comprises mostly boiler plate and legalese. 

Finally, since the purpose here is to improve communications, 

the proposed rules require that all of this disclosure be in plain 

English, the new official language of the Securities and Exchange 

Commission. 

Just to be clear, the Commission does not propose getting into 

the business of determining what is the proper method or amount 

of compensation. It’s not the job of the SEC to substitute our judgment for that of the board. Nor would I, speaking as Chairman, 

subscribe to the notion that all executive pay is excessive. Surely 

many executives deserve every penny they’re paid, and more. Being 

a CEO requires a rarified collection of attributes and skills that are 

in all-too-short supply, and compensation in the market for executive talent can be fierce. 

At the same time, I needn’t cite here the several notoriously public cases of extravagant wastes of shareholders’ assets by gluttonous CEO’s and pliant compensation committees. It’s a testament 

to the importance of this issue that we have received nearly 17,000 

public comments on the proposed rule. That’s one of the highest in 

the 72-year history of the Securities and Exchange Commission. 

11

At the SEC, we look at results from the vantage point of the ordinary investor, and what we’re finding is that, in many cases, 

we’re not getting the right results. It’s not just public companies 

that have a problem using plain English. Our accounting rules and 

regulations also can be complex and difficult to interpret. And, 

when the rules are difficult to interpret, they may not be followed 

very well. And, if the rules aren’t followed very well, then, intentionally or not, individual investors are going to suffer. 

Weeding out the counterproductive complexity that’s crept into 

our financial reporting will require the concerted effort of the Securities and Exchange Commission, the Financial Accounting Standards Board, the Public Company Accounting Oversight Board, and 

every market participant. This can’t be a one-time effort. We will 

have to commit for the long term, but it will be well worth it. 

Finally, let me turn to our efforts to better protect older Americans against financial fraud. Consider these statistics: An estimated 75 million Americans are due to turn 60 over the next 20 

years. That’s an average of more than 10,000 people retiring every 

day. Households led by people over 40 already own 91 percent of 

America’s net worth. Very soon, the vast majority of our Nation’s 

net worth will be in the hands of the newly retired. 

Following the Willie Sutton Principle, scam artists will swarm 

like locusts around this increasing vulnerable group, because that’s 

where the money is. 

On a daily basis, our agency receives letters and phone calls from 

seniors and their caregivers who have been targeted by fraudsters. 

Often the victims have already been taken in. These fraudulent 

schemes may begin with a free lunch, but we want to make sure 

that they end with a very high cost to the perpetrators. 

That’s why we’re attacking the problem from all angles, from investor education, to targeted examinations, to aggressive enforcement efforts. And, because State securities regulators share our 

concerns, we are cooperating in this initiative with State regulators 

across the country. 

Each of the initiatives I have outlined today is part of an overall 

strategy to make the individual investor, the average American, 

the ultimate beneficiary of all that we do at the Securities and Exchange Commission. Our Agency has, for many years, proudly worn 

the badge of investor’s advocate. In the months and years ahead, 

we pledge to rededicate ourselves to that mission. 

I appreciate the opportunity to be back with you today. I want 

to thank you, Mr. Chairman, Representative Frank, and members 

of this committee, for your continuing strong support for investor 

protection and for the work of the SEC. I am happy to answer any 

questions that you may have. 

[The prepared statement of Chairman Cox can be found on page 

54 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Chairman. And again, welcome 

back, and your record on a number of issues in this committee in 

the past have been extraordinary, and your knowledge. And I share 

the views of members on both sides of the aisle when I say that 

your appointment was excellent from many perspectives. 

And also, congratulations on your priorities, particularly the announcement of the $1 billion cut in SEC section 31 fees. We worked 

12

long and hard on that, and we—our colleague, Vito Fossella, it was 

his legislation, and it truly did make a difference in the markets, 

and we thank you for your leadership on that issue, as well as your 

project on interactive data, which has tremendous upside potential 

in molding the technology with the traditional markets. We are 

most appreciative of that. 

I know the gentleman from Massachusetts will have some questions on executive compensation, but that area as well, your leadership is most appreciated here in the Congress. 

Let me ask you, you were participating, were on the committee 

on the legislation that became Sarbanes-Oxley. And I’m just wondering what your view is from the other side of the divide, now 

that you are Chairman of the SEC, what do you think that the general impact has been on the individual investor? 

And secondly, what can we do, working together, to make this 

legislation work even better? 

Mr. COX. Well, you had pointed out that not only was I a member of this committee when we considered that legislation, but I 

also served on the conference committee that negotiated the final 

result between the House and the Senate. And I have to say that 

one of the most interesting parts of my new job is that I am now 

in a position to implement, through regulation, legislation that I 

worked on as a Member of Congress. 

I listened very carefully to Representative Frank’s comments on 

section 404 that he made during his opening statement, and I will 

say that I think, just as Mr. Frank does, that this legislation can 

work—and just as you do, Mr. Chairman. 

There is nothing about the legislation, the law itself, that is inherently onerous, that is guaranteed to cost more than the investor 

benefit—than was intended. It’s a very brief passage. It has a very 

simple concept that is unobjectionable at its core, and that is that 

public companies should have solid internal controls. It should be 

a priority of management, and there should be a way to check on 

that through outside auditing. 

What has happened in practice is that it hasn’t worked exactly 

as you all intended. It’s more expensive, compared to the benefits 

that we all expect to get from that legislation, than it needs to be. 

And so, as the administrators of this law, the people who are bound 

to make it work—we at the Agency want to make sure that we get 

back to what Congress intended. 

There is a great deal of benefit to be had from this provision, it’s 

a very important provision, and we aim to apply it in a sensible 

way that squeezes out the maximum amount of shareholder benefit 

and investor protection at the lowest possible price. We want to 

make sure that there is not a focus on the unimportant. We don’t 

want to drive down cul-de-sacs; we don’t want an instinct for the 

capillary instead of the jugular, but rather we want to make sure 

we’re going after those things that are material to the audit, that 

are material to the investor protections that Congress was interested in obtaining. 

As you know, this is a particular focus for smaller public companies. The Commission has exempted them, temporarily, from compliance since the law was enacted. My predecessor, Bill Donaldson, 

appointed an advisory committee on smaller public companies that 

13

looked at this problem for a year and has just reported. I commend 

the authors of that report for their hard work over a year. I think 

they have done an outstanding job at presenting the perspective of 

smaller public companies, and the special problems that are faced 

there. 

Taking into account all of those recommendations and the many 

other sources of comment that, as you know, we have, what the 

SEC will next move to do is ensure that the application of section 

404—not only by the SEC, but very importantly, by the PCAOB, 

which has written AS2, and the bulk of the specifics that are being 

followed to implement the law—will work together to try and get 

it right. I am absolutely certain that this can be done. 

The CHAIRMAN. That’s encouraging. Do we have any idea about 

the timing of that proposal, specifically the recommendations from 

the small business committee? 

Mr. COX. Well, yes. As I mentioned, they have just provided us 

with their 32 recommendations after 13 months of looking at the 

problem. We are now on the threshold of making a decision about 

whether to extend the current exemption, or instead, to move forward. You can expect a result in the next few months from the 

Commission. 

The CHAIRMAN. Thank you. The—as you know—and this is a bit 

far afield, but I think it’s important because of its affect on the capital markets, and that is the whole CFIUS process. You obviously 

followed the uproar that occurred with the Dubai Ports proposal. 

There is now legislation in the Senate, and there is discussion here 

in this committee about legislation on CFIUS. 

It occurs to me that we need to be very judicious about how we 

approach this issue, because the entire issue of direct foreign investment and its obvious benefits sometimes are lost in emotional 

arguments. 

What kind of advice would you give the committee, going forward, regarding the CFIUS process? 

Mr. COX. Well, as you know, I do not sit as a member of CFIUS. 

I do sit as a member of the President’s working group on financial 

markets, which is chaired by the Treasury Secretary, and it includes the Chairman of the SEC, the Chairman of the CFTC, and 

the Chairman of the Fed. 

The SEC, for its part, has a good deal of international focus that 

is certainly a cognate of the issues that CFIUS is concerned with. 

In particular, because of the anticipated globalization of exchanges, 

securities markets, and perhaps the integration of the trading platforms themselves, we’re focused on potential acquisitions, not only 

of foreign exchanges by U.S. markets, but also the obverse, and 

that is the potential acquisition of our now publicly owned exchanges by foreign interests. 

Because of the importance of those issues, before a real transaction is on the table, before it’s clear whose ox is getting gored if 

we go one way or the other, I’m trying to lay out with my counterpart regulators and other nations—particularly our major trading 

partners—what principles we are trying to achieve with our regulation. 

The national security concerns that are at the center of the 

CFIUS process are the special focus, in part, of the Office of Global 

14

Security in the Securities and Exchange Commission. That’s a relatively modest office, but the mission of that office is shot through 

the review and evaluation that is conducted in almost every case, 

both for offerings and for periodic filings, by the Division of Corporation Finance. 

The CHAIRMAN. Well, of course, you were the first Chairman of 

the Homeland Security Committee, so you obviously have some interesting background, both on the foreign investment side and the 

market side, as well as the homeland security— 

Mr. COX. I am trying to confine myself to comments that I am 

suited to give, as Chairman of the Securities and Exchange Commission, and not lapse into what I might tell you I think about 

CFIUS as a former Member of Congress. 

The CHAIRMAN. Even when we ask for free advice? 

Mr. COX. I will restrain myself. 

The CHAIRMAN. The gentleman from Massachusetts? 

Mr. FRANK. About section 404, I have to say I was talking to the 

chairman about this. I think this is the right time to act on this. 

I think there are dangers of going too far in—what I think is too 

far—in the total exemption for other people, and then not doing 

enough to be flexible. So, I am glad to hear that you are going to 

move on that, and I think that is useful. 

On executive compensation, I very much agree with what you 

said. Obviously, I think we should go further and not set any 

guidelines here, but allowing—making sure the shareholders—I 

again—it’s relevant to Sarbanes-Oxley, too. Sometimes we don’t do 

a balance here. 

During the bad times of MCI, and Enron, etc., there was a lot 

of concern about the extent to which people would feel secure investing their money in the market. You know, one of the things 

that Sarbanes-Oxley has done, people forget that those fears once 

existed. We sometimes tend to kind of pocket the good and forget 

that something happened. 

And the stability of the market, the total confidence people feel 

in investing, is important for our economy, and it’s one of the consequences of Sarbanes-Oxley. So it is important that we improve 

that some without weakening it in any substantial way. 

Similarly, I think we are now at a crisis where what’s happening 

is an increasing number of Americans don’t believe that they have 

the kind of stake that they want to have in progress in this country. There has been kind of a disconnect between the overall GDP 

and their sense of how they benefit. 

And if people in the financial community and the business community don’t understand that the extraordinarily high levels of 

compensation that, in many cases, appear to be unconnected to any 

metric of success, that that’s contributing to this problem. And 

when they see an over-reaction in their minds with regard to 

CFIUS, or excessive resistance to trade, they don’t make these connections. They are missing something. 

Now, let me ask you about a couple of issues that have once bubbled up here, and you now preside over them. One of the things 

I think we don’t do, we sometimes don’t give ourselves credit when 

something good has happened, but we also don’t go back and revisit 

predictions of disaster, when disaster has not come. 

15

I have shared before—it’s not universally shared—that there are 

two phenomena which seem to me to be greatly related in one respect. That is the expensing of stock options in the financial statements of companies, and same sex marriage in Massachusetts. In 

both cases, we heard great predictions of chaos, travail, and tribulation. And I think most people are now pretty bored with both 

subjects. So, I won’t ask you about the Massachusetts one, but— 

[Laughter] 

Mr. FRANK. But I will about stock options. We have now had the 

expensing of stock options. You have had to preside over some 

questions about it. What has been the result, so far, of the requirement that stock options be expensed? 

Mr. COX. Well, you are right that this requirement is just now 

being digested, both by filers, registrants on the one hand, and by 

the markets on the other hand. And I think you are also right that 

the clocks haven’t stopped, and the world hasn’t come to an end in 

consequence of this. 

Indeed, at the Securities and Exchange Commission, in our executive compensation proposal, we have decided to use the same approach that we’re taking with stock options for financial statement 

presentation purposes, and incorporate that into the way that we 

are coming up with one number for an executive’s compensation. 

This will put, I think, increasing pressure on the whole system to 

get it right. 

It is very important, I think, that we keep our eye on the ball. 

The main object here is, to the maximum extent possible, accuracy. 

We want to make sure that the number which, after all, is somewhat notional—it’s a forecast—is as close to reality as possible. 

And so, the Office of Economic Analysis and the Office of the 

Chief Accountant at the Securities and Exchange Commission, as 

well as our Division of Corporation Finance, are going to be working very, very closely together, and interactively with the regulator 

community, to constantly review proposals to do a better job of getting it right. 

Mr. FRANK. People who thought it was going to have a tremendous effect were underestimating the ability of investors to assimilate information. The fact that it might have been presented differently didn’t change the information. 

The common thread in both cases is we have confidence that if 

we just give information to the people who are going to be investing, they will use it wisely. 

One other issue that had been an issue and may come back 

again, a couple of years ago this committee was very seized with 

the notion that it was very important to mandate that mutual 

funds separate the position of CEO from the position of chairman. 

And this was a very important issue, according to this committee. 

I must say I was skeptical that it was going to make much difference, one way or the other. I didn’t see any studies that showed 

it made much difference. But the SEC then adopted it. It was held 

by the courts not to have done it right in the kind of midnight 

judge’s approach. Your predecessor, on his last day in office, readopted it. The courts re-disadopted it, and it’s now back before 

you. 

16

And I am wondering, because this was, at one point, a very hot 

issue for many members of this committee, who believed that it 

was essential to protect investors and the integrity of the industry, 

that we mandate this separation. It is now before you, before the 

Commission. I am wondering what the status of it is. Do people 

still think it’s important? I’m wondering whether you will be hearing from—you know, is this committee still urging you to move 

ahead, or is that another issue that seems to have faded with time? 

Mr. COX. Well, your rendition of the history lays the foundation 

for my answer very accurately. There were two parts, before and 

after the court decision, to my ability to influence this process as 

chairman. 

The first, prior to the court’s decision, came when I announced, 

virtually the day I got to the SEC, that we would implement that 

rule exactly as it was written, as with all rules that had been previously enacted by the Securities and Exchange Commission. 

The second was very recently, when the court asked us to review, 

again, a particular provision of the rule that had been contested because of defects that they saw in our administrative procedure. And 

so we’re going to do exactly what the court expects. The court, in 

its ruling, indicated it would withhold the issuance of its mandate 

for 90 days. We’re due to report back to the court in 90 days. We 

will do so. The professional staff of the SEC and the Commissioners themselves are now discussing exactly how we will take the 

next step. 

Separate and apart from that substantive decision, I am also 

working with the Office of Economic Analysis and the Office of the 

General Counsel to examine the way that we do economic analysis 

of all of our rules. 

You mentioned that you hadn’t seen studies that you were impressed with, contemporaneously with the consideration of this 

issue by the Commission last time around. I think what the court 

has invited us to do is to make sure we avail ourselves of the best 

evidence before we make a decision. So, instead of the fore-shortened process that the court objected to, we will have a very thorough process this time around. 

The CHAIRMAN. The gentleman’s time has expired. The chairman 

of the subcommittee of jurisdiction? 

Mr. BAKER. I thank the chairman. Chairman Cox, I want to point 

out in your initial offer here to lead the Commission in the direction of a plain English disclosure standard that, in your discussion 

of appropriate remedies to excessive executive compensation, you 

spun immediately to the work perquisites, which I found sort of 

contradictory to the plain English standards. You might want to 

think more along the lines of— 

Mr. COX. Perhaps I could have said ‘‘perks.’’ 

Mr. BAKER. That’s probably what would have summed it up. But 

as I understand it, that’s sort of the care and feeding standard of 

an executive. So if you’re doing an executive washroom remodel, or 

the corporate jet, or catered meals, or anything he charges to the 

company, that’s all bundled up so that the shareholder can be appropriately affronted—if that is the proper response—to the total 

package, not just the underlying salary, which some people have 

difficulty in absorbing already, and that the remedy to many 

17

abuses in corporate America is simply a transparency standard to 

disclose to the affected parties that own the company, so that they 

might take whatever action they deem appropriate. And I just 

heartily commend you for the proposed rule, and the direction 

which you are taking. 

Secondly, on the XBRL project, there are two elements of that 

that I want to throw into the mix, as to possible benefits. As the 

taxonomy is more effectively described, that may have the tangential effect of bringing foreign capital in as accounting standards become more harmonized. I am told today that many companies contemplating registering in the United States choose not to do so because of the extraordinary time and expense of coming to our generally accepted standards, and that XBRL may yield that benefit. 

And then, secondly, with regard to the current practice of quarterly income disclosures, I have found that to be a contributor to 

many decisions made by corporate leadership to meet or beat the 

Street. And that, I think, energized, to some extent, some of the 

problems which this Congress and the Commission has had to address. 

By moving beyond the current 8K standard to a more real-time 

material fact disclosure methodology, which is based on an XBRL 

platform, would be, I think, a terrific outcome of this project. So I 

simply want to compliment the Commission for your view on this 

subject, and encourage you to move forward as quickly as is practicable. 

As to the question that I principally wanted to ask before I got 

sidetracked by all this other stuff, I am—the committee has conducted hearings over some period of time relative to the designation system for the NRSRO’s. It’s my opinion; I can’t speak for others on the committee, that that designation system has yielded us 

a very uncompetitive market for all those rating agency operations. 

Congressman Fitzpatrick has introduced legislation which, in essence, creates a registration system as opposed to designation. 

Have you had the opportunity to contemplate which methodology 

might be the most advisable going forward? Or, more particularly, 

if you have had the chance to even review the Congressman’s bill, 

can you opine on your view of that legislation, if you can be that 

specific? 

Mr. COX. I can do both, I think. First of all, I want to take the 

view, as a former Member of Congress, and as the current Chairman of the SEC, that we are going to be very respectful, as an 

agency, of the legislative process of the Congress. So, if the Congress is moving legislation in this area, we offer ourselves as a professional resource for technical assistance, if you seek it. 

We don’t know yet—I can’t know, I don’t think anyone knows, because of our bicameral process—whether there will be legislation in 

the near term. And so, simultaneously with your consideration of 

legislation here, we are, at the SEC, reviewing exactly these same 

questions. 

We are concerned, as are you, with the achievement of the public 

policy objectives of this whole structure. We want to make sure 

that there is competition, transparency, and investor protection. 

Whether or not one or the other of the two models that you have 

described is superior is a question that I don’t think the CommisVerDate 0ct 09 2002 16:59 Dec 07, 2006 Jkt 031036 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 F:\DOCS\HBA123.000 HFIN PsN: TERRIE
18

sioners or, speaking separately, the professional staff, have definitely answered. 

But we are very deep into this process right now. It is the central 

focus for us. And I know for the credit rating agencies themselves, 

who are working on their voluntary framework, that seeing a result 

of this process is vitally important. 

The CHAIRMAN. The gentleman’s time has expired. The gentleman from Pennsylvania. 

Mr. KANJORSKI. Following on the questions of Mr. Baker, I am 

very much interested in what the status is of the rule, streamlining 

the process for approving applications of the nationally recognized 

statistical rating agencies. Is the Commission moving full speed 

ahead, or is there some lag time? 

Because there is—it seems to me there would be no need for legislation, if in fact you are ready or capable of implementing something that is acceptable. 

Mr. COX. Well, the question of whether there is need for legislation to accomplish a specific objective depends, in substantial part, 

on how ambitious you are about restructuring regulation of the 

credit rating agencies. The SEC certainly has, within its existing 

authorities, power to do something. I do not know that we have the 

power to do everything that has been contemplated in some legislation. 

With respect to our own rulemaking, as you know, the SEC actually proposed a rule in March of 2005, to define the term NRSRO 

for purposes of our own rules and regulations. We received 30 comment letters on that rule proposal. The professional staff in the division right now are formulating a recommendation to the Commission as to whether to take further action on that proposal, or instead, an alternative proposal. 

Mr. KANJORSKI. Can you inform us of what the status is on the 

voluntary framework discussions that you are having with the 

credit rating agencies, is that moving forward? 

Mr. COX. It is, indeed. And, as I just alluded to, I think that 

those agencies are, themselves, very anxious to have this process 

move as quickly as possible. 

Our Commission staff are continuing to provide technical assistance to them in that process, in the process of their development 

of a voluntary framework. In fact, I understand that there were 

discussions via teleconference between the rating agencies and the 

staff last week, so this is an ongoing matter for us. 

Mr. KANJORSKI. Very good. It sounds to me like there is a question of whether we’re going to strive for quantity or quality. And 

in a way, your expertise and the Commission’s expertise is far 

greater than the committee in understanding that issue of quality 

and quantity. This, of course, is an ongoing pressing issue before 

the committee, and you’re probably unlikely to indicate to us 

whether we should put our foot on the pedal, or put it on the 

brake? 

Would you give some—I mean, yes, we have 2 or 3 months now, 

potentially, left in this session. Should we move and devote time 

to this effort, or wait and cooperate with the Commission, see what 

the next 2 or 3 months produces, as a result? 

19

Mr. COX. My predecessor testified that, in order to do aggressive 

oversight, the SEC would need greater authorities. What I have 

just told you is that I ought to be as respectful as I can of the separate roles that the legislative and executive branches play. I want 

to be sure that the SEC does not just do its level best, but does 

a superb job of implementing the intention of Congress when it 

comes to administering our statutes. 

So, I—it would be the easiest thing in the world for me, as a 

former Member, to start opining on bills, and telling you what I 

would like you to do. I understand full well the legislative process, 

and the role of this committee and of the Senate Banking Committee. And so I am trying to resist the temptation to offer that advice. We will work with you, either way. 

Mr. KANJORSKI. Thank you. Moving to another subject, I mentioned in my opening remarks the ETF’s applications and the time 

delay. Is it possible, without causing a great deal of expense and 

time, that we get a handle on just how many applications are pending, and how long they have taken with the idea in mind is there 

something we can do to assist in that effort? 

Because I am starting to wonder whether or not, since the products have been on the market for more than a decade, whether 

there is sufficient body of experience now in evaluating the success 

of ETF’s mechanism to standardize the application process, and 

permit a wider variety of products, which seem to be in demand, 

but not being held back. 

Mr. COX. Well, I think I share your premise, your implicit 

premise, that the length of time that it has taken to process exemptive applications is too long. And as Chairman, I am working to 

shorten it substantially. 

The investment management staff—to answer your question—is 

currently working on over 215 exemptive applications. They range 

in complexity from the routine—in other words, applications for exemptive relief that have been previously issued to other applicants—to quite complex questions, such as people seeking authority 

to operate and actively manage ETFs. 

With respect to the age of this backlog, 85 of the 215 exemptive 

applications—or I should say approximately 85—have been pending 

for over a year. The division, under my direction, is taking several 

steps to achieve our goal of improving the timeliness of our exemptive applications process. 

First, the staff is preparing recommendations that the Commission adopt new exemptive rules that would eliminate the need for 

filing at all, certain of these routine exemptive applications, including fund-of-fund applications that are contributing to the backlog. 

Second, we are identifying other rules that the Commission could 

adopt or amend, to further eliminate the need for filing other kinds 

of exemptive applications, such as those related to inter-fund lending, frequent capital gain distributions, and index-based ETFs. 

Third, we have spent considerable resources identifying and moving out in the division applications—or I should say moving out of 

the division applications—involving products such as ETFs, for 

which the applicant has legitimate concerns regarding timing of 

the markets. And we are doubling our efforts to reduce the current 

exemptive applications backlog by identifying those pending appliVerDate 0ct 09 2002 16:59 Dec 07, 2006 Jkt 031036 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 F:\DOCS\HBA123.000 HFIN PsN: TERRIE
20

cations that can be processed promptly, and by providing more 

timely comments on other applications. 

The Acting Director of the Division, Susan Wyderko, is strongly 

committed to the steps. She has exercised a lot of management creativity, and I think she is having great success in achieving the objectives. So I hope that you will have tangible results to see in this 

area very soon. 

Mr. KANJORSKI. Thank you. 

The CHAIRMAN. The gentleman’s time has expired. The gentleman from Texas, Mr. Paul. 

Mr. PAUL. Thank you, Mr. Chairman. Welcome, Chairman Cox. 

I had a question about section 404, but I think you have touched 

on that already, and I don’t know whether you can add anything 

new on it. But I do want to assess the general principle of regulation. 

As you know, I am not a champion of regulation. As a matter of 

fact, I see Federal regulation as nothing more than moving us toward central economic planning, and I think we can make pretty 

strong economic and constitutional arguments against a lot of what 

we do around here. 

Also, on economic terms, we do know that large companies are 

less resistant to a lot of regulation than the small companies, because handling of regulations is much more difficult for the small 

company. And therefore, we have a greater penalty placed on the 

small company. 

We also know that the general rule that when Congress or other 

government bodies regulate, for every regulation, every law that we 

pass, we generally create too many problems. And I think the case 

could be made that the Sarbanes-Oxley bill has had some bad consequences. 

I would like to mention a few things where there has been some 

dire assessments of Sarbanes-Oxley, and I would like to give you 

a chance to refute these, and see whether or not we should refute 

these negative assessments, or move in the direction of reforming 

the legislation. 

First off, I would like to quote from a rather famous economist 

that many of us know about, and that is Milton Friedman. And he 

was commenting on Sarbanes-Oxley and he said, ‘‘It’s terrible. It 

ought to be eliminated. It’s costing the country a great deal. Sarbanes-Oxley says to every entrepreneur, ‘For God’s sake, don’t innovate, don’t take chances, because down will come the hatchet, 

we’re going to knock your head off.’ ’’ Those are pretty strong 

terms. I would never use that type of language. 

And also, there has been other assessment. An economist writing 

in the Wall Street Journal not too many months ago said that it 

is very costly, it has cost public company shareholders $1.4 trillion, 

$460 for every man, woman, and child in the United States. 

And another important aspect of this—and we have seen several 

articles on this—the London stock exchange did a survey of 80 

IPO’s that were coming on to the market. Of those 80, 90 percent 

of the 80 that contemplated American markets versus London, 90 

percent chose to go overseas into the London market. So that is a 

consequence that we either ignore or we have to say these assessments are completely wrong. 

21

There was another study done by Foley & Lardner, a law firm, 

which said that it has increased the cost associated with being a 

publicly held company by 130 percent. These are rather astronomical figures. 

And what would it take for us to assess this, and decide that 

maybe we ought to back off section 404? I certainly would like to 

see the whole section repealed. But do we wait until problems get 

much worse? But if these numbers are true, this is very, very costly 

to us, and as time goes on these costs will increase because we’re 

really still in the early stages of implementing this law. 

Do you have any comments along this line? Or what do you think 

of some of these assessments? 

Mr. COX. Well, I think you have nicely set the table for discussion of the broad impact of what undoubtedly was landmark legislation. The significance of the events that gave rise to that legislation is still before us. The trial is going on in Houston right now. 

And yet, it has been a few years. And so we have had the opportunity to assimilate some of this significant change that Congress 

mandated. 

My considered view is that—considered, in the sense that I have 

now had three calendar quarters as Chairman of the SEC to look 

at this from that perspective—is that there is nothing about the 

law itself, the way it’s written, that should prevent us from being 

wise in its administration so that the benefits that Congress hopes 

to get from it can be obtained, while the costs—the unnecessary 

costs, which are what you’re talking about—can be wrung out. 

It’s not investor protection to cause investors to pay for something they don’t want and don’t need and can do without. What investors do demand are protections for their money, so that their investment will be safer, ultimately yield a higher return. We’ve got 

to distinguish between, in other words, what is worthwhile and 

what isn’t. 

I have a great deal of respect for Dr. Friedman. In fact, when I 

was chairman of the policy committee here in the House, we had 

a board of advisers, and he served ably on it. I have always been 

anxious to hear his perspective on things. 

When he says that Sarbanes-Oxley is terrible and ought to be 

eliminated, I believe he is referring, in a gross sense, to some of 

the pathologies that are being ascribed to the law, which—in as 

much as he is an economist and didn’t serve on this committee 

when we drafted the legislation, I will allow him that kind of generality. But speaking with that generalization, I think we need to 

recognize the difference between what the legislation mandates and 

what’s actually happened. 

When the climate in the board room is anti-risk, when people are 

hunkering down, they’re concerned about a lot of things. Part of it 

was the climate that produced our legislation, and the way that everyone, from litigants to insurers, to the accounting firms themselves, which had been at the center of many of these scandals, was 

reacting. 

And so, I think now that things have settled down a bit, we have 

an opportunity at the SEC—and I have been there for just a few 

months, so whatever costs have been incurred heretofore, be they 

start-up costs, initial costs, capital outlays, what have you, that’s 

22

water under the bridge. I want to make sure, going forward, that 

we do this wisely. And I absolutely believe that we can. 

There are some things, in terms of international competitiveness 

that you alluded to that I think we have to be mindful of. And that 

is, while Sarbanes-Oxley presents compliance issues and potentially disproportionate costs for smaller companies, if you take a 

look at what’s going on in the smaller company market, in 2005, 

close to 100 foreign companies registered with the SEC for the first 

time. That doesn’t get headlines; these are mostly smaller companies. 

So, that’s telling us that we are still an attractive market for foreign listings, and we just need to make sure that we recognize as, 

simultaneously, markets in other countries are becoming more mature and more attractive, and more realistic possibilities as places 

to list—we didn’t always have that competition in the past—that 

the United States of America retains its lead as the biggest, deepest, most liquid capital market in the world, in part because we 

also have the most predictable and safe rule of law and regulations 

that are consistent not only with investor protection, but also with 

capital formation and the maintenance of orderly markets. That is 

our mission. I hope we can do that. 

The CHAIRMAN. The gentleman’s time has expired. The 

gentlelady from New York. 

Mrs. MALONEY. First, I would like to welcome the chairman back 

to the Financial Services Committee, and I congratulate him on his 

appointment and his hard work. 

I appreciate your mentioning the Investors Fee Relief Act, which 

I introduced with Congressman Fossella, and I am very glad to see 

that you’re continuing to cut the fees to reflect the reality of what 

is appropriate to support the regulation. It is very important to the 

investors I represent, and all investors. 

I would like to go back to section 404. In my district, small companies are really concerned about the cost and burden of complying. I know that you are aware of the legislation that has been 

floated by Representatives Feeney and Sessions that would make 

section 404 voluntary for companies with market capitalization 

under $700 million. 

You testified before the Senate that you want one standard, you 

don’t want a different standard for large and small firms, but that 

you would be open to addressing unnecessary costs. 

One idea that was put before the House Financial Services Committee by Marshall Carter, chairman of the board of the New York 

Stock Exchange—last week he proposed that the SEC and the Public Accounting Oversight Board move to a 3-year Sarbanes-Oxley 

section 404 review cycle as a way to reduce regulatory burdens. 

This could be accomplished without having to pass legislation to 

amend the law. Could this proposal help small companies by reducing the cost and the burden of compliance, which is very difficult 

for smaller firms? Your comments? 

Mr. COX. I am very well aware of the proposal advanced last 

week by the chairman of the New York Stock Exchange. That proposal, as well as a wide range of alternatives, is, as you would expect, under very active consideration right now at the SEC, as we 

23

try to make work the discussion we have been having here this 

morning. 

We are also gathering as much data as we possibly can from the 

experience of companies that have already implemented section 

404. And that includes a fair number of smaller public companies 

that, in most ways, are exactly like the companies that have heretofore been exempted. So we have ample empirical data that we 

can avail ourselves of. 

And, as you know, we have this public roundtable coming up at 

the SEC next week that is going to be focused on these very issues 

of full implementation. That’s going to be an all-day affair. If you 

can put it in the context of your experience here as a Member of 

Congress, sitting on the dais at this hearing, we as Commissioners 

are going to be there all day and listen to 50 witnesses. We’re going 

to get a wide variety of perspectives. I think we’re going to get a 

lot of quality data and comment at that hearing. 

Mrs. MALONEY. Chairman Cox, as you know, the securities industry that I represent is very, very concerned about reducing global market access barriers and national treatment barriers. The 

United States is a world leader in providing financial services. 

And although our trade deficit is over $700 billion, in the area 

of financial services our country boasts a trade surplus of almost 

$17 billion, which is very, very important. The industry tells me, 

though, that the barriers that they face prevent them from providing their clients with the global products and services that they 

demand. And they are hoping that you will do everything—and 

that our country, our U.S. trade negotiators, will do everything—

to support the competitiveness of this very important export industry of the United States. 

So, I would like to ask you, do you support the goal of securing 

access to foreign markets for U.S. firms that is comparable to the 

access foreign firms enjoy in the United States? And this access 

would include the ability of our firms—meaning U.S. firms—to supply services from the United States to sophisticated investors in 

foreign markets on a cross-border basis without having to establish 

a commercial presence. I would appreciate your comments on this 

issue. 

Mr. COX. Well, it’s an excellent question, and it tempts me to 

give a very elaborate answer, because I’m so interested in so many 

aspects of this topic. But the way you have put the question, it’s 

susceptible to a yes or no answer, and the answer is yes. 

Mrs. MALONEY. Would you like to elaborate further? 

Mr. COX. Sure. 

[Laughter] 

Mrs. MALONEY. Can we achieve this? Is this competitiveness for 

our financial services markets a priority of our country? Will we 

fight at the table for their ability to sell these products without a 

commercial presence in the country? 

Mr. COX. Yes. Obviously, our trade negotiations generally are the 

province of the USTR and other parts of the executive branch beyond the SEC. But, specifically with respect to securities regulation, the SEC conducts a fair amount of international intercourse 

with our trading partners. 

24

Just yesterday, for example, I hosted Chairman Shang of the 

CSRC, China’s securities regulator, and we executed a joint agreement that is going to permit us to expand substantially the level 

of our cooperation and information sharing. We are very anxious in 

China, as well as in every other country on Earth, to make sure 

that our financial services have the kind of access that we provide 

here to their firms. 

And so, that principle of reciprocity is vitally important to us as 

securities regulators, as I am sure it is to our trade negotiators. 

Mrs. MALONEY. Thank you, Mr. Chairman— 

The CHAIRMAN. The gentlelady’s time has expired. 

Mrs. MALONEY. My time is up. I just want to tell you how much 

I enjoyed working with you on this committee, and your leadership 

on the Anti-Terrorism Insurance Act. And I hope you will continue 

to keep your eye on making sure that vital program is there for the 

American economy. 

Mr. COX. Thank you for your kind comments. I certainly, as I 

said at the outset, miss seeing all of you here more than anything 

else, more even than I miss the work of the Congress, and we will 

have our corner of the counter-terrorism world to maintain at the 

SEC, and I am going to continue to apply myself there. 

Mrs. MALONEY. Thank you so much. 

The CHAIRMAN. The gentleman from Connecticut, Mr. Shays. 

Mr. SHAYS. Thank you, Mr. Chairman, and new Mr. Chairman. 

It’s great, Chris, to have you here. I would like to ask you about 

the 202 rule involving the Investment Advisory Act, and also about 

hedge funds. 

First, with hedge funds, you are requiring, as of February, managers of certain hedge funds to register with the SEC and subject 

themselves to certain reporting requirements. I am interested to 

know the status of this rule—not in depth, but in general. 

Mr. COX. It has just gone into effect. It is giving us the opportunity to gather census data, if you will, about the scope and scale 

of the issue that we face. We have nearly doubled the number of 

registrants as a result of the effectiveness of this rule. We believe 

that—at least we infer—that all of these new registrations are on 

account of the rule. 

And so, I would guess that 9 to 12 months down the road we 

should be in a position to infer something from all of this new data 

that we are gaining about whether, and if so how, additional regulation of the funds themselves is advisable. 

As you know, the regulation, the rule that has gone into effect, 

is focused on the advisers, and not the funds. 

Mr. SHAYS. No preconceptions on where you are headed, just totally open about the data you’re going to get and then drawing conclusions afterwards? 

Mr. COX. Well, I don’t have any preconceptions about the data 

that we haven’t seen yet. Of course we have studied the issue of 

hedge funds, generally. And so, there is at least that preconception, 

if you will. We are not without a background on the issue. And indeed, for a variety of reasons, including the potential retailization 

of hedge funds, the systemic risk, and impact on the markets themselves, not only I, but my counterpart regulators in other countries, 

are watching this like hawks. 

25

Mr. SHAYS. The other area I would like to get into is the issue 

of the Investment Advisors Act and the Securities Exchange Act. 

There is a concern among a number—I represent a huge number 

of financial institutions. And there is a concern of when—if the 

Commission intends to provide some guidance to financial institutions in order to clarify the potential problems with the new 202 

rule, in terms of when are they advisers and when are they just, 

you know, dealing with transactions? 

And the question I am asking is do you see this as a problem, 

and are you hearing that guidance is needed? 

Mr. COX. Well, it is, and I am also hearing that it is. We are very 

busy working on this right now. I am hosting collaborative discussions among the SEC and the bank regulators to implement Regulation B, which I take it is what you’re asking me about. 

It has been a long time since Gramm-Leach-Bliley, since we 

worked on that in this committee, Mr. Chairman. Indeed, it was a 

different millennium than we’re now in. It was 1999. 

And so, it’s about time that we had rules and guidance. I think 

it’s vitally important that we do so. It has obviously been a sticky 

wicket, that’s why it’s taken this long. But I have decided to rededicate the Agency to getting it done, and I am leading those efforts 

personally, getting personally involved in them. 

We are having a series of multi-hours-long meetings to work it 

out, step by step, very patiently. And I think that we can achieve 

a result. 

Mr. SHAYS. You have only been there 9 months, and I marvel at 

the things that you have to be prepared for. Do you feel that you 

are kind of caught up, or do you still feel that you are still in somewhat of a learning mode, in terms of understanding where your fellow Commissioners are, and where your staff is? 

Mr. COX. Well, I have to answer that in two ways. I believe that, 

in part, because of the absolutely outstanding professional staff of 

the Securities and Exchange Commission, it has been possible for 

me to get up to speed on a number of issues very, very rapidly. 

But second, I have to say that you learn some humility in Congress, where you are required to take responsibility for such a 

broad array of different issues. We have all got to dedicate ourselves to lifetime learning. And I certainly am enjoying that opportunity at the SEC. 

Mr. SHAYS. Just one last point. Not a question. I was, frankly, 

surprised to learn the salary of your position. And I just want to 

state to the chairman that I, given all the people in the position 

that the chairman—this chairman here, I just think we need to determine why the salary, frankly, is so low and what can be done 

to raise it up a bit. 

The CHAIRMAN. The gentleman’s time has expired. Does the 

chairman want to respond to that? 

[Laughter] 

Mr. COX. No, I just want to say, Mr. Chairman, that the Congress, if not by design, then by accident has put me as Chairman 

of the SEC in a remarkable position of moral leadership to talk 

about executive compensation. 

[Laughter] 

26

The CHAIRMAN. Well said. The gentleman’s time has expired. The 

gentlelady from New York. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Welcome back, 

Chairman Cox. 

Mr. COX. Thank you very much. 

Ms. VELAZQUEZ. Mr. Chairman, in order 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 that it is harder for small firms to go public today 

than it has been in the past? 

Mr. COX. Well, I have no better source of information than what 

public companies, or companies on the threshold of going public, 

tell us. And there is no question what they’re saying. They are saying that the answer to your question is yes. That is what we are 

hearing from the advisory committee that the Securities and Exchange Commission itself appointed. That’s what we are also hearing from venture capitalists who nurture companies to the point 

where they might become public. 

One can argue the point and say, ‘‘Well, this information is 

wrong,’’ or, ‘‘There is another perspective.’’ And actually, the SEC 

does have a different perspective in many cases. But it’s impossible 

to deny that the people who are in this position, who are themselves smaller public companies or companies on the threshold of 

becoming public, are telling us that, over time, this has become a 

greater burden and a greater expense. 

Ms. VELAZQUEZ. Is there anything that the SEC is doing to ease 

the burden? 

Mr. COX. Yes. And I appreciate the way that you yourself have 

drawn our attention to this issue. On behalf of many of the smaller 

public companies, and the companies that are not yet public that 

I was alluding to, the SEC not only can do something here, but we 

have a very significant responsibility to do something here. 

I know, from firsthand experience, as a member of the Conference Committee, that that’s what Congress intended. The Congress did not intend chaos, we didn’t intend unnecessarily high 

costs. We didn’t intend expense all out of line with the investor protection benefit that it purchases. 

There is nothing in section 404, which is the main focus of a lot 

of this criticism, that mandates that kind of chaos. Instead, I think 

section 404 has a very good idea expressed within it. I think it is 

expressed very economically. It’s not a very long section. 

There are hundreds of pages, on the other hand, in AS2, which 

is published by the PCAOB. The SEC itself has the responsibility 

and opportunity to provide management guidance in addition to 

the auditing guidance that’s provided in AS2. Between the SEC 

and the PCAOB, I am absolutely confident that we can make this 

work far better. 

Ms. VELAZQUEZ. Good. Thank you. The SEC permits smaller 

companies to use simplified forms for reporting on the Securities 

27

Act and the Exchange Act. In order to qualify as a small business 

issuer under SEC Regulation SB, the company must have revenues 

and a public float of less than $25 million. These requirements 

have not been changed since the enactment of Regulation SB in 

1992. 

Since 1992, stock prices have increased significantly, and measurable inflation has occurred. Do you believe it is appropriate for 

the SEC to raise the threshold associated with regulation SB? 

Mr. COX. Yes, I do. And we are preparing to consider a proposal 

at the Commission level that would do precisely that. 

Ms. VELAZQUEZ. Okay. Earlier this Congress, Mr. Chairman, 

Representative Kelly and myself introduced and passed legislation 

modernizing the business development company statute. As you 

may know, modernizing the business development company statute 

is a past recommendation from the SEC’s small business forum, 

and the subject of several previous legislative efforts. 

These enable the SEC to meet its mission to facilitate capital formation. However, these regulations are outdated, which in turn 

limits the financing option for smaller companies, and also hurts 

those that have invested in BDCs themselves. 

With this in mind, is the SEC going to propose new rules this 

year to modernize BDC regulations? 

Mr. COX. Yes. And, in fact, I think that the Commission will be 

ready to consider final action some time perhaps late this summer, 

or maybe even early summer. I want you to know that I certainly 

support modernizing the definition of eligible portfolio company. 

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

The CHAIRMAN. The gentlelady yields back. The gentleman from 

California, Mr. Campbell. 

Mr. CAMPBELL. Thank you, Mr. Chairman. And it’s good to see 

you, Chairman Cox. As the person who succeeded you—albeit it not 

replaced you—in Congress, I want to, first of all, thank you for 

leaving the California 48th Congressional District in such excellent 

shape, and to let you know I drove by your house the other day 

and it hasn’t burned down or anything. 

So I just have one quick question, relative to the complexity in 

financial reporting issue. As you suggested in your testimony, a lot 

of the complexity, certainly in accounting, is driven by having increasingly complex financial instruments and increasingly complex 

financial transactions. 

I understand that you are working on, in the SEC, perhaps principles-based accounting system, and I just wanted to ask how is 

that progressing? Where are you—where is the SEC on that? And 

what is the path from here? What stands in the way, etc.? 

Mr. COX. Well, the SEC, as you know, has a road map to convergence of what is a more principles-based system, IFRS, and U.S. 

GAAP. At the same time, we are also working very closely with the 

Financial Accounting Standards Board in this war on complexity 

that I advertised earlier. I think it’s vitally important for individual 

investors in chief, but also for our whole system. 

And part of that project, I think, is going to open up some of 

these questions that you are raising. 

28

Mr. CAMPBELL. So, as far as the principles-based—it’s still—at 

this point it’s just a matter of discussion and something you’re 

looking at, a principles-based accounting system, or— 

Mr. COX. Well, U.S. GAAP is a very rules-based system. And so, 

as we have discussions with our overseas counterparts about our 

own acceptance of IFRS, as we talk about convergence of those systems, it gives us an opportunity to move perhaps to a more principles-based system. 

Mr. CAMPBELL. Okay. Thank you. I yield back. 

Mr. COX. But before you yield back, I want you to know that, as 

you know, we just bought a new house in your district last year, 

before I knew that the President was going to ask me to do this 

job. So I hope that you can keep going by the house— 

Mr. CAMPBELL. I will keep checking on it. 

Mr. COX. I was there one weekend in 2006, and so— 

Mr. CAMPBELL. I will keep checking on it. And after I have the 

parties there, I will make sure that I clean up. 

[Laughter] 

The CHAIRMAN. The gentleman yields back. The gentleman from 

Missouri, Mr. Clay. 

Mr. CLAY. Thank you, Mr. Chairman, and welcome back, Mr. 

Chairman, and welcome back to the committee. 

There is an outcry among investors that executive compensation 

is too inflated, and that the disclosure of the compensation is too 

vague and confusing, at best. Will your plain English requirements 

apply to executive compensation reports, and do you expect that to 

work, if it does apply to it? Are there enforcement provisions with 

punitive measures if reports continue to be confusing to most investors? And could you elaborate? 

Mr. COX. Yes. The answer to the first part of your question is absolutely yes. All of the revised executive compensation regulatory 

regime is going to demand plain English. And indeed, our ultimate 

goal—not just in the area of executive compensation, but in all information that is distributed to individual investors—is that we 

have plain English requirements. 

Second, with respect to what happens if you don’t follow these 

rules, all of the enforcement authorities that the SEC possesses 

with respect to observance of its rules will apply equally to these 

executive compensation rules. 

Mr. CLAY. Okay. Thank you for that. And I support SarbanesOxley, or otherwise known as SOX, and appreciate how it helped 

to stem the tide of distrust in our financial markets caused by the 

financial collapse of several large corporations. I do understand the 

prohibitive cost to some of our smaller publicly traded companies. 

Additionally, I understand that the second year cost will be less 

costly. 

However, I do recognize the need to make adjustments in SOX 

for the smaller companies. Do you think that it is wise that companies be exempted completely from Sarbanes-Oxley, or don’t we still 

need transparency? Would not the combination of lower costs after 

the first year, and perhaps a less frequent reporting schedule, 

make the process affordable while maintaining these reporting requirements? 

29

Mr. COX. We are considering, as you would expect, a wide range 

of alternatives on improving the implementation of section 404, including those that you mentioned. 

But, with respect to the question of exemption versus applying 

the law in some fashion, I think my own view as Chairman—and 

I need to hasten to add that the Commission has not made a formal decision on this; the Commissioners are all entitled to their 

views, and we are still working this out, so I am not speaking for 

the Commission, but for myself—I would like to see this law applied to public companies for, among other reasons, the fact that 

the law itself seems to contemplate that. The law does not have an 

elaborate exemption provision. It was the intent of Congress, I believe, that these provisions be applied. 

But I also think it was the intent of Congress that they be applied in a sensible way. And I think Congress would be the first 

to recognize, from the wide range of experiences that Members here 

have, that there is a difference between General Motors and Joe’s 

Motors, and an allowance has to be made for that in designing systems to comply with this provision. 

Mr. CLAY. So, in your opinion, it’s proven to be more costly for 

some firms than others? 

Mr. COX. I think there is no question that, proportionately, the 

costs are going to be higher for smaller companies than for large 

companies. Certainly, as expressed as a percent of earnings, the 

impact on a small company will far outweigh the impact on a large 

company. 

Now, whether it should be scaled in exactly that way is another 

question. But we need to know, going in, that proportionately, the 

impact is greater on smaller companies. 

Mr. CLAY. I thank you for your responses. It is good seeing you 

again. I yield back, Mr. Chairman. 

Mr. SHAYS. [presiding] Thank you. And I will now go to Mrs. 

Biggert. Before recognizing her, if I am still here, I need to clarify 

the issue of broker-dealer/financial planner. I am not quite sure 

when I asked my question I did the proper follow-up, and I am just 

going to prepare you for that. 

Mr. COX. I am sorry, I answered a Reg B question, because I 

thought that’s what you were asking about. 

Mr. SHAYS. Yes. I was talking about the broker-dealer, not the 

financial planner. 

Mr. COX. Yes. All right. Do you want to ask that question now? 

Mr. SHAYS. No, I think I will just go to Mrs. Biggert now, and 

make sure that, before we leave, we get that on the record. 

Mr. COX. Okay. 

Mr. SHAYS. Mrs. Biggert? 

Mrs. BIGGERT. Thank you, Mr. Chairman, and thank you, Mr. 

Chairman, for being here. And first of all, I would like to thank you 

for making financial education your top priority for the SEC. I have 

been working on financial literacy within the Congress, and I particularly thank you for working with the NASD to help our military 

and their families. It’s very important. And thank you for working 

to educate and protect our elderly investors and retirees and future 

retirees. You’re doing a great job. 

30

My question. The securities and futures industries in Chicago appeared to unanimously support parity in the portfolio margining 

between single stock, futures, and options. I found it is rare that 

competing industry interests unanimously support a proposal, unless it’s good for the market and good for consumers. I believe that 

this is an important step for the capital markets. 

Under rules proposed by the CBOE and the NYSE, a broad array 

of products, including equity securities, listed options, OTC derivatives, U.S. securities, futures, and broad-based futures could be included in a single account margin on a portfolio basis. 

But last November, I believe that the Commission committed to 

approving self-regulatory organization rules to permit the customer 

portfolio margins by June 30, 2006. And I know that you are currently taking comments on CBOE and the New York Stock Exchange rule changes. 

Do you anticipate that the Commission will be able to meet its 

commitment to Congress to act on these proposals by June 30th? 

Mr. COX. I do. And let me add that I am committed, in my capacity as a member of the President’s working group on financial markets, to implementing portfolio margin rules in collaboration with 

the CFTC. I think it makes a great deal of sense, from the investor’s standpoint, from the investor protection standpoint. 

Mrs. BIGGERT. Thank you. And then, in your testimony, you 

mentioned improving disclosure of financial data, and there is a 

fair disclosure from issuers of securities. And in addition, you mention that disclosures should be in plain English, and accounting 

complexity should be reduced. 

In 2004, this committee held a hearing on corporate governance 

in accounting for oil and gas reserves due to several financial restatements by the companies in these industries. And in recent 

days, the accounting method of last-in first-out has come into question, as it relates to these industries. 

Are investors in the American public getting clear and accurate 

financial statements from the oil and gas companies, including accuracies about the oil and gas reserves? And is this something that 

the SEC is examining? 

Mr. COX. It is, indeed. Rules, as you know, in this area are old. 

They date back to the 1970’s. And one of the things that has happened, in the meanwhile, is that technology has changed. And so, 

the technological premise for these rules needs to be re-examined. 

Under our current rules, an oil and gas company is prohibited 

from disclosing any reserves, other than proved reserves under this 

definition. And so, if there is disparity between real life and good 

science, on the one hand, and what’s in our publicly-mandated disclosures on the other hand, we need to address it. 

Mrs. BIGGERT. Are you looking at the rules to be—to see if you 

can bring them into the 21st Century? Is that something that you 

can do? 

Mr. COX. We are looking at it. The view of the professional staff 

to date has been that they have been unable to conclude that the 

newer technologies in use since the 1970’s have been demonstrated 

to be routinely reliable for the attribution of proved reserves in the 

context that we’re talking about here, for financial reporting. 

31

But the Commission staff did allow the use of those new technologies in calculating proved reserves in the Gulf of Mexico, following a special project that it undertook. 

Allowing the use—I think we all understand here—of new technologies would likely produce reports of increased levels of proved 

reserves, and what we’re weighing is whether or not we’re going to 

conversely reduce the reliability of the estimate. And we don’t want 

to do that, of course. 

Mrs. BIGGERT. Thank you. Thank you, Mr. Chairman. I yield 

back. 

Mr. SHAYS. I thank the gentlelady. Mr. Cleaver, thanks for your 

patience. 

Mr. CLEAVER. Thank you, Mr. Chairman. Chairman Cox, thank 

you for being here. I did not have the privilege of serving on the 

committee with you, but everybody who has speaks so highly of 

you, so it’s a privilege for me to have the opportunity to have an 

exchange with you. 

I have become somewhat obsessed with our national debt and 

with the investments by foreign nations in our government. Do you 

know the current size of the U.S. investments held by foreign entities? 

Mr. COX. I don’t have that figure to quote for you right now, and 

I would actually be surprised if I turned around and somebody did, 

but I will check. 

Yes, I mean it’s a very easy figure for us to get, and in a very 

formal proceeding such as this I would hate to do it seat of the 

pants. So why don’t we get you the precise figure following this 

hearing? 

Mr. CLEAVER. And I am interested also, if you can, in what portion of that is held by China and Japan. 

Mr. COX. We would be very happy to do that. 

Mr. CLEAVER. Thank you. But is that something, though, under 

normal circumstances, that the SEC would monitor? 

Mr. COX. Well, you know, the Securities and Exchange Commission is very concerned with cross-border capital flows, and the 

maintenance of healthy, transparent, open markets that look after 

the interest of our own investors. It’s impossible to do that job 

these days, and restrict yourself to our national border or not notice which way the capital flows are moving, which country’s regulatory regimes necessarily we are dealing with, because they are 

the preponderant trading partners in the capital markets, and so 

on. 

So, I think your question is right down the center lane of what 

we’re interested in at the SEC. 

Mr. CLEAVER. Is it what you consider dangerous if the interest 

of foreign—the investments of foreign entities reached a portion 

where they actually almost controlled major portions of our Wall 

Street companies? 

Mr. COX. Well, I don’t believe that we should erect barriers to 

foreign investment in our country, for the simple reason that we 

don’t want foreign countries to erect barriers to our investment. 

I would see—and here I am going to try and restrict myself to 

the role that I am testifying in, as Chairman of the Securities and 

Exchange Commission, and not give you a perspective as the 

32

Chairman of the Homeland Security Committee, or a former Member of Congress, which, being in these surroundings, I am almost 

tempted to do. 

But what we do at the SEC is evaluate the disclosures made by 

market actors. And the transparency of market actors is something 

that we have to be able to enforce through our regulations. If the 

people that are making the investments are not strictly market actors, but sovereigns, that’s harder to do. 

And so, if you’re dealing with nations themselves, or their surrogates and their wholly controlled entities, I think it presents a different public policy issue than if you were dealing with purely market actors, private market actors from other countries. I think they 

tend to act for market reasons; governments act for reasons of national interest. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Mr. SHAYS. Thank you very much. The Chair would recognize 

Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman, and let me add my 

voice to the chorus of those welcoming Chairman Cox to our committee. And I am certainly just as happy as I could be that a man 

of his integrity and leadership and philosophy has been chosen for 

this position. 

Chairman, let me offer an apology here. I had to run off to a 

prior speaking engagement. So, although I heard your testimony, 

I have missed much of the question and answer period. So, if this 

is redundant, please forgive me. 

In your testimony today, you expressed concerns with ensuring 

that our public investors have access to accurate and useful market 

data. I think the Commission has now been reviewing possible reforms to the consolidated model of market data for over a decade. 

Even by government standards, that’s a fairly excessive period of 

time. 

Recently on the Senate side, I believe, in your hearing there, you 

indicated that market data reform was something that was a front 

burner issue for the Commission. 

And so, my question is, as this issue sits on the front burner, is 

it on low, medium, or high? In other words, do you have a time 

table yet on when the Commission will address this issue? 

Mr. COX. Well, it’s very salient for, among other reasons, the reason that the pricing of market data and the revenue generated by 

market data are of exceptional relevance to the now-public markets 

in the United States. 

Back in December of 1999, the SEC issued a concept release 

dealing with the regulation of market information and fees, and so 

on. That focused primarily on the fees charged for market information, and the role that revenues derived from those fees played in 

funding the operation of the SRO’s, and thus the operation of self 

regulation in the market. 

The majority of the commenters on that issue—and the concept 

release generated a fair amount of comment—believed that the 

SEC’s cost base approach, which was expressed in that concept release, would be unnecessary and impractical. They weren’t fans. 

The commenters cautioned that, for example, classification of 

common costs couldn’t be done without significant disagreements, 

33

continual auditing, and considerable expense. And some of them 

pointed out that, historically, cost-based systems have encouraged 

cost padding, and creating disincentives to reduce the cost through 

efficient operation or innovation. 

So, that then took us to the appointment of an advisory committee in 2001. And the SEC’s advisory committee on market information then expressly rejected this cost-based approach in its report to the Commission. They recommended that the SEC retain 

the consolidation and move from a single consolidator model towards a system of competing consolidators. 

Then we had Reg NMS, which was adopted shortly before I came 

to the SEC. That didn’t take any action on the competing 

consolidator idea. And in fact, it even reaffirmed the single 

consolidator system for best-priced quotations and for last sale information. 

It did take some limited steps to confirm that SRO’s could sell 

data other than currently consolidated data, but it left it to the 

Commission to explore whether further action was necessary to address concerns with the pricing of consolidated market data. 

Mr. HENSARLING. But any time table on— 

Mr. COX. The next step, in order to solve this problem, and to 

deal with it in a good way, is for us to understand with our counterpart regulators—for example, the FSA—you know, how we intend to deal with what we expect to be the new shape of the industry and the markets, now that they are for-profit entities. 

It is this interplay between the interest that we have in transparency, and the transmission of this information to the market in 

real time, on the one hand, and the role that the revenues play in 

sustaining the SRO’s themselves, it’s that yin and yang that we 

have got to deal with. 

So, I don’t have a date that I can give you here in this hearing, 

by which all these questions will be resolved. But I hope it’s of 

some comfort to you that this is a front burner, not a back burner 

item. It’s something that we are very, very intently focused on. 

Mr. SHAYS. The gentleman’s time is— 

Mr. HENSARLING. Unfortunately, I already see the red light is on, 

so apparently you didn’t want to answer my other question. Thank 

you, Mr. Chairman. 

Mr. SHAYS. Mr. Fitzpatrick? 

Mr. FITZPATRICK. Thank you, Mr. Chairman. Earlier today, there 

was some discussion on a bill that I introduced that’s pending before the committee—H.R. 2990—the Credit Rating Agencies Duopoly Relief Act. And currently, the SEC has only designated five 

credit rating agencies as nationally recognized statistical rating organizations, NRSRO’s, for use in SEC regulations. 

My view, Mr. Chairman, is that 5 is not enough. And to compound matters, 2 of the 5, Moody’s and S&P, control about 80 percent of the market share. I introduced H.R. 2990, which would 

eliminate the SEC’s designation process in order to engender some 

competition and to protect investors. 

Congressman Kanjorski earlier asked an excellent question, 

which is given the fact that there is legislation pending, and at the 

same time SEC staff is reviewing the designation process, should 

we put our foot on the accelerator or the brake, he said. 

34

And I believe you had essentially two responses. One is that, 

given the difference between the legislative and the executive process, you respect the legislative process we’re going through, and we 

appreciate that. 

Now, the second is that currently staff is in the process of defining the term ‘‘NRSRO,’’ and I think you indicated, through the 

rule-making process that started back in March of last year—I’m 

not sure what—whether or not we have actually gotten to the actual definition. Has that been completed? Because it goes to Mr. 

Hensarling’s question as to how long is this reform process going 

to take? Has NRSRO been defined at this point by the SEC? 

Mr. COX. Well, as you know, the proposal was put out in March 

of 2005. We received comments on it, the comment period closed. 

And now we have been in extended study period. I think the inference you can draw from that is it wasn’t just right the way it is. 

Mr. FITZPATRICK. So, 14 months later, we still—I mean, defining 

an NRSRO is just the very beginning of the reform process. And 

14 months later, we haven’t gotten to the definition? 

I think my view would underscore the need for legislation proposing reform. So I won’t ask you your specific position on the legislation. But I would ask, as a general matter, do you believe that 

by encouraging competition in the industry, ratings quality will improve? Will costs come down? 

And perhaps most importantly, will the anti-competitive practices such as—which is rampant in the industry today providing 

unsolicited ratings with a bill, sometimes in the industry referred 

to as the ‘‘shake-down,’’ which I find very offensive, would this kind 

of legislation improve the process? 

Mr. COX. Well, since you—if I understand your question right—

are not asking me to comment on the legislation, but on the goals 

of the legislation, specifically competition, transparency, and possibly greater Commission authority to provide oversight in this 

area—those are our goals, as well. 

I am not trying to be opaque in my answer, either to Representative Kanjorski or to you. So let me be very clear about what I mean 

to say there, when I say that I understand and appreciate the role 

of the Congress here. 

Many times, on many different subjects, I had the pedal to the 

metal, my foot on the accelerator, trying to pass legislation as urgently as it could possibly be enacted. And I also was frustrated, 

because that didn’t always happen. 

So, if you ask me whether to go full speed ahead or not, even if 

I said yes, I still don’t know whether or not that’s going to result 

in legislation. And, if so, whether it would result in legislation this 

year or next year, or when. And I dare say that you might not 

know, either. That’s the way the legislative process works. And 

that’s all I meant. 

So, what the SEC is responsible for doing is what the SEC has 

control over. And that is our own process. We are not waiting for 

something to happen here legislatively. On the other hand, we are 

not suggesting to you that, because we’re doing something, you 

shouldn’t. But we strongly share your goals. 

And some of the things—I think I also alluded to this in my answer to Representative Kanjorski—some of the things that you 

35

could do legislatively, we can’t do through rulemaking. So the two 

are a little bit ‘‘apples and oranges’’. 

Mr. FITZPATRICK. As a follow-up, your colleague, Commissioner 

Campos, who helped spearhead the development of the IOSCO voluntary code of conduct for rating agencies, has stated that he believes rating agencies legislation is needed, citing his unhappiness 

with voluntary agreement negotiations between the Commission 

and the SEC, designated rating agencies. 

Chairman, do you think that the Commission needs statutory authority in this area to properly oversee the credit rating—the industry? 

Mr. COX. The Commission has not taken a formal position on 

this, but I have the same position as did my predecessor, and that 

is that we would appreciate the provision by Congress of enhanced 

authorities for the SEC in this area. 

Mr. FITZPATRICK. Thank you. 

Mr. SHAYS. I thank the gentleman. Mr. Chairman, we have two 

remaining giants of the committee to ask questions, Mr. Gillmor 

and Mr. Leach. Mr. Gillmor? 

Mr. GILLMOR. I don’t feel like a giant, but thank you, Mr. Chairman. Mr. Chairman, congratulations on your appointment. I would 

like to welcome you back. You and I came in the freshman class 

of 1988, and I am glad that between you at the SEC and Porter 

Goss at the CIA, at least some did pretty well. 

I want to bring up two areas. One, back in the 106th Congress, 

at that time you and I were both serving on the Energy and Commerce Committee, in the financial services area. I had introduced 

a bill which you cosponsored, along with then-subcommittee chairman Mike Oxley, which would have required publicly-traded corporations to disclose to their shareholders significant charitable 

contributions. The theory behind that was that that’s the shareholder’s money, they ought to know what’s happening with it. 

And, in fact, a lot of public companies voluntarily disclose it, but 

some of them don’t want the shareholders to know what they’re 

doing. And I have reintroduced that legislation this year. 

I guess my question is do you still have the same view you did 

when you co-sponsored that bill, in terms of public disclosure, and 

would the SEC consider, either with or without that legislation, requiring public companies to disclose significant charitable contributions and insider-affiliated charitable contributions on an annual 

basis? 

Mr. COX. Well, first, let me acknowledge the very generous compliments that you gave, and I want you to know how much I appreciated sitting next to you on this, and the committee across the 

hall. And I also recognize that you’re being unduly modest in comparing a couple of your classmates to yourself. I think the country 

very much benefits from your being here, as well. And I appreciate 

the opportunity to appear before you in this capacity. 

I didn’t realize when I was a Member of Congress, and you and 

I were working on this together, that in response to your request, 

the SEC, before I was Chairman, conducted a feasibility study on 

implementing your legislation on requiring public companies and 

mutual funds to disclose information about their contributions in 

36

their SEC filings. Obviously, you know about that, and I have 

learned about it in my capacity as Chairman. 

The result, as you know, of that study was that the Commission—at least at the time—believed that requiring this disclosure 

would, in fact, be feasible. And public companies, the Commission 

believed, are capable of tracking and disclosing this information to 

investors. 

So, from the standpoint of giving technical guidance on your legislation, I think that is still operative, and that should still help 

you as you deal with the legislative process here. 

Insofar as our ability to do this, or our interest in doing this separate from legislation, the staff noted at the time—again, before I 

was Chairman—that charitable contributions make up a relatively 

small proportion of a corporation’s financial activities. And, particularly in the case of mutual funds, the Commission staff found that 

the vast majority of funds didn’t contribute to charitable causes. 

So, given that our disclosure regime operates fundamentally on 

a materiality premise, the question arises whether, if that’s what 

is guiding us here, we would do that following our own lights. 

On the other hand, materiality is the floor. Everything that is 

material must be disclosed. Some things that our specific disclosure 

requirements mandate are not inherently, per se, material, and we 

require them anyway. This is true, for example, in the environmental area. So I think Congress would be well within its rights, 

if it decided, as a matter of public policy, that this kind of disclosure should be mandated, notwithstanding that it might not in 

every case otherwise be material under the Supreme Court standard. 

Mr. GILLMOR. The other area I want to ask you about is the area 

of disclosure of taxes. One of the things that I am concerned about 

is that, in many instances, shareholders receive from companies information that is, in fact, misleading, even though it’s accurate. 

And one of the areas is the reporting of income for SEC purposes, 

which goes out on the Street, and that’s what people look at as corporate earnings, in terms of determining whether to buy or sell 

shares. 

On the other hand, there is another figure which is not always 

disclosed, and that’s the income for public companies that is reported to the IRS. 

So, the thrust of my question is, do you think it would be possible to have a system where a corporation would have to disclose 

SEC-reported income and IRS-reported income, similar to what 

companies do with executive compensation? 

It seems to me that it’s a rather key fact in order that investors 

can make a fair decision about whether they want to buy or not. 

Mr. COX. Well, as you may know, the Commissioner of Internal 

Revenue, Mark Everson, has publicly floated this idea, and I have 

heard from him on it. We have discussed it. I certainly share the 

goal of increasing transparency of financial disclosure. I am not 

certain that publicizing tax returns is the best way to that result. 

Mr. GILLMOR. I am not suggesting to go so far as to making the 

tax returns public, which I think you brought up. It’s simply providing some comparable figures, so that—I may be wrong, but if a 

shareholders knows that a company reported $1 billion to the IRS, 

37

but says to you they made $2 billion, and a person makes an investment on the $2 billion—so I’m not suggesting we make the 

whole return public. 

Mr. COX. Well, your question began by noting how much of the 

information that’s provided to investors right now might not be 

useful. And indeed, it might be confusing, and so on. I want to 

make sure, in all of the disclosure that the SEC mandates, that we 

are illuminating, and not making it harder for people to figure out 

what’s going on. 

Mr. GILLMOR. Right. 

Mr. COX. A lot of the disclosure that the SEC requires is necessary for them to understand, for example, a corporation’s tax deferral strategies. It might not be helpful to an investor’s understanding of the overall financial condition of the company. 

So, I am certainly going to pay close attention to this discussion, 

work with my counterpart regulator at the IRS, and work with the 

Secretary of the Treasury in my capacity as a member of the President’s working group, to talk about this. I think it will get a good 

deal of attention. 

But I want to be clear. This is an IRS idea that has been floated. 

It is not an SEC initiative. We are going to look at it, but I am 

certainly not pre-sold on it. 

Mr. SHAYS. Thanks to the gentleman. 

Mr. GILLMOR. Thank you, Mr. Chairman. Good luck on the new 

job. 

Mr. COX. Thank you. 

Mr. SHAYS. The Chair at this time would recognize Mr. Leach for 

whatever time you may consume. 

Mr. LEACH. Well, thank you, Mr. Chairman. And I certainly 

share the earlier comments made about your service, Chris. We 

welcome you in this job. And I think your presentation today has 

been very impressive, particularly your emphasis on transparency 

and more simplified, timely disclosures. 

I want to raise an issue that is very difficult for you, also for 

those of us in Congress. And that is the remuneration issue. And 

you point out—and I think quite properly—that you are reluctant 

to enter into this issue. 

On the other hand, there are two perspectives that I think have 

to be raised at this time. One relates to the market itself. If the 

public loses confidence in public corporations and their mission—

that is, is their mission to serve the shareholders or to serve insiders—you can have a real shake in confidence in the market. If the 

public loses faith in the market, that is not a trivial circumstance. 

You point out—I think quite properly—that remuneration is 

largely the province of the board. But what happens when a board 

and a CEO are pretty much in tandem? I mean, we have this example that the Wall Street Journal has laid forth of a public corporation over the last decade that has given a couple of billion dollars in stock options to a CEO, and at the same time, a couple of 

hundred million dollar stock options to the board. That is an extraordinary situation. 

I don’t know if it’s an SEC issue or not. But if it is, has the SEC 

examined this case? 

38

Secondly, I have the good fortune to represent the University of 

Iowa. A distinguished scholar at the university, a professor named 

Eric Lee, has done a study of stock options, and he has examined 

literally thousands of public corporations. 

He has concluded that it is rather impressive how many stock 

options were granted at low points, just before shares had risen. 

And he has concluded that the odds of such a happy coincidence 

for the recipients is so high that it is about twice as high as winning a Powerball with a dollar ticket, which implies that it is conceivable that some of these grants of options were done retroactively, which implies, as I understand it, a possible violation of 

law. 

And so, my query: is the SEC looking at this particular circumstance at this time, and is there a market confidence type of 

dilemma that occurs with these remuneration issues? 

Mr. COX. Well, particularly with the pathology that you just described, there is a market confidence issue, I mean, because that 

either is or borders on fraud in its most extreme forms. 

When I said earlier that the SEC doesn’t want to second guess 

the board, make judgments in place of the board about the methodology or the levels at which executives are compensated, what I 

mean, of course, is that we don’t want to substitute our own judgment for the honest judgment, the business judgment, of the board 

of directors. 

Mr. LEACH. Fair enough. 

Mr. COX. But if an individual executive or confederates on the 

comp committee or on the board are in any way violating the trust 

of the shareholders, that’s an entirely different matter. And our enforcement division is very interested in that. 

Mr. LEACH. Well, I appreciate that. And I just think we would 

be shirking our duty if we didn’t raise this kind of issue. And your 

institution is the singular one in our society that can look at these 

things. And so I appreciate your attention. Thank you. 

Mrs. KELLY. [presiding] Thank you. Mr. Sherman? 

Mr. SHERMAN. Thank you, Madam Chairwoman. Chairman Cox, 

it’s good to see you again. I don’t see you on the plane as often; 

I guess your new job doesn’t involve trips to Newport Beach. Other 

than that, I hope you like it. I have quite a number of questions 

that I will pose. Maybe you will have a chance to respond, or 

maybe you can respond for the record. 

The first is that the accounting statements that are audited contain the same information that accountants have been providing for 

about 100 years. A few decades ago we went beyond the income 

statement, the balance sheet, to a funds flow statement that is 

really the same information presented in a different format. 

Yet the markets are much more interested in other information, 

and are willing to act on it, even though it comes to them in 

unaudited form. For example, if you are dealing with Boeing, you 

want to know what they have in the way of back orders. If you’re 

dealing with a retail store, what is its revenue per square foot? All 

this information tends to get reported. None of it is audited on a 

quarterly basis, or even on an annual basis. 

And so, I hope that the SEC would move beyond the 100-yearold income statement and balance sheet to at least a system where 

39

companies would be encouraged to provide information relevant to 

their industry that is audited, so that it can be relied upon, and 

so that even if you are producing weekly or monthly reports that 

are unaudited, the management knows that, by the end of the year, 

there is going to be an audit of what they have been presenting, 

just as we get unaudited quarterly, and sometimes even more frequent information about the income statement, and eventually it is 

audited. 

The second area I would like you to focus on is that of the SEC 

as an enforcement agency. And here, my information may be a little stale. But most of this hearing has focused on those investors 

who are making investments in something that a securities professional would say, ‘‘Looks like a legitimate investment.’’ They are 

buying a publicly registered stock on a stock exchange, comes with 

a prospectus. Even Enron came with a prospectus. 

But then there is a whole group of absolutely phony investments 

that you or I would look at and say, ‘‘My God, this is a violation 

of every securities law,’’ being hawked on the Internet. And I am 

told that the SEC is prevented by law from even having its people 

pose as potential buyers on the Internet. You can’t even have your 

people surf the Net to find the apparently bogus investments. 

And I hope that, in addition to protecting the reasonable investor 

who is buying stocks in companies on stock exchanges, etc., that 

the SEC would devote some resources and get whatever legislative 

authority it needs to at least pose some risk to these charlatans 

selling investments on the Internet and in other ways. 

The third issue I would like to bring up is the issue of minority 

shareholder rights. One that we know you have talked about, executive compensation. One way to deal with that is to have a group 

of shareholders dispossess the current board and install a board 

more responsive to shareholder interests. 

And yet, we have a system in which companies go to the State 

with the lowest possible minority shareholder rights standards. 

And I hope that you would present this Congress with some ideas 

of setting minimum rights for minority shareholders of all publiclytraded corporations, rather than have Delaware and Nevada and 

others fight to provide the most possible protection for entrenched 

management. I would like you to respond, time permitting. 

Mr. COX. Well, first, I want to thank you for your generous comments, and let you know that while my current occupation doesn’t 

permit me to be on the plane with you as much, I certainly intend, 

as a Californian Chairman of the SEC, to make sure that the portion of America west of the Mississippi has just as much representation in our regulatory system as does the East Coast. 

Mr. SHERMAN. Does that mean you’re volunteering to speak in 

the San Fernando Valley? 

Mr. COX. Well, we can talk about that. 

Mr. SHERMAN. Okay. 

Mr. COX. It’s—you know, particularly we should talk about that 

for around January or February I think. 

Moving directly to your questions. First, you’re certainly one of 

the few CPA’s I know in the Congress, if not the only one. And I 

think, having looked at these issues from the vantage point of a 

Member of Congress with that background for such a long time, 

40

you’re more keenly aware than most of the anachronism that you 

pointed out in your question, the mismatch between a system that 

relies on snapshots taken at year-end, on the one hand, and the 

fast moving economy that we live in today, where information 

moves 24/7— 

Mr. SHERMAN. And if I can interject, it’s also just a snapshot of 

the things that accountants decided over 100 years ago should be 

photographed, and does not include such things as employee turnover rates, which, to me as an investor, might be more important 

than just quarterly sales. 

Mr. COX. And I think you’re absolutely right, first of all. I agree 

with the entire premise of your question. And second, you’re absolutely right that the kinds of other things that investors are interested in and could benefit from, were they available, are not only 

are things that are off balance sheet, off income statement, or off 

funds flow statement, but they may be only quasi-quantitative. 

They may be qualitative. In the information economy, with services 

being such an important part these days, the manufacturing model 

may not always fit. 

And so, as we take a look at the overhaul of accounting and all 

of its complexity, one of the things that we have to keep uppermost 

in mind is that, to serve investors, we need to give them real information that they can use. That means, as I pointed out earlier also, 

that it should not be confusing; it should be in plain English. 

Interactive data, which is one of the big initiatives of the SEC, 

as you know, is very well suited to helping us move in this direction, because it’s real time, because it applies to all data, potentially. It doesn’t even need to be a number; it can be text. Being 

able to move this information around immediately in real time is 

going to help the preparers. It’s going to help management from an 

internal control standpoint, from a management control standpoint. 

And ultimately, I hope, therefore, it helps us to come up with better numbers, and in some cases, audited numbers that today we 

just can’t have access to. 

With respect to the SEC posing as potential buyers, the SEC—

I have just consulted with general counsel—I don’t believe is legally inhibited, but we can check on this. But rather, it is by long 

standing practice that the Commission, in our enforcement activities and in our inspection activities, foreswears any deceptive conduct. 

Mr. SHERMAN. Mr. Chairman, if that’s the case, I would urge 

that your employees get practice in using the Internet, and seeing 

the investments that are being put forward there, and that the tradition of ‘‘not being deceptive’’ should not override an efficient effort 

to protect Americans from the investments that you and I would 

laugh at, but that others are putting their money into. 

Mr. COX. Yes, I assure you that—because that’s where I was 

headed next—that we are doing so. And you would expect from an 

agency that is focused on interactive data, that we are very keen 

on exploring investor protection for those investors that are already 

on the Web. The SEC has very recently set up scam Web sites so 

that investors that think that something looks too good to be true, 

and are about to buy it on the Internet, can click all the way 

through and then find out at the end that it’s really the SEC. 

41

So, we have sort of threaded that needle. We have been able to 

do what you’re describing. But then in the end, you know, we tell 

them, ‘‘This could have been real. And if it had’’—and it serves as 

investor education. 

We also have a portion of our enforcement that is focused on 

Internet enforcement, as you would expect. So we are very much 

working this area. 

Mrs. KELLY. Thank you very much, Mr. Sherman. Mr. Scott, I 

am going to ask if you are prepared to go now. I have not yet asked 

my own questions, but since you—barring the advent of another 

one of our colleagues, since you are the last man standing on this 

committee at this point, I will do the mop up, and you go ahead, 

if you’re ready to—are you ready for your questions? 

Mr. SCOTT. I certainly am, and thank you for referencing Bruce 

Willis’s great movie, ‘‘Last Man Standing.’’ Those of you who 

haven’t seen that, I am sure you will enjoy that amazing shoot-out. 

Let me just commend you, Chairman Cox, on the excellent job 

you are doing. You certainly distinguished yourself in a very short 

period of time, bringing tremendous leadership and some very 

good, positive changes to the Securities and Exchange Commission, 

and I want to commend you for your leadership and the work you 

are doing there. 

Let me ask you about regulation B in my first question. Can you 

provide us with some sort of report on the status of the proposed 

regulation B, and any efforts that the Commission has made to 

work with banking regulators to propose a regulation that merits 

the legislative intent of Gramm-Leach-Bliley? 

Mr. COX. Well, in fairness, since I was asked earlier about the 

definition of investment advisor and broker, and I answered by giving the status of Regulation B, I should answer your question now 

by describing where we are in— 

[Laughter] 

Mr. COX. But I won’t. I will tell you that because Gramm-LeachBliley is, at this point, not a new law, it was passed in 1999, I 

think it’s high time that we have rules implementing the statute. 

And so, I am committed to promulgating Regulation B as early as 

is humanly possible. I have convened meetings of the banking regulators and the SEC to go over this collaboratively to come up with 

a solution that makes sense for all of the regulated community, and 

I think we can do it. I would hope that we have a result, even this 

year. 

Mr. SCOTT. Good. All right. Thank you very much. Let’s go very 

quickly to Sarbanes-Oxley. I don’t know if this question may have 

been asked prior to me, but I would be very interested in getting 

your take on the application of section 404, and where you stand 

on the recommendations vis a vis the smaller cap companies and 

the exemptions applicable to those. 

Mr. COX. First, I am very appreciative of the work that our 

smaller public company advisory committee did for the Securities 

and Exchange Commission, and for the benefit of America’s investors. They worked for 13 months and produced a report very recently. As you know, I think it well reflects the concerns from 

smaller companies, including smaller public companies. 

42

Their recommendations are going to be taken to heart at the 

SEC. They are one of several sources of information and input. 

With respect specifically to that portion of their report, the 1 of 

their 32 recommendations that suggested that we exempt certain 

smaller public companies, I will say as 1 of 5 commissioners in this 

capacity—because this is going to be a Commission decision, and 

so I’m speaking now for myself—that I am hopeful that we could 

achieve the objective that they sought, not by the blunt instrument 

of an exemption, but rather by the tailored application of the statute with full mind of the Congressional intent to smaller public 

companies in their different circumstances. 

I think that should be possible, and I think that, even in their 

recommendations, the advisory committee contemplated that, if 

there was a suitable framework for management of smaller public 

companies, that they wouldn’t need an exemption. 

Mr. SCOTT. Okay. My other question I would like to ask is your 

take on another very topical issue, the committee on investments 

by foreign countries directly in the United States. 

We have had some very serious hearings on that issue, as a result of the Dubai Ports deal. And we’re looking at how we can certainly protect our security, and make sure we are secure there. Do 

you have any words of concern, in terms of the level of overreach 

that we might do that could perhaps put a damper on our ability 

to attract much desired foreign investment in this country? And 

what advice would you give our committee and the Congress, as we 

look at reform of CFIUS? 

Mr. COX. Well, I am going to constrain myself to answer the portion of your question that I am qualified to answer as Chairman 

of the SEC, and not stray off into the more general of national security and public policy questions that you necessarily have to take 

into account, and any restructure of CFIUS. 

From the SEC’s standpoint, obviously, we are concerned about 

investor protection and about maintaining the United States capital markets as the largest, deepest, and most liquid markets in the 

world, and we want to continue, as I think you do—I infer that 

from your question—the attractiveness of the United States market 

for foreign investors. We want to make it clear to everyone that we 

welcome foreign investment in this country. 

At the same time, I think we want to distinguish, at least for disclosure purposes, between state actors, sovereigns, who, as one 

might imagine, the SEC would have a great deal of difficulty exercising its enforcement regime against, on the one hand, and market 

actors on the other hand. And that’s a distinction that I think Congress and policy makers need to keep in mind, as well. 

Mr. SCOTT. Thank you very much, Chairman. 

Mrs. KELLY. Thank you, Mr. Scott. Chairman Cox, it’s really a 

pleasure to have you here in this capacity. Having been one of our 

colleagues, and having served with you, I have to say I am very 

interested and appreciative of the effort that you have put in to 

make the SEC look and be responsive to some of the issues that 

have been troubling for me personally, and others who have been 

involved with the market. 

Perhaps these questions that you have been asked indicate 

that—I don’t want you to feel that this means that people, all of 

43

us sitting here, are not appreciative of the efforts that you have 

made. 

That being said, I understand that your testimony doesn’t explicitly refer to the needs of smaller public companies. They are disproportionately affected by over-regulation. The accounting industry has been working hard to try to lower the costs of audits for 

smaller companies, and according to the CRA report on the 404 

costs, smaller public companies’ costs for 404 audits and compliance have declined by approximately 30 percent from the first year 

of the 404 review to the second, as companies begin to learn to 

work within the system. 

But the industry doesn’t have the authority to change the law. 

And it seems clear that the law really needs to be changed, especially for smaller companies. Recently, the advisory committee of 

the SEC, on this issue, suggested that smaller public companies 

needed to be excluded from portions of section 404. 

You said that—in your Senate testimony—that the question is 

not whether to apply 404 to all companies, but how. I am concerned that this answer to the other House conflicts with your advisory committee, and also sends the message that any company 

unwilling to pay a tax of $1 million a year in compliance costs 

should not look to sell shares to the public. 

The advisory committee recommended that companies with less than $10 million in revenue be excluded from section 404 below a 

market cap of $750 million, because the costs of compliance were 

disproportionate to their revenues. I am afraid that this benefits 

biotech companies, but it doesn’t benefit the small manufacturing 

companies. 

For instance, a firm could have higher revenues, but require the 

devotion of scarce personnel resources for their compliance. 

I would be interested in your thoughts on exempting from 404 re- view companies with less than $1 million in revenue per employee, 

or a similar number. 

Mr. COX. First of all, thank you very much for your compliments, 

and I want you to know how much I appreciate seeing you in the 

chair. 

Section 404, and more generally, the regulatory burdens placed 

on smaller companies, are a very, very important focus for the SEC 

necessarily, because one of our missions is facilitating capital formation. 

We are well known as the investor’s advocate, but our tripartite 

mission includes maintaining orderly markets and facilitating capital formation, as well. And all of these things, properly viewed, are 

complementary. We can’t say that we are doing our job of protecting investors if, in fact, companies that are offering their securities are effectively prevented from doing so by our regulation, and 

the products and the investments are, therefore, unavailable to the 

investing public. 

The advisory committee’s recommendation, which I have now 

had the opportunity to read very carefully, premises its recommendation on exemption of some smaller public companies on 

the lack of an available framework that is tailored to smaller public 

companies. I think that that is the essence of their recommendation, that if you’re going to have a 404, you’ve got to make sure 

44

that it applies in a tailored way across the board, and that you 

don’t take the standard that works for Exxon and apply it to a 

small business. 

The same applies, it strikes me, when it comes to the 

disporportionality of audit fees. Necessarily, the same level of expenditure is going to much more dramatically impact a company 

with smaller revenues and smaller earnings than it will a large 

company. And so, to the extent that the audit of internal controls 

necessitates a certain base level of activity, there is no escaping the 

fact that it’s going to be more significant for smaller companies. 

The SEC needs to take all of this into account. 

My hope is that we can implement 404 in a way that you all intended—and that I intended, because I was here and worked on 

the development of that legislation as well. I don’t think any of us 

had in mind, when we voted for Sarbanes-Oxley and its included 

section 404, that this provision would produce anomalous results, 

or outlandish costs, or inhibit risk-taking by companies, or keep 

products off the market, or in any other way distort our investor 

protection regime. 

And so, I am taking it as my charge to make sure that we can 

make 404 effective, and see to it that it achieves Congress’s objectives at the same time that we lower the cost and make sure that 

there is a regime that specifically fits smaller companies. 

Mrs. KELLY. I am glad to hear you say that. When you talk about 

facilitating capital formation, there is a small-cap, mid-cap people, 

these people that have revenue of less than $1 million per employee sometimes, and people who do generate this economy capital—do increase with capital formation. So that is a good stance. 

We have been joined by Mr. Fossella, my colleague, and I would 

like to come back to pursue that line of questioning a little bit further, but let me turn to Mr. Fossella. 

Mr. FOSSELLA. Thank you, Madam Chairwoman. Mr. Chairman, 

thank you. Thank you for your patience. And more importantly, 

thank you for the strong leadership you have brought to the Commission. Your consensus-building approach I think is admirable, 

and I can’t tell you enough how I appreciate the fact that the President made the right choice in selecting you. 

Having said that, I know you have answered a wide array, and 

you have been very patient. Let me just jump into one specific 

issue regarding legislation that I introduced regarding procedural 

reforms, and looking at ways to restructure the Commission. 

In regards to procedural reforms, it included provisions aimed at 

increasing communication between registrants and the Commission 

in regards to the status and/or closure of inspections and investigations, and requiring Commission approval prior to the initiation of 

sweep examinations. Structurally, the legislation would restore the 

Commission’s inspections and examinations authority to the divisions of market regulation and investment management, to insure 

examination staff are working alongside the division staff responsible for creating and interpreting the rules. 

I think you have tried to establish and strike the right balance 

of protecting investors, facilitating capital formation, but also recognize that the most effective tool we have in ensuring the integVerDate 0ct 09 2002 16:59 Dec 07, 2006 Jkt 031036 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 F:\DOCS\HBA123.000 HFIN PsN: TERRIE
45

rity of these markets, is to have an effective and strong and vibrant 

SEC, especially in the inspections and examinations. 

So, I know—or so I have been told—that the Commission has 

begun to implement aspects, or at least evaluate some of the aspects of some of the reforms that are included in the legislation. 

Can you please tell us what, if any, have been made, or are in the 

process of being made? And prospectively, what, if anything, we 

can anticipate? 

Mr. COX. I would be pleased to do so, and I want to thank you 

for your interest in this area, and your active involvement, because 

it is in response to comments and feedback, including those that 

you provided to the Commission, that the Commission has recently 

changed in several respects the way the Commission itself oversees 

these SEC examinations. And let me just go through some of these 

changes for you. 

First, it is now the policy of the Office of Compliance Inspections 

and Examinations, OCIE by acronym, to provide advance notice to 

the Chairman and to the Commission of any proposed sweep examination. That didn’t use to occur. In addition, the Office has beefed 

up the pre-exam process, to ensure that exams aren’t duplicative, 

and that they are as minimally disruptive as necessary to accomplish the objective. 

Second, OCIE is promulgating a new policy that, if an examination hasn’t been closed within 120 days after the completion of the 

fieldwork portion of the review, the registrant then is provided 

with notice that the examination is still in progress. So it is no 

longer the case that the subject of the examination is in the dark. 

Third, at the conclusion of an examination, the registrant is provided with a letter, either setting forth the deficiencies identified 

by the staff, or informing the registrant that the examination is 

being closed without findings. We have also been working to provide greater transparency to the firms under examination in other 

ways. 

For example, OCIE is amending the informational brochure that 

it provides to firms at the outset of every examination, so that they 

understand clearly, up front: first, that most examinations are 

going to be over within 120 days, after the end of the field work; 

second, that they are invited, as registrants under examination, to 

communicate with the exam staff about any questions that they 

might have regarding the structure of the examination; and third, 

they are given a phone number to call if any issues arise they feel 

more comfortable discussing through the SEC’s examination hotline. 

Staff at the SEC are also updating our public Web site so that, 

if you are a registrant being examined, you have immediate access 

to the names and phone numbers of the supervisory staff in each 

SEC field office. 

Mr. FOSSELLA. Thank you for those initiatives and changes. I’m 

just curious, is there any—do you see any more changes coming 

down the pike, or any more formal—a ratification of some of the 

other questions that have been raised in the underlying legislation, 

or is the system a more fluid dynamic process that we can anticipate? 

46

Mr. COX. Well, what has been accomplished has been accomplished in a relatively short period of time, as you are aware. 

Mr. FOSSELLA. Yes. 

Mr. COX. I am comfortable, as Chairman, that I have a good deal 

of organizational authority at the Commission. I am also absolutely 

convinced that the leadership of that office wants this process to 

work with as much transparency as possible, and wants to be sure 

that while, as you would imagine, these examiners aren’t always 

going to be the most popular people in the world, that the function 

that we are performing is fully understood, and that, in a larger 

sense, it is appreciated, if not by the subject of the examination at 

the moment, then by the investing public. 

And so, I think all of the Commissioners, who share this objective, and I, and the leadership of the office are going to be in a position to continually improve this process. The Office itself, as you 

know, is not the oldest part of the 72-year-old SEC. It’s a relatively 

recent addition. 

And I think that the additional resources that we have been able 

to deploy in the post-Enron world, with the additional funding 

that’s been provided by the Congress, mean that the way we do our 

work in this area is becoming more salient. It will give us more 

feedback and an opportunity to be more responsive to the market. 

Mr. FOSSELLA. Thank you very much, Mr. Chairman. Thank you. 

Mrs. KELLY. Thank you, Mr. Fossella. Chairman Cox, I have two 

questions left. One is not mine, one is a follow-up that I have been 

asked by my colleague, Chris Shays, to ask. This is the question 

he asked me about. 

He says that the Commission currently is exempting broker-dealers from the Investment Advisors Act if they give financial planning only incidental to their activities. And he is concerned about 

that, and wondered if you could speak about that. 

Mr. COX. I am happy to speak about that, and I am very sorry 

that I gave him an excellent answer to the wrong question. And I 

am sorry he is not here to hear it, but thank you for asking it, and 

letting me respond to it on the record. 

As you know, our broker-dealer investment adviser rule is currently the subject of litigation. There is a lawsuit challenging the 

rule by the Financial Planning Association. The SEC is going to be 

filing a brief in the next few weeks. The staff have provided some 

interpretive guidance that’s of a few-months-old vintage, and we 

are going to continue to consider additional guidance on this subject in the meanwhile. 

We are in the cauldron of this lawsuit right now, and I think 

that things rather rapidly should become clear on that front. 

Mrs. KELLY. Thank you. I am sure Chris will get that answer. 

So thank you very much. 

The final question I have is that companies in my district are increasingly coming to me with a concern about naked short-selling 

in their stocks. This is a practice that is sometimes used to hold 

down the valuations of companies, particularly manufacturers, retailers, and it leaves them vulnerable. While we know it’s technically illegal, it seems that the practice is common. And not only 

that, there seems to be growing evidence that it may be deliberately taking place. 

47

I understand that reg SHO has shown the need for more information from the markets about shorting and failed trade, and I 

wonder if you are willing today to speak about this, what’s being 

done. I think the SEC has—with the—I think that reg SHO has 

shown this need, and I think perhaps you might have something 

that you would be willing to share with the committee on it. 

Mr. COX. Well, first of all, I think you are absolutely right, that 

this is an important issue, and reg SHO, as written, may not be 

the final answer. The Commission adopted this regulation in 2004, 

in June. It didn’t become effective until last year. And so, we are 

just now in a position to begin to assess whether or not the rule 

is working as it was intended. 

Since the adoption of the rule, the data that we have assimilated 

thus far has told us that about 99 percent of all trades, by dollar 

value, settle on time without incident. So that’s certainly part of 

the good news. And the overwhelming majority of these fails are 

closed in less than 5 days, even within the 1 percent. 

So, on an average day, approximately 1 percent, by dollar value, 

of all trades including equity, debt, and municipal securities, fail 

to settle. And that’s where we’re focused here. Those failed positions, we are learning, are, in the main, getting closed out more 

quickly, now that the rule is in effect. 

But, like you, I am very concerned about what’s in the 1 percent, 

because it’s 1 percent of a very big number. The staff are developing rule amendments to further reduce the continuation of large 

fails to deliver position. In the meantime, the Commission has extended our existing pilot program through August of 2007, so that 

we can ensure that the progress that we have already made isn’t 

lost. 

Mrs. KELLY. Are you aware that publicly-traded companies and 

State regulators aren’t allowed to see the records of the failed 

trades from the Depository Trust and Clearing Corporation? Don’t 

you think that maybe State regulators should know if the amount 

of shares trading in a state-chartered corporation exceeds what is 

allowed under the State rules? 

Mr. COX. We are certainly interested in working very closely 

with our counterpart State regulators for a number of reasons, including the preponderance of the most egregious problems in this 

area, with thinly traded, smaller companies that are the normal 

domain of the blue sky regulators. And so there is ample opportunity to do better in this area. 

Mrs. KELLY. Thank you very much. 

Mr. COX. May I say also for Congressman Shays, who isn’t 

here—because I neglected to do so—that when the Commission, before I was Chairman, last looked at the issue of investment advisers and broker-dealers, they charged the staff with proposing a 

study of this issue. The staff have now given me enough information so that I can make a decision whether to go forward with that 

study, and how, and I very recently did so. 

So, among the other bits of news on that topic is that there will 

be an effort, in a very serious way, to infer from marketplace data 

what we should do by way of distinguishing between the roles of 

investment advisers, on the one hand, and broker-dealers, on the 

other hand. 

48

Mrs. KELLY. Thank you. You have been very patient with us on 

a very busy day, which is why so many people have come in and 

out of the committee. We are very grateful for the time that you 

have spent here, Mr. Chairman. 

The Chair notes that some members may have additional questions for this panel, so without objection, the hearing record will remain open for 30 days for Members to submit written questions to 

these witnesses, and to place their responses in the record. This 

hearing is adjourned. 

[Whereupon, at 12:58 p.m., the committee was adjourned.] 

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