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LEGISLATIVE PROPOSALS TO RELIEVE 

THE RED TAPE BURDEN ON INVESTORS 

AND JOB CREATORS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

MAY 23, 2013 

Printed for the use of the Committee on Financial Services 

Serial No. 113–26 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

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 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

SPENCER BACHUS, Alabama 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RANDY NEUGEBAUER, Texas 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

LYNN A. WESTMORELAND, Georgia 

BILL HUIZENGA, Michigan 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

KEITH ELLISON, Minnesota 

MELVIN L. WATT, North Carolina 

BILL FOSTER, Illinois 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

DANIEL T. KILDEE, Michigan 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 23, 2013 ..................................................................................................... 1 

Appendix: 

May 23, 2013 ..................................................................................................... 37 

WITNESSES 

THURSDAY, MAY 23, 2013 

Bullard, Mercer E., President and Founder, Fund Democracy, Inc., and Jessie 

D. Puckett, Jr., Lecturer and Associate Professor of Law, University of 

Mississippi School of Law .................................................................................... 7 

Ehinger, Ken, Chief Executive Officer, M Holdings Securities, Inc., on behalf 

of the Association for Advanced Life Underwriting (AALU) ............................ 9 

Quaadman, Thomas, Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce ....................................................................... 11 

Reich, Marc A., President, Ironwood Capital, on behalf of the Small Business 

Investor Alliance (SBIA) ...................................................................................... 13 

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

Smith, Robert, Corporate Secretary, Vice President and Deputy General 

Counsel, NiSource, Inc., on behalf of the Society of Corporate Secretaries 

and Governance Professionals ............................................................................. 17 

Tharp, Charles G., Chief Executive Officer, Center On Executive Compensation ........................................................................................................................ 18

APPENDIX 

Prepared statements: 

Huizenga, Hon. Bill .......................................................................................... 38 

Bullard, Mercer E. ............................................................................................ 39 

Ehinger, Ken ..................................................................................................... 57 

Quaadman, Thomas ......................................................................................... 67 

Reich, Marc A. .................................................................................................. 106 

Silvers, Damon A. ............................................................................................. 116 

Smith, Robert .................................................................................................... 126 

Tharp, Charles G. ............................................................................................. 142 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hurt, Hon. Robert: 

Written statement of the Association for Corporate Growth (ACG) ............ 149 

Written statement of the Investment Company Institute (ICI) and the 

Independent Directors Council (IDC) .......................................................... 151 

Maloney, Hon. Carolyn: 

Written statement of the California Public Employees’ Retirement System 

(CalPERS) ...................................................................................................... 158 

(1) 

LEGISLATIVE PROPOSALS TO RELIEVE 

THE RED TAPE BURDEN ON INVESTORS 

AND JOB CREATORS 

Thursday, May 23, 2013 

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 9:31 a.m., in room 

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

Members present: Representatives Garrett, Hurt, King, Royce, 

Huizenga, Stivers, Fincher, Mulvaney, Hultgren, Ross, Wagner; 

Maloney, Sherman, Scott, Himes, Peters, Watt, Foster, and Carney. 

Also present: Representative Green. 

Chairman GARRETT. Greetings. Good morning, everyone. Good 

morning to the panel. 

The Subcommittee on Capital Markets and Government Sponsored Enterprises is hereby called to order. Today’s hearing is entitled, ‘‘Legislative Proposals to Relieve the Red Tape Burden on Investors and Job Creators.’’ 

I welcome the panel to today’s hearing. We will begin with opening statements, and after that, we will turn to the panel. And with 

that, I recognize myself for 3 minutes for an opening statement. 

Today’s hearing is entitled, as I said, ‘‘Legislative Proposals to 

Relieve the Red Tape Burden on Investors and Job Creators,’’ and 

it will focus on four specific pieces of legislation that would remove 

various regulatory impediments and target red tape that hinders 

small businesses’ ability to create new jobs and help the economy 

grow. 

The Dodd-Frank Act significantly expanded the SEC’s authority. 

However, Congress did not first determine that this unprecedented 

expansion was necessary to further their mission or that the SEC 

was capable of executing its new authorities and mission. 

Despite what my Democratic colleagues are likely to allege, we 

are not attempting to deregulate the financial services industry. 

Very simply, the bills before us are a series of targeted and pragmatic fixes to some of the most burdensome and unnecessary provisions of Dodd-Frank. 

In fact, three of the four bills before us today already enjoyed bipartisan support last Congress. The SEC has a threefold mission: 

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2 

kets; and to facilitate capital formation. So by removing unnecessary and time-consuming requirements, these bills discussed in today’s hearing will ensure that the SEC has the time and resources 

to focus on its core mission and reach other congressional mandates, such as those outlined in the JOBS Act, which the SEC has 

failed to fully implement. Last week, there was a lot of discussion 

about the SEC’s resources. Now, these four bills fix many of the 

unnecessary provisions of Dodd-Frank, freeing up SEC resources to 

be devoted to mission-critical rules. 

I want to specifically recognize and thank Congressman Hurt, 

Congressman Huizenga, and Congresswoman Wagner for their terrific work on these bills. I commend each of you, and I look forward 

to passing these bills through the committee, hopefully in a bipartisan manner, as we have done in the past. 

In conclusion, the Dodd-Frank Act, was not written in stone or 

handed down from on high, and Congress has an obligation to 

amend or repeal those provisions that did not cause or contribute 

to the financial crisis and whose cost outweigh their purported benefits. That is what we begin with today. 

And with that, I now turn to the gentlelady from New York, Mrs. 

Maloney, for 4 minutes. 

Mrs. MALONEY. I thank the gentleman for his leadership, and I 

welcome all the witnesses. This hearing will focus on four bills that 

are designed, as the title of the hearing suggests, to relieve what 

is seen as red tape. 

So we have four bills under consideration today. The first would 

repeal a section of Dodd-Frank that requires companies to disclose 

the ratio of the total compensation of their CEO to that of the median compensated employees on a quarterly basis. 

The intent was to bring transparency to the compensation process and to encourage fair practices. The SEC has not written rules 

yet in this area, and when the committee reviewed this bill in the 

last Congress, an amendment was passed that gave the SEC additional authority to narrow the requirements while maintaining the 

intent behind the provision. 

The second bill would exempt certain private equity fund managers from the SEC registration requirement. Private equity registration was something we incorporated into the Dodd-Frank Act 

because many believed there were areas in the industry that were 

completely dark, even while recognizing that this was not the cause 

of the financial crisis. 

The bill this committee reviewed last year included an amendment from my colleague and friend, Mr. Himes, which said that 

only private equity firms that were leveraged more than two to one 

would be required to register. Since that time—and his bill did 

pass the committee—the SEC has required private equity firms to 

register. 

The third bill we are looking at would prohibit the PCAOB from 

mandating audit firm rotation. I would like to understand why 

audit firm rotation is necessary, and I question why we are interfering with the PCAOB’s independent authority. 

Finally, a fourth bill would put additional hurdles on the SEC to 

interfere with its ability to write rules that would change the legal 

standard for broker-dealers. Dodd-Frank required the SEC to study 

3 

the fiduciary duty broker-dealers owe to their clients and that investment advisers have. The SEC completed the study, and recommended a uniform standard for broker-dealers and investment 

advisers. However, they have not yet proposed a rule that is under 

comment, and some feel that this is not a necessary—that there 

are different duties. 

I look forward to hearing from the panelists today and gaining 

a greater understanding of this issue. I want to thank everybody 

for coming, and I want to thank everyone who authored these important bills, and I especially thank our chairman for calling this 

important hearing. Thank you. 

Chairman GARRETT. I thank the gentlelady. The gentleman from 

Virginia is now recognized for 4 minutes. 

Mr. HURT. Thank you, Mr. Chairman. Mr. Chairman, thank you 

for holding today’s hearing on these important proposals. Today, we 

will discuss several bills that will reduce the regulatory burdens 

that restrict the flow of private capital to small businesses. 

In Virginia’s 5th District, thousands of jobs would not exist but 

for the investment of private equity. These critical investments 

allow our small businesses to innovate, expand their operations, 

and create jobs. One P.E.-backed company in my district, Virginia 

Candle, told me that, ‘‘Without private investment, we would not 

have been able to take our business out of a garage in Lynchburg, 

and into millions of homes all across the world.’’ 

The same can be said for many small businesses in the districts 

of Representatives here in this room, and all throughout Congress. 

Unfortunately, Dodd-Frank placed a costly and unnecessary regulatory burden on private equity by exempting advisers to similar 

investment funds. These unnecessary registration requirements, 

which do not increase the stability of our financial system, impose 

an undue burden on small and mid-sized private equity firms, and 

therefore decrease capital available to spur job growth. 

That is why I have introduced H.R. 1105, the Small Business 

Capital Access and Job Preservation Act. This bill is co-sponsored, 

as the ranking member said, by Representatives Himes and Cooper. If enacted, these undue burdens on private equity advisers will 

be eliminated, and they will be given the same exemption that 

SEC’s registration requirements under Title 4 of Dodd-Frank, that 

venture capital advisers receive. Additionally, the bill will specifically limit the exemption to advisers to private equity funds that 

have leverage of less than 2:1. 

It is important to note that private equity funds did not cause 

the financial crisis. They do not appear to be a source of systemic 

risk, as some have suggested. These funds are not highly interconnected with other financial market participants, therefore, the 

failure of a private equity fund would be highly unlikely to trigger 

cascading losses that would lead to a similar financial crisis. By 

eliminating unnecessary regulations, this bill seeks to expand capital formation so that companies can innovate, expand, and create 

jobs. 

In that same vein, I have introduced H.R. 1564, the Audit Integrity and Job Protection Act, with Representative Meeks. This bill 

will eliminate the threat of mandatory audit firm rotation by proVerDate Nov 24 2008 17:59 Sep 25, 2013 Jkt 081761 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\81761.TXT TERRI
4 

hibiting the Public Company Accounting Oversight Board, the 

PCAOB, from moving ahead with its potential rulemaking. 

In 2011, the PCAOB released a concept draft to impose mandatory audit firm rotation, a directive requiring public companies to 

change their independent auditor every few years. As a result, this 

proposal would significantly impair the quality of public audits; reduce the supervision and oversight of audit committees; and impose 

significant, unnecessary costs that impede investment and harm 

investors and consumers. 

A GAO study conducted pursuant to Sarbanes-Oxley found that 

initial year audit costs under mandatory audit firm rotation would 

increase by more than 20 percent over subsequent year costs in 

order for the auditor to acquire the necessary knowledge of the 

public company. Beyond harming the competitive position of American public companies, I have heard from innovative private companies in Virginia’s 5th District, including many of our research and 

development bio-tech firms, that mandatory audit firm rotation 

would create a further disincentive to go public in light of the increased costs, and already complex regulatory scheme. 

Both the SEC and Congress have previously rejected mandatory 

audit firm rotation, and most recently, the JOBS Act explicitly 

banned audit firm rotation for emerging growth companies. Let me 

close by saying that unemployment in my district, Virginia’s 5th 

District, continues to be unacceptably high. We cannot continue to 

impose onerous and unnecessary regulatory requirements that 

force firms to divert essential capital from preserving and creating 

jobs, to needless rules and regulations. 

I look forward to the testimony of each of our distinguished witnesses today, and I thank them for their appearance before the 

subcommittee. Mr. Chairman, thank you, and I yield back the balance of my time. 

Chairman GARRETT. The gentleman yields back. And before I go 

to Mr. Scott, I yield to the gentlelady from New York for a unanimous consent request. 

Mrs. MALONEY. It is done. 

Chairman GARRETT. I thought you wanted to— 

Mrs. MALONEY. Oh. I have a legislative proposal here and statement from Ian Simpson, the director of global governance for 

CalPERS, the California Public Employees Retirement System, and 

I request unanimous consent to place it into the record. 

Chairman GARRETT. Without objection, it is so ordered. 

Mrs. MALONEY. Thank you. 

Chairman GARRETT. Thank you. Mr. Scott is now recognized. 

Mr. SCOTT. Thank you, Chairman Garrett, and thank you, Ranking Member Maloney. 

This is an important subject, and I kind of view these four bills 

with a bit of trepidation. I think it is important for us to be very 

careful. The Dodd-Frank Act is an extraordinarily important act to 

make sure that we never get into a financial crisis such as we had 

before. 

And I do believe in making the right kind of adjustments. Oftentimes when we make adjustments, we sometimes can create unintended consequences, create sometimes more of a problem than we 

had before, so we have four bills. 

5 

The Audit Integrity and Job Protection Act addresses questions 

as to whether or not mandatory audit firm rotation by the Public 

Company Auditing Oversight Board is the most efficient way to enhance auditor independence and audit quality. I think it is important that we hear from our accounting firms on that. They are the 

ones that have to make all of this work. And we have to make sure 

that we get the right answers. 

H.R. 1135, the Burdensome Data Collection Relief Act, looks to 

repeal disclosure requirements for a public company’s ratio of CEO 

pay to median employee, as is required under Dodd-Frank. There 

are reasons why such language was put into Dodd-Frank. So, I 

think we have to be very careful. 

H.R. 1105, the Small Business Capital Access and Job Preservation Act, exempts investment advisers to certain private equity 

firms from SEC registration and reporting. Again, this is required 

under Dodd-Frank. What does the SEC say about this? I am saying 

all of these things were put in for a purpose. 

So, as we move forward to address the many regulatory issues 

raised by these pieces of legislation, what I am saying is, we have 

to get the right balance, and balance the concerns on behalf of, yes 

investors, but also consumers. Also, the users, and our constituents 

with the concerns that are raised by American public companies, 

many of which are also run by our constituents and have stakes 

in our communities. 

I believe in transparency, and I am also a pragmatist who recognizes that while notably improving admittedly less than satisfactory economic and market conditions that our American businesses 

are operating under, we must do everything we can to improve conditions, and facilitate growth without imposing any undue, unexpected regulatory burdens. And I am sure my colleagues share in 

this evenhandedness. If they are onerous, we need to say why. Onerous to one person, might not be onerous to another. So, all I am 

asking for is that we move with a very clear, jaundiced eye, and 

not with an overwhelming zeal to move in and try to undermine 

or repeal Dodd-Frank. 

With that, I yield back. 

Chairman GARRETT. The gentleman yields back. Before we go to 

Mrs. Wagner, the gentlelady from New York is recognized for 30 

seconds. 

Mrs. MALONEY. I would just like to take this opportunity to 

thank Kristin Richardson for her extraordinary work on this committee, and prior to that, for her work in my district office in New 

York. She has done an extraordinary job and will be leaving to join 

the private sector. But I am deeply grateful for her sacrifice, and 

her devotion, and her hard work. Thank you, Kristin. 

[applause] 

Chairman GARRETT. So we will be seeing you in New York when 

we go up to New York? Great. Okay. 

Mrs. Wagner is now recognized for 3 minutes. 

Mrs. WAGNER. Thank you very much, Mr. Chairman. 

The first thing I would like to note is that the discussion draft 

amending Section 913 of the Dodd-Frank Act that I have circulated 

is just that, a draft. And I appreciate the opportunity to have it included in this hearing to receive all of the proper input. The draft 

6 

is intended to address what has become one of the biggest issues 

facing retail investors today. I guess this has simply become known 

as the fiduciary issue. And what we have is two different Federal 

agencies, the SEC and the Department of Labor, heading towards 

a separate and massive rulemaking that could fundamentally 

change the way in which families and investors choose financial 

products and services, and not necessarily for the better. 

Today, we will focus on the SEC. In January 2011, the SEC proposed adopting a ‘‘uniform fiduciary standard for brokers and advisers for their dealings with retail customers.’’ While the SEC 

claimed this proposal would better protect investors, the agency 

failed to provide any evidence to support such a claim. And in fact, 

failed to provide any data, or evidence showing that retail customers were being harmed or disadvantaged under current standards of conduct. 

SEC Commissioner Paredes, and then-Commissioner Casey said 

in a joint statement that the study ‘‘failed to justify its recommendation that the Commission embark on fundamentally 

changing the regulatory regime for the broker-dealers and investment advisers.’’ And even though investor confusion surrounding 

standards of care was the main rationale behind the study’s recommendation, Paredes and Casey went on to say that the uniform 

standard ‘‘may in fact create new sources of confusion for investors.’’ 

So it seems to me that we have a solution in desperate search 

of a problem. And the solution could end up harming investors 

more than helping them. The draft that I have circulated is meant 

to address the shortcomings of the SEC’s proposal, and to ensure 

that regulators do not lose focus on the fact that, at the end of the 

day, it is everyday Americans who are harmed most when Federal 

agencies regulate without justification. 

I hate to break it to you, but it is not the ultra-wealthy, or the 

1 percent who are most affected by this: it is the new dad looking 

to buy life insurance so he can sleep better at night; or the mom 

looking to set up an education account for her child who gets 

turned away because she is told that she is not sufficiently 

wealthy; or the grandfather who has fewer choices when deciding 

how to pass on wealth to his grandchildren. 

You don’t protect investors by simply restricting their choices 

and adopting a one-size-fits-all regulatory regime. In fact, I would 

submit that this does more harm than good. 

The draft legislation would improve the regulatory process by requiring the SEC to identify whether investors are being harmed or 

disadvantaged under current standards of care, and also require 

the SEC to conduct a rigorous cost-benefit of any potential rule. 

In addition, the SEC would be required to verify that any final 

rule would actually reduce, I underscore, reduce investor confusion. 

I think we can all agree that the SEC shouldn’t make the problem 

worse. 

I thank the chairman for the time, and I look forward to hearing 

from our witnesses today on this very important matter. And I 

yield back my time. 

Chairman GARRETT. Thank you. And before we get to the witnesses, one last comment. The gentleman from— 

7 

Mr. HURT. Mr. Chairman, I just have two letters: one from the 

Association for Corporate Growth; and one from the Investment 

Company Institute and the Independent Directors Council. And I 

was wondering if I could have unanimous consent to make them 

a part of the record? 

Chairman GARRETT. Without objection, it is so ordered. 

Mr. HURT. Thank you. 

Chairman GARRETT. Now, we can go to the panel. And thank you 

to the entire panel for being here today. For those who have not 

been here before, just recognize that your entire written testimony 

will be made a part of the record. We will now yield to you 5 minutes each. 

We also ask that you—we always say this a number of times— 

make sure that your button is pushed and that the microphone, as 

you have done, is pulled fairly close to you, otherwise it is sometimes hard to hear you. 

So to begin things, from the University of Mississippi, Mr. 

Bullard, you are recognized for 5 minutes. 

STATEMENT OF MERCER E. BULLARD, PRESIDENT AND 

FOUNDER, FUND DEMOCRACY, INC., AND JESSIE D. 

PUCKETT, JR., LECTURER AND ASSOCIATE PROFESSOR OF 

LAW, UNIVERSITY OF MISSISSIPPI SCHOOL OF LAW 

Mr. BULLARD. Thank you, Chairman Garrett, Congresswoman 

Wagner, and members of the subcommittee for the opportunity to 

appear before you today. It is certainly an honor and a privilege 

to be back before the committee. 

I would like to direct my comments today to the draft cost-benefit 

bill, and although I am going to talk about the bill as if it is final 

text, I just want you to note that I do appreciate it is a draft, and 

certainly I wouldn’t be surprised if there were changes made to the 

text going forward. 

I also want to note that the bill’s cost-benefit requirements, in 

theory, are certainly unobjectionable. And for the most part, they 

describe how the SEC should think about cost-benefit analysis in 

doing its rulemaking. However, in practice, the requirements will 

have little relationship to how cost-benefit analysis is actually conducted. 

My concern is that they will not improve cost-benefit analysis. 

Rather, they will impede or simply prevent needed rulemaking, add 

unproductive employees to government payrolls, and trigger more 

litigation and more expense for all parties involved. 

Excessive cost-benefit requirements ultimately will turn government agencies into the Orwellian two factions that opponents of 

red tape claim to oppose. Legal challenges to rules have proven 

time and time again that there is only one standard for cost-benefit 

analysis that is really needed, the arbitrary and capricious standard under the Administrative Procedures Act. 

Industry participants have been successfully challenging inadequate cost-benefit analysis under that standard for decades. One 

consequence of the regulatory paralysis that excessive cost-benefit 

standards create that does not receive much attention is the problem of unintended consequences. 

8 

As every experienced lawyer knows, one response to regulatory 

paralysis is always the same—rulemaking through enforcement. 

The fiduciary duty is no exception. States bring State law fiduciary 

claims against brokers. FINRA brings FINRA rule-based fiduciary 

claims against brokers. Fiduciary claims are the most common 

claims in FINRA arbitration proceedings where no one even knows 

what the standards are that are being applied because arbitration 

panels are not required to tell us what they are. 

When you take away the SEC’s ability to define the fiduciary 

duty, you guarantee that there will be dozens of versions of fiduciary duties promulgated by dozens of sources of authority. Excessive cost-benefit standards ultimately promote the development of 

non-uniform, enforcement-based law. 

Others will also step in and do their own rulemaking. Let me 

read you the headline from an article on Rick Ketchum’s speech, 

delivered only yesterday—‘‘FINRA’s Ketchum to SEC: Act Now on 

Fiduciary, or We Will Make Our Own Disclosure Rules.’’ FINRA 

rules already have a substantive fiduciary component. Industry 

lawyers have characterized its most recent amendments to a suitability rule as establishing a de facto fiduciary standard. 

The fiduciary duty has already blossomed, gassing 1,000 lights 

that are anything but illuminating. As an alternative to rulemaking, the SEC itself has brought a number of claims, for example, for failures to disclose revenue-sharing payments that allege 

what are essentially fiduciary duty violations clothed in the garb 

of anti-fraud claims. 

In fact, one might even predict that when cost-benefit requirements threaten to paralyze rulemaking by the SEC or the CFPB, 

for example, the Executive Branch might choose to sidestep rulemaking by appointing prosecutors to run those agencies. 

The cost-benefit bill also requires SEC coordination with other 

agencies that may reflect an intent to constrain the DOL’s own fiduciary rulemaking. If so, in light of recent events, I would say this 

approach is at least premature. The DOL’s original proposal, which 

has been roundly criticized by me in this room itself and others, 

has been withdrawn. 

The DOL is conducting an intensive cost-benefit analysis. DOL’s 

officials have expressly stated they are crafting exemptions for reproposal that are designed to accommodate existing industry practices. And the re-proposal is only a couple of months off. I would 

say that Congress should at least wait to know what the DOL proposal is going to be before seeking to prevent the rulemaking from 

going forward. 

The bill also includes a provision that requires the SEC to make 

a finding, as a condition of adopting a fiduciary rule, that the rule 

would reduce investor confusion about the legal standards that 

apply to financial professionals. This customer confusion test does 

nothing more than hold investors hostage, denying them the right 

to an efficient fiduciary standard until they can prove that they 

have achieved a higher level of legal sophistication. 

The solution to investor confusion is not to require investors to 

become smarter about regulations. It is to make smarter regulations. 

9 

In conclusion, the bill requires that the SEC, again, as a condition of imposing a fiduciary duty on brokers, to impose unrelated 

rules on investment advisers. There is no question the SEC should 

consider whether broker rules that apply to activities that advisers 

also engage in should be extended to advisers as well. 

But making the adoption of a fiduciary rule automatically triggers such unrelated rulemaking, creates a strong inference that 

this provision is nothing more than rent seeking by an industry 

that wishes to regulate its competitors into submission. Investor 

adviser rules, like the fiduciary rule, should stand or fall on their 

own merits. 

Thank you, and I would be happy to answer any questions. 

[The prepared statement of Mr. Bullard can be found on page 39 

of the appendix.] 

Chairman GARRETT. I thank the gentleman. Next, from the Association for Advanced Life Underwriting, Mr. Ehinger, you are recognized for 5 minutes, and welcome to the panel. 

STATEMENT OF KEN EHINGER, CHIEF EXECUTIVE OFFICER, M 

HOLDINGS SECURITIES, INC., ON BEHALF OF THE ASSOCIATION FOR ADVANCED LIFE UNDERWRITING (AALU) 

Mr. EHINGER. Thank you, Chairman Garrett, Ranking Member 

Maloney, and members of the subcommittee. I am Ken Ehinger, 

president and chief executive officer of M Holdings Securities, Inc. 

I am testifying today on behalf of the Association for Advanced Life 

Underwriting. 

We appreciate the opportunity you have given us to testify on 

draft legislation by Representative Wagner. Her draft legislation 

would, in essence, require the SEC to identify a real need and determine that there will be real benefits outweighing the costs before upending the current standards that apply to broker-dealers. 

While we understand the Wagner proposal is a discussion draft 

at this point, we support her effort as a sensible proposal that we 

believe will lead to better rulemaking by the SEC. 

I have spent more than 3 decades in the securities and insurance 

business. I was honored to share that experience with this subcommittee when I testified more than a year-and-a-half ago. 

As I said then, a standard of care for financial professionals that 

sounds good in theory may fail in practice if it is vague and amorphous and provides no guideposts for compliance. And, a fiduciary 

duty offers little protection if regulators do not have the tools and 

resources to effectively oversee the financial professionals who are 

subject to it. 

I reiterate those statements today. 

During consideration of Dodd-Frank, the then-Chairman of the 

SEC advocated that the bill include a legislative mandate to the 

SEC to impose a new standard on broker-dealers. Congress rejected 

that approach and directed the SEC to study whether there were 

gaps in existing investor protection before acting on any new rule. 

The 2011 SEC study was criticized on all sides because of the 

lack of economic analysis and findings of specific harm and market 

failure supporting its conclusions. The SEC says that it needs to 

address investor confusion. A 2008 Rand Corporation report found 

that investors were confused about the legal differences between 

10 

brokers, dealers, and investment advisers, although they were very 

satisfied with their own financial professionals. 

But instead of addressing the confusion issue by developing better, clearer, and more concise disclosure about the role in which a 

financial professional serves, the SEC took a different path. Over 

the past 5 years, it has used precious time and staff resources to 

continue to press for a change in the broker-dealer standard of care 

to conform to the standard that applies to investment advisers. 

The SEC most recently set out various options for reform in this 

area in a 72-page release requesting a mountain of data, little of 

which relates to whether investors are being harmed. 

I have great respect for the SEC and for its dedicated staff. But, 

the Commission has detailed dozens of staff to work on this discretionary rulemaking project over the last few years. 

I believe the SEC could make much better use of those staff, if 

it would do two things. First, direct two or three to develop a targeted disclosure rule that addresses any issue of investor confusion. 

And second, reassign the others to fill what continues to be a monumental gap in investment adviser inspections and oversight. 

Representative Wagner’s bill would address these issues very directly. If the criteria in her discussion draft had been in place from 

the outset, precious time and resources would have been saved by 

the SEC. The focus on the SEC’s regulatory effort would have been 

to identify real and specific harm, and then to craft a rule or other 

remedy to address that harm cost-effectively. Investors would have 

been far better off. 

AALU’s members are licensed life insurance professionals. Many 

are licensed in multiple States. Most AALU members are registered representatives at SEC and FINRA-registered broker-dealers, and/or are investment adviser representatives of SEC-registered advisers. Our members are subject to multiple layers of 

Federal and State regulation and oversight. 

The variable insurance products our members sell, which trigger 

broker-dealer registration, give customers investment choices and 

an insurance guarantee, which has been recognized as even more 

important in recent years of market volatility. 

The range and features of products such as variable life and variable annuities make it difficult to determine which product is 

‘‘best,’’ and a ‘‘best interest’’ standard almost certainly would lead 

to increased litigation. Determining what is ‘‘best’’ would be highly 

subjective, opening a producer to second-guessing and liability, 

often years after the sale of the product. 

Life insurance enables individuals and families from all economic 

brackets to maintain independence in the face of potential financial 

catastrophe. The life insurance industry, through permanent life 

insurance and annuities, provides 20 percent of Americans’ longterm savings. 

Two out of three American families—that’s 75 million families— 

count on the important financial security that life insurance products provide. Therefore, any proposed change in regulation that 

could limit consumer choices and access to these critical protection 

and savings vehicles should meet a high burden with respect to the 

need for the changes. 

11 

I want to thank you again for the opportunity to testify. AALU 

looks forward to continuing to work with you on these critical 

issues. 

[The prepared statement of Mr. Ehinger can be found on page 57 

of the appendix.] 

Chairman GARRETT. And I thank the gentleman. It is good to see 

you back here again. 

Mr. Quaadman from the U.S. Chamber of Commerce, welcome to 

the panel. 

STATEMENT OF THOMAS QUAADMAN, VICE PRESIDENT, CENTER FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE 

Mr. QUAADMAN. Thank you, Chairman Garrett, Ranking Member 

Maloney, and members of the subcommittee. 

If you take a look at the four issues that are before us today, 

there is a common thread that runs throughout them. There is a 

lack of benefit for investors and businesses. There are large costs 

that are imposed on businesses. And there is a mode of government 

micromanagement that inhibits investors and the ability for businesses to grow and create jobs. 

That is why the Chamber, in releasing our Fix, Add, Replace 

(FAR) agenda earlier this year, included these four issues as those 

that should be addressed. The FAR agenda was specifically designed to fix the flaws in Dodd-Frank, add the issues that were left 

unaddressed in Dodd-Frank, and replace those provisions that are 

unfixable. 

In looking at the specifics of the four issues before us, the Chamber supports H.R. 1135, the Burdensome Data Collection Relief 

Act, which would repeal Section 953(b) of the Dodd-Frank Act. The 

pay ratio disclosure in Section 953(b) in Dodd-Frank creates a corporate disclosure that forces businesses to disclose irrelevant information for investors. It doesn’t convey information to investors as 

to company performance, their long-term prospects or its management. 

Instead, it imposes costly compliance burdens that, if you take a 

look at a public company that may be operating in dozens, if not 

in over 100 countries, they have to reconcile differing definitions of 

compensation, employees, and benefits, quantify those, and then 

take into account currency fluctuations over all those different borders. 

So if you take a look at the information provided by the Center 

On Executive Compensation, one company has estimated it will 

cost almost $8 million to comply with this provision; another company has estimated it will cost $2 million just to determine the 

pension benefits that could be subject to this provision. 

When you start to extrapolate those numbers across the more 

than 10,000 public companies in the United States, you are looking 

at costs well into the hundreds of millions of dollars. 

The Chamber also supports H.R. 1105, the Small Business Capital Access and Job Preservation Act. This solves the problem, the 

classic problem, of trying to pound a square peg into a round hole. 

The SEC has created a mismatch of trying to impose public investor disclosures upon private investors. 

12 

Therefore, private equity funds, which are important sources of 

capital for the business community, have to safeguard untradeable 

securities and also have to start to engage in expensive periodic 

valuations of businesses that are in their portfolio. 

It has been estimated by the Association for Corporate Growth 

that for each of these businesses in a portfolio, it will cost the fund 

between $500,000 and $1 million. When you take a look at a private equity fund that could be invested in 20, 30, or 50 businesses, 

that starts to actually sideline a sizable amount of capital that 

could be used for productive purposes. 

The Chamber also supports H.R. 1564, the Audit Integrity and 

Job Protection Act. The Chamber agrees that Congress should not 

legislate independent standard setting standards and that there 

should be independent standard setting. But this is an example 

where the PCAOB has left its field of audit region and got into corporate governance. With possibly only two to three audit firms engaged in audit activities in an industry, it could actually turn into 

a government mandate as to what vendor a company should use 

and when they should use them. 

Furthermore, this will diminish audit committee oversight. The 

GAO, as has been noted, has estimated this would raise audit costs 

by at least 20 percent and it would harm audit quality. Over 90 

percent of the commenters to the PCAOB over the last 2 years 

have opposed this provision and then, in fact, the majority of investors have also done so. 

The Chamber is also very appreciative of Congresswoman Wagner’s discussion draft on Section 913 of Dodd-Frank. The Chamber 

echoes the concerns of over 150 Members of Congress on a bipartisan basis who have raised concerns about fiduciary duty roles. 

We agree that there needs to be a coordinated effort amongst the 

SEC and other Federal agencies to look at the issue and then determine what the problems are, what the solutions are, and what 

the cost-benefit should be. 

Unfortunately, what we have seen with the history of joint 

rulemakings under Dodd-Frank, is they have happened in a disjointed manner. They have happened out of sequence and they 

have created market confusion in and of themselves. 

That, we think, is something that would harm investors and the 

businesses that they help capitalize. 

Finally, I would just like to say if you take a look at each of these 

issues and bills in the abstract, they are trying to address costs 

and burdens, as I mentioned, but we also need to look at them on 

a much broader and global basis. 

We would also support consideration of Congressman Fincher’s 

bill, H.R. 1221, the Basel III Capital Impact Study, which would 

look at a cumulative impact study of various Dodd-Frank 

rulemakings. 

Finally, I would just like to say we commend Congress for the 

bipartisan action it took last year in passing the JOBS Act. And 

we think that the passage of these four bills is a page from the 

same playbook and would support that. Thank you. 

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

67 of the appendix.] 

Chairman GARRETT. And I thank the gentleman. 

13 

Now, on behalf of the Small Business Investor Alliance, Mr. 

Reich. Welcome, and you are recognized for 5 minutes. 

STATEMENT OF MARC A. REICH, PRESIDENT, IRONWOOD CAPITAL, ON BEHALF OF THE SMALL BUSINESS INVESTOR ALLIANCE (SBIA) 

Mr. REICH. Thank you, Chairman Garrett, Ranking Member 

Maloney, and members of the subcommittee. Thank you for the opportunity to testify today. 

My name is Marc Reich, and I am president of Ironwood Capital, 

a private equity firm in Avon, Connecticut. I represent the Small 

Business Investor Alliance, the trade association of lower middle 

market private equity firms, and the many institutional investors 

that provide the capital that we, in turn, invest in small and medium-sized businesses nationwide. 

My firm manages six private equity funds, four of which are organized as small business investment companies, investment funds 

that are licensed and regulated by the U.S. Small Business Administration. We invest subordinated debt and equity in amounts ranging from $5 million to $12 million to support small business owners 

in growth financings, recapitalizations, and buyouts. I strongly support H.R. 1105, the Small Business Capital Access and Job Preservation Act, introduced by Representatives Hurt, Himes, Garrett 

and Cooper. Thank you to the committee for examining this bill 

today, and especially to the sponsors of the legislation for working 

so diligently to bring it to this point. 

H.R. 1105 strengthens the ecosystem of the private equity marketplace by reducing overregulation that threatens capital access 

for small businesses. The Investment Advisers Act of 1940 as modified by Dodd-Frank requires private fund advisers to register with 

the SEC if they manage more than $150 million of capital. 

Since the Act became effective, over 1,500 private equity funds 

have registered with the SEC. 

My testimony today will be brief and pointed, focusing on a few 

of the most common and vexing problems experienced by managers 

of middle market private equity funds as a result of SEC registration and regulation, in my view, the potential negative impact on 

small businesses if H.R. 1105 does not become law. 

First, however, I would like to speak to the issue of middle market private equity and systemic risk to the financial system. The 

global economic downturn was a tremendous stress test for the financial system. The middle market private equity industry weathered the downturn in good shape. 

In fact, private equity saved many small businesses during the 

financial crisis when their access to capital was severely curtailed. 

Middle market private equity doesn’t create systemic risk by 

trading in synthetic financial instruments. We don’t speculate on 

currency or commodities. We don’t put the retirement funds of individuals at risk. We invest directly in small businesses, the backbone of our economy and the growth engine for job creation. 

I support having a strong body of regulation within which to operate. Good government regulation is, in fact, the strength of our 

system. But that regulation must be appropriate to the context to 

which it is applied, should not be redundant with or in conflict with 

14 

other regulations, and should not adversely impact the flow of capital—in our case, again, the flow of capital to U.S. small businesses. 

SEC compliance and regulatory costs are especially high for 

small investment funds. At Ironwood Capital, we already spend approximately $250,000 annually on SBA compliance costs. Initial 

SEC registration costs us $100,000, plus an additional $250,000 annually thereafter. 

In addition to the actual dollar cost of additional compliance, 

having a second Federal regulator removes fund managers from 

their primary role of investing in and coaching small businesses. 

While this is true for both large and small funds, there is a disproportionate impact on smaller funds since they have smaller 

chains, teams, and operate in very lean environments, but face the 

same array of regulations. 

Many of the regulatory requirements we now face under SEC 

rules are inappropriate to the nature of our business. We invest almost exclusively in privately held companies and hold securities 

which are not readily marketable or otherwise transferable. Nonetheless, we are now subject to the SEC custodial rules, which require us to hire a third-party custodian to hold onto untradeable 

securities. 

If our securities ended up in the hands of unscrupulous people 

seeking to profit from them, nothing would happen. 

Likewise, we are now required to retain and archive all e-mail 

messages, then review them to detect illegal activity, such as insider trading. Again, we don’t hold anything that is tradable. But 

we are subject to this rule. This is a purely regulatory exercise 

with no benefit to investors, nor does it contribute to the safety and 

integrity of the overall financial system. 

Having two regulators overseeing substantially the same segment of the market has resulted in several unnecessary and costly 

situations. 

In one case, the manager of multiple SBICs now regulated by the 

SEC has been preparing its financial statements for years in accordance with SBA regulatory accounting standards, but was required by the SEC to restate all of their financial statements on 

a GAAP basis, which cost them about $500,000. 

The effect of relatively high compliance expenses and conflicting 

regulation motivates managers of small funds to either exit the 

business or raise far more capital for their next fund to offset the 

cost of double regulation, which, in turn, has the effect of causing 

those funds to now invest in bigger companies, leaving the smaller 

companies significantly out in the cold. Neither option is good for 

the sustained flow of capital to small businesses. 

Thank you to the committee for holding this hearing on H.R. 

1105, a bill that removes overregulation and helps small business. 

The SBIA looks forward to working with you to craft better legislation and the appropriate modifications. I am happy to answer any 

questions you may have. 

Thank you. 

[The prepared statement of Mr. Reich can be found on page 106 

of the appendix.] 

Chairman GARRETT. I thank the gentleman. 

15 

From the AFL-CIO, welcome back, Mr. Silvers. 

STATEMENT OF DAMON A. SILVERS, POLICY DIRECTOR AND 

SPECIAL COUNSEL, AFL-CIO 

Mr. SILVERS. Good morning, Chairman Garrett. It is a pleasure 

to be with you again. And good morning to you, Ranking Member 

Maloney. 

I am Damon Silvers, the policy director and special counsel to 

the AFL-CIO. I want to thank you and the committee for the opportunity to appear today. 

Since 1980, the United States has gone through several cycles of 

financial deregulation, each of which was followed by speculative 

bubbles and mass unemployment. The Bank of England has estimated that the worldwide costs of the collapse of the most recent 

U.S.-centered financial bubble driven by deregulation is in excess 

of $60 trillion and rising. 

Today, this committee is considering a package of bills, each of 

which is wrong-headed in its own peculiar way, but when taken as 

a package, together with other measures being taken up by the 

House such as derivatives deregulation, constitute the House seeking to initiate yet another round of financial deregulation. If successful, there is no reason to believe that the outcome of this effort 

will be any different than the outcomes of the last 3 times that 

Congress went in this direction. 

Now, I am going to take up briefly each of the four bills. In my 

written testimony, there is a detailed analysis. 

H.R. 1135, the Burdensome Data Collection Relief Act, seeks in 

truth to keep secret the relationship between CEO pay and the median pay of other employees at public companies by repealing Section 953-b of the Dodd-Frank Act, which requires such disclosure. 

The AFL-CIO strongly opposes H.R. 1135. It is a bill designed to 

hide material information from investors, to encourage runaway 

CEO pay, and to increase economic inequality. Each of these outcomes of this bill will feed systemic risk. 

H.R. 1105, the Small Business Capital Access and Job Preservation Act, as drafted now—it could be drafted to narrowly address 

the concerns the previous witness, Mr. Reich, has raised, which I 

think are legitimate—has nothing to do with small business. It exempts leveraged buyout firms. That is what private equity is code 

for. It exempts leveraged buyout firms from the registration and reporting requirements in the Dodd-Frank Act. 

This bill would increase systemic risk, weaken investor protections, and offer further regulatory subsidies to leveraged buyout 

firms, a portion of Wall Street that is already the beneficiary of inexcusable tax subsidies. And it is drafted in a manner aimed at 

misleading Members of this House into thinking the bill has meaningful protection against leverage when it does not, because the 

firms do not incur leverage at the firm level. They do so at the investment level. For all of these reasons, the AFL-CIO strongly opposes H.R. 1105. 

The draft legislation to amend Section 913 of the Dodd-Frank Act 

places a number of unusual procedural obstacles in the way of the 

SEC strengthening the standard of conduct that is applied to 

broker-dealers’ treatment of their clients. Currently—and this has 

16 

not come out yet, despite the amount of time spent in this hearing 

on this bill—brokers have no legal duty to give investors advice 

that is actually in the client’s interest. 

This fact was at the heart of Goldman-Sachs’ defense when the 

SEC charged Goldman with selling credit default swaps in the Abacus transaction to clients without telling them the swaps had been 

designed by the party on the other side of the transaction. In a 

sense, this draft bill is designed to facilitate Goldman-Sachs and 

their future imitators continuing treatment of their less favored clients as feedstock for their most favored clients. The AFL-CIO 

strongly opposes this bill. 

H.R. 1564, the Audit Integrity and Job Protection Act, seeks to 

prevent the Public Company Accounting Oversight Board (PCAOB) 

from placing limits on the length of time a public company can use 

the same audit firm, audit firm rotation. H.R. 1564 both substantively weakens the ability of the PCAOB to play its role in protecting our economy against systemic risk, and it weakens the 

independence of the body. Both results are contrary to the public 

interest, and will significantly increase the risk of financial crisis, 

and the AFL-CIO opposes this bill. 

I should note that the subcommittee does not possess the information the PCAOB has as a result of its inspection process. I 

would suggest the subcommittee consider seeking to grant itself 

that authority so it can have the information the regulator has, as 

the regulator considers whether or not to do this, from the inspections. 

Now, in conclusion, there is an urgent financial regulatory agenda, and it is not this one. That agenda is completing the DoddFrank rulemaking process, really taking on too-big-too-fail institutions, as Senators Brown and Vitter are attempting to do, and fairly taxing the financial sector, starting with ending the carried interest loophole and enacting a financial transaction tax. 

This subcommittee should turn away from yet another costly indulgence in the delusions of deregulation, and instead focus on how 

to strengthen our statutory and regulatory protections against systemic risk and the exploitation of investors. 

Once again, on behalf of the AFL-CIO, I want to thank the subcommittee for the opportunity to appear. I look forward to your 

questions. 

[The prepared statement of Mr. Silvers can be found on page 116 

of the appendix.] 

Chairman GARRETT. Thank you. 

On behalf of the Society of Corporate Secretaries and Governance 

Professionals, Mr. Smith, you are recognized for 5 minutes. 

Thank you. 

STATEMENT OF ROBERT SMITH, CORPORATE SECRETARY, 

VICE PRESIDENT AND DEPUTY GENERAL COUNSEL, 

NISOURCE, INC., ON BEHALF OF THE SOCIETY OF CORPORATE SECRETARIES AND GOVERNANCE PROFESSIONALS 

Mr. SMITH. Thank you, Chairman Garrett, Ranking Member 

Maloney, and members of the subcommittee. I am here today in my 

capacity as director of the Society of Corporate Secretaries and 

Governance Professionals, and I appreciate the opportunity to parVerDate Nov 24 2008 17:59 Sep 25, 2013 Jkt 081761 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\81761.TXT TERRI
17 

ticipate in this hearing. And I will jump right in to the heart of 

the issues. 

My comments this morning will be limited to the CEO pay ratio 

disclosures and potential audit firm rotation issues. We believe 

these issues, if implemented, would be detrimental both to companies and their investors. With respect to H.R. 1564, we believe that 

the exclusive authority to hire and retain an audit firm should remain with the company’s independent audit committee. 

The audit committee remains tasked by Congress and the SEC 

with the responsibility of selecting a company’s audit firm, and we 

believe the audit committee is best able to judge if the audit firm 

is bringing the right level of technical competence, objective, and 

professional skepticism to its work. Mandatory rotation would unnecessarily impinge on the audit committee’s independent judgment and fiduciary duties, and it would replace this with an arbitrary one-size-fits-all requirement. 

Second, we believe that the costs of mandatory rotation outweigh 

any benefits from a blanket rule. The costs associated with mandatory audit firm rotation are considerable, entailing as much as 

2,600 to 3,700 hours of audit committee, senior management, and 

staff time. 

Additionally, approximately half of our surveyed members indicated they believe fees for audit committee and audit-related services would increase 20 percent or more in the initial years following 

the auditor change. In addition, the GAO also estimated that additional costs would average approximately 80 percent higher than 

the audit costs had there been no change. 

Furthermore, we believe that the benefits of forced rotation 

would be minimal and that rotation would likely have a negative 

effect on audit quality. More than 85 percent of our members surveyed were very concerned about the loss of the audit firm’s institutional knowledge of the company and industry if required to 

switch auditors. And 70 percent of the responding members that 

had experienced an auditor change in the last 10 years indicated 

that they had noticed a change in the audit quality as a result of 

the new engagement. 

Finally, we believe that mandatory auditor rotation would leave 

many public companies with few experienced and eligible audit 

firms. Many public companies in certain industries have very limited choices with respect to audit firms with appropriate expertise. 

Many, again as a practical matter, only use one or two of the big 

four firms to provide their audit services. Nearly 90 percent of our 

members surveyed indicated that their company’s audit committee 

evaluates audit firms based on industry knowledge or international 

scope, and considered these items very important in the selection 

of the audit firm. 

Requiring a company to choose a less qualified, less experienced 

firm seems significantly less than ideal from a governance perspective. For these reasons, we oppose mandatory audit firm rotation. 

With respect to CEO pay ratio, we believe the requirement that 

the ratio be based on the median employee is simply unworkable. 

In order to know who the median employee is, each company in the 

United States would have to calculate the cash and non-cash comVerDate Nov 24 2008 17:59 Sep 25, 2013 Jkt 081761 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\81761.TXT TERRI
18 

pensation for every employee: full time; part time; domestic; international; hourly; and salaried. 

Pension accruals would have to be calculated by actuaries and 

H.R. professionals for no productive purpose other than to determine the median employee. International companies face an even 

more daunting task. They have foreign subsidiaries that have completely different computer systems, pay scales, compensation structures, and laws, including privacy laws in some jurisdictions that 

could prohibit the transfer of personal compensation information 

across borders without express consent of that employee. The potential issues with pay ratio are significant and numerous. 

Additionally, this type of disclosure does not appear to be desired 

by shareholders or investors. The 12 shareholder proposals of 

which we are aware that have been voted on since 2010 on average 

received less than 7 percent support. The bottom line is that there 

are already a lot of disclosures on compensation and shareholders 

have a regular venue and voice in the compensation process 

through say on pay. 

The disclosure is not meaningful. The skewed results that would 

result where two similar companies produced the same equipment, 

but one outsources the production of its products and the other one 

does not, clearly demonstrates the non-materiality and even potentially misleading nature of the disclosures. 

Similarly, the inclusion of part-time employees and international 

employees yields absurd results, where a full-time executive would 

be compared with a part-time employee who may only work 20 

hours per week, or with international employees who may live in 

a third world country. 

Lastly, we agree with the Chamber’s earlier comments that these 

additional disclosures could be incredibly costly without an offsetting benefit that would justify the cost. Hiring staff to perform the 

detailed calculation and then audit it and confirm it so that it is 

reliable and accurate would be daunting and overly burdensome. 

For these reasons, we believe that the requirement should be repealed. 

Thank you very much. 

[The prepared statement of Mr. Smith can be found on page 126 

of the appendix.] 

Chairman GARRETT. Thank you. 

And representing the Center On Executive Compensation, Mr. 

Tharp. 

Welcome. 

STATEMENT OF CHARLES G. THARP, CHIEF EXECUTIVE 

OFFICER, CENTER ON EXECUTIVE COMPENSATION 

Mr. THARP. Thank you. Thank you, Chairman Garrett, Ranking 

Member Maloney, and members of the subcommittee. My name is 

Charlie Tharp, and on behalf of the Center On Executive Compensation, I am pleased to provide our views on Section 953(b) of 

the Dodd-Frank Act, commonly known as the pay ratio mandate, 

and to express our strong support for Congressman Huizenga’s bill, 

H.R. 1135, which would repeal the pay ratio. 

As was commented earlier, we believe that it would impose significant costs on organizations, especially global employers, and 

19 

would divert resources from more productive uses such as job creation and investment without providing meaningful information to 

investors. 

The Center On Executive Compensation is an advocacy and research organization. And we are a division of the H.R. Policy Association, which represents human resource executives of over 340 

large companies, 100 of whom are members of the Center. 

I would like to make four key points in support of our review for 

the repeal of Section 953(b). The first is that the pay ratio calculation is overly complex. As was mentioned, the law would require 

that a company find the median compensation—not the average— 

of employees using the definition of pay that is used for the summary compensation table in the proxy disclosure. 

Companies don’t keep that information except for the calculation 

of the high five executives, and this is something that would have 

to be gathered manually and calculated. And as was pointed out, 

there is really no other legitimate business reason to collect the information in this way, so it would be a redundant effort. 

Second, there is a requirement that it be conducted on all employees. And that would include part-time and full-time employees. 

And as it is literally read, that could be employees around the 

world in various locations, no matter how many hours they work 

for the company. Again, this data is not housed in any accessible 

way by companies. 

And third, there would be a burden to conduct this collection of 

data. In our survey, half of our companies said it would take 3 

months to collect this data. Another 20 percent said it would take 

5 months. And this is information that would have to be disclosed 

in each SEC filing from a company, which are numerous. 

I would offer one example from one of our subscribers that said 

they have no existing way to calculate the annual total compensation of every employee around the world. They have 101 payroll 

systems. They have 3,600 employees who are paid in 2 different 

countries because of the nature of their assignment. Six countries 

that use noncalendar tax years. And it was mentioned earlier that 

many countries have privacy rules that inhibit the ability to share 

this information. 

There is also a tremendous expense, as Mr. Quaadman pointed 

out, since the cost of implementation would be millions of dollars. 

The two examples used, one company would be $7.6 million as 

their estimate just to collect this data. And the pension calculations, again, would be over $2 million. 

The final point is that it is information which isn’t useful to investors and which investors haven’t asked for. If you look at the 

differences between company structures, the labor markets in 

which they operate, the product markets, it would be very difficult 

to compare information across companies. 

And in those cases where shareholders have had an opportunity 

to vote on the pay ratio, the 9 that were in 2010, none received 

support of over 10 percent by investors, and the average support 

was just a little over 6 percent. And it is clear that when given the 

opportunity to request this information—over 90 percent of investors have voted against it. 

20 

In conclusion, we believe that the pay ratio wouldn’t be helpful 

to investors, would be potentially confusing, and would be overly 

costly and burdensome to implement. And that is why we support 

repeal. Again, thank you very much for the opportunity to offer our 

views. 

[The prepared statement of Mr. Tharp can be found on page 142 

of the appendix.] 

Chairman GARRETT. Thank you. Just so the panel knows, votes 

have been called, but I think we will get in at least one series of 

questions, and then close after that. I am not going to go next, as 

I normally would as Chair. I am going to defer to the vice chairman. The gentleman from Virginia is recognized for 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. Again, I thank each of the 

panelists for being here. I guess I wanted to first talk about the 

private equity registration bill, and wanted to first turn my attention to Mr. Quaadman. Obviously, the purpose of Dodd-Frank is to 

get at the idea of systemic risk. How do we prevent systemic risk 

and prevent another financial crisis? 

Obviously it strikes me, as the chairman said, that the implementation of Dodd-Frank and the enactment of Dodd-Frank is not 

something that should prevent us in and of itself from looking at 

ways to make Dodd-Frank more useful or to make it less harmful, 

especially to those who are trying to create jobs. 

And jobs is obviously—if you look at my rural Virginia fifth district, there are places in my district where we have had unemployment as high as 15 percent. So this is a very real issue, and capital 

formation is very important. 

I was wondering if you could maybe talk a little bit about the importance of private equity in capital formation, and then also address the issue of systemic risk and whether or not the investment 

that takes place as a consequence of that really presents any systemic risk as contemplated by Dodd-Frank. 

Mr. QUAADMAN. Thank you, Mr. Hurt. First off, in the United 

States we have an extremely diverse set of capital financing for 

businesses. So, private equity is a very important part of that. 

Private equity obviously can be where a fund comes in and takes 

a troubled company and turns it around. On the other side, they 

can take a smaller company that is looking to grow and provide 

them with the basis to do so. So private equity in that regard is 

a very critical part of the funding structure that businesses have. 

In terms of systemic risk, private equity was not a cause of the 

financial crisis. In fact, when you take a look at Title I of DoddFrank through the prior Vitter Amendment, which was the last 

amendment agreed to in the Senate, the Senate on a bipartisan 

basis put a very strong line around what systemic risk can actually 

be in order to keep as many non-financial companies out of it. 

So when you take the fact that private equity was not a part of 

the financial crisis, where you actually have Congress and DoddFrank trying to restrict systemic risk regulation, clearly this is— 

private equity should not fall within the focus of this. 

Mr. HURT. Thank you. Mr. Reich, I wanted to see if you could 

also address the issue of systemic risk, and then also talk about 

whether or not this added regulation has the potential of perhaps 

creating more systemic risk, more too-big-to-fail. I think you adVerDate Nov 24 2008 17:59 Sep 25, 2013 Jkt 081761 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\81761.TXT TERRI
21 

dressed that a little bit in your comments, but maybe you could address that issue? 

Mr. REICH. I would be happy to. Thank you for the question. As 

I said in my comments, it has been demonstrated that private equity hasn’t contributed in any meaningful way, and maybe perhaps 

not at all, to the systemic risk. 

Part of that is because of structure. And the private equity industry, whether by design or through evolution, is a very, very stable system. Our investors are not individuals. They are large financial institutions. We have California State Teachers. We have New 

Hampshire Prudential, MetLife, all major investors. It is not Ma 

and Pa Kettle showing up with their savings in a coffee can asking 

to invest in private equity. But the structure is such that when our 

investors are in, they are in. They can’t exit. They commit to a 10- 

year period, which creates real stability in the system. We all saw 

what happened with the hedge funds. They have quarterly redemption rights, and people were running for the door and created tremendous problems. Private equity, again, is very, very stable— 

structurally very stable. 

As to the systemic risk, it is interesting when you take a look at 

Dodd-Frank and H.R. 1105 and what has gone on—and by the way, 

I don’t view this as a step towards deregulation. 

Mr. HURT. Yes. But my time is running out, and I really want 

you to address what the implication for capital formation for small 

businesses could be? 

Mr. REICH. Certainly. What happened is because of the cost of 

regulation, the players that continue in the industry have had to 

raise more capital to cover the increased costs. That creates some 

systemic risk in itself because it is forcing more capital into the 

hands of fewer. So we have less diversification. And by moving up 

in size, they can’t invest in the smaller businesses. So the smaller 

businesses really get hurt in the process. 

Mr. HURT. Excellent. Thank you. I yield back the time I don’t 

have. 

Chairman GARRETT. The gentleman yields back. 

Votes were called about 7 minutes ago, so let’s go into recess. We 

only have two votes, so it should not take long. As a matter of fact, 

after they vote the first time, we move right into the second vote, 

and then we will whip back here. So we will be in recess until that 

second vote is over. Thank you. 

[recess] 

Chairman GARRETT. The hearing is called back to order. And at 

this time, I yield to the gentlelady from New York. 

Mrs. MALONEY. I would like to follow up on the question by my 

good friend, Mr. Hurt, who is very sensitive, and I respect his sensitivity to being sensitive to the really burdensome requirements on 

smaller firms. But also to involve in the conversation Mr. 

Quaadman and Mr. Silvers, who had really competing statements 

on the bill. Already, people have started registering in these private equity firms with the SEC. And now, firms under $150 million are exempted from registration. Yet Mr. Silvers, in your testimony, you said the way that this 

is written is that it applies to the leverage at the fund level, and 

only to private equity funds, and that it would exempt many priVerDate Nov 24 2008 17:59 Sep 25, 2013 Jkt 081761 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\81761.TXT TERRI
22 

vate equity funds. Could you explain that further? You made it 

sound like the leverage argument doesn’t really apply to the private equity funds. Maybe a better way to help the small firms 

would be to raise the ceiling as opposed to going into the leverage 

idea? I would like the comments of the panel on that. Mr. Silvers, 

and then Mr. Quaadman, and Mr. Reich, or anybody who would 

like to respond. 

Mr. SILVERS. Congresswoman, what my testimony addresses is 

that leverage, which is the systemic risk issue associated with leverage buyout firms or private equity firms. Leverage in these 

firms is incurred not at the firm, but at the level of the partnership. So if you put in the bill language as is currently in the bill 

that says, we are not exempting firms with leverage, that language 

is completely misleading because it measures the leverage at the 

investment fund level, and not at the level of the companies the investment fund controls. 

Leveraged buy-outs are done at the company level, right? So that 

in a given leverage buy-out, a private equity firm might own the 

equity, the controlling share in 10 operating companies. Each of 

those operating companies will have done the borrowing. The way 

the language is written right now, you can have vast amounts of 

leverage in the total portfolio controlled by that leverage buy-out 

fund, and it would register the way leverage is measured in this 

bill as none whatsoever. Now your question about size? My reaction 

to Mr. Reich’s testimony was that he was describing the concerns 

of funds that were somewhat larger than the $150 million level, 

but were not in the big-time of private—in the world of leverage 

buy-outs and private equity. 

And also, funds that were perhaps less leveraged than the typical 

large player in the business. Now, I would agree with you that I 

think that his testimony raises a question of whether the $150 million limit is the right number. I am not going to express a view on 

that today. I am somewhat skeptical, but I think it would be worth 

looking into. But the way this bill is written, it is very easily a 

blanket exemption for funds that definitely represent systemic risk. 

Mrs. MALONEY. Okay. Mr. Quaadman? 

Mr. QUAADMAN. Mrs. Maloney, thank you for the thoughtful 

question. I think first off, some of the work that Mr. Himes has 

done, which was incorporated with this bill has been very helpful. 

I do think Mr. Hurt’s approach is actually a very thoughtful way 

forward. What we are seeing with the SEC is that you have an 

agency that is really geared toward public company disclosures and 

regulations. And that while Congress made a decision that there 

should be more oversight over private equity firms, the way that 

it is being done, it is being done through a check-the-box mentality 

that neither benefits the regulators nor does it help the P.E. firms 

themselves. 

So I think there is an appropriate balance here where you can 

have P.E. firms that can go out there and help businesses with capital, and with management, and not necessarily put onerous regulatory burdens on them. And it is just a matter of that balance. 

Mrs. MALONEY. Mr. Reich, and anyone else who would like to 

comment? Mr. Bullard? Mr. Reich, please, if you could comment on 

this discussion? 

23 

Mr. REICH. On that specific point, you are certainly correct. 

There is leverage both at the firm level, the fund level, and at the 

company level. But again, I think it is best covered just by disclosure. And I think there is adequate disclosure that is required 

right now by the SEC and the government in general to assess the 

systemic risk. I don’t see it as a big problem, however. 

Mrs. MALONEY. Okay. Mr. Bullard? 

Mr. HURT [presiding]. Just briefly. 

Mr. BULLARD. I would just like to point out that the SEC dealt 

with this issue in its venture capital rulemaking, which is the 

other major category that is exempted. It dealt specifically with the 

leverage requirements that are imposed on venture capital. It 

seems to me that looking at this bill, the 2:1 ratio doesn’t really 

do the kind of leverage restriction that you are looking for, simply—but directing the SEC to do the leverage restrictions itself 

would solve the problem. And the venture capital rulemaking 

seemed to be the one the industry was happy with the resolution. 

It is one that people were happy with the way the SEC dealt with 

leverage— 

Mr. HURT. Thank you. 

Mr. BULLARD. —I think that might be a better fix to that approach. 

Mr. HURT. The gentlelady’s time has expired. The Chair now recognizes Mrs. Wagner for 5 minutes. 

Mrs. WAGNER. Thank you, Mr. Chairman. And thank you all for 

being here today. Mr. Ehinger, I want to begin with just a general 

question, sir. What effect do you believe a broad, loosely defined fiduciary standard will have on retail, investors, and families who 

purchase insurance or other financial products? 

Mr. EHINGER. Thank you, Congresswoman Wagner. I appreciate 

the question. I also wanted to repeat one of your statements, that 

this is a solution in search of a problem, for sure. But I think in 

answer to your question, almost certainly it could create some increased liability. My concerns would be that particularly with respect to the life insurance business, there would be a shift to other 

kinds of products, non-bearable products, which in essence means 

less choice. I also think many insurance agents may choose not to 

stay registered, again not offering the opportunity to their clients 

perhaps to have the choices that are available at this point today. 

So I think that, coupled with higher costs, that again will be 

passed on in some regard could have a detrimental effect on, really 

the accessibility for products and services to all— 

Mrs. WAGNER. I couldn’t agree more. Again, Mr. Ehinger, in the 

Section 913 study, the SEC failed to identify any kind of systemic 

harm or disadvantage being done to investors under current standards of conduct. How do you feel that omission undermined, or misinformed the study’s recommendations to adopt a uniform fiduciary 

standard? 

Mr. EHINGER. I think the only thing that has been found—and 

I will reference back to the 2008 Rand study—with respect to the 

concerns about not understanding the legal responsibilities is confusion. And it is our view, our position that confusion is not resolved by changing legal structures, and creating more confusion, 

24 

by having multiple definitions of what, even the term fiduciary 

means. 

Confusion is resolved by proper, simplified disclosures, we think 

with access to better information in a more in-depth way. And in 

addition, education, and the SEC has a division really set up to address that, as well. 

Mrs. WAGNER. I think those are the two big takeaways. I know 

you have mentioned the 2008 Rand study, as have I, about the confusion issue. But to me, the most interesting thing about that study 

is that they said that generally, most investors and families were 

very happy with the services that financial professionals were in 

fact providing them. So I think those are the two big interesting 

takeaways there. So then it would seem, as the SEC pointed out 

in their study, that investor confusion is the real issue to be addressed. 

And for the record here, I do want to state that I do believe it 

is a completely legitimate concern. But, do you feel that there are 

better ways for the SEC to address investor confusion, as opposed 

to making wholesale changes in the way that financial professionals are regulated? 

Mr. EHINGER. I do, absolutely. And so I am reiterating what I 

mentioned before and that is to more properly and in a simple way, 

disclose really the roles and responsibilities of the investment folks 

who are working with individuals. And also to really support the 

educational efforts, as well. I think the other side of that is really 

if there is some concern about that confusion, one of the things that 

ought to be understood is really what the gaps truly are between 

the different ways that regulators, whether it is the B.D. regulators, or whether it is the SEC regulators act in practice. 

Mr. EHINGER. Because the term, fiduciary, while it may appear, 

and it may sound as a higher standard, in practice that standard 

really depends on how it is really enforced, how it is really complied with. 

Mrs. WAGNER. I appreciate that. I have limited time. Mr. 

Quaadman, you used a phrase in your testimony that caught my 

eye. You stated that the SEC has shown benign neglect to retail 

advisers through past rulemakings. Who will ultimately pay the 

price if fiduciary standards are broadly applied with little regard 

to the cost or restrictions on choice that would come with it? 

Mr. QUAADMAN. Thank you for asking that question. First off, in 

terms of investor confusion that you were talking about and the increased cost, it is going to be the retail investor that is going to 

face that confusion, face that cost. And, in fact, they actually may 

have less products to choose from if we don’t have coordinated rulemaking. 

What has also been clear with the SEC, in terms of their policies 

over the last several years, which is why we use that term, in 

terms of enfranchising retail investors or retail investor protections, whatever, they have always gone down to the bottom of the 

list in favor of institutional investors and others, so that, unfortunately, it is the mom-and-pop shareholder who has really been neglected and is unfortunately going to pay a price at the end of the 

day. 

Mr. HURT. Thank you, Mr. Quaadman. 

25 

Mrs. WAGNER. Thank you. 

Mr. HURT. I thank the gentlelady, and the Chair now recognizes 

Mr. Scott for 5 minutes. 

Mr. SCOTT. Thank you very much. As I said in my opening statement, we have to get sort of a delicate balance on many of these 

issues. Let me talk about the first one. We have a serious problem 

in this country and that problem is this wide gap between what 

those at the top are making and those in the middle are making 

in terms of income. And so, Dodd-Frank attempts to address that. 

I heard some of the same arguments against that, that we had 

on say on pay. I have nothing against people making as much 

money as they want to make, and can make. And I don’t think 

there is anything in this section that does that. But we have a serious problem. And the country cannot go on with this huge wage 

and income gap between the top half of 1 percent, our CEOs making gobs of money, which they have a right to do, I don’t question 

that. But when you get to the middle class, this country’s heart and 

soul is based on the middle class, and it is shrinking. 

And so, Mr. Silvers, I would like for you to address for a moment 

why this is so important and how we can remove some of the arguments—and Mr. Smith, you make good arguments, and I want to 

come to another point, because I think I agree with you on this necessary audit rotation, which I want to get to, as well. 

But Mr. Silvers, please address why this is really, really important and give some factual information as to where we are going 

if we don’t address—we will not have a middle class. 

The other point I want to make is that these people, these are 

public companies. And these individuals of the middle class make 

investments in these companies. They have a right to know, and 

I think what we are trying to do with this ratio is to try to come 

up with some mechanism that would encourage a fairer deal in 

compensation for the middle class. 

Mr. Silvers? 

Mr. SILVERS. Thank you, Congressman Scott. Let me begin with 

your point about income inequality. 

CEO pay, at the height of the post-war economic boom, when corporate profits were highest and when middle-class income growth 

was strongest, was 24 times that of the pay of the average worker. 

Now today, there are different studies with different numbers, and 

my testimony cites a study by Bloomberg, the news organization, 

which finds that average CEO to worker pay ratio in the S&P 500 

is 204 to 1. 

Other studies have found in varying years in the last decade, the 

ratio is as high as 500 to 1. There are two things about these studies, though, that make them limited in understanding just how bad 

the problem is that would be corrected if the SEC were to issue the 

implementing rules on the Dodd-Frank measure that we are discussing this morning. 

The first problem is that these numbers are actually not firmspecific, meaning it is impossible for anyone—you, in your role as 

a legislator, an investor, an employee, anyone—to know what those 

numbers are company by company and to make judgments based 

on what those numbers are. 

26 

And this is important because academic study after academic 

study cited in my written testimony, and the wisdom of management experts like Peter Drucker, is that this ratio is a key window 

into whether or not companies are actually being run as teams and 

whether or not they are going to be capable of generating long-term 

value over time. 

The other issue, and it has been cited by several of my fellow 

witnesses in a kind of upside-down way, but the other issue is we 

live in a global economy. If you want to understand how a global 

public firm is being run, and whether it is being run in a manner 

that is sustainable and is likely to produce maximum effort on everyone’s part, you need to know what the executive pay—how the 

executive pay looks for the firm globally. 

I’m sorry, sir. 

Mr. SCOTT. I only have 20 seconds, and I think those are excellent points. We have addressed that a little. 

But Mr. Smith, I think your point is well-taken. I have concerns 

about this mandatory rotation of audit firms. Auditing and accounting firms get right to the skeletal operations, the intricacy, 

the complexities of companies in dealing with taxes, audits, all of 

that. You can’t get more deep penetration. 

And I think there is something lost if we try to mandate that industry, put a time scope on how long or what accounting companies 

can do and then they must rotate when the whole purpose in the 

accounting firms is familiarity. So I am with Mr. Silvers and with 

Mr. Smith, I think those are the two major bills that we have to 

examine closer. Thank you, Mr. Chairman. 

Mr. HURT. I thank the gentleman. The gentleman’s time has expired. The Chair now recognizes Mr. King from New York for 5 

minutes. 

Mr. KING. Thank you, Mr. Hurt. And I intend to yield time back 

to you. But first, I would like to ask Mr. Quaadman whether he 

believes there is a need to study the cumulative impact of the 

Dodd-Frank rulemakings? And are you aware of any estimates regarding their impact to date? 

Mr. QUAADMAN. Thank you, Mr. King. If you just take a look at 

some of the bills here, as I mentioned before, pay ratio could cost 

$7 million for a large company. If you take a look at audit firm rotation, you could have a firm that spends $100 million on audit 

costs, and that could go up by at least $20 million. Just those two 

bills alone could cost a company $27 million. 

We also have to take a look at the Volcker Rule and others, to 

take a look at the money market fund regulations that are coming 

down that could boost the cost of capital for some firms by 400 

basis points. So we think that a study like that is needed. 

Mr. KING. Thank you. I yield the balance of my time to Mr. Hurt. 

Mr. HURT. Thank you, Mr. King. I would like to just focus a couple of questions on the audit firm rotation bill. Obviously, investor 

protection is an extremely important jurisdiction of this committee 

and the SEC and the PCAOB. 

But I was wondering if I could get Mr. Quaadman just to talk 

briefly about the protections that are already organically found 

within the corporate audit committee process. And what are the inVerDate Nov 24 2008 17:59 Sep 25, 2013 Jkt 081761 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\81761.TXT TERRI
27 

centives? If you could just talk about that broadly in terms of investor protection? 

Mr. QUAADMAN. Thank you, Mr. Hurt. First off, Sarbanes-Oxley 

greatly strengthened audit committees and the role that they have 

and the independence that they have. So Congress, through its directive, has actually authorized the audit committee to really be 

the overseer of financial reporting for a company. 

What is happening here is that what the PCAOB has been looking at for 2 years, despite overwhelming opposition, is to actually 

neuter the audit committee, go against what Congress wanted to 

do and really start to create rotation. 

What is also going on, and I just want to throw this out there, 

is this isn’t happening in a vacuum because in the European 

Union, they are not only looking at mandatory audit form rotation, 

but they are also looking at something known as mandatory re-tendering, which means that every couple of years, a company has to 

go out regardless and just solicit new bids. 

This is just going to create a vicious cycle where there is going 

to be constant marketing going on and actually everybody’s—their 

eyes are going to be taken off the ball of, in terms of good financial 

audited financial statements. 

Mr. HURT. Thank you. Mr. Smith, over the years this issue has 

been looked at before, the audit firm rotation. Could you talk a little bit about what findings and conclusions have been made in previous bodies that have examined this issue? 

Mr. SMITH. Yes, thank you. When I looked at it—I am trying to 

remember the exact years, but it is in my written testimony—there 

were findings that showed several failures that were the result of 

the weakened state of the audit committee, as the reports were— 

I am sorry, not of the audit committee, of the audit firms, in doing 

their audit in those reports as they were considering this rulemaking 3 separate times over the last decade or so. 

So the record is clear in those committee reports with respect to 

the weakening of the audit committees. 

Mr. HURT. And can you talk a little bit about the actual costs 

that this suddenly accrues to the company, and are there any benefits? If we are going to talk about the cost-benefit side of this, in 

your opinion, do the benefits, if there are any benefits, outweigh 

the costs? 

Mr. SMITH. Sure. As we surveyed our members, the members responded that they would expect to see at least a 20 percent increase in the audit costs over— 

Mr. HURT. Which is consistent with the GAO study. 

Mr. SMITH. And the GAO even went further and they had a 

range that averaged approximately 80 percent of an increase just 

in the first year alone. And so what happens is you combine that 

increase in costs and the perceived benefit of independence and 

audit skepticism. But what really happens as we sieve through 

those concept releases is that not only do you have the increased 

costs but you also have a deterioration and a learning curve that 

is going on at the audit firms, which is substantial, and creates 

risks that an audit committee should be—I believe, have a choice 

and exercise their fiduciary duties in order to make that decision 

as opposed to having it mandated. 

28 

Mr. HURT. You think that the imposition of such a rule would affect your company’s competitiveness and the competitiveness of 

American companies generally? 

Mr. SMITH. I think it would be hard to say that increasing our 

costs by a substantial amount in the millions of dollars, which 

would be money that otherwise would be used for capital improvements and capital investments on infrastructure or creation of jobs 

through other investments, would not harm the economic state of 

our company or any other— 

Mr. HURT. Thank you, Mr. Smith. And I think the gentleman’s 

time has expired. 

I recognize Mr. Himes for 5 minutes. 

Mr. HIMES. Thank you, Mr. Chairman. I was moved by Congressman Scott’s comments and want to associate myself with those 

comments. I honestly don’t know whether disclosure is going to 

fundamentally alter compensation in this country. But I know that 

in addition to the economic challenges that the disparity creates, 

there is a perception of fairness issue that is terribly important. 

And in the presence of members of the industry, I have been in 

those meetings where compensation is determined always with an 

eye to comparability, comparable pay. I would suggest that we have 

to start going to fairness or we will be in a lot of trouble. 

Mr. Silvers, on H.R. 1105, you talked about the leverage limitation, the 2X leverage limitation. You said this limitation was clearly drafted in bad faith. Mr. Silvers, I drafted that limitation, and 

I object on two counts. One, I see what happens to this institution 

when we challenge each other’s good faith or thereof, and I also see 

what happens when we get to each other’s motivations. 

But more importantly, I drafted this leverage limitation because 

of a criticism that you raised 2 years when you came before this 

committee and said these are large leveraged pools of capital. Now 

in discussion, we ultimately determined that they are not large leveraged pools of capital, that in fact they create leverage at the industrial company level that they purpose. 

But I thought, gosh, a lot of people out there think that they are 

a large leveraged pool of capital, and perhaps we ought to address 

that by saying that if they were to become such, we should put a 

limitation on them. Mr. Silvers, since you got this personal, I would 

point out that I have about a 95 percent AFL-CIO voting record. 

So I suspect that we can philosophically find agreement on many 

issues. But I do want to pursue this issue now that we have moved 

the discussion to the sponsored companies, the Burger Kings, and 

the car wash companies that LBO firms, love them or hate them, 

invest in. 

I am wondering whether anybody on the panel can point to a 

Burger King—and by the way, there have been monumental failures, for example, Federated Department Stores. Can anybody on 

the panel point to an LBO’d or an MBO’d company that went down 

because their banks made unwise decisions or because bondholders 

made unwise decisions that created systemic risk? An LBO private 

equity purchased company that got leveraged the way companies 

do every single day in our economy, that went down and created 

a systemic problem for the United States of America. Okay. That 

is a lengthy period of silence. 

29 

So what I—Mr. Silvers, you move on to the bond market. And 

I have two questions. You move on to the bond market in your testimony here. And I agree with you, by the way. I suspect that there 

may be a bubble developing in the high-yield market. 

But I am puzzled by using that as an argument against a bill 

which simply attempts to take the smaller private equity companies, unleveraged by definition because of that limitation that I put 

in, and not have them sending reams of data to the SEC that is 

a burden to them and which we have acknowledged doesn’t create 

systemic risk. 

How does the existence of H.R. 1105 or the nonexistence of H.R. 

1105 in any way impact the bond market, and in particular the 

high-yield market? If H.R. 1105 passes, is the high-yield market 

going to be any different? 

Mr. SILVERS. Congressman? 

Mr. HIMES. Yes. 

Mr. SILVERS. Your statement ratifies my criticism of your bill because you make clear that you understand that the issue of leverage in the leveraged buyout or private equity business is an issue 

of portfolio leverage and not of firm leverage, and that you understood that when you wrote the bill. I think that is all there is to 

be said about this. 

Mr. HIMES. You and I both know that these entities don’t take 

on leverage. By the way, 2 years ago you testified that they were 

highly leveraged pools of capital. 

Mr. SILVERS. No. I disagree with that, Congressman. 

Mr. HIMES. Well, the record will show it. But I—out of an abundance of caution—put in that limitation. I was on the high-yield 

market. I have one other question, though. H.R. 1105—this is your 

testimony—would deny investors and private equity funds, including worker’s pension funds, protections of investing with a registered investment adviser. And I take that very seriously. 

My understanding is that investors like the AFL-CIO pension 

funds and others which invest in these funds are accredited institutional investors, that is to say, sophisticated investors. And my understanding further is that they negotiate partnership agreements 

with these funds in which they say, we want this kind of disclosure. 

We want this—that there is a negotiation in which those accredited and institutional investors receive protections that a retail investor couldn’t possibly hope to negotiate with respect to a company they may invest in. So where is the investor protection angle 

here? 

Mr. SILVERS. Congressman, you rightly point out that there are 

some pension funds that are large enough dealing with large leveraged buyout firms or hedge funds or venture capital firms in certain market conditions to effectively negotiate bespoke or customized terms. That is true. 

Our concern is that those funds are not the only funds that are 

out there. There are many smaller funds, and there have been market conditions over the last 15 years in which even large funds had 

effectively no ability to negotiate fundamental investor protections 

such as the ones that you cited from my testimony. 

30 

Registration with the SEC as an investment adviser protects all 

of those funds, right? And as we both know, the limitations on who 

can invest in a private equity fund, a leveraged buyout fund, a 

hedge fund, a venture capital fund, those limitations ensure that 

we are not talking about mom-and-pop investors anyway. 

Mr. HURT. The gentleman’s time has expired. 

Mr. HIMES. Thank you, Mr. Chairman. 

Mr. HURT. The Chair now recognizes the gentleman from South 

Carolina, Mr. Mulvaney, for 5 minutes. 

Mr. MULVANEY. Thank you, Mr. Chairman. I intend to yield my 

entire 5 minutes to the gentlelady from Missouri, Mrs. Wagner. 

Mr. HURT. Mrs. Wagner is recognized. 

Mrs. WAGNER. Thank you very much, Mr. Mulvaney, and Mr. 

Chairman. Mr. Ehinger, just in follow up here, in the Section 913 

study, the SEC staff claimed that it is not likely that many brokerdealers would ‘‘implement major changes to their businesses in response to the imposition of a uniform fiduciary standard.’’ And it 

also went on to say that the uniform standard would ‘‘not require 

that broker-dealers limit the range of products and services they 

currently offered to retail investors.’’ 

I guess I would be interested in both Mr. Ehinger and Mr. 

Quaadman, do you agree with either of these assessments? 

Mr. EHINGER. I do not agree. I think having the experience of 3 

decades, as I said, of being involved in the broker-dealer securities 

and insurance business, I can say that the changes would be many. 

First of all, compliance oversight, and perhaps even expectation 

of plans for any and all transactions, whether they were solicited 

or unsolicited types of transactions, would probably come into 

place: disclosure document requirements; more complex audits; and 

supervisory reviews. 

The supervision that we do in our firm, we will look at the transactions and the insurance products that are sold in particular on 

a one-on-one basis specific to that situation. And if we are looking 

at that relative to plans as such, it could be very difficult to discern 

what is best. 

We have already spoken to some of our liability insurance organizations, errors and omissions insurance in particular, who estimate 

that costs would increase as much as 20 to 30 percent to anticipate 

this. Not to mention what I mentioned earlier, and that is the unknown. That is the legal liability cost that there is, as well. I think 

there would be many changes. 

Mrs. WAGNER. Mr. Quaadman? 

Mr. QUAADMAN. I echo the same concerns. We have talked to our 

members about this, and we are getting a lot of the same feedback 

also. 

Mrs. WAGNER. Great. Wonderful. Thank you. I yield back my 

time to the Chair. Mr. Hurt, if you have any— 

Mr. HURT. I thank the gentlelady. The gentlelady yields back. 

The Chair now recognizes Mr. Carney for 5 minutes. 

Mr. CARNEY. Thank you, Mr. Chairman. Thank you to the panelists for coming in. I would like to go back to the discussion about 

costs of audit rotation. Mr. Smith, there was some discussion a couple of questioners ago about those costs. 

31 

Could you summarize them again and talk specifically about 

what the costs—what drives those higher costs from the GAO 

study and the survey, I think that you said you did, of corporate 

secretaries? What are the elements of those higher costs? Eighty 

percent in the one case, and I think you said 20 percent in terms 

of your corporate secretaries. If that wasn’t the number, whatever 

that number is. 

Mr. SMITH. It was 20 percent and 80 percent, respectively. One 

example of one of our members that we have documented in the 

written testimony is a large global company that voluntarily rotated its audit firm within the past 10 years. 

And I have ballparked its numbers, but in the written testimony, 

I break it down showing that they estimated that there were approximately 100 hours of audit committee time that were utilized, 

500 to 600 hours of senior management, and 2,000 to 3,000 hours 

of finance, legal, tax, accounting, and internal audit employee’s 

times. And so, if you think about— 

Mr. CARNEY. So as you transition from one firm to another, it involves a lot of extra time of staff to bring that firm up-to-speed on 

the particularities of that company’s operation. 

Mr. SMITH. Absolutely. So if you picture an audit committee who 

is independently charged with making sure that the audited financials are correct and accurate, and they are thinking about making 

a change, they have to go through for the shareholder’s benefit, and 

we are all happy that they have to, to examine any potential firms 

that are coming in to make sure that they can get the same high 

level of comfort that they have with their current firm in order to 

make a decision to transfer it. 

They would also then have to go through a process of documenting and making sure that reports were put into place and 

transition plans were put into place that begin the transition. And 

then afterwards, there are heightened levels of double-checking to 

make sure that everyone followed the processes needed to do that. 

So, it is just a tremendous amount of work. 

Mr. CARNEY. Presumably, there are some benefits involved in the 

rotation. Mr. Silvers expressed his objection to the bill. And I guess 

I would ask you, Mr. Silvers, what the benefits are opposite those 

costs and why you think they are justified? 

Mr. SILVERS. In my written testimony, I— 

Mr. CARNEY. And I think there was other testimony, and somebody can correct me if I am wrong, that there are really effectively 

only two or three firms that actually do this. 

Mr. SILVERS. Congressman, in my testimony, I go into, at some 

length, the challenges of this issue. Because there are currently 

really only four global audit firms, and some of them have specialties, and companies can find themselves in really challenging spots. 

The issue on the other side, though, is the question of auditor independence. And the issue of whether or not the same company has 

had the same auditor for decades, for example, which is true in the 

case of some long-lived companies, whether there really can be the 

requisite level of independence at that point? 

Mr. CARNEY. Yes, I understand that. Is there anything in Sarbanes-Oxley, for instance, that puts something in the audit committee to balance that out? You, or Mr. Smith, either one? 

32 

Mr. SILVERS. Congressman, there is no question, as one of the 

prior witnesses said, Mr. Quaadman I believe, that Sarbanes-Oxley 

strengthened auditor committee independence, and made the relationship between auditors and issuers more independent. We have 

been though for the last 10 years since Sarbanes-Oxley passed, 

more than 10 years we have been in this environment with only 

4 major audit firms. And we have been through a major financial 

crisis that raised serious issues about whether the current—about 

whether the audit firms really performed their roles properly. 

In my written testimony, and earlier in this hearing, I mentioned 

that the PCAOB has done extensive examinations of what occurred 

during that crisis. And they are in relation to auditor independence. The PCAOB’s interest, as I understand it, and I serve on the 

standing advisory group for the PCAOB’s interest in auditor rotation is, I believe, based significantly on the results of those inspection reports. And I would urge—before this subcommittee moves on 

this bill— 

Mr. CARNEY. I am running out of time, and I would have liked 

some time to talk a little bit about the systemic risk that—and 

some of the other bills, but did you have something else, Mr. 

Smith, you wanted to add? 

Mr. SMITH. If I could. Your question was on what Sarbanes-Oxley 

did to strengthen— 

Mr. CARNEY. Right. Does it counterbalance this issue of independence? 

Mr. SMITH. —and so the audit committees were strengthened. 

There is a requirement that they be completely independent, and 

that is modified in the major exchange rules as well. There is also 

partner rotation that must occur on a regular basis. And so, if you 

think about what partner rotation does, it brings a fresh set of 

eyes. Someone who presumably is not cozy with management, if 

that were the case anyway, to make sure, and to have that fresh 

look. So— 

Mr. CARNEY. And presume, actually, some additional cost. Thank 

you. 

Mr. SMITH. Correct. 

Mr. CARNEY. I see my time has expired. 

Mr. HURT. The gentleman’s time has expired. The Chair now recognizes the gentleman from Michigan, Mr. Huizenga, who is also 

the patron of H.R. 1135, for 5 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman, I appreciate that. And 

I would be more than willing to grant my friend 30 seconds if he 

wanted to pursue that line of questioning on the systemic risk? It 

may be a continuation of a conversation we already started. 

Mr. HURT. The gentleman is recognized for— 

Mr. CARNEY. Yes, I just wanted— 

Mr. HURT. —30 seconds? 

Mr. CARNEY. —to go back to the back-and-forth with my colleague Mr. Himes, Mr. Silvers. And I am at a loss to understand 

how the two pieces of legislation that are being discussed implicate 

systemic risk? And maybe you could summarize that briefly? 

Mr. SILVERS. Congressman, you mean the registration— 

Mr. CARNEY. Both the registration one and the pay ratio one. 

33 

Mr. CARNEY. I understand the overall purpose in pay ratio in 

particular. But I don’t understand how it implicates systemic risk. 

Mr. SILVERS. I will start with CEO pay, okay? 

Mr. CARNEY. All right. 

Mr. SILVERS. As I stated in my written testimony, the CEO pay 

rule does 3 things. It proves the ability to look at firms and whether they are essentially unbalanced in the way they are managed, 

right? Such that CEO— 

Mr. HUIZENGA. Before I reclaim my time, I am going to have you 

hurry that up very quickly, because it is eating into my time, and 

I have some questions, as well. Because I am at a loss, as well. 

I appreciate that. I am at a loss as to how this possibly puts companies, or a system at risk. Systemic risk was something that you 

were talking about, and it seems to me—and we had some conversations here about Dodd-Frank not only being a regulatory bill, 

but it is a social engineering document, I understand that might 

have been the motivation for some in the drafting of it. I am just 

afraid that this is more of a knee-jerk reaction to any kind of discussion about changing, improving, or looking at, or opening up 

Dodd-Frank. And we saw that 2 weeks ago when the Administration, through Secretary Lew, opposed all of the bipartisan derivatives bills. 

We are seeing that now, I think. And it seems to me that this 

is part of the problem with Washington, D.C. We can’t have a rational conversation without somebody having a knee-jerk reaction. 

But Mr. Quaadman, Mr. Smith, Mr. Tharp, obviously you heard 

Mr. Silvers report that my legislation specifically would significantly increase this risk, and I am very curious to see whether you 

agree with that. And whether that creates pitfalls in our economy? 

And how disclosing CEO to worker pay ratio determines the performance of these companies with a particular sector in the market? 

So if you don’t mind, in my remaining 2 minutes? 

Mr. QUAADMAN. Okay Mr. Huizenga, if I could answer that in 

two ways, and also to take up something that has been discussed 

by both Mr. Silvers and Mr. Scott, Dodd-Frank actually mandates 

that there is a joint rulemaking, which is not yet complete, on intent of compensation rules, which is supposed to look at excesses 

in compensation, and to deal with potential issues of compensation 

in the financial crisis. So regulators are already looking at that. 

Pay ratio in and of itself isn’t designed to deal with those systemic 

risk issues. 

Second, in answer to your question, let me just give two examples. If you were to take a company, let’s say a retail chain or a 

fast-food chain or whatever, that has a lot of hourly workers, they 

are going to have a high differential. If you take a Wall Street firm 

where you could have a lot of employees making comparable pay 

to a CEO, they are going to have a very low ratio. So what does 

that ratio tell you about the company? About the industry? It 

doesn’t convey anything that is material to investors. And materiality should be the test. 

Mr. HUIZENGA. And Mr. Tharp? 

Mr. THARP. Congressman, I think it is a great question that 

there should be an assessment to the extent to which the purported 

34 

relationship between pay ratio and risk would be a factor. And in 

fact, in the written testimony from Mr. Silvers, he cites James Collins’ work on ‘‘Good to Great.’’ And we did a little research. Those 

companies in fact have a higher pay ratio than the average company, and of the 11 cited—in fact one went bankrupt and the other 

was Fannie Mae, but their ratio is 412, versus the—and this is 

AFL-CIO data, versus the data of the average CEO, which is 354, 

according to their data. 

Mr. HUIZENGA. Yes. 

Mr. THARP. So, I think there should be challenges to the basic 

assumption that it does lead to better performance, or— 

Mr. HUIZENGA. I agree, and I am very familiar with ‘‘Good to 

Great.’’ I came out of an organization which used that book as a 

basis of how it operated. And, I am tempted to take a friendly 

amendment from somebody that would require union executive pay 

to be compared to union membership pay. And then maybe we 

should expand that to who they are affiliated with in France, the 

Philippines, Greece, and others, to get a better picture, rather than 

hiding ‘‘material information.’’ 

And I think that everybody would realize that with 57 unions, 

and 12 million members, even the AFL-CIO would have some difficulties in doing that. Mr. Chairman, my time is up, and I appreciate that. 

Mr. HURT. Thank you. The gentleman’s time has expired. The 

Chair now recognizes the gentleman from California, Mr. Sherman, 

for 5 minutes. 

Mr. SHERMAN. Thank you. Mr. Quaadman, we have been working on a separate issue, which is the proposal of the FASB to require the capitalization of leases. They are supposed to define Generally Accepted Accounting Principles (GAAP). It has been generally accepted for 200 years that you don’t do that, where our profession is only 200 years old. Why don’t I ask you to just spend a 

minute explaining what the harm would be if that proposal goes 

forward? 

Mr. QUAADMAN. Thank you, Mr. Chairman. Thank you for your 

leadership on this issue, along with Mr. Campbell. What this would 

do is it would—number one, it would actually boost up the liabilities that are on balance sheets of companies by trillions of dollars. 

That would actually impact their ability to raise debt. It would also 

increase reporting requirements as well as onerous requirements. 

It would also shut down the ability of companies to get equipment. 

And also for commercial real estate tax refunction. 

What is more important, however, is that the investor community 3 years into this project has said that this exposure draft will 

not provide any more additional information than they already 

have today. So while you have all of the costs that are going to be 

borne by businesses, investors aren’t going to be benefited. So it is 

really a question of why are we even doing it? 

Mr. SHERMAN. And wouldn’t we be penalizing those companies 

that enter into 5- and 10- and 20-year leases, and give a push towards less certainty in stability in leases, communities, shopping 

centers, et cetera? 

Mr. QUAADMAN. That is correct. It actually will focus business activities on a much shorter-term basis and less on a long-term basis. 

35 

And it will also artificially force an earlier recognition of expenses 

than actually happen. 

Mr. SHERMAN. I want to turn to, I guess, Mr. Smith, on the audit 

rotation. One concern I have is, we only have, as you point out, 

four firms. Could there be a circumstance where there are only two 

firms with the capacity, both in terms of having offices in the right 

place, if you are headquartered in Wichita, only one of those firms 

may have an office in Wichita. You may be in an industry that only 

a couple of firms have specialty in. 

So if we currently return Firm A, and the only other firm in the 

world that can do it is Firm B, and we have to abandon firm—right 

now we can always tell Firm A to keep their fees down, otherwise 

we will go to B. If you require me to go with B, how high will the 

audit fee be then? 

Mr. SMITH. Yes, and even more troubling is that it takes away 

the competitive nature of the transfer for sure, right? Because they 

know that you are going to be coming to them, so there would be 

no competitive negotiation of the transfer fee, presumably. But 

even additionally, the feedback from our members is—and specifically in certain industries where you only have two audit firms 

that would be qualified, or expertise to the level that would make 

an audit committee comfortable, both of those firms may be engaged by that company in the first instance, right? 

Because there are non-audit fees that are being used, and so you 

could already have them engaged on matters that—you are already 

working with them, so is there really that transfer you are looking 

at? So I think there is a hyped— 

Mr. SHERMAN. Now— 

Mr. SMITH. —perception that there would be an independent 

shift in that case. Having said that— 

Mr. SHERMAN. —you pointed— 

Mr. SMITH. —the firms—the large firms work closely with those 

companies anyway. 

Mr. SHERMAN. —you pointed out that currently there is at least 

rotation of the engagement or audit partner? 

Mr. SMITH. Correct. 

Mr. SHERMAN. One thing I bored my colleagues with is—and I 

don’t know whether this has become just practice or whether it is 

mandated, that the technical review department of the audit firm 

actually sign off. Arthur Andersen had a policy of don’t ask, don’t 

tell, that is to say, the technical review department, if they weren’t 

asked, they didn’t tell. 

With the four firms that still exist, is there at least a practice 

and is there a mandate that the technical review department actually review the audit before the sign-off? 

Mr. SMITH. My understanding is that the concurring partner relationship has been significantly strengthened as a result of the 

audit changes that took place through 2003 in Sarbanes-Oxley. 

Mr. SHERMAN. And then, finally, you quantified the additional 

work that the company has to do when they change auditors. What 

is the increased fee likely to be? It is not only the time of their own 

employees, but they are going to have to write a bigger check. Any 

idea what the start-up fee, changeover fee, additional fee is as a 

percentage? 

36 

Mr. SMITH. Other than those percentages, I really don’t have 

hard numbers at my fingertips right now. But they would be expected to be very significant and— 

Mr. SHERMAN. Half a year about? 

Mr. SMITH. At 80 percent, according to the GAO study. You are 

really looking at almost double the audit fees, which— 

Mr. SHERMAN. So you pay 108— 

Mr. SMITH. —if you have a $8 to $10 million audit fee, then you are looking at almost $6 to $8 million in increased costs. 

Mr. SHERMAN. Thank you. 

Mr. HURT. The gentleman’s time has expired. 

Let me again thank the witnesses for their testimony today. I 

also thank you, in addition to your insights, for your patience as 

we had to work through our voting schedule. 

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

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

With that, the hearing is adjourned. Thank you. 

[Whereupon, at 1:52 p.m., the hearing was adjourned.] 

(37) 

A P P E N D I X 

May 23, 2013 

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