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65–678 PDF 2011

LEGISLATIVE PROPOSALS TO PROMOTE 

JOB CREATION, CAPITAL FORMATION, 

AND MARKET CERTAINTY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MARCH 16, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–19 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

BARNEY FRANK, Massachusetts, Ranking 

Member 

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 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 16, 2011 ................................................................................................. 1 

Appendix: 

March 16, 2011 ................................................................................................. 41 

WITNESSES 

WEDNESDAY, MARCH 16, 2011 

Bertsch, Kenneth A., President and CEO, Society of Corporate Secretaries 

and Governance Professionals ............................................................................. 6 

Deutsch, Tom, Executive Director, American Securitization Forum (ASF) ........ 8 

Hendrickson, Pamela B., Chief Operating Officer, The Riverside Company ...... 9 

Silvers, Damon A., Policy Director and Special Counsel, AFL–CIO ................... 15 

Weild, David, Senior Advisor, Grant Thornton LLP ............................................ 11 

Zubrod, Luke, Director, Chatham Financial ......................................................... 13 

APPENDIX 

Prepared statements: 

Hurt, Hon. Robert ............................................................................................. 42 

Bertsch, Kenneth A. ......................................................................................... 44 

Deutsch, Tom .................................................................................................... 50 

Hendrickson, Pamela B. ................................................................................... 83 

Silvers, Damon A. ............................................................................................. 93 

Weild, David ...................................................................................................... 107 

Zubrod, Luke ..................................................................................................... 122 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Written statement of the Center On Executive Compensation .................... 125 

Written statement of the Credit Union National Association (CUNA) ........ 127 

Written statement of NASDAQ OMX ............................................................. 130 

Written statement of NYSE Euronext ............................................................ 132 

Hurt, Hon. Robert: 

Written responses to questions submitted to Pamela Hendrickson ............. 133 

(1) 

LEGISLATIVE PROPOSALS TO PROMOTE 

JOB CREATION, CAPITAL FORMATION, 

AND MARKET CERTAINTY 

Wednesday, March 16, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:04 p.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Schweikert, Royce, 

Manzullo, Neugebauer, McCotter, Posey, Hayworth, Hurt, Grimm, 

Stivers; Sherman, Lynch, Miller of North Carolina, Donnelly, 

Himes, Peters, and Green. 

Chairman GARRETT. This hearing of the Capital Markets Subcommittee will come to order. Today’s hearing is entitled, ‘‘Legislative Proposals to Promote Job Creation, Capital Formation, and 

Market Certainty.’’ Each side will be limited to 10 minutes for 

opening statements. 

And I will now yield myself 1 minute. 

Basically, all I want to say during my time is I am pleased to 

chair today’s hearing inasmuch as today is the first legislative 

hearing in which we are going to try to discuss real solutions that 

address several of the negative consequences that resulted from 

Dodd-Frank. And these are the areas as mentioned: job creation; 

capital formation; and market certainty. 

I am also pleased that we have with us today the subcommittee’s 

five freshmen. Basically, these freshmen have stepped up to the 

role of sponsoring the five pieces of legislation that we will be discussing from the panel shortly, which address the areas of promoting job creation and eliminating unnecessary government overreach. These are issues that they all engaged in during the campaign of last fall. And now that they are here in Washington, I 

would say that these freshmen are proving that they can get the 

job done and are doing something about these issues. 

Throughout the debate over Dodd-Frank in the last Congress, I 

often spoke about the many negative consequences, both intended 

and unintended, that it has caused. Now, some of those negative 

consequences are being exacerbated by what? By the rulemaking 

process that we are going through right now. 

2 

So my hope is that the bills in front of us today will spur a productive discussion that will continue here in this subcommittee and 

throughout this Congress. They will focus on ways to—as I have already said—get capital, private capital off the sidelines, back into 

the marketplace and create those jobs that we so desperately need. 

And with that, I will yield 3 minutes to the gentleman from California. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

Some say that all we worry about here is the next election. If you 

are only worried about the next election, you can achieve your purpose by passing statement bills, bills that might pass the House or 

committee, but have no chance in the other body. Hopefully, we are 

focusing on bills that will actually pass both bodies, be signed by 

the President and, hopefully, will focus on things that affect the 

capital markets, not just our own reelection chances. 

Dodd-Frank needs technical correction and improvement. Those 

who voted for it acknowledged that it would need a technical corrections bill. And we are going to need to pass several. But if we 

pass nothing except on a purely partisan basis—as I believe almost 

every vote at the full committee in markup has been absolutely 

party line, and that is thousands of votes we have cast already this 

year, each of us casting a couple dozen. 

And so, I hope that these bills will move forward and become bipartisan, both in content and in sponsorship. I am particularly concerned with the credit rating agencies. Senator Franken and I 

worked on an amendment that then got mangled in conference so 

that it is a little vague. And it gives a little too long to the SEC 

to act. What we need is to guarantee that we clarify that and that 

we expedite it and we make it clear to the SEC that within 2 years, 

we will not be in a circumstance where you get to pick your credit 

rating agencies when you are issuing a debt instrument. 

If the pitcher picks the umpire, it is a strike. We know that. And 

hopefully, we won’t be dealing with tactics that try to dissuade us 

from that by saying things like, ‘‘Well, just tell people not to rely 

on the credit rating agencies’ rating,’’ which begs the question, 

what social purpose do they serve, but also, how can you possibly 

not rely on it? 

Even if you are investing in a mutual fund, you have to choose 

between several different mutual funds. Which one of those funds, 

both with a 5 percent rate of return, is investing in the safest instrument? I guess if you have $10,000 to invest and you want to 

spend a couple million dollars evaluating the portfolios on your 

own, you could reach a conclusion. Otherwise, you have to rely on 

the credit rating agency. 

We do have one bill that deals with credit rating agencies, but 

it does not deal with the issue that we have to deal with, which 

is issuers selecting their own rater. And I hope that legislation that 

will drive this change forward may—on an expedited basis, will 

pass this committee on a bipartisan basis, whether that is through 

an amendment to the Stivers bill or as separate legislation. 

I yield back. 

Chairman GARRETT. And I thank the gentleman. I think we are 

on the same page, hoping to see these bills get through the process 

and to the White House and signed. 

3 

And with that, I will yield 1 minute and 20 seconds to the gentleman from Arizona. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. One minute, 20 seconds. Okay. I am going to actually speak to H.R. 1070, which is the 

Small Company Capital Formation Act of 2011. And part of this, 

we have had a couple of the folks who are here to testify today 

have actually come and visited me in my office talking about what 

has gone on with Reg A. 

If you take a look at the little charts—and we have a handful of 

charts we have mocked up, you see that nice, long, flat line on the 

right-hand side? That is where we have been now since 1992, 1993 

where we have not raised the dollar amount that you can take a 

small company and go and put it out on the market. 

If we truly care about creation of jobs, if we care about capital 

formation and getting that velocity of innovative ideas in the marketplace where you and I can buy and sell them in some type of 

stock or equity, I think this bill is simple. It directs the SEC to 

raise that limit up. We would like to raise it up to $50 million for 

initial offerings within those Reg A rules. 

Thank you, Mr. Chairman. 

Chairman GARRETT. I thank the gentleman. 

Mr. Peters is recognized for 2 minutes. 

Mr. PETERS. Thank you, Mr. Chairman, and thank you for holding a hearing on legislative proposals to promote job creation. I 

think there is bipartisan agreement that job creation should be our 

top priority. And some of the bills that we will be dealing with 

today are issues that were worked on in the last Congress in a bipartisan fashion. 

For example, I worked with Chairman Garrett as well as Mr. Meeks on including a provision in Dodd-Frank that includes a $150 

million exemption from the SEC registration requirement for private funds and also directs the SEC to come up with a registration 

scheme for larger firms that takes into account the amount of risk 

they pose for investors or for the larger economy. I think the 

amendment provides the SEC with the flexibility that they need to 

come up with a less burdensome registration scheme and I look forward to continuing to work with Chairman Garrett on this issue. 

I also worked closely with many of my colleagues on both sides 

of the aisle and in both Houses of Congress on the derivatives title 

of Dodd-Frank. Bringing greater regulation and transparency to 

these markets is of critical importance. But I remain committed to 

making sure that end-users who are using derivatives to hedge actual risk are not required to post margins. It is important that as 

we revisit the end-user exemption, we keep in mind the important 

role that captive finance companies play in supporting the work 

that end-users do to create jobs and to grow our economy and also 

pension funds that provide retirement security to millions of workers and retirees. 

Mr. Chairman, I yield back the balance of my time. 

Chairman GARRETT. Thank you. 

The gentleman from California for 1 minute and 20 seconds? 

Mr. ROYCE. Yes, thank you, Mr. Chairman. I think the future of 

U.S. competitiveness is dependent upon us looking at three glaring 

impediments to capital formation: first, unnecessary and duplicaVerDate Nov 24 2008 17:05 Jun 16, 2011 Jkt 065678 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\65678.TXT TERRIE
4 

tive regulation; second, excessive litigation; and third, a convoluted 

Tax Code. We have the second highest corporate tax code in the 

world. 

In terms of raising capital through IPOs, I have watched us go 

from a situation where half of the world’s new public companies in 

the 1990s were here to one today where we have 13 percent. And, 

as Mr. Weild notes in his testimony, there has been a precipitous 

decline in the number of publicly listed companies in the United 

States on our exchanges. 

We had 8,823 in 1997, and 5,091 at the end of last month. That 

is a 42 percent decline. And this is the definition of capital flight. 

When capital, both human and financial, can relocate anywhere 

around the globe with the type of ease that they have today, we 

have to reassess the business environment that we have created 

here. 

The three problems I indicated are all problems that Congress 

has contributed to mightily. And I am grateful to the Chair for taking a critical step in this endeavor and I look forward to the testimony of our witnesses. 

Thank you, Mr. Chairman. 

Chairman GARRETT. I thank the gentleman. 

To the gentlelady from New York for a minute and 20 seconds? 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

And thank you to our witnesses for joining us. Congressman 

Royce’s comment regarding the business environment could not be 

more apt. And vis-a-vis that, this week we have introduced the 

Burdensome Data Collection Relief Act, H.R. 1062. And that would 

repeal Section 953 of Dodd-Frank. There have been statements of 

support from both sides of our political aisle supporting this concept of repeal. And I appreciate that. 

Existing law does, as you all know, require extensive disclosure 

regarding executive compensation. And all material information 

that a company that issues stock—is a public company—is required 

to be disclosed, material information that would affect a decision to 

invest or divest or vote for directors. The legislation that we have 

proposed in H.R. 1062 only applies to immaterial disclosures, which 

is, in fact, virtually all of that particular section. 

One lesson of our financial crisis that started, as we know, in 

2008, is the importance of risks and incentives associated with executive compensation. H.R. 1062 focuses disclosures regarding executive compensation on these risks and incentives by eliminating 

irrelevant and confusing, extraneous information. 

The disclosure requirement, Section 953(b), as it now exists 

would be costly and time-consuming for employers, would serve no 

useful purpose for company shareholders, and most crucially, would 

divert resources from job creation. And that is our critical role 

here. So for these reasons, we need to repeal Section 953(b). 

I thank you again for your testimony today. 

And I thank the chairman. I yield back. 

Chairman GARRETT. The gentlelady yields back. 

The gentleman from Virginia for a minute and 20 seconds? 

Mr. HURT. Thank you, Mr. Chairman. 

I want to thank you all for being here this afternoon. 

5 

Mr. Chairman, I want to thank you for holding today’s hearing 

on these important legislative proposals that will facilitate job creation by increasing the flow of private capital to small businesses. 

As noted by Republican and Democrat Members in last week’s 

hearing with the SEC, there is serious concern about the effects of 

the new government mandate for advisers to private equity included in Dodd-Frank. These unnecessary registration requirements, which do not make the financial system more stable or less 

risky, will impose an undue burden on small and mid-sized private 

equity firms and will decrease capital available to spur job growth. 

This is why I have introduced H.R. 1082, the Small Business 

Capital Access and Job Preservation Act, with bipartisan support. 

If enacted, private equity advisers will be given the same exemption under Dodd-Frank that venture capital advisers receive. This 

will allow small businesses to access capital, expand, and get people back to work. With unemployment still unacceptably high in 

my district, Virginia’s 5th District, and across the country, now is 

not the time to impose onerous and unnecessary regulatory requirements that force firms to divert essential capital from preserving and creating jobs. 

I look forward to the testimony of our witnesses and thank them 

for their appearance before our subcommittee today. 

Thank you, Mr. Chairman. And I yield back the balance of my 

time. 

Chairman GARRETT. I thank the gentleman. 

Now, the gentleman we have been waiting to hear from is recognized for a minute and 20 seconds. 

Mr. STIVERS. Thank you, Mr. Chairman. You will always be waiting to hear from me because I am the most junior member of the 

committee. I would like to thank the chairman for calling this important hearing. 

And the five bills we are going to talk about today are going to 

be addressing some of the most burdensome parts of the DoddFrank bill that are having a negative impact on jobs in our country. Specifically, the proposal that I have brought forward deals 

with the asset-backed securities market. It is the Asset-Backed 

Market Stabilization Act of 2011. 

Last year, in Dodd-Frank, the credit rating agencies were basically held liable for potential shareholder lawsuits. And as a result 

of that, the Securities and Exchange Commission had to issue two 

no-action letters to get the asset-backed securities market moving 

again. And unfortunately, that is not a way to make things work. 

We can’t have laws on the book and have regulatory agencies 

saying we are not going to enforce this law. So I think there is a 

better way to move forward. 

I know Mr. Sherman talked earlier about the conflict of interest. 

I think we need to deal with both of those things long-term. And 

we are looking at making some changes that may deal with a little 

more of that in this bill. But this bill will basically do away with 

Section 939(g) of the Dodd-Frank bill and go back to the old Section 

436. 

It will help folks like Ford, and like Honda, that employs about 

4,400 people in my district and built 400,000 cars last year. This 

6 

is a way to finance the creation of things and make sure that we 

continue to have jobs in this country. 

I look forward to hearing the witnesses. And I appreciate the opportunity to bring this bill forward. 

Thank you, Mr. Chairman. I yield back. 

Chairman GARRETT. The gentleman yields back. 

And at this point, I welcome again the entire panel for being 

with us here today. Without objection, your complete statements 

will be made a part of the record. And as those of you who have 

been on these panels before know that you will each be recognized 

for 5 minutes. And, of course, before you are the red, green, and 

yellow lights to advise you to keep you within that timeframe, if 

we can do so. 

So with that, I begin with 5 minutes to Mr. Bertsch, please. 

STATEMENT OF KENNETH A. BERTSCH, PRESIDENT AND CEO, 

SOCIETY OF CORPORATE SECRETARIES AND GOVERNANCE 

PROFESSIONALS 

Mr. BERTSCH. Thanks. My name is Ken Bertsch, and I am the 

new executive head of the Society of Corporate Secretaries and 

Governance Professionals, which is an association of governance officers. We have 3,100 members. 

Thank you for the opportunity to testify on the repeal of Section 

953(b) of the Dodd-Frank Act, which requires company disclosure 

on the pay ratio, as Congresswoman Hayworth just mentioned, between the CEO and the medium-paid employees of the company. 

We acknowledge the public policy concern on widening pay gaps in 

the United States. However, we believe the required disclosure will 

not be material or meaningful to investors and that Section 953(b) 

as now written will be difficult and expensive to implement. 

We note also, by the way, that the SEC faces challenges in implementing many Dodd-Frank reforms and is otherwise resourceconstrained. The SEC must prioritize and focus on the most important issues facing investors in the securities market. Accordingly, 

we believe the provision should be repealed. If Congress wishes to 

move ahead on the concept of the pay ratio, a more workable legislation should be enacted. 

We have two basic problems here. One, the pay ratio would not 

provide meaningful information to investors, in our view. Under existing SEC requirements, investors get extensive disclosure on executive compensation. 

SEC disclosure documents are meant to contain information that 

a reasonable investor needs to make an investment decision. SEC 

disclosure documents are not meant to contain every item of information that any investor could possibly want to know. Proliferation 

of disclosure requirements not censored on a disciplined standard 

will make SEC disclosure documents unusable for the average investor. 

The pay ratio will not provide meaningful, comparable data because it is not based on similarly situated employees. There is a 

great deal of noise around what constitutes a company employee 

with many firms contracting out work locally or globally and others 

not doing so. Some companies have overseas locations with lower 

pay levels where much of the work is done. They have outsourced. 

7 

These companies may have better pay ratios than those that 

have chosen to maintain their operations, call centers, for example, 

in the United States. Companies with franchisees rather than company staff stores will also likely have a better pay ratio. The pay 

ratio will not be a meaningful measure to compare the CEO’s compensation or to compare the pay practices within a single industry. 

We believe investors have indicated limited interest in obtaining 

such pay ratio information from companies. We are aware of votes 

last year on 10 shareholder proposals requesting reports on pay 

disparity. On average, the proposals were opposed by 93.9 percent 

of the shares voted. They received lower levels of support than 

many other shareholder proposals concerning executive compensation. 

Finally, if investors are concerned that they need additional disclosure on pay equity, they can exert pressure through say-on-pay 

votes, votes on directors, and shareholder proposals. 

The second major area of concern—the requirement as written is 

burdensome well beyond its benefit. Given the definition used in 

this provision, we fear that large, worldwide U.S. companies will 

not be able to calculate the median of the annual total compensation of all employees, as the law specifies, with the degree of precision and certainty required for information filed under U.S. securities laws. 

Payroll systems are not set up to gather the kind of information 

required under this provision. This is especially the case for companies organized into multiple business operating units. Those business units keep records and have internal controls over what each 

employee is paid, but they report aggregate figures to the parent 

company for inclusion in consolidated financial reports for public 

filings. 

A company would have to convert the pay of each employee globally into the elaborate pay formula applicable to the named executive officers in the summary compensation table. To our knowledge, 

no public company now calculates each employee’s total compensation this way. For a company with tens of thousands of employees, 

this would be a very large and costly task, at best. 

My written testimony lists some of the questions that corporate 

staff must answer in trying to comply. I would point to one in particular that—and there are really a lot of different questions that 

would have to be answered. One that is a little bit different than 

other understanding is that local privacy laws in some markets actually prevent the export of personal compensation information 

across borders without employee consent. 

In summary, we believe the provision is simply unworkable and 

would produce information that is not meaningful to investors. 

Thank you. 

[The prepared statement of Mr. Bertsch can be found on page 44 

of the appendix.] 

Chairman GARRETT. I thank the gentleman. 

Mr. Deutsch for 5 minutes? 

8 

STATEMENT OF TOM DEUTSCH, EXECUTIVE DIRECTOR, 

AMERICAN SECURITIZATION FORUM (ASF) 

Mr. DEUTSCH. Thank you very much, Chairman Garrett, for inviting me to testify here on behalf of the American Securitization 

Forum. My name is Tom Deutsch. I am the executive director of 

the organization that represents over 330 member institutions who 

originate the collateral for most mortgage and asset-backed 

securitizations in America. That includes auto loans, student loan 

companies, mortgage originators, small banks, large banks, as well 

as lenders to small and medium-sized businesses. 

Let me first just address a couple key points of the importance 

of the securitization markets to the overall global economy, in particular, the U.S. economy. Currently, there are over $11 trillion 

outstanding of securitized assets in America, of all these different 

asset classes: credit cards; student loans; asset-backed commercial 

paper, etc. In particular, 91 percent of all outstanding loans—at 

least currently, loans that are being originated to support auto 

loans to consumers, 91 percent of those are financed through the 

securitization process. 

Finally, even talking about Government-Sponsored Enterprises. 

Although 95 percent of mortgages in America today are backed by 

the U.S. Government, Fannie Mae, Freddie Mac, and Ginnie Mae 

all securitize those loans into the secondary market and sell them 

to the institutional investors such as pension funds, mutual funds, 

insurance companies, and others who seek returns on those investments. 

But as we saw in 2009, once the securitization market stopped 

working, the credit market stopped working. It is a very quick— 

and, unfortunately for American consumers, unfortunate that they 

wouldn’t be able to access auto loans, credit cards, and student 

loans at many of the same levels, certainly not looking to go back 

to a 2006 credit availability, but we certainly don’t want to go back 

to a 2009 credit availability, either. 

As we saw strong consumer ABS demand uptick into 2010, we 

had significant issuance of auto and other asset-backed 

securitizations. We also saw credit availability expand for more 

lower-income borrowers and also at cheaper rates throughout the 

United States. 

My purpose in testifying here today is to talk about two issues. 

In my written statement, I go into a great amount of detail about 

some key issues related to securitization that concerns the orderly 

liquidation authority provisions of the Dodd-Frank Act. There is a 

tremendous amount of detail, and I will leave that to your future 

reading. 

But in my oral remarks today, I do want to focus on the ASF’s 

strong support for Congressman Stivers’ legislation to effectively 

repeal the repeal of 436(g). Although he has not introduced it yet, 

we have seen the draft that is available online. 

In this testimony, I would like to provide a little bit of background of how 436(g) works and in particular, why it is important 

for the securitization markets that we have a long-term fix. As 

Congressman Stivers indicated, on July 22nd, the repeal of 436(g) 

went into effect. That was the day after President Obama signed 

9 

Dodd-Frank into law. That same day, the securitization markets 

completely shut down. 

No issuer of auto loans, student loans, etc., was able to put a 

securitization in the market because of a peculiar SEC regulation, 

items 1103 and 1120, that specifically require that ratings be included in statutory prospectuses. The securitization markets are 

the only markets to be impacted by this. 

Because of this, credit rating agencies were not willing to provide 

consent to include those ratings into the statutory prospectuses because at that point, they had become subject to strict Section 11 

liability. That is in their ratings, when they are providing some forward-looking statements about the potential credit quality out of 

the underlying assets and what that performance may be over 

time, they are very concerned that with 20/20 hindsight 5 years 

down the road, you could look back and say, that assessment 

wasn’t exactly right. We are going to bring litigation against you 

because you didn’t have the right assumptions. 

This is very different than existing parties that are subject to 

Section 11 liability under the Securities Act because they look at 

existing facts and things that they can actually verify as opposed 

to make forward-looking statements. That is why it is critical to 

distinguish between credit rating agencies being subject to this Section 11 strict liability and other potential actors that are currently 

subject to this liability. 

But at this point, the markets have resumed under the SEC’s noaction letter, which we certainly are very grateful for the SEC staff 

to be able to keep the securitization markets going. But a no-action 

letter is certainly not a long-term or permanent fix. So what we are 

proposing and what we are strongly supportive of is legislation that 

would ultimately repeal the repeal of Rule 436(g) so that the 

securitization markets can go back to normal and have the permanency associated with being able to understand the rules and not 

have this subject to change in the SEC’s position. 

I thank you very much for the time. And I look forward to answering any questions that committee members may have. 

[The prepared statement of Mr. Deutsch can be found on page 50 

of the appendix.] 

Chairman GARRETT. And I thank you for your testimony. 

Ms. Hendrickson for 5 minutes? 

STATEMENT OF PAMELA B. HENDRICKSON, CHIEF OPERATING 

OFFICER, THE RIVERSIDE COMPANY 

Ms. HENDRICKSON. Chairman Garrett, members of the subcommittee— 

Chairman GARRETT. Can you just pull your microphone up a little bit? 

Ms. HENDRICKSON. Sorry. 

Chairman GARRETT. And then you might want to even pull it up 

closer to you a little bit. 

Ms. HENDRICKSON. Can you hear me now? 

Chairman GARRETT. There you go. 

Ms. HENDRICKSON. Chairman Garrett, members of the subcommittee, my name is Pam Hendrickson, and I am the chief operating officer of The Riverside Company. 

10 

Riverside is a private equity firm that manages $3.5 billion of investor funds. We use that money to buy and build small companies 

that, with our capital and guidance, will grow and create hundreds 

of jobs. Today, the 50 companies we own in the United States together employ more than 10,000 people. 

There are more than 2,000 small and mid-market private equity 

firms like us in the United States. I am here today to support legislation introduced by Representative Hurt of Virginia that would 

eliminate the Dodd-Frank requirement that private equity firms 

register with and report to the Securities and Exchange Commission under the Investment Advisers Act of 1940. 

Registration will not accomplish Dodd-Frank’s stated purpose of 

helping identify and reduce systemic risk in the U.S. financial system. Let me begin by sharing a story. Commonwealth Laminating 

and Coating is a small company based in Martinsville, Virginia. It 

manufactures solar window films that help shield cars, houses, and 

commercial properties from the sun’s heat. 

Its products are sold all over the world, but they are all manufactured in Martinsville. In 2006, CEO Steve Phillips realized that he 

needed much more capital to continue to grow his company. Riverside was approached as a potential capital source and acquired a 

majority interest in CLC. 

At the height of the recession, Riverside and CLC together invested an additional $16 million in capital to significantly boost the 

company’s production capacity. Together, we grew jobs by 73 percent. 

By the time Riverside sold CLC last summer, the company had 

grown its earnings by 277 percent. The teachers, firefighters, and 

government employees whose pension funds invested in Riverside 

received a significant return. 

The bottom line is that with Riverside’s help, this small company 

in Martinsville nearly quadrupled its earnings and significantly increased its employee base during our ownership period. This is 

what Riverside and firms like us do every day. 

But suppose the CLC investment hadn’t turned out so well. 

Could a failure there have created the type of cascading losses that 

caused the financial crisis? The answer is a resounding no. 

Private equity investors commit capital over a 10-year period. 

They generally have no right to pull their money out of a fund. So 

there simply couldn’t be a run on the bank. 

Any financial loss would have been confined to this single investment. Private equity transactions are not interconnected with other 

financial market players. And they are not related to each other. 

The failure of any one company cannot cause a ripple effect. Our 

world is not the Wild West. Our industry is closely watched and 

heavily scrutinized by a very sophisticated group of investors, generally large pension funds, foundations, and endowments who employ highly-trained consultants and experienced lawyers. 

Private equity has been around for 50 years and has survived at 

least 3 cyclical downturns. In all those years, neither the SEC nor 

this committee have had to devote time to worrying about negative 

macroeconomic impacts or investor fraud in private equity. We invest in businesses and people, not publicly traded securities. 

11 

What happens to Riverside if the proposed registration and reporting requirements take effect? Let us look at just one issue, 

valuation. Valuing private companies where there is no publicly 

traded stock is an art, not a science. It is challenging, and it is expensive. While we develop quarterly valuations for our investors, 

they understand that the true value of an investment is known 

only when the acquired company is sold and profits are returned 

to them. 

Under the proposed new rule, all private equity firms would be 

required to calculate the value and performance of each of their 

funds, and, therefore, each of their companies, on a monthly basis. 

You can do the math. Our 50 companies times 12 months means 

we would have to undertake 600 separate valuations each year to 

comply with the regulation. 

Under the new rules, small firms might need to calculate 240,000 

company values each year. That is for members of the Association 

for Corporate Growth, who represent about 20,000 small companies. According to comments filed with the SEC, estimated annual 

costs per firm of this exercise range from $500,000 to $1 million. 

To conclude, private equity exists in large part because the public equity markets do not do a good job of serving the capital needs 

of small companies, the companies that generate the most job 

growth. Instead of imposing additional costs and regulatory burdens, we should be supporting a system that has steadily provided 

critical capital to small and growing businesses, thereby strengthening companies, communities, and creating more jobs. 

Thank you for the opportunity. 

[The prepared statement of Ms. Hendrickson can be found on 

page 83 of the appendix.] 

Chairman GARRETT. Mr. Weild? 

STATEMENT OF DAVID WEILD, SENIOR ADVISOR, GRANT 

THORNTON LLP 

Mr. WEILD. Thank you. Chairman Garrett and members of the 

subcommittee, thank you for inviting me to testify this afternoon 

on job creation, capital formation, and market certainty, issues that 

are absolutely critical to our Nation’s economic future. My name is 

David Weild, and I am a senior adviser for the Capital Markets 

Group of Grant Thornton, one of the six global audit tax and advisory organizations. 

The United States stock market, once the envy of the world, has 

suffered a devastating decline in numbers of small initial public offerings. Our research and analysis of relevant data strongly demonstrates that small businesses and entrepreneurs cannot access 

the capital they need to grow jobs. The United States is losing 

more public companies from our listed stock exchanges than we are 

replacing with new IPOs. 

When measured by number of listed companies, America’s stock 

exchanges are declining while those of other developed nations are 

increasing. It is imperative that Congress, regulators, and stakeholders in the debate evaluate and take action to increase the number of U.S. publicly listed companies. An increase to the Regulation 

A ceiling will provide a less costly and more effective alternative 

for smaller entrepreneurial companies that want to access the pubVerDate Nov 24 2008 17:05 Jun 16, 2011 Jkt 065678 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\65678.TXT TERRIE
12 

lic capital markets and may also enable smaller growth-oriented 

companies to access the public market at an earlier stage in their 

growth cycle. 

We applaud the Small Company Capital Formation Act as the 

beginning of a campaign to bring back the small IPO, the U.S. 

economy and our stock markets. Regulation A was originally enacted during the Great Depression to help the economy by improving small-business access to equity capital. Huge startups and 

growth companies have the option to borrow money from a bank, 

and consequently, access equity risk capital is essential to drive entrepreneurship. 

This bill does three things that are enormously beneficial for 

small companies’ capital formation and in turn, the U.S. economy. 

First, it will drive down costs for issuers by permitting the use of 

a simpler offering circular for the SEC’s review. Second, it opens 

up the Regulation A exemption to a size—this is important—that 

will allow companies to list on the New York Stock Exchange and 

NASDAQ and to avail themselves of the so-called ‘‘blue sky’’ exemption, thus avoiding extremely costly State-by-State filings. 

And third, it will allow issuers to gauge the viability of an offering by meeting with investors before incurring the significant costs 

of an offering. This last so-called ‘‘testing the waters’’ provision 

may not seem like much, but there has been a steady increase in 

IPOs that are postponed, withdrawn, priced below the low end of 

the range of the IPO filing range, or that have broken the IPO 

issue price within 30 days of the completion of an offering. These 

so-called ‘‘busted deals’’ can be ruinous to small companies. 

I fully endorse the passage of this bill to increase the cap on Regulation A from $5 million to $50 million with the following requirements: one, that issuers file audited statements with the Securities 

and Exchange Commission and distribute such statements to prospective investors; two, that issuers be required to submit their offering statements to the SEC electronically; three, that periodic disclosures be determined by the SEC—we recommend that they 

mimic those required of registered companies—and four, that the 

SEC stipulate so-called ‘‘bad boy’’ provisions to disqualify from participation in this market those individuals or entities with a disciplinary or criminal history. 

I applaud the subcommittee for seeking solutions to the capital 

formation challenges that small-growth companies face. Passage of 

the Regulation A draft bill is a necessary first step in the campaign 

to bring back the small IPO, generate jobs, and revitalize the U.S. 

economy. 

Please note, however, that this Regulation A draft bill alone is 

not going to be sufficient to get the IPO market back on track and 

to get America back on the path to prosperity. I encourage Congress to seek many solutions, including a congressional charter for 

a new stock market, one that focuses on providing the essential 

economic model that sustains the infrastructure needed to support 

small public companies and drive that long-term growth and prosperity that we all seek for all Americans. A market such as this 

would also drive tax revenues without costing the taxpayers a 

dime. 

13 

Thank you for this opportunity to present on such an incredibly 

important topic. I am pleased to answer any questions. Thank you. 

[The prepared statement of Mr. Weild can be found on page 107 

of the appendix.] 

Chairman GARRETT. I appreciate your testimony. We will have 

questions in a moment. 

Mr. Zubrod for 5 minutes? 

STATEMENT OF LUKE ZUBROD, DIRECTOR, CHATHAM 

FINANCIAL 

Mr. ZUBROD. Good afternoon, Chairman Garrett, and members of 

the subcommittee. I thank you for the opportunity to testify today 

regarding legislative proposals to promote job creation, capital formation, and market certainty. My name is Luke Zubrod, and I am 

a director at Chatham Financial. 

Today, Chatham speaks on behalf of the Coalition for Derivatives 

End Users. The Coalition represents thousands of companies across 

the United States that utilize over-the-counter derivatives to manage day-to-day business risk. Chatham is an independent adviser 

to businesses that use derivatives to reduce risk. A global firm 

based in Pennsylvania, Chatham serves over 1,000 end-user clients, ranging from Fortune 100 companies to small businesses, including clients in 46 States and every State represented by members of this subcommittee. 

The Coalition supports the efforts of this subcommittee to pass 

legislation aimed at reducing systemic risk and increasing transparency in the OTC derivatives market. The Coalition also appreciates the bipartisan nature of the present undertaking. The overwhelming and bipartisan support for end-users was made clear in 

the amendments adopted to the financial reform legislation that 

passed the House in December 2009. 

Several amendments, including the Murphy-McMahon amendment which passed with 304 votes, were intended to ensure that 

the salient economic requirements of the Act were appropriately focused on those entities whose use of derivatives could jeopardize financial stability. In essence, they were intended to protect endusers from onerous bank-like regulation that would divert precious 

working capital from job-creating activities, including research and 

development and business expansion. 

Let me turn to where things now stand in terms of implementing 

the derivatives title of the Dodd-Frank Act and point out where 

end-users have the greatest concern. The Coalition appreciates recent comments by Federal Reserve Chairman Ben Bernanke, CFTC 

Chairman Gary Gensler, and SEC Chairman Mary Schapiro indicating that margin requirements should not be imposed retroactively. Appropriately, the chairmen recognized that the retroactive imposition of a margin requirement would upset the reasonable expectations of market participants when they entered into 

preexisting contracts and could severely restrict economic growth. 

The Coalition is concerned, however, by recent testimony provided by regulators concerning the imposition of margin requirements on end-user transactions used prudently for the purpose of 

risk management. Congress recognized that the imposition of margins on end-users would divert working capital from job-creating 

14 

activities and hamper economic growth while offering no appreciable mitigation of systemic risk. 

Indeed, following the conclusion of the conference committee, the 

chairmen of the four committees with primary jurisdiction over 

Title 7 took steps to make clear that regulators did not have the 

authority to impose margins on end-user hedges. However, in spite 

of congressional intent and the clear language of the statute, some 

regulators appear to have interpreted Title 7 as giving them authority to impose margin on end-user hedges and even worse, requiring swap dealers to impose margin requirements on all enduser hedges. We respectfully request that this committee provide 

end-users with certainty by clarifying that their hedges will not be 

subject to margin requirements. 

The Coalition appreciates the hard work of the CFTC, the SEC, 

and prudential regulators in proposing more than half of the 150 

or more expected rules to meet the 1-year rulemaking timeline 

mandated by Congress. The regulators have run an open and 

transparent process and have met with representatives of the Coalition approximately a dozen times. However, we are concerned 

that the statutory deadline for rulemaking does not allow regulators sufficient time to incorporate recommendations, craft 

thoughtful rules, and conduct adequate cost/benefit analyses. 

The regulators have sufficient authority to adopt a phased-in approach to implementation of rules. We are eager to ensure the final 

rules strengthen the market and minimize unintended and unnecessary consequences. 

We therefore, respectfully ask this committee to consider extending the date by which final derivatives regulations must be promulgated, which is now set at July 15, 2011. Additionally, I elaborate 

in my written testimony on two more issues, which I will briefly 

summarize. 

First, though we strongly support the legislation’s transparency 

objective, we are concerned that proposed real-time reporting rules 

could inadvertently jeopardize end-users’ ability to secure efficient 

market pricing in certain situations. Second, the Coalition is concerned that capital adequacy guidelines finalized by the Basel Committee on banking supervision late last year could unnecessarily 

and substantially increase end-user costs incurred as they use derivatives to manage their business risk. 

As regulators go about the important work of finalizing the rules 

intended to address problems revealed by the financial crisis, it is 

critical that well-functioning aspects of these markets not be 

harmed. We appreciate your attention to these concerns and look 

forward to continuing to support the subcommittee’s efforts to ensure that derivatives regulations do not unnecessarily burden 

American businesses, jeopardize economic growth, or harm job creation. 

Thank you for the opportunity to testify today. 

[The prepared statement of Mr. Zubrod can be found on page 122 

of the appendix.] 

Chairman GARRETT. And I thank you. 

Mr. Silvers for 5 minutes? 

15 

STATEMENT OF DAMON A. SILVERS, POLICY DIRECTOR AND 

SPECIAL COUNSEL, AFL-CIO 

Mr. SILVERS. Thank you, Mr. Chairman. I am Damon Silvers. I 

am the policy director and special counsel for the AFL-CIO. I am 

testifying today on behalf of the Americans for Financial Reform 

and the Consumer Federation of America as well as for the AFLCIO. 

The 250 member organizations of Americans for Financial Reform represent well over 50 million Americans and their families. 

I should note I am also the Deputy Chair of the Congressional 

Oversight Panel for TARP, however, I am not here on behalf of either the panel or its staff. 

The title of today’s hearing is, ‘‘Legislative Proposals to Promote 

Job Creation, Capital Formation, and Market Certainty.’’ These are 

the very goals that the Dodd-Frank Wall Street Reform and Consumer Protection Act sought to achieve after the most traumatic financial crisis since the Great Depression cost our Nation 8 million 

jobs, left 13 million families facing home foreclosure, and destroyed 

$10 trillion in household wealth. 

Well-regulated financial markets facilitate capital formation and 

help private companies obtain the financing they need to grow and 

create jobs. Poorly-regulated markets, such as we have seen over 

and over again in the last 15 years, lead to bubbles and panics and 

excess volatility, which destroy confidence and jobs. If we want 

well-regulated markets, Congress must first give regulators the opportunity to implement the Dodd-Frank Act and the financing necessary to do so effectively. 

The American people are genuinely worried—I think that is an 

understatement—about unemployment and are frustrated that 

Congress is focused on side issues that will not help people get 

back to work. A tracking poll conducted by the Kaiser Foundation 

in February found that 71 percent of adults in this country feel 

that Congress is paying too little attention to the economy and jobs. 

Tragically, cynical exercises in financial deregulation, such as the 

bills under consideration today, are only going to intensify public 

frustration with this Congress. 

If there was a truth-in-labeling act for Congress, the Business 

Risk Mitigation and Price Stabilization Act would be called the 

‘‘Help Create Another AIG Act.’’ The proposal would amend the 

definition of a major swap participant to prevent regulators from 

designating from special oversight undercapitalized and highly-leveraged financial institutions that maintain major derivatives positions that threaten U.S. financial stability. 

I have here the Congressional Oversight Panel’s 300-page unanimous bipartisan report on AIG that will hopefully help refresh the 

subcommittee’s memory as to where this type of deregulation leads. 

The Burdensome Data Collection Relief Act, which would repeal 

the Dodd-Frank requirement that issuers disclose the ratio between CEO pay and median worker pay, should be called the ‘‘Promote CEO Pay Secrecy Act.’’ 

I have here the Congressional Oversight Panel’s unanimous bipartisan report on executive compensation and the TARP, which, 

among other things, contains the testimony of the special master 

for executive pay that executives of our country’s major financial 

16 

firms ‘‘feathered their own nests to the tune of billions of dollars 

while their companies were receiving public money and laying off 

tens of thousands of Americans.’’ 

The Small Business Capital Access and Job Preservation Act, 

which would amend the Investment Advisers Act to provide a registration exemption for private equity fund advisers, should be 

called the ‘‘No Accountability for Leveraged Buy-Out Funds Act.’’ 

I have here the special regulatory reform report of the Congressional Oversight Panel, which lays out the systemic risks associated with leveraged private pools of capital. And if one has an interest, one could take a look at tens of thousands of jobs lost 

through leveraged buy-outs over the last 2 decades in the United 

States. 

The Small Company Capital Formation Act, which would allow 

offerings of up to $50 million to rely on the Regulation A exemption 

and seek capital from the investing public without audited financial statements should be called the ‘‘Promote Penny Stock Fraud 

Act.’’ And finally, the Asset-Backed Market Stabilization Act, which 

would exempt the rating agencies from the same standards that 

apply to other experts giving an opinion in connection with offerings of asset-backed securities—remember asset-backed securities. 

They are, after all, the market that caused the collapse of our economy—would be called the ‘‘Illegal Immunity for the People who 

Brought You the Financial Panic Act.’’ 

In reality, these legislative proposals are not attempts to help 

put Americans back to work or to restore confidence in our financial markets. They are a systematic effort to chip away at the first 

meaningful steps toward reregulating our financial markets and restoring some level of stability after 30 years of deregulation led to 

the worst financial crisis, the worst unemployment, and the greatest economic suffering in our country since the Great Depression. 

For these reasons, the Americans for Financial Reform, the AFLCIO, and the Consumer Federation of America strongly oppose 

each of these efforts on behalf of Wall Street interests to weaken 

the Dodd-Frank Act and to further put our country in danger of repeating the experience of 2008. Thank you. 

[The prepared statement of Mr. Silvers can be found on page 93 

of the appendix.] 

Chairman GARRETT. I thank the gentleman for his testimony. 

But if we rename all the bills, we won’t continue to get the bipartisan support that we have been getting for all of them. 

[laughter] 

So with that, I thank the panel for all their testimony. 

And we now go for questioning to the gentleman from Virginia 

for the first 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. And I appreciate you taking me out of order. 

Mr. Silvers, I was particularly interested in your testimony. I assume that you would agree—it sounds like you have been around 

here long enough. It sounds like to me you would agree that there 

are significant costs to increased regulations to businesses—in this 

case, private equity funds—which have to comply with these new 

regulations. Do you agree with that? 

17 

Mr. SILVERS. I would compare that to telling you that every time 

you sneeze, there is a cost. The regulations that the Dodd-Frank 

Act subjects private equity funds to, which is registration under the 

Investment Company Act, I think is widely understood to be among 

the least onerous of the regulations that we apply to financial markets. 

Mr. HURT. But you would agree there is a cost? 

Mr. SILVERS. I think there is a—as I said, I think there is a cost 

to every act one takes in life. 

Mr. HURT. Okay. Thank you. And in the SEC budget, have you 

been following the SEC budget request and the tremendous strain 

that all these additional regulations are going to put on the SEC? 

Are you familiar with that? 

Mr. SILVERS. I have been following the systematic effort to strip 

the SEC of the resources necessary to protect American investors 

by you and your colleagues. Yes, I have. 

Mr. HURT. Okay. And so, you understand that by imposing these 

new costs on these businesses, it necessarily means there is less 

capital to put into companies that create jobs in Martinsville, Virginia, where I represent the people who have 25 percent unemployment? You understand that? 

Mr. SILVERS. Are you asking me to agree with the way you see 

the world? Or are you asking me a question? I am not sure which. 

Mr. HURT. I am asking you a question. And that is— 

Mr. SILVERS. Can you restate it? 

Mr. HURT. —do you agree that by increasing the costs to these 

businesses, that it necessarily means they have less capital to put 

on the street to employ people in this country and specifically, in 

Martinsville, Virginia— 

Mr. SILVERS. Absolutely not. 

Mr. HURT. —which is part of my district. 

Mr. SILVERS. Absolutely not. And let me explain to you why. 

Mr. HURT. How, then, do you—what would you say to the 61 people who now have jobs in Martinsville, Virginia, as a consequence 

of the investments made by, in this case, Riverside? What would 

you say to those people? 

Mr. SILVERS. I am saying you are cynically exploiting them to deregulate Wall Street and further put our entire country in danger 

of repeating 2008. That is what I would say. 

Mr. HURT. You call it exploitation. I call it a paycheck. 

I yield back my time. 

Chairman GARRETT. Thank you. 

The gentleman from Massachusetts for 5 minutes? 

Mr. LYNCH. Yes. Let us continue along that line of questioning, 

Mr. Silvers. 

First of all, I want to thank the chairman. And I want to thank 

all the witnesses for their willingness to help the committee with 

its work. 

I want to associate myself—and I do this rarely—but I want to 

associate myself with the remarks of Mr. Silvers. As a general matter, I think this group of bills, these five bills—some are worse 

than others. But I generally think that the effort to redefine a 

major swap participant and to induce leverage—hello—I am astounded. 

18 

I am astounded that we have not even recovered from this disaster, this financial crisis, and we are planting the seeds for the 

next one by inducing leverage, by removing liabilities from rating 

agencies who grade asset-backed securities as AAA and they turn 

out several weeks later to be junk bonds, to stop the disclosure of 

CEOs’ pay in relation to their employees in denigration of the efforts of Dodd-Frank to align the interests of the CEO and the investors and shareholders, to block the registration of financial advisers for private equity firms. This is back to the future. 

I am as astounded by the substance of this proposal as I am by 

the speed at which we have forgotten what got us into this mess 

to begin with. It is really breathtaking that we are back into a— 

regulation. 

And in response to the gentleman who asked the question about 

costs, Mr. Silvers, can you estimate what it cost American homeowners and—well, go globally. These asset-backed securities were 

sold—they went viral, including through AIG and others. What is 

the total cost of the failure, the abject failure of us to induce responsibility and accountability and to preserve the integrity of our 

financial system? What was the cost of that? 

Mr. SILVERS. Congressman Lynch, a lot of people have been trying to figure that out. The number is very large. I will give you 

some numbers to give you a frame of reference. 

Mr. LYNCH. Please. 

Mr. SILVERS. As I think everyone knows, this Congress gave au- thority for TARP that was $700 billion. 

Mr. LYNCH. Which I voted against. But go ahead. 

Mr. SILVERS. Approximately $500 billion was laid out. Current estimates are that the net cost will be somewhere in the $50 billion 

range for TARP alone. Trillions of dollars were laid out by the Federal Reserve to address the economic crisis and prevent it from 

worsening. The costs involved in that are very hard to measure. 

In terms of vanished wealth, in terms of the fall of the stock 

market, the fall of the housing market—and the housing market is 

still falling—my testimony reflects, I think, the general estimates 

of around $10 trillion. 

In terms of lost GDP, it is hard to figure exactly because you 

have to make assumptions about what would have happened had 

we not gone through this horrific policy failure. But again, the estimate—I think one could reasonably estimate something on the 

order of 5 percent of GDP a year for several years running. That 

is approximately—let us see, GDP is $15 trillion. That is $1.5 trillion in lost GDP. It is very hard to estimate. What is the financial 

cost one associates with throwing 13 million families out of their 

homes? I don’t know how to price that. 

I don’t know how to price what it means that multiple millions 

of Americans have graduated from high school and college and 

gone into nothing. I don’t know how to price that. And, by the way, 

we are just talking about the United States now. We are not talking about worldwide—Ireland, Iceland, Spain, one could go on. I 

don’t think there is any doubt, but the right number here is well 

in excess of $10 trillion. 

Mr. LYNCH. Okay. I see my time has expired. I thank the gentleman. 

19 

And I yield back. Thank you, Mr. Chairman. 

Chairman GARRETT. I thank the gentleman and recognize myself 

for 5 minutes. First, although the gentleman says he is baffled that 

we are moving legislation or considering legislation that would induce or increase leveraging, I don’t know of any of the legislation 

that the panel has just discussed here today that says anything 

with regard to leverage. 

Second, the gentleman speaks to the fact that we are trying to 

undo some of the causes—legislation dealing with the underlying 

causes of what brought us to the— 

Mr. LYNCH. By redefining—will the gentleman yield? 

Chairman GARRETT. If you will just let me finish this thought. 

Mr. LYNCH. Sure. 

Chairman GARRETT. —the causes of it. And I don’t know that 

any panel that we have had over the last year-and-a-half said that 

part of the cause of the problems was the lack of data compilation 

with regard to salaries, nor was it anything to do with the interconnectedness of private equity funds. So those were not the 

causes. Those are just the elements that are now the additional 

burden that we are placing onto industry and the capital markets 

that are preventing the very same jobs that I think everyone on 

this panel would like to see brought to fruition. 

Did the gentleman have just a— 

Mr. LYNCH. Right, just in looking at the way we are redefining 

major swap participants, we are—allowing entities that do not 

have the underlying capital as Dodd-Frank would require. 

Chairman GARRETT. Yes. 

Mr. LYNCH. And so, those folks would be included and be able— 

that would be an inducement to that type of activity for firms that 

don’t have the underlying capital. 

Chairman GARRETT. Okay. 

Mr. LYNCH. You will have more of that. That is why I am saying 

it increases leverage. 

Chairman GARRETT. Reclaiming my time. And I am reminded 

that that provision has already been addressed by this House and 

has passed this House by over 300 bipartisan votes previously. 

Mr. LYNCH. Why did we redefine here, then? 

Chairman GARRETT. Well— 

Mr. LYNCH. It is also in law—and the House and Senate— 

Chairman GARRETT. The gentleman— 

Mr. LYNCH. —passed that. And the President signed it. 

Chairman GARRETT. I did not yield the remaining time. 

Mr. LYNCH. I am sorry. 

Chairman GARRETT. So with my remaining time, Mr. Zubrod, I 

see in your testimony that you are requesting legislative extension 

of Dodd-Frank with regard to derivatives. Can you very quickly, 

with regard to rulemaking, talk to us about how much time is necessary in order to get this thing right? 

Mr. ZUBROD. I think the Coalition for Derivatives End Users 

hasn’t formally put forward a proposed time request. 

Chairman GARRETT. No? 

Mr. ZUBROD. But I think it is eventually critical that as we regulate this very large market for the first time, regulators have sufficient time to write thoughtful rules. 

20 

Chairman GARRETT. Thank you. And you also mentioned other 

changes to legislative fixes that the Coalition has looked through. 

You talked about real-time reporting, the capital considerations 

with regard to Basel, not creating margin requirements by the endusers, I guess, would be one specific one you need. Anything other 

than those? 

Mr. ZUBROD. We have written over 100 pages of comment letters 

to the— 

Chairman GARRETT. For legislative fixes? 

Mr. ZUBROD. On regulatory matters. For now, the items that we 

are focused on receiving some legislative clarification include the 

clarification that margins shall not be applicable to end-user transactions. 

Chairman GARRETT. Right. That is the main one. 

Mr. ZUBROD. And the implementation date. 

Chairman GARRETT. Okay. 

Mr. Silvers, you came up with a couple of different names for 

these bills. The Business Mitigation and Price Stabilization Act 

should be called the ‘‘Help Create Another AIG Act.’’ But if you 

look at the legislation that is drafted out there, any reading of it— 

and when you consider under the Murphy amendments that passed 

the House, as I said before, with wide bipartisan support, how 

would anyone take that to read that it would not capture an AIG 

situation again? It didn’t capture it the last time with the regulators. But why would it not capture it with that definition as we 

have presented? 

Mr. SILVERS. There are, in Dodd-Frank, in addition to those capital requirements that obviously fall under the—that banks fall 

under through the normal banking system, there are two categories 

of swaps—of actors in the derivatives market under Dodd-Frank. 

Chairman GARRETT. I understand. 

Mr. SILVERS. One category is what you call—is a dealer, swaps 

dealer. The other category is a major swaps participant. The full 

definitions of both categories are being worked out through regulation at the moment. But the difference between the two fundamentally is the notion of a dealer is somebody who is basically working 

to—would appear to be somebody working to maintain a balanced 

book. A major swaps participant would be someone likely to be taking risks. They would be taking one side of a particular position. 

What AIG was doing was taking one side of a particular position. 

They were not a dealer. They sometimes referred to themselves as 

a dealer. But that is not what they were. They were taking the risk 

without the other side— 

Chairman GARRETT. So you are saying—I understand what they 

were doing. 

Mr. SILVERS. —in a whole set of derivatives— 

Chairman GARRETT. So you would say that they would not be 

captured by this definition? 

Mr. SILVERS. While it is always conceivable that the regulators 

could write their definition of a dealer in such a way as to capture 

parties that are taking a major position in one direction, it doesn’t 

seem the obvious way one would envision a dealer. 

Chairman GARRETT. Mr. Zubrod, do you have a comment on 

that? And then I will close on that. 

21 

Mr. SILVERS. But that is your risk right there. 

Chairman GARRETT. I understand your perspective. 

Mr. ZUBROD. AIG had a $2 trillion book of derivatives. I think 

the bill that this House passed and the bill that the Senate 

passed—each of them would very clearly encompass AIG in its 

major swap participant definition. 

Chairman GARRETT. There is no way they are going to squeak 

out of this, however the regulators— 

Mr. ZUBROD. A $2 trillion derivatives book is not a needle in a 

haystack. 

Mr. SILVERS. But you are gutting that provision. 

Chairman GARRETT. Thank you. 

Mr. Himes, from Connecticut, for 5 minutes. 

Mr. HIMES. Thank you, Mr. Chairman. 

Just a question for Mr. Silvers. I share your concern that there 

is a fairly cynical effort under way now to—in a not terribly 

thoughtful fashion—roll back a lot of the progress that was made. 

As a response to all of the catastrophe that you described—and I 

appreciate the dramatic flair of your testimony. But I am also very 

conscious of the fact that the exercise of getting this right is a very 

nuanced, technical, and esoteric thing. And there is one thing I 

wanted to ask you about, which pertains to private equity. It is 

something I have been thinking a lot about. 

You object to the Small Business Capital Access and Job Preservation Act, suggesting that perhaps private equity entities generate 

what you call leverage pools of capital. And, by the way, if we are 

talking about hedge funds, I am with you on that one. But I am 

really curious whether it is your belief that private equity operates 

at the fund level with a lot of leverage. 

I don’t know a lot of private equity entities that operate with leverage at the fund level. Of course, they do leverage-up their investments. But if not, whether you really do believe that even the 

largest private equity players do create systemic risk. 

Mr. SILVERS. Congressman Himes, you correctly point out that 

where private equity or leverage buy-out funds put equity—put leverage into our economy is at the firm level, not at the management company level or at the fund level. The limiteds are not borrowing money. Right? The company that they invest in is. 

As—there were two issues that have led, I think, investor advocates and people concerned about the regulation of the financial 

system to be in favor of including private equity funds in the requirement to register—that private pools of capital have to register 

with the SEC. The first issue is the one that I addressed in my oral 

testimony, which is the issue of systemic risk. 

Systemic risk comes as several things happen: one, as the firms 

that private equity funds invest in get larger; two, as the banking 

system lays on more and more leveraged loans; and three, as particular private equity sponsors essentially have more and more— 

have larger and larger sets of obligations through their portfolio 

companies into the banking system. If the economy weakens, bank 

lenders and credit rating agencies become very interested in the capacity of the private equity complex to be able to backstop the credits across the pool. 

Mr. HIMES. I agree that— 

22 

Mr. SILVERS. [Off microphone.] 

Mr. HIMES. I am sorry, let me just interrupt. 

Mr. SILVERS. Yes. 

Mr. HIMES. I am following you here. But it seems to me that the 

right answer for us, then, is to follow the extenders of leverage, 

which are typically lenders into the firm level investments. And I 

am 100 percent with you there. I just am really wondering—and 

I have one follow-up question about the industry, too—whether we 

are, in fact, looking at the private equity entities as themselves 

generators of systemic risk. 

Mr. SILVERS. What I was pointing out is contrary to the testimony of my fellow panelists. There is an interlinked quality to that 

risk at the private equity fund level that is not going to be very 

easily captured by bank regulators looking at the exposure of this 

bank or that bank. 

The second point that is not in my prior oral testimony, but 

which is very important to investor advocates is that there is a set 

of fundamental investor protections such as a single common 

standard of fiduciary duty and access to Federal courts in cases of 

breaches of fiduciary duty or worse conduct that is created when 

a private equity fund registers with the SEC as an investment adviser. And those investor protections are extremely important to 

the teachers and firefighters and the like—my fellow witnesses. 

Mr. HIMES. Thank you. I don’t mean to interrupt. But I do actually have one question. It is actually not relevant to the legislation 

at hand. It is just something that, oddly, I don’t know the answer 

to. It doesn’t often happen in these hearings. 

But very quickly, if the chairman would indulge me, I have heard 

anecdote after anecdote of leveraged buy-outs that destroyed jobs 

and leveraged buy-outs that created jobs. My question to both Ms. 

Hendrickson and Mr. Silvers—is there any study, any third-party 

validation as to whether this industry, net-net—and, by the way, 

it is not perhaps legislatively relevant. I am just curious what the 

facts are. Is there any third-party validation around whether this 

industry as a whole creates or subtracts jobs from the economy? 

Maybe Ms. Hendrickson, and then Mr. Silvers. 

Ms. HENDRICKSON. As with most things, there are many studies. 

And it depends on which one you choose to look at. The most recent 

studies that I have seen and corroborated by our own data, actually, are that through the recessionary period, we grew jobs 6 percent. Now, we invest in middle-market-type companies. But the industry average appears to be about 6 percent job growth through 

the recession. 

Mr. HIMES. Thank you. 

Ms. HENDRICKSON. There are obviously anecdotal examples 

where that did not happen. 

Mr. SILVERS. There is a gentleman named Joshua Lerner at Harvard who has done very good work in this area. The evidence that 

he has found is somewhat inconclusive. There are two methodological problems. Many studies, particularly those sponsored by the 

industry, conflate essentially the LBO business model and the venture business model. No question the venture business model creates jobs. 

23 

European studies that have disaggregated those two models tend 

to find that the—and there is another issue, which has to do with 

sort of apples to apples issues around companies. The issues that 

disaggregate the business models typically find that the LBO 

model destroys jobs, and the leverage model creates them. The V.C. 

model creates them. The labor movement’s view of this is heavily 

influenced by some very large anecdotes at companies like SafeWay 

and RJR Nabisco, which involve tens of thousands of lost jobs, 

worker suicides and the like. 

Mr. HIMES. Thank you. 

Thank you very much, Mr. Chairman. 

Chairman GARRETT. And if there are other things that you just 

don’t know. Okay. 

To the— 

Mr. HIMES. Don’t get used to it. 

Chairman GARRETT. Okay. Wow. Okay. 

To the gentleman from Arizona for 5 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. I thought that was 

an interesting question. 

Mr. Silvers, forgive me for not jotting these down. Who are the 

folks that you speak for? 

Mr. SILVERS. The AFL-CIO, the Consumer Federation of America, and the Americans for Financial Reform, which is a large Coalition of more than 250 organizations. The members of the Americans for Financial Reform are in my written testimony. 

Mr. SCHWEIKERT. Okay. Mr. Silvers, is it typical for those groups 

to take a position opposing a bill without reading it? 

Mr. SILVERS. Excuse me? 

Mr. SCHWEIKERT. Is it typical for those organizations to take a 

position on the bill without reading it? 

Mr. SILVERS. I can tell we are going to have a dispute as to what 

the bill says. Why don’t we come to it? 

Mr. SCHWEIKERT. Mr. Silvers, can you grab for me the nice, little 

bill in regards to the $50 million capital formation? 

Mr. SILVERS. Just a moment. What did I do with the bills? Sorry. 

I brought the bill text with me, if— 

Mr. SCHWEIKERT. The Small Company Capital Formation Act. 

Mr. SILVERS. Okay. 

Mr. SCHWEIKERT. H.R. 1070. 

Mr. SILVERS. Okay. 

Mr. SCHWEIKERT. Do you have it? 

Mr. SILVERS. Not yet, but that is okay. Why don’t you read the 

provision that you think I misunderstood? 

Mr. SCHWEIKERT. No, no, I was going to ask you—to take you to 

page three, line six. You made a rather bold statement that—how 

simple and evil this was because of the lack of audited financials. 

And I know literacy may be a problem around here, requiring the 

issuer to file audited financial statements with the Commission 

and distribute such statements to prospective investors. What are 

we missing here, Mr. Silvers? 

Mr. SILVERS. When we reviewed the bill, the bill gave that as an 

option to the SEC. If you since changed it to make it mandatory, 

then I would suggest that is an improvement, and I congratulate 

24 

you for it. But when we look at it, it was voluntary. It wasn’t voluntary. It was an option the SEC could choose to impose. 

Mr. SCHWEIKERT. Okay. Mr. Chairman, Mr. Silvers, it was always this way in our work-up. But I appreciate you being willing 

to play. 

Mr., is it ‘‘Weild?’’ 

Mr. WEILD. ‘‘Weild.’’ 

Mr. SCHWEIKERT. ‘‘Weild.’’ Could you actually share with me—because you and I have already had some conversation—both the 

good and the bad you think would come from changing the Rule A 

amounts, or the Reg A amounts? 

Mr. WEILD. First of all, the bill the way it is currently crafted 

has some—I would call it an enhanced Regulation A, not only in 

terms of size, but in terms of investor protections. So I applaud the 

committee on that. 

It allows us to access capital—corporations, small corporations— 

more cost-effectively and avoid the train wrecks that they typically 

have in the market by not being able to test the waters. And so, 

that is a great positive—much more cost-effectively because you 

don’t have to add a lot of the exhibits that are typically associated 

with the prospectus of formal S-1 that add up to quite a bit of cost 

and that very few people ever actually read in the marketplace. 

Mr. SCHWEIKERT. Mr. Weild, share with me what you think the 

biggest threat to the markets is if we do this. 

Mr. WEILD. If we do this? I truly believe there are not big threats 

to the market. To put it into context, when WorldCom went—filed 

for bankruptcy, it had $100 billion in assets. And that represents 

2,000 $50 million transactions, which in today’s terms would be increasing the size of the listed market by 40 percent. So essentially, 

by strangling small companies and entrepreneurship by not allowing them cost-effective access to capital, we really dampen the 

economy job formation. And exactly, I would say the constituency 

that Mr. Silvers represents. 

Mr. SCHWEIKERT. All right. Mr. Weild, as you may know, I have 

a compulsion about making graphs and charts. It is a problem in 

my statistical background. 

Up on the screen—actually, go back one, please, you will notice 

the lines. And one thing I found fascinating is it looks like over the 

last decade or so, we have actually had a shrinkage of U.S. listings. 

While you see our competitors, somewhat of an explosion by some 

of them. What is your understanding of what has happened to the 

number of traded equities? 

Mr. WEILD. We have lost from the peak in 1997, which interestingly was before the crescendo in the bubble—we have lost 42 percent of listed companies from the United States listed equities markets, which, by definition, is pulling jobs out of the U.S. economy. 

And by contrast, other countries, including China—the one at the 

top of the chart there is China. But almost every other industrialized country in the world is net adding listed companies to their 

markets. 

Mr. SCHWEIKERT. Mr. Weild and Mr. Chairman, thank you. 

Chairman GARRETT. And I thank the gentleman. 

The gentleman from Ohio for 5 minutes? 

25 

Mr. STIVERS. Thank you, Mr. Chairman. Thank you for holding 

this hearing. 

I appreciate all the witnesses. 

I would like to ask Mr. Deutsch a question about Ford. If you remember, last year Ford had to cancel an offering. You talked about 

the whole bond market closing down. But clearly, there was a front 

page article in the B section of the Wall Street Journal about Ford 

having to cancel, I think it was a $100 million asset-backed bond, 

because of the very provision we are talking about, Section 929(g) 

in the Dodd-Frank Act. Can you just explain to the committee 

quickly what happened there? 

Mr. DEUTSCH. Yes, I think Ford and—again, I don’t know all the 

extreme particulars of the Ford transaction. There were actually a 

number of transactions in the market, coming to the market at 

that point. I believe Ford had a transaction. I think it was closer 

to a billion dollars that they were looking to sell off into the secondary market of loans backed by prime quality auto collateral. 

Mr. STIVERS. And what is the effect of them not being able to finance that $100 million? 

Mr. DEUTSCH. Ultimately, they can’t sell cars. 

Mr. STIVERS. Or employ people, right? 

Mr. DEUTSCH. Which, obviously, you stop employing people to 

make those cars. 

Mr. STIVERS. Right. So, the change in the law was effective immediately. The SEC did step in and have a no-action letter that 

kept the law from being enforced. And that is where we are today. 

And that is why some things are allowed to sort of go forward at 

this point. 

But I guess the SEC is maybe talking—according to Mr. Silvers 

and some other reports I have seen—about removing rating agency 

references altogether. That is another direction to go. Frankly, that 

would solve this problem, too. But the result is two things. It has 

more cost in the marketplace because if the liability is passed on 

through the increased cost at the rating agencies, it will cost 

issuers more and, therefore, affect jobs. But the second piece is less 

information will be available in the marketplace—readily available 

in the marketplace. Are those good or bad things? 

Mr. DEUTSCH. Generally, it is a very bad thing. Although the 

SEC could change their rules to no longer require that a rating has 

to be included in a statutory prospectus, you would still have ratings being conveyed to investors. 

Mr. STIVERS. Right. 

Mr. DEUTSCH. But they are conveyed in these ancillary documents. Why wouldn’t you want to convey the information in your 

primary offering document? 

Mr. STIVERS. They would be less readily available is a way to say 

that. 

Mr. DEUTSCH. Of course. 

Mr. STIVERS. The information may still be available, but it results in less information in the marketplace. 

Mr. DEUTSCH. Correct. 

Mr. STIVERS. And so, that is why I prefer this approach as opposed to that approach. You could just remove the rating requireVerDate Nov 24 2008 17:05 Jun 16, 2011 Jkt 065678 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\65678.TXT TERRIE
26 

ment from the prospectus, which is the other way to go. But it 

makes information less readily available. 

I do have a question for Mr. Silvers really quickly because I want 

to talk about more information and less information in the marketplace. Can you quickly tell me how people know what an investment grade bond is? 

Mr. SILVERS. If you are asking whether I think that having ratings in the bond market is a good idea or not, I think that is a complicated question. I think it is— 

Mr. STIVERS. I am not asking you that. I am asking you how people would describe an investment grade bond. If you were going to 

just tell somebody what an investment grade bond is, what would 

you refer to? You know what the answer is. 

Mr. SILVERS. An investment grade bond is a term of art, and it 

derives from the credit rating. 

Mr. STIVERS. Thank you. And that is the point. Credit ratings 

are an important part of the information in the marketplace. 

Mr. SILVERS. I think you misconstrue my testimony. 

Mr. STIVERS. Yes. 

Mr. SILVERS. I don’t disagree with you. 

Mr. STIVERS. Okay. Essentially, what I am telling you is if you 

remove the ratings from the prospectus, which is the direction you 

want to go, you are going to have information less readily available 

in the marketplace. 

Mr. SILVERS. Actually— 

Mr. STIVERS. It is just a fact. 

Mr. SILVERS. No, but you misunderstand the direction I want to 

go. 

Mr. STIVERS. Okay. Okay. I will let you go a little bit here. I 

don’t have much time, though. 

Mr. SILVERS. I think you have touched on a very important issue 

in terms of financial reform. 

Mr. STIVERS. And, by the way, it is not that I want to do nothing 

about the rating agencies. 

Mr. SILVERS. No, I know. And I— 

Mr. STIVERS. There is work to be done. 

Mr. SILVERS. I think it may very well be that you and I completely agree about this. 

Mr. STIVERS. Okay. 

Mr. SILVERS. Now, it is not a matter of— 

Mr. STIVERS. —I am reading or listening to your testimony, by 

the way. 

Mr. SILVERS. Right. It is not a matter on which I can say that 

it is—you put me in an awkward position, in a sense, because there 

are differences of opinion in the people that I represent on this 

question. 

Mr. STIVERS. I notice the United Auto Workers not on your list, 

by the way. 

Mr. SILVERS. That is not— 

Mr. STIVERS. You are going to have a hard time getting them on 

this one. 

Mr. SILVERS. That was not what I was referring to. 

Mr. STIVERS. Okay. Yes. 

27 

Mr. SILVERS. All right. What I was referring to is—and I will 

give you an example. 

Mr. STIVERS. Yes. 

Mr. SILVERS. Credit ratings have been used to screen out investment grade commercial paper for money markets. 

Mr. STIVERS. Yes. 

Mr. SILVERS. Many people feel that is a critical function to avoid 

a huge moral hazard problem in the money market area. 

Mr. STIVERS. Can I come back to this? Because I have one more 

question for Mr. Deutsch because it is an important—something 

happened in the marketplace last week, and I want to ask him 

about it. 

Redwood Capital made a disclosure, not a required disclosure, 

about ratings shopping. Would disclosures on ratings shopping help 

fix a lot of the problems that occurred in the marketplace? I know 

I am out of time. I think they will let you answer. 

Can he answer, Mr. Chairman? 

Mr. DEUTSCH. I think certainly additional disclosures around ratings shoppings—I think that many investors would like to see additional disclosure around that. Many investors would find that helpful to understand the different ratings—the agencies that issuers 

have approached. And so, I think there would be some—that would 

be well-received by the investor community. 

Chairman GARRETT. Thank you. 

The gentlelady from New York for 5 minutes? 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

And I am fascinated by our witnesses’ testimony from Mr. 

Bertsch and Mr. Deutsch, Ms. Hendrickson—forgive me—Mr. 

Weild and Mr. Zubrod, in particular, because you are describing a 

litany of loss in a sense, due, no doubt, to unintended consequences. And those losses are very real to the nearly 14 million 

unemployed Americans who are counting on us to help them. And 

that is what we are trying to do today. 

We have lost resources that should be devoted to job creation. 

You have described that eloquently in your testimony. That is what 

we are endeavoring to reverse in the pieces of legislation we have 

introduced. We have seen that there is a loss of trust in the common sense of our fellow citizens, in this case, investors and entrepreneurs, who are the engines of job creation in so many instances. 

And this represents a loss for all Americans as working capital is 

kept out of the marketplace due to regulation-induced stasis, or 

worse, working capital is migrating out of the United States market entirely. And I think it is important for everybody listening to 

remember those things. 

So in an effort to clarify the highly useful nature of what we are 

endeavoring to do by repealing Section 953(b) of Dodd-Frank, Mr. 

Bertsch, could you talk more about the disclosure of information 

that is currently necessary and how that is useful to investors? 

Mr. BERTSCH. Disclosure of information before Dodd-Frank? 

Dr. HAYWORTH. Before Dodd-Frank, before 953(b). 

Mr. BERTSCH. Sure. There is extensive disclosure on senior executive pay that has been in place for quite a while. It had been 

modified a few years ago. And I think that the interest in that information on the part of investors relates in part to the fear of conVerDate Nov 24 2008 17:05 Jun 16, 2011 Jkt 065678 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\65678.TXT TERRIE
28 

flict of interests to the extent that the CEO, in particular, has influence over that, over his own or her own compensation. So I 

think that that is appropriate disclosure and has been useful in understanding that whole dynamic. 

I do think, frankly, that—and this is my view. With these organizational representations, I haven’t done enough of this to know to 

what extent I should try to clear this. But from my perspective— 

and I worked most of my career on the investor side, some of the 

disclosure enhancements made a few years ago by the SEC in a 

particular compensation disclosure analysis requirement actually 

complicated things so much that proxy statements are actually less 

useful than I think they used to be. 

It used to be faster and easier to get a pretty good fix on CEO 

pay than it is now. So I think disclosure requirements can backfire 

at some point. I think they are legitimate, but I think you want to 

make them as smart as possible. 

Dr. HAYWORTH. The phrase that always comes to my mind when 

I think about so many of the regulations we talked about that have 

been promulgated in Dodd-Frank, among other things, is more heat 

than light is generated by these things. 

Speaking of light, compensation disclosure requirements that you 

have just described, Mr. Bertsch, that perhaps, in fact, we have 

asked for too much information, so to speak, even before DoddFrank—you alluded to a survey among investors, I believe it was, 

that described their desire, if you will, for more information about 

compensation. 

Mr. BERTSCH. Yes, in the testimony I just referred to, that we 

have seen a series of shareholder proposals on—requesting reports 

on pay disparity. And they don’t get very high votes. 

Dr. HAYWORTH. Right. 

Mr. BERTSCH. So that is an indication that shareholders generally don’t express a lot of interest as opposed to, for example, the 

say-on-pay. There were many shareholder resolutions requesting 

advisory votes on pay. Those got much higher levels of support 

other than these have. So 6 percent support is not—on an average, 

is not very high. 

Dr. HAYWORTH. And if there were some sort of movement toward 

say-on-pay, presumably current—or pre-Dodd-Frank data would 

satisfy the informational requirements for shareholders to make 

those sorts of decisions—or to participate in those decisions. 

Mr. BERTSCH. I think that issue is not, to my knowledge, at this 

point being addressed again. 

Dr. HAYWORTH. Right. 

Mr. BERTSCH. But that is a more substantial issue than this one. 

Dr. HAYWORTH. Yes. 

Mr. BERTSCH. And my major point is that this is actually a lot 

of work. 

Dr. HAYWORTH. Right. 

Mr. BERTSCH. This is not a simple statistic to throw out there. 

And it is not one that I believe is of particular value to investors. 

Dr. HAYWORTH. Right. And, indeed, as I understand it, to compute a median—as I understand it, the problem exists on several 

levels. To identify the population of workers to whom this regulation would actually apply, if we wanted to start the process of data 

29 

collection. There are all sorts of complications in identifying then 

what pieces of data would actually be applicable, how they would 

fit into a computation and then the fact that they would have to 

be computed for every single employee so as to identify a median. 

Mr. BERTSCH. That is correct. 

Dr. HAYWORTH. Am I correct? 

Mr. BERTSCH. A median is a lot different than an average to calculate. Our members believe that you need to calculate it for every 

single person in order to arrive at the correct median. 

Dr. HAYWORTH. Right. How else could you arrive at a median, indeed? 

Mr. BERTSCH. There you go. 

Dr. HAYWORTH. I appreciate your clarifying all of those points for 

us, Mr. Bertsch. Thank you. 

Mr. BERTSCH. Yes. Thank you. 

Chairman GARRETT. And I announce to the rest of the committee 

that we do have a vote that is called, but we are just going to plug 

along as long as we have our panel here. And members here—just 

the order that—unless anyone else comes from your side, will be— 

next will be Mr. Royce. And then—I guess the other people have 

probably stepped out to vote already. So when they come back, they 

will be in line. 

So the gentleman from California for 5 minutes? 

Mr. ROYCE. Thank you. 

Mr. Weild, I want to thank you for your testimony. And you gave 

some pretty staggering statistics there that I think should give us 

all pause. But in terms of capital formation for small-growth companies, you recommend passing this Reg A change. What else 

should we be focused on here? 

Mr. WEILD. I think there are three things that the House Financial Services Committee can think about. One of the Reg A passes, 

which is a big step forward in terms of knocking down the costs 

of capital and the certainty of raising money. The second is that 

the stock market itself, the way it is currently constructed, has deprived issuers of any real choice in market structure. And it is really optimized where the 10 percent of the largest market value stock 

that represent 90 percent of the volume. It is a one-size-fits-all 

stock market. 

And I think that to create a market structure that—just like 

bridges, roads, and tunnels are infrastructure to the U.S. economy, 

so is the stock market. And if we don’t have a way of paying for 

the research, sale support, and the liquidity provision that is so 

desperately needed by small-cap. companies, then the low end of 

the market, the smaller companies, die on the vine. They wither in 

the vine, just like our communities would if we didn’t have bridges, 

roads and tunnels. 

The third thing is you might consider in the private market, 

there are some archaic restrictions, in the private market. The prohibition against general solicitation and an inability for accredited 

investors effectively to be able to buy and sell stocks in the private 

market. Those are things that could help capital formation. 

Mr. ROYCE. So those things come to mind. I am wondering if 

there are additional provisions in Dodd-Frank that sort of compound this problem with capital formation. And one of the frequent 

30 

things we see in the financial press is the conversation about capital flight, about the decision to move business to Europe rather 

than to try to soldier through here. Because in Europe, they don’t 

have any intention of following our lead on some of these particular 

provisions that have been raised as a concern, right? 

They have a different regulatory framework there. There is certainty to it. And I think that a lot of businesses look at that and 

say, ‘‘All right, we will opt for that as the alternative.’’ 

It is a mouse click away, basically, these days to get to do business under a regulation that seems far more certain. We are in the 

throes of waiting for 300 rules to be written. We haven’t been able 

to reach agreement, for example, between the SEC and the CFTC 

and get them on the same page—50 differences we know of so far, 

60 more rules to come down the pike by September. And after that, 

40 more that we are waiting for. 

And in this environment, the derivatives business and a lot of 

other businesses seem to be flirting with relocating. Some of it is 

already happening. Do you see that as a challenge here? 

Mr. WEILD. I see getting the regulation right-sized for the company size to be absolutely critical. I think that is one of the themes 

that I have heard a little bit here from this panel, that what 

worked for a $200 billion market value company isn’t necessarily 

appropriate for a $100 million equity market value company. 

Mr. ROYCE. We have made no adjustment yet, really, on Sarbanes-Oxley to address this problem, have we, really? 

Mr. WEILD. There are some exclusions from 404 for sub-$75 million equity float value company. So there have been some adjustments. 

Mr. ROYCE. Do you think that is helping? 

Mr. WEILD. I think that the bigger issue—if you look at the 

charts that we submitted, Congressman, what was interesting was 

our discovery that the sub-$50 million equity market value companies started to disappear from the IPO market before SarbanesOxley ever came into effect in 2002, that the implosion started in 

1997. 

Mr. ROYCE. I agree. And I gave these—in my opening statement, 

I gave these figures. I agree that erosion began for that portion of 

the market. But what has happened since is that the acceleration 

has included the entire market. So it is not now just the smaller 

firms. It is across-the-board. IOPs are now 13 percent of the market. We were 50 percent of the market. This is quite an adjustment. 

So I think we can attach some of this to the way in which we 

have—Sarbanes-Oxley, for example, has really been—we have had 

a failure to address it in ways that solve at least that problem. I 

grant you, Mr. Weild, some of your other points in terms of what 

we have to do for the niche of the market that you are most interested in. But on top of it, I am just saying it is the market in its 

entirety that we risk losing to Europe and elsewhere. 

Mr. WEILD. I would tell you that if you don’t get the growth side 

of the economy back in high gear, then it actually drags down the 

performance of the entirety of the economy, including the large cap. 

stock. 

Mr. ROYCE. Yes. 

31 

Mr. WEILD. To your point about moving capital offshore, I gave 

a presentation at the New York Stock Exchange to a bunch of pension fund trustees not that long ago. And I sat through a number 

of the presentations prior to my own. It was very interesting how 

many consultants to the pension fund industry were advocating to 

American pension funds to move their money offshore to highergrowth economies, the brick countries, which are Brazil, Russia, 

India, and China. That is very disturbing. 

Mr. ROYCE. Thanks for that information. 

I yield back. 

Chairman GARRETT. The gentleman yields back? 

Mr. ROYCE. Yes. I yield back. 

Chairman GARRETT. I thought you had another question. 

Mr. ROYCE. I have used all my time. 

Chairman GARRETT. With unanimous consent, you can ask your 

other question. 

Mr. ROYCE. Yes, I will then ask another question, if you don’t 

mind. 

The NRSRO issue—that has been around for some time. And I 

was going to ask Mr. Deutsch. 

We had a few entities issuing what ended up being flawed rulings. But they were treated as the gold standard with few alternatives. It was very, very frustrating. And in 2006, we tried to correct that in the Credit Rating Agency Reform Act, which I think 

made some strides to promote competition. That was the goal 

there, to establish a more transparent rating process. 

But unfortunately, the financial markets have turned upside 

down since the passage of that Act. And clearly, part of it was the 

credit rating agencies. But Dodd-Frank, I think, took a different 

approach here and essentially opened the NRSROs up to a very active trial bar. And when I laid out in my initial statement here, I 

pointed out we had 97 percent of the lawsuits worldwide are here 

in the United States. The day after the law was enacted, the 

NRSROs refused to allow their ratings to be used, bringing a temporary freeze to the credit markets before the SEC promised not 

to enforce the provision. 

Where is the happy medium with the NRSROs? We need to encourage due diligence among counterparties in the market, but essentially removing the rating agencies from the picture altogether 

seems to be overkill. So I was going to ask you, Mr. Deutsch, about 

that. 

Mr. DEUTSCH. I have, I guess, multiple responses. I think first, 

credit ratings serve an important part of the financial markets. I 

am not sure either side of the aisle will disagree with that. 

The second point is that creating policy reform around the rating 

agencies has been extraordinarily perplexing. 

Mr. ROYCE. Right. 

Mr. DEUTSCH. It is very challenging to try to figure out, in a 

market with some natural economies of scale, how to improve that 

market and make appreciable change. But I think— 

Mr. ROYCE. On that thought, let me give you some time to contemplate the answer, give it back to us in writing. We have 20 seconds left of the vote. And I think Mr. Garrett is a little faster than 

me. If we head out right now, we can make that vote. 

32 

Mr. Chairman, I yield back. Are you ready? 

I will get that answer in writing, all right? 

Mr. DEUTSCH. Right. 

Mr. ROYCE. Thank you very much. 

Chairman GARRETT. The gentleman yields back. 

I appreciate the testimony of the panel. If there are other questions—and it looks like there may be another question—there may 

be someone doing what Ed is doing, rushing to the vote, and the 

others may be rushing back. So with that, unless there is an objection, I will ask one last question and hopefully, find out our one 

last member, who is probably in a hallway someplace here. 

So I yield myself such time as I consume, I guess, to— 

[laughter] 

Just a question for Mr. Silvers. 

With regard to H.R. 1062, which is—you euphemistically called 

it the ‘‘Promote CEO Pay Secrecy Act.’’ Okay. Which is obviously— 

what the sponsor is trying to do is try to make not such a burdensome requirements in a legislative format. But what I will throw 

to you is we sort of went through to look to see what is already 

out there if you do repeal this. Right? What the SEC is doing. 

Now, correct me if I am wrong on any of these because this is 

just our quickly running through it. But even if we pass this, you 

would still have what the SEC has done. One is companies would 

be required to disclose a total pay number for the CEO and other 

senior executives. Is that correct? 

Mr. SILVERS. That is a longstanding SEC rule, yes, sir. 

Chairman GARRETT. So that information has always been out 

there, and that would continue to be out there, right? 

Mr. SILVERS. Yes. 

Chairman GARRETT. Then secondly, companies whose—also the 

flow is—more specific information around retirement benefits as 

well. 

Mr. SILVERS. The Commission’s disclosures around retirement 

benefits have increased over time. It is certainly true that there is 

today required disclosure around retirement benefits. There is 

some dispute about the details of it, I would say, but it is certainly 

there. 

Chairman GARRETT. Okay. So that is there. So you have the pay 

and the retirement. And thirdly, companies also have to disclose 

additional information about termination payments, which, I guess, 

is, what, like golden parachutes and that sort of thing, right? 

Mr. SILVERS. Yes. Yes. Mr. Chairman, if you— 

Chairman GARRETT. Yes. 

Mr. SILVERS. If you would allow me— 

Chairman GARRETT. Sure. 

Mr. SILVERS. Two points—one is there is no—the Commission 

has made great progress over the last decade in getting more comprehensive data about CEO pay available to investors and the public. I don’t think that is a matter of dispute. I think that the—what 

is so important about the provision of the Dodd-Frank Act that we 

are discussing here is that it creates a critical context for evaluating what CEO pay means in the context of a public company. 

Right? And the question of whether CEO pay—and this has two 

consequences. One is whether CEO pay is essentially eroding the 

33 

corporate culture by effectively placing the CEO and perhaps other 

senior executives in a completely different place than the other 

members of their team. And the second issue is, like many issues 

with CEO pay, whether or not it gives investors and the public a 

context for determining whether or not the level of CEO pay that 

you are receiving is essentially commensurate with, in general, the 

type of value that is being created by this firm. 

Chairman GARRETT. But doesn’t that go to another requirement 

they have that the board or the compensation committee, I guess, 

would actually also have to lay out why is it they are giving the 

CEO all these benefits, most notably, the executive pay? And so, 

if it is extremely high, they would have to say this is why we think 

he is worth ‘‘X.’’ 

Mr. SILVERS. Right. 

Chairman GARRETT. Which, in my opinion, in many cases, also 

I agree, are astronomical sums that you and I probably can’t comprehend. Maybe you can because you—who knows what your salary is. But— 

[laughter] 

Mr. SILVERS. Let me put it this way. The multiple between my 

salary and any of the ones that we are talking about is itself a very 

large and hard to encompass number. I think your— 

Chairman GARRETT. There may be multiples between your salary 

and my salary. 

Mr. SILVERS. I think we have that in common, Mr. Chairman. 

Chairman GARRETT. Yes, okay. 

Mr. SILVERS. The narrative you are discussing is, I think—my 

colleague on the panel talked about the frustrating issues involved 

in credit rating agencies and trying to find the right balance, a 

comment I very much agree with. The SEC has tried to get public 

corporations to tell investors and the public, give them some meaningful detailed explanation as to why they are paying 300, 400, or 

500 times the amount the typical employees are paid, to their 

CEOs. If you have read those narratives, I think they are uniformly meaningless. 

Mr. Chairman, if you could indulge me for 10 seconds? Your colleague, Mr. Schweikert suggests that I hadn’t read his bill. 

Chairman GARRETT. Yes. 

Mr. SILVERS. His bill clearly, as it is now—because it was in a 

different paragraph—makes auditing of companies under Reg A optional. It is very clear. It was just hidden. And I want to make 

clear that I stand by my original testimony in that matter. It is in 

the heading paragraph of that section. And he read a misleading 

excerpt when he read that section of that bill. 

Chairman GARRETT. He was just—I can’t say whether he— 

Mr. SILVERS. No, I am not—it is not your fault, Mr. Chairman. 

Chairman GARRETT. I am certainly not saying that he was misleading. I saw he had a section of the bill actually circled, so he 

was reading a piece from his own legislation on page three of the 

legislation. 

Mr. SILVERS. It says, ‘‘The Commission may determine necessary 

in the public interest to require an audit.’’ The word ‘‘may,’’ as we 

all know around here, means voluntary. 

34 

Chairman GARRETT. With that, I see that—well, no. Is it voluntary for the Commission, but not— 

Mr. SILVERS. It is precisely— 

Chairman GARRETT. —but not for the company? 

Mr. SILVERS. It is precisely as I said it was in response to his 

question. The way the bill reads, ‘‘If the Commission chooses to do,’’ 

which the Commission may or may not do, right, the Commission 

can choose to require an audit. But the bill does not require it. It 

would be perfectly legal, under this bill, for the Commission to sit 

tight and for companies to go to market and raise up to $50 million 

in investment from the general public and not provide an audited 

financial statement. 

Chairman GARRETT. The entire premise behind Dodd-Frank is 

that the regulators, whom we are entrusting with all these grand, 

new authorities and some regulators, additional funding sources as 

well, that they are not going to be doing the wrong thing. 

Mr. SILVERS. Why don’t we just require it? I think that was the 

testimony of my fellow witness. My testimony is about the bill as 

written. 

Chairman GARRETT. All right. 

The gentleman from Ohio? 

Mr. STIVERS. Thank you, Mr. Chairman. I appreciate you giving 

me a little more time. 

I wanted to ask Mr. Silvers about some of the other sections relating to the credit rating agencies in the Dodd-Frank bill, because, 

frankly—I don’t know if you have it in front of you, and I can bring 

you my copy, if you need it, but my bill does impact Section 939(g). 

But I would like to talk to you about Sections 932 and 933, especially. Section 932 subjects rating agencies to additional restrictions on—or disclosures, keeps people from doing revolving door 

from an issuer to the agencies and then more importantly, Section 

933. 

Section 933 of Dodd-Frank does subject the rating agencies to 

legal liability for misleading statements and just untrue statements, which your testimony about Section 939(g) implied that it 

overturned Section 933 of Dodd-Frank as well. I just would like Mr. 

Silvers to clarify for the audience and the world that might be 

watching on C–SPAN3. It won’t be a very big world. 

[laughter] 

Whether he thinks my bill turns over any of the other sections 

with regard to the rating agencies, including and especially Section 

933 of Dodd-Frank. 

Mr. SILVERS. As I think the prior exchange showed, it can be 

dangerous to express an opinion on these matters without having 

lots of time to look at the text. My testimony did not say that your 

bill is a grant of total immunity to the credit rating agencies. I 

think it is nonetheless a grant of immunity. 

If you might indulge me a moment or so longer— 

Mr. STIVERS. We have a little time now. 

Mr. SILVERS. Yes. I think that several people in this hearing 

have expressed the view that this matter with the rating agencies 

is complicated. And I very much agree with that. I think our exchange a few moments ago suggests that we probably have some 

common ground on some of these questions. 

35 

Mr. STIVERS. Yes. 

Mr. SILVERS. I think the view of the Coalitions and the organizations that I represent here today very much goes back to what Mr. 

Miller said very—at the—Mr. Miller? 

Mr. STIVERS. It was Mr. Sherman, I believe. 

Mr. SILVERS. Mr. Sherman, I am sorry, Mr. Sherman’s comment 

at the beginning of the hearing. We need to have a robust regulatory framework for the rating agencies because of the embedded 

and unresolvable conflicts. 

Mr. STIVERS. Conflicts of interest, yes. 

Mr. SILVERS. And if we did that, then I think we could talk, I 

think, with a greater degree of flexibility about a variety of issues 

of the type that you are concerned with. I think it is absolutely correct that we should not be in a mode of no rating agencies at all 

because there is a substantial sort of information economics being 

associated with having rating agencies, if they are properly regulated. 

We very much got into a—much as we did with independent 

auditors prior to Enron and WorldCom, we got into a world where 

we didn’t have the necessary framework to capture those economics. We had sort of false economics around the rating agencies. It 

seems to me, that might be a sort of space where there might be 

some bipartisan opportunities. 

Mr. STIVERS. I think there are. And I appreciate it. I guess, my 

point is to say I am not saying that Dodd-Frank did completely bad 

things about rating agencies. I support Section 932. I support Section 933. I support Section 938. 

Section 932 creates disclosures so that rating agencies, for the 

first time, have to list the assumptions underlying their ratings so 

investors can understand what those ratings mean. Section 938 

creates universality of ratings so that they all have a very similar 

meaning. And Section 933 gives them real liability if they make 

meaningful misstatements or purposeful misstatements or mislead 

people on purpose. 

And, I guess, the point that I am trying to bring out is Section 

939(g) is only one teeny piece of the—what Dodd-Frank did on the 

credit rating agencies. And unfortunately, it didn’t work. It is not 

working today. That piece of law is not being enforced. And there 

is a better way to go by getting rid of it and then moving to what 

I talked about at the very end of my questions, on an additional 

disclosure on rating shopping. 

And, I guess, Mr. Silvers, I am curious what your thought is 

about what Redwood did on ratings shopping and whether you 

think that kind of—and my understanding, from reading the Financial Times, not—the SEC didn’t tell me this. But the Financial 

Times says the SEC may be working on something with regard to 

that. What I would consider doing in this bill is including a requirement in the bill that ratings shopping has to be disclosed, 

which is currently not part of Dodd-Frank. And I think it would 

make this bill a little stronger. 

I have talked to Mr. Peters from Michigan about it, frankly. And 

so, I guess, Mr. Silvers, in the minute we have left, what do you 

think of that? 

36 

Mr. SILVERS. Right. Ratings shopping—I am very pleased to hear 

that you are working as you say you are on the ratings shopping 

issue. It is a serious part of the problem. 

I think our view would be that there is much unfinished work 

to be done with the rating agencies. And it seems as though you 

and your colleagues on both sides of the aisle have some—have a 

fruitful path here. 

Mr. STIVERS. Yes. Thank you. 

Mr. SILVERS. Thank you. 

Mr. STIVERS. Thank you, Mr. Chairman. I appreciate it. 

Chairman GARRETT. Thank you. 

The gentleman from California is recognized for 5 minutes. 

Mr. SHERMAN. I believe it is Mr. Weild who is here to focus on 

credit rating agencies. No? Which of your— 

Mr. DEUTSCH. I would raise my hand, but I am not sure what 

question you are going to ask. 

[laughter] 

Mr. SHERMAN. Okay. Right now, other than patriotism, which is 

often in short supply, why wouldn’t a credit rating agency selected 

by the issuer—and this bill proposes that they wouldn’t be liable 

if they even knowingly gave too high a rating. What constraint 

would there be on the credit rating agencies? 

Mr. DEUTSCH. I think what this bill does is creates a whole panoply of potential liability for a rating agency. 

Mr. SHERMAN. When you say this bill, you mean the Stivers bill? 

Mr. DEUTSCH. Section 939(g) by repealing— 

Mr. SHERMAN. Okay. 

Mr. DEUTSCH. —Section 436(g) now. 

Mr. SHERMAN. Right. 

Mr. DEUTSCH. You would subject the rating agencies to a whole 

panoply of possible liabilities under Section 11, which is strict liability under the securities law, which is the highest form of liability under those securities laws. So it is not just that you can point 

out one thing here or one thing there. It creates this whole broad 

set of liabilities that the rating agencies, whether we like it or not, 

would say, we are not willing to accept that level of liability. 

Hence, we won’t rate these asset-backed bonds. Hence, those bonds, 

at least under current SEC law, can’t move forward. 

Mr. SHERMAN. So are you suggesting we go back to the old approach, no liability and every economic incentive to give AAA and 

Alt-A? 

Mr. DEUTSCH. I think Congressman Stivers’ questioning of the 

witness, Mr. Silvers indicates that there is significant liability for 

rating agencies. But it is not Section 11’s strict liability under the 

securities law, which currently only applies— 

Mr. SHERMAN. Wait a minute. Those rating agencies have testified in this very room that they are so proud that they got a court 

to rule that, under the First Amendment, you can’t sue them and 

that, therefore, they feel invulnerable and wish to—and it is that 

invulnerability that emboldened them to get the additional market 

share that they could get by giving AAA to Alt-A. So why do you 

think that their legal analysis of the law prior to Dodd-Frank is 

wrong? 

37 

Mr. DEUTSCH. Again, what I think Congressman Stivers is indicating is this is not prior to Dodd-Frank. Dodd-Frank has created 

private rights of action here. 

Mr. SHERMAN. Right. And the position of the credit rating agencies before Dodd-Frank was that they were immune from such private rating. Do you agree with that position? 

Mr. DEUTSCH. Correct. I am not here to testify as to Sections 933 

or 944, the advisability of that. That is now law. That is moving 

forward. There are these private rights of action. What I am here 

to testify is that the repeal of Section 436(g) shut down the 

securitization markets completely, absolutely without deniability. 

Mr. SHERMAN. So you think— 

Mr. DEUTSCH. That is a fact in record that if we would have 

moved forward with—by creating this liability to the rating agencies, they would, in fact, not rate these transactions, and credit 

would not flow in America. 

Mr. SHERMAN. Okay, what about— 

Mr. STIVERS. Would the gentleman from California yield for 1 

second? 

Mr. SHERMAN. Yes, I will. 

Mr. STIVERS. Have you looked at Section 933 of Dodd-Frank? It 

does provide an amount of liability outside of Section 939(g). So I 

don’t want anybody to think that Section 939(g) is the only liability 

the credit rating agencies had to deal with in Dodd-Frank. There 

is also Section 933. And I have a summary for you, if you need it. 

Mr. SHERMAN. I am just beginning to look at your bill and by implication, which provisions of Dodd-Frank it repeals and what is 

left afterwards. 

But, Mr. Deutsch, are you arguing that the credit rating agencies 

should be subjected to an ordinary liability negligence standard? 

Mr. DEUTSCH. I am arguing that credit rating agencies should 

not be subjected to the Section 11 strict liability standards that 

issuers are subjected to because the statements that they are making are looking at the future. 

Mr. SHERMAN. But my question was about ordinary negligence liability. 

Mr. DEUTSCH. I am answering your question as to what I am testifying is that we are not taking a position on what they should be 

subjected to. 

Mr. SHERMAN. Okay. 

Mr. DEUTSCH. It is that they should not be subjected. 

Mr. SHERMAN. So let me ask Mr. Silvers. Do you think we should 

go to a world where there is no strict liability, it is not clear there 

is negligence liability, the credit rating agency is selected by the 

issuer, who is anxious to get the highest rating and willing to write 

a $1 million check? Does that sound like a good system to you? 

Mr. SILVERS. No, I do not think that is a good system. My testimony is clear. We are not in favor of extending further legal protections to the credit rating agencies. And furthermore, as, I think, my 

exchange with Mr. Stivers, hopefully, drew out, there is a deep 

need to make structural changes in the business model of the rating agencies. And I believe, Congressman, that is your intention. 

And hopefully, that is something that maybe some bipartisanship 

should be built around. 

38 

Mr. SHERMAN. Yes, I could see quicker implementation of what 

I believe is Section 939(f), that is to say, a system where the issuer 

is not selecting their umpire along with Mr. Stivers’ bill. And I look 

forward to working with him to try to, on the one hand, make sure 

that they don’t face excessive liability, and on the other hand, 

make sure that they are not selected, just as umpires at a baseball 

game. The pitcher doesn’t pick the umpire. And he can’t sue the 

umpire. 

Mr. SILVERS. Congressman, if I might just add. I think the distinction between forward-looking and backward-looking statements 

that the rating agencies would like to hold up here in relation to 

Section 11 is spurious. 

Mr. SHERMAN. I look forward to looking at that distinction. 

And I yield back the balance of my nonexistent time. 

Chairman GARRETT. There you go. 

The gentleman from New York for 5 minutes? 

Mr. GRIMM. Thank you, Mr. Chairman. 

I think that we all agree the purpose for all of us—and there certainly are good intentions all around. It is the unintended consequences that we have to worry about because we all want the 

economy to grow. We want to create jobs. 

There was a meltdown. There are a lot of reasons for that meltdown. A lot of the rules and regulations simply weren’t enforced. 

There was a lack of proper oversight and enforcement of rules that 

existed. And I think the pendulum has swung so far the other direction that we are—we can be overregulating and hurting industry. 

Very quick question, Ms. Hendrickson. Do you have an approximate cost to your firm, specifically your firm that you will have 

to—you would expect to pay for compliance to be fully compliant 

with the Dodd-Frank Act? 

Ms. HENDRICKSON. At the moment, I expect the cost to be between $350,000 and $500,000 for the first year. That is buying new 

software to do trading, to monitor trading activity. And, of course, 

we don’t do anything in the public market. It is to hold legended 

worthless securities by a third-party custody agent. And then, of 

course, to hire a third compliance officer to certify valuations of our 

companies, which were already looked at by two nationally-known 

accounting firms. 

Mr. GRIMM. Thank you. 

Mr. Zubrod, my Business Risk Mitigation and Price Stabilization 

Act, the newly-termed ‘‘AIG Act’’, which is pretty good. I have to 

admit. I did get a chuckle out of that. That is good. That is very 

good. End users—will end-users, in your opinion, just in your opinion, migrate the markets that operate under a less punitive regulatory environment if they are not exempt from clearing requirements? 

Mr. ZUBROD. I think end-users would certainly evaluate opportunities to ensure that they can operate efficiently and manage their 

risks sufficiently. But I think the message that we would like to 

give is that we are simply looking for clarification on something 

that Congress and this committee intended all along, which is that 

there would not be a margin requirement on end-users. That is 

something that was part of the—in addition to containing systemic 

39 

risk and increasing transparency in this market, Congress came together and said that we also need to ensure that end-users are not 

subject to the salient economic requirements of this Act. 

Mr. GRIMM. If I could, just to put this in perspective, because I 

think when you talk about the numbers, it scares some people— 

$600 trillion is the overall market, derivatives market, notional 

number? Is that somewhere in the realm of reason? 

Mr. ZUBROD. That is right. The $600 trillion notional amount is 

not a measure of risk in the market. It is simply a quantification 

of the—what we call the notional amount. A more appropriate 

measure of risk is the market value of the transactions. And once 

you net offsetting positions, once you contemplate transactions that 

have been cleared through central clearing—currently about a 

third of the entire derivatives market is already subject to central 

clearing. And that will increase substantially as a result of this 

Act. If you contemplate other such mitigation factors, that $600 

trillion amount compresses to something less than $2 trillion in 

market value, which is a much more appropriate measure of risk. 

Mr. GRIMM. Will the growth of clearing reduce systemic risk or 

increase systemic risk, in your opinion? 

Mr. ZUBROD. The Coalition supported both the Act’s objective of 

increasing transparency by subjecting every single derivatives 

trade to a trade reporting requirement so that regulators could 

have information on where market risks lie. We also did support 

increased collateralization, whether through clearing or otherwise, 

amongst systemically significant users of derivatives. And so, I 

think that, indeed, the Act will contribute toward mitigation of systemic risk and reduce materially, if not eliminate, the derivatives 

market’s contribution to the ‘‘too-big-to-fail’’ problem. 

Mr. GRIMM. Thank you. 

Thirty seconds, Mr. Chairman? One last question? 

Mr. Silvers, I see that you are a big proponent of Dodd-Frank. 

And it appears from your testimony that Dodd-Frank really zeroes 

in on the heart of the problems that caused the meltdown. Simply 

yes or no, is that accurate? 

Mr. SILVERS. Mostly. 

Mr. GRIMM. Okay. Is there anywhere in here that it mentions 

Fannie Mae or Freddie Mac? 

Mr. SILVERS. That is why I answered mostly. 

Mr. GRIMM. Okay. Thank you. I thought that point needed to be 

made. 

Chairman GARRETT. Thank you. I appreciate that. 

And I appreciate the panel. And at this point, I would seek unanimous consent to enter into the record—bear with me here—the following documents: from NASDAQ, a letter with regard to their 

support for the Small Company Capital Formation Act of 2011; 

from the New York Stock Exchange strongly supporting the Small 

Company Capital Formation Act of 2011, among others; from the 

Center on Executive Compensation, the support of H.R. 1062 seeking to repeal Section 953(b) of the Dodd-Frank Act; and finally, I 

believe it is a statement from the Credit Union National Association as well. Without objection, it is so ordered. 

And finally, this concludes today’s hearing. The record will remain open, however, as is always the case, for an additional 30 

40 

days for all those folks who still think of additional great questions 

to provide to the panel, the things that maybe they don’t—just 

don’t know about, as some of the other members have suggested 

earlier in the day. 

And so, with that, again, I thank the panel. And this hearing is 

concluded. 

[Whereupon, at 4:04 p.m., the hearing was adjourned.] 

(41) 

A P P E N D I X 

March 16, 2011 

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