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Thursday, May 13, 2004
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
    The committee met, pursuant to call, at 10:06 a.m., in Room 2128, Rayburn House Office Building, Hon. Michael Oxley [chairman of the committee] presiding.
    Present: Representatives Oxley, Biggert, Hart, Hensarling, Garrett, Watt, Ackerman, Sherman, Inslee, Moore, Lucas of Kentucky, Emanuel, and Bell.
    The CHAIRMAN. [Presiding.] The committee will come to order.
    Two years ago, this committee convened a hearing to address ''The European Union's Financial Services Action Plan and its Implications for America's Financial Services Industry.'' Today's hearing explores how the US-EU Dialogue has worked over the last 2 years and how participants expect it to evolve in the context of a united Europe consisting of 25 countries with a wide range of economic strength and development.
    We welcome back witnesses from the SEC, the Treasury, and the Federal Reserve to discuss this issue. I look forward to seeing whether their expectations 2 years ago were met and what they think the future might hold. We welcome for the first time on this topic our PCAOB witness who will provide a perspective on how innovative and productive a variety of informal processes can be in resolving difficult transatlantic regulatory issues.
    I am particularly pleased to welcome for the first time before this committee the European Commission. It is not often that a foreign authority testifies before Congress. I understand that Director-General Alexander Schaub will use the opportunity of this hearing to present significant new ideas on how the US-EU regulatory relationship might evolve. We look forward to this testimony.
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    Two years after our first hearing on this issue, many of the same issues remain on the forefront of the transatlantic regulatory debate: The supervision of financial conglomerates, international accounting standards, convergence in accounting standards, transparency in prospectuses, and making consolidated supervision function on both sides of the Atlantic.
    And yet, much has changed. We convene today shortly after the historic accession of 10 Eastern European countries into the European Union. This fulfills the dreams of many, including myself, that Europe after World War II could one day be united, whole, and free. Much of the European financial services agenda, especially after the fall of the Berlin Wall, has aimed to create a financial services marketplace to serve a European market nearly equivalent in size to ours.
    The financial markets have also changed. The end of the Cold War and a revolution in risk management and telecommunications together have created opportunities and enthusiasm for global capital markets to integrate across borders. I believe that transatlantic trade in both goods and services benefits consumers and businesses on both sides of the Atlantic and helps create a vibrant job market here in the U.S.. It generates competition in both markets and forces firms to be more efficient, innovative and effective in serving customers. These trends place pressure on financial regulators to find better ways of working together.
    Following our hearing 2 years ago, the US-EU Financial Markets Dialogue was created. It fosters regulatory discussion on emerging transatlantic issues and attempts to avoid conflicts. I understand that the Dialogue has been extremely successful. In fact, it has been so successful that some have suggested it needs to grow and become more formalized. Others have suggested that the Dialogue should seek to accelerate financial market integration and foster convergence of regulatory standards across the Atlantic. Our witnesses today will provide insight into the innovative tools used today to increase transatlantic mutual understanding and cooperation.
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    This is a very important initiative. Financial firms operating in multiple states must comply with multiple, sometimes conflicting, regulatory requirements. These requirements reflect government efforts to protect consumers and to foster financial system stability, safety, and soundness. The Financial Services Committee seeks to strengthen the U.S. regulatory framework, permitting it to adapt to a world where significant changes in capital market behavior and the world around us require new approaches to accounting, auditor oversight, consolidated supervision and protection from abuse from terrorists and money launderers.
    This committee also seeks to reduce regulatory burdens. Last fall, we enacted major banking regulation relief legislation, and we are right now working on an insurance regulatory package. I am committed to reducing inefficient regulatory burdens for all financial institutions doing business in the U.S. subject, of course, to security and financial stability considerations.
    Relieving regulatory burdens in the U.S., however, is only part of the picture. America's largest financial institutions are major players in the European capital markets. Major European firms are a significant and growing presence in all three sectors of the United States financial services market: banking, securities and insurance. The choices one country makes for how best to protect its investors and depositors may not always coincide with the choices other countries make.
    Different policies can be driven by differences in market structure. Such differences are legitimate and do not easily lend themselves to calls for convergence. I believe that convergence and equivalence in regulatory structures can only make sense where convergence is already underway in the markets and where differences in regulation can have a detrimental impact. To endorse convergence as a goal without considering the needs and views of the voters that brought us to Washington to represent their interests would be irresponsible.
    I hope this hearing will help us understand which differences in regulatory standards are needed to address different market structures and which differences are inefficient. I am skeptical that transatlantic regulatory convergence will occur quickly in all areas. While the financial markets continue integrating, national regulators will need authority and a legislative mandate to protect consumers and markets at home. I note that it took Europe almost 40 years to achieve a legal framework based on mutual recognition, and this framework is still under construction.
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    Some might question whether the mutual recognition concept can operate outside the EU. In addition, the EU's new framework has not yet been fully tested. The Financial Services Action Plan will not be implemented until next year, and concerns have already been expressed that full implementation may impose unnecessary costs or create unnecessary conflicts. Questions also exist concerning how the new regulatory structures in Europe will interface with the rest of the world, putting pressure on the execution of consolidated home country supervision.
    Here in the U.S., we have our own regulatory burdens to consider and address. The specter of listed firms needing to provide financial statements using two different accounting standards and the prospect of having two different regulatory capital frameworks for financial institutions are two examples of areas where regulators on both sides of the Atlantic face common challenges. I believe that practical working relationships such as those created through the US-EU Dialogue and other transatlantic discussions can help generate a process for differences to be discussed and understood better.
    We will not all agree today on the right solutions for any of the issues before this transatlantic regulatory Dialogue. In the future, we cannot expect disagreements will disappear regarding how best to regulate the very fluid and innovative financial sector. But I firmly believe that increased dialogue can lower the temperature of our disagreements and can lower the odds that serious misunderstandings can develop. The capital markets will not stop integrating, and it is our responsibility as policymakers to ensure that the rules generated to protect consumers and enhance market discipline do not generate excessive and inefficient compliance costs.
    Are there other members seeking for an opening statement?
    [The prepared statement of Hon. Michael G. Oxley can be found on page 28 in the appendix.]
    The gentleman from California, Mr. Sherman?
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    Mr. SHERMAN. Thank you, Mr. Chairman. No discussion of our trade and international economic relationships can be complete without a mention of the one-half trillion dollar trade deficit of the United States. The world is building a house of cards. It is a beautiful house of cards. They are happy living in the house of cards. But every year we add another half trillion dollars of debt of the United States to the rest of the world, we build another story on the house of cards.
    And in a perfect world we could hope that somehow that trade flow would be not only—the negative would be slowed but even reversed. We can dream of a world in which the second half of this decade involves us sending a Cadillac to Europe for every Mercedes they sent us in the first half of this decade. I know of no one in the automotive industry planning for that as an eventuality. The world is addicted to the United States as importer and as borrower.
    And so in perhaps a decade, individual actors in the economic system, whether they be countries, banks or individual investors, will probably and unfortunately in a very short period of time suddenly lose faith in the dollar, wonder why the world has lent so much to a country that has done so little to repay.
    Now, I would like to think that we can avoid this catastrophe, but that would involve a weak dollar. Instead, our Asian governmental friends and trading partners are deliberately and I would say illegally or at least wrongfully weakening their own currencies. That would involve a U.S. budget surplus. I don't know of anyone who dreams of that at any time in the near future.
    So since we are unlikely to avoid the disaster, the question is whether we are building our financial institutional system to prepare for the disaster, to make sure that the panic does not become a depression.
    We have, I believe, in our stock markets circuit breakers to deal with sudden drops. I hope that our witnesses today will discuss with us here or supplement the record with a discussion of what we can do to have equivalent circuit breakers for sudden declines in the U.S. dollar, for sudden and multi-trillion dollar outflows of capital from the United States, and from all the things that you would expect will eventually happen, and you can wonder whether it happens in 5 years or 15 years, but what eventually happens to a country that is almost force-fed like a European goose, import after import, consumption after consumption until suddenly it breaks.
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    I would hope that this international financial system is not just the most efficient way to deal with how to live in a house of cards, but also that we build in mechanisms to deal for what happens when the house of cards falls over. I yield back.
    The CHAIRMAN. The gentleman's time has expired.
    The gentlelady from Illinois seeks recognition.
    Mrs. BIGGERT. Thank you, Mr. Chairman, and thank you for calling this important hearing today. As you noted in your opening statement, the financial services markets in the U.S. and Europe are increasingly intertwined.
    I think this hearing is well-timed, coming as it does just 2 weeks after the historic accession of 10 Eastern European states to the Union. I would like to congratulate you for organizing a hearing that includes our key partner in the Dialogue—the Commission of the European Union. This is an excellent opportunity for the Financial Services Committee to hear both American and European perspectives on the key transatlantic regulatory issues of our day.
    The relationship between the American and European capital markets is of keen importance to the U.S., generally, and of particular importance to those of us who come from Chicago. Last year, there was a great deal of controversy associated with the proposal for a European options exchange to establish itself as a competitor to the traditional options exchanges in Chicago. The resolution was that the exchange submitted to the jurisdiction of the CFTC and established a subsidiary. Along the way, many people in my home state began to think in very concrete terms about what it means to have such integrated capital markets.
    I am a firm believer in the adage that political friendships follow the trade lanes. Free and fair trade fosters competition and communication, benefiting workers and consumers on both sides of the relationship. My impression from the testimony submitted is that the regulatory Dialogue underway right now between the U.S. and the EU contributes to these goals.
    While I support these goals and the accomplishments achieved to date within the Dialogue, I think it is important to sound a note of caution as well. We must be careful that in our zeal to find new and better ways for our regulators to work together internationally, we do not lose sight of our own very important domestic policy goals.
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    In this country, we have over the last century built the deepest, most transparent and most liquid capital market in the world. This capital market and the economy that it supports are the engines of global growth and innovation. One critically important component of that market is the framework of laws and regulations that protect investor access to information and provide for rigorous oversight of financial institutions.
    Financial innovation and economic growth in the U.S. have thrived under this framework. Growth and innovation have been slower in Europe, but are accelerating with a number of reforms. On this side of the Atlantic, we must be sensitive to the views of the financial markets and ensure that the EU package of reforms does not stifle growth and innovation through imposition of significant compliance costs.
    I also believe that policymakers on both sides of the Atlantic must consider more carefully the nuts and bolts of how consolidated home country supervision will in fact work. This is especially important for the highly complex financial institutions that are at the heart of both the American and European financial systems.
    I agree that we can and must work more closely together. I am just not so sure that agreeing up front to wholesale harmonization of legislative frameworks or treating all regulations as equal is wise. I think that a case-by-case determination of where convergence might be necessary to achieve increased market efficiency and stability is more appropriate. It is for these reasons that I support the US-EU Dialogue and look forward to hearing testimony about it today.
    Thank you very much and yield back.
    [The prepared statement of Hon. Judy Biggert can be found on page 31 in the appendix.]
    The CHAIRMAN. The gentlelady yields back. Are there further opening statements?
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    The gentleman from Washington State.
    Mr. INSLEE. Thank you. I look forward to your discussion about coordination in regulatory affairs, because I think we have seen some good successes in coordination with the American and EU regulators, but we have seen some different approaches, temporarily at least, taken by the EU and American regulatory structure, particularly an anti-trust issue that provokes my concern from the 1st district of the State of Washington.
    And we think there are problems that can happen when there are obviously inconsistent approaches by the two regulatory branches that can force American companies to undergo different treatments, has wide implications in privacy issues and piracy issues and the like.
    So we obviously are very interested in anything we can do to promote a true coordination, and I just hope that the panel will address the prospects of working on the issues at the upcoming US-EU Summit or the G7 meetings in the hopes that we can really reach that happy day when we have got total coordination between these two regulatory bodies. Thank you.
    The CHAIRMAN. I Thank the gentleman.
    We now turn to our distinguished panel. The Honorable Randal Quarles, Assistant Secretary for International Affairs at the United States Department of the Treasury; the Honorable Susan Bies, Governor, United States Federal Reserve Board; Ms. Samantha Ross, Chief of Staff of the Public Company Accounting Oversight Board and Mr. Ethiopis Tafara, Director of the Office of International Affairs, United States Securities And Exchange Commission.
    Welcome to all of you folks, particularly Ms. Ross who makes her first appearance before our committee as a representative of the PCAOB.
    Mr. Quarles, we will begin with you.
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    Mr. QUARLES. Thank you, Mr. Chairman.
    The CHAIRMAN. Get your mike on there, Mr. Quarles.
    Mr. QUARLES. Thank you, Mr. Chairman and members of the committee. With your permission, Mr. Chairman, I would like to submit my written remarks for inclusion in the record.
    The CHAIRMAN. Without objection, all of the prepared remarks will be made part of the record.
    Mr. QUARLES. Thank you, sir. And I want to begin by thanking this committee for its support for the US-EU Financial Markets Dialogue, which I, at least, think has been really integral to the progress that we have been able to make over the last couple of years, having that support.
    As you mentioned at the outset, sir, the US-EU Dialogue began in March of 2002, and since then we have had technical meetings that have been led jointly by the Treasury and the European Commission. That includes active participation of the U.S. regulators, principally the Federal Reserve and the Securities Exchange Commission. Those have taken place on roughly a quarterly basis, and in addition to Dialogue it is supplemented by substantial interaction of senior policy officials.
    The United States has a keen interest, a self-interest in the success of Europe's Financial Services Action Plan, because a central aim of our foreign economic policy is to promote a strong and growing global economy. And we know that strong and efficiency capital markets support robust growth.
    Also, U.S. financial institutions are a vital and leading part of the European financial landscape, and we want our firms to be able to compete globally on fair terms that reward their competitiveness. And so just as the United States is interested in the evolution of European capital markets, so Europe is interested in the evolution of U.S. capital markets and some of the recent steps that we have taken here.
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    Both the U.S. and the EU recognize that our financial, legal, historical and cultural traditional are different. The challenge of the Dialogue is to see through these differences and work to achieve our common objectives and substance and manage the spillovers of these differences into each other jurisdiction. If we are successful in this effort, then both sides will win.
    So against this background, the United States strongly supports Europe's Financial Services Action Plan. And in fact we commend Europe for the ambition and the progress that they have made to date.
    In my written remarks, I cover a broad range of issues, but let me mention two of the many key issues that we are discussing with Brussels. The Financial Conglomerates Directive requires a foreign supervisor regime to be deemed equivalent by Europe for firms from that country to operate within Europe without making costly changes to their method of operation. While there is always room for refinement and improvement, of course, it goes without question that the U.S. supervisor regime is a gold standard for the world's capital markets, and all U.S. regulators have cooperated closely with Europe in explaining their approaches to consolidated supervision. We are confident that a positive equivalence finding will soon be made.
    Second, the Prospectus and Transparency Directives initially suggested that U.S. firms that would be listing new U.S. securities in Europe should prepare financial statements on the basis of international accounting standards by 2005, rather than US GAAP or they would have to cease issuing in Europe.
    Moreover, the draft directives didn't make any provision for grandfathering previously listed issues. We discussed these matters with Brussels for the last year, and the final text of these directives provide for grandfathering of existing issues, and we fully expect that U.S. firms that will be listing new securities in Europe will be permitted to continue preparing their statements in US GAAP.
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    In addition to these specific matters, we applied the increased transparency of European rulemaking, growing consultations of regulators with market participants. These have improved European rulemaking in the same way that they improve our own rulemaking here in the U.S.. They have created a greater consensus and buy-in for proposed regulations, and they have strengthened European financial markets.
    I think it is inevitable that there will be compromises in building an integrated capital market in light of different European country practices. That will be part of the FSAP process. But Brussels, the parliament, the member states and the commission, in our view, are working to instill as liberal a vision as possible for the European capital market.
    The FSAP's implementation is a work in progress. It will continue to evolve, but it represents an important step forward and the extension of this vision at the European-wide level to the so-called passport, and that will contribute to the growth in global capital markets.
    Following the selection of a new commission and European parliament later this year, the Dialogue will need to tackle new challenges in promoting a more vibrant transatlantic capital market. Among these are promoting convergent accounting standards, improving corporate governance, strengthening investor protection and reducing the cost of clearance and settlement in Europe.
    In conclusion, the Dialogue has increased the transparency of rulemaking and it is been part of the momentum to European financial market reform. I think that it is rightly credited as having helped diffuse transatlantic tensions in an important area that is vital to the functioning of the world economy.
    And, finally, if those of us on both sides of the Atlantic can agree on financial regulatory standards, then others around the globe will follow. I think the potential benefits of this effort are enormous and that it is important that the Dialogue succeeds, and I believe it will.
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    Thank you, sir, very much.
    [The prepared statement of Hon. Randal Quarles can be found on page 47 in the appendix.]
    The CHAIRMAN. I thank you for your testimony, Mr. Quarles.
    And, Ms. Bies—it is Bies, right? I am sorry, I had it wrong, but we will correct the record.
    Ms. BIES. My husband will appreciate that very much. Thank you, Mr. Chairman. I appreciate the opportunity to speak today on matters relating to the US-EU Financial Markets Regulatory Dialogue. I am going to comment briefly on the Dialogue's role in helping us to monitor European-wide regulatory developments in financial services and understand the effects on U.S. banking organizations operating in the EU.
    At the time the Treasury Department initiated the Dialogue in 2002, the European Union was continuing with efforts to establish a single market in financial services by implementing measures comprising the Financial Services Action Plan. U.S. regulators were continuing to implement provisions of the Gramm-Leach-Bliley Act, and Congress was considering reforms that led to the adoption of Sarbanes-Oxley.
    U.S. and EU financial services firms were and remain major participants in each other's markets. These regulatory developments will impact those firm's operations for years to come. In the United States and internationally, it is generally accepted that a foreign firm conducting business in a local market should receive national treatment; that is, the foreign firm should be treated no less favorably than a domestic firm operating in like circumstances.
    Implementing national treatment can be challenging, as local rules must be adapted to foreign organizations that operate under different legal and regulatory structures. It is therefore critical that supervisors have timely and full information in order to have a good understanding of the supervisory and regulatory environments in which global firms operate.
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    The Dialogue has served as a useful forum for information sharing among regulatory experts who are responsible for implementing rules embodying national treatment. It helps to foster a better mutual understanding of U.S. and EU regulatory approaches, developments and time tables and to identify potential substantive conflicts in approach as early as possible in the regulatory process.
    Although the Federal Reserve has an established program of working with foreign supervisors, both bilaterally and multilaterally, the Dialogue is the only venue specifically dedicated to US-EU regulatory issues. It complements the Federal Reserve's ongoing relationships and discussions with EU national regulators.
    The Dialogue provides an efficient and effective forum for discussion of issues across a spectrum of financial services. As such, it has great utility for supervisors of large, complex financial services organizations. We have been able through the Dialogue to advance our views on the application of the EU's Financial Conglomerates Directive to U.S. bank holding companies.
    Under EU rules, foreign financial firms must be subject to supervision at the holding company level by competent home country authority which is equivalent to the supervision provided for by the provisions in the directive. In the absence of an equivalence determination, U.S. financial firms with EU operations could be subject to higher capital and risk control requirements or be required to create an EU subholding company.
    The Federal Reserve and the Comptroller of the Currency have provided information regarding the supervision of U.S. banking organizations. We anticipate that the commission will keep us informed of member states' progress in this regard, and we expect that U.S. banking organizations will be found to be in compliance with the supervision standards of the directives.
    I would like to comment briefly on the relationship between the Dialogue and international developments in the areas of capital, accounting, and auditing standards. As you know, the Basel Committee on Banking Supervision is in the process of revising the Basel Capital Accord. Dialogue participants have discussed application, implementation, and timing concerns regarding Basel II. It has not focused on technical issues that have been under discussion within the Basel Committee. Technical issues have been left for the experts to work through.
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    The Dialogue has served as a useful venue for participants to gain a better understanding of implementation procedures that are anticipated. This discussion has helped both sides to achieve a better sense of the implementation challenges we all face and the commitment to see the process through.
    The Federal Reserve and U.S. banking agencies are actively involved in the efforts of the Basel Committee to promote enhanced international accounting and disclosure standards and practices for global banking organizations. For example, an official of the Federal Reserve Board is a member of the Standards Advisory Council that advises the IASB and its trustees. Federal Reserve also has been active in supporting the Basel Committee's project with the International Federation of Accountants and other international regulatory organizations, such as IOSCO.
    Although we have been actively involved in addressing international accounting and auditing issues primarily through our involvement in the Basel Committee's projects, the Securities and Exchange Commission has had the primary role in discussing these matters with the EU representatives in the Dialogue.
    In summary, the Federal Reserve has found the Dialogue to be a useful vehicle in monitoring the rapid regulatory developments in the EU and exchanging information. At the Federal Reserve, we have an obligation to keep apprised of these developments on a timely basis in order to fulfill our supervisory functions and ensure a level playing field for U.S. banking organizations operating in the European Union. We are confident that continuing the Dialogue in its present informal form will facilitate these objectives. Thank you.
    [The prepared statement of Hon. Susan Bies can be found on page 34 in the appendix.]
    The CHAIRMAN. Thank you, Ms. Bies.
    Ms. Ross?
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    Ms. ROSS. Thank you, Chairman. Good morning. I am pleased to appear before you today on behalf of the Public Company Accounting Oversight Board to discuss the regulatory Dialogue between the Board and the European Union.
    While we are not part of the official Financial Markets Regulatory Dialogue, under the leadership of our chairman, Bill McDonough, we have established a very effective working relationship with the EU related to oversight of the auditing profession. Both we and Europe have learned from experience that no borders can contain the losses and uncertainty that occur with large corporate failures.
    Beginning with the work of this committee, Congress took steps to restore the public's confidence in our markets with the Sarbanes-Oxley Act. The act created the Board to oversee the auditors of public companies and gave it significant powers.
    Among these powers, the Board has the authority to register public accounting firms that prepare audit reports for issuers as well as to conduct inspections of those firms. The board also has the authority to conduct investigations and disciplinary proceedings concerning public company audit work. Further, the Board has the authority to establish the standards governing the preparation of audit reports.
    One of the Board's first steps was to establish a registration system for accounting firms that audit public companies, including non-U.S. firms that issue audit reports for companies that have registered securities in the U.S.. This includes the auditors of U.S. multinational companies that have significant operations abroad and the auditors of foreign companies that have elected to access the U.S. capital markets.
    Today, 840 accounting firms have been registered by the Board, including 35 non-U.S. firms from countries such as the United Kingdom, Germany and Hungary. More than 145 additional non-U.S. firms have applied for registration, and we expect that as many as 300 may register in the near future. Registration is only the beginning of our oversight, however.
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    As we prepared for our oversight of non-U.S. firms, we began exploring with international auditing regulators ways to enhance the effectiveness of our oversight and minimize duplicative regulations. Based in large part on these discussions, the Board has developed a cooperative framework that would allow it to gain insight from and rely on the inspection by a firm's home country regulator.
    This approach would permit varying degrees of reliance on the home country system of inspections, depending on the independence and rigor of that system. The board would place the greatest reliance on those systems that maintain the highest level of rigor and independence from the accounting profession. Conversely, the Board would participate more directly and rely less on those systems that are less independent or rigorous.
    The European Commission is facing the same issues relating to audit quality that we face. The Parmalat scandal, which came to light last December, galvanized investors in European securities to demand more reliable financial reporting and auditing. With the proposed 8th Company Law Directive, European Commissioner Frits Bolkestein and Director-General Alexander Schaub have taken important steps to restore confidence in European markets.
    Shortly after the 8th Directive was proposed this past March, Commissioner Bolkestein and our Chairman held an unprecedented roundtable discussion in Brussels with EU member state representatives. Our primary discussion focused on the key objectives of auditor oversight upon which we are all building our new regulatory systems.
    The oversight system required by the 8th Directive appears to mesh quite well with the oversight system we are putting in place here in the U.S.. The 8th Directive would require external independent oversight of auditors in a manner that is transparent, well-funded and free from undo influence by auditors or audit firms. It would also provide for cooperation with other regulators. These provisions should substantially enhance our ability to coordinate with our European counterparts.
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    While the assistance of non-U.S. regulators will help us achieve our objectives under the Sarbanes-Oxley Act, true collaboration is a two-way street. The board has previously stated it is willing to assist non-U.S. regulators in their oversight of accounting firms. Because the needs of every regulator are different, we plan to work out the details of our assistance through direct discussions.
    In conclusion, we still have much work ahead of us to establish lasting relationships and working protocols with other regulators, and the Board is optimistic. Cooperation among regulators requires good will and flexibility. Our experience with the European Commission has demonstrated that European regulators share this view. We are confident that with the continuation of our open and constructive Dialogue with both the EU and its member states, we will be able to work together to fulfill our important missions to protect investors. Thank you.
    [The prepared statement of Samantha Ross can be found on page 52 in the appendix.]
    The CHAIRMAN. Thank you.
    Mr. Tafara?
    Mr. TAFARA. Thank you. Chairman Oxley and distinguished members of the committee, I am delighted to have been invited to testify about the US-EU Regulatory Dialogue on capital markets. The Dialogue is the result of historic changes in the way capital markets function and our likely to develop. Today, almost all developed markets and even a considerable number of developing markets have adopted forms of security regulation similar to our own. At the same time, capital markets have become global. The result is something unique—a truly global capital market but operating in a world of expensive domestic capital market regulation.
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    At this point, I should say that I firmly believe that the U.S. securities laws and SEC market oversight are two of the principal reasons why our markets are as efficient and effective as they are at fueling the capital needs of our economy. These laws focus on investor protection and have created in investors a certain bedrock confidence in the integrity of our securities markets that even sizable financial scandals have not been able to diminish entirely.
    In Europe, the union has promised to create an EU-wide capital market and a rationalized coordinated European securities regulatory structure. These initiatives will improve the efficiency and liquidity of Europe's securities markets, developments that will benefit both U.S. investors and issuers in the long run by providing the former with greater investment opportunities and benefiting issuers by possibly lowering their cost of capital.
    The U.S. and EU securities markets are too large to be ignored, and potential conflicts between the regulatory requirements of these markets can have an adverse impact on cross-border flow of capital. Some of these conflicts may prove difficult to avoid, stemming, as they may, from differences in regulatory philosophy. Nonetheless, some duplicative or even contradictory regulation in this cross-border environment may offer little in the way of investor protection and merely place an unnecessary burden on issuers, firms and investors. The SEC is committed to avoiding such situations where possible.
    The US-EU Dialogue was created as a form in which to discuss such conflicts and other regulatory matters and fulfill several functions. Most importantly, it has served to reinforce our common ground. With respect to financial services regulation, the U.S. and EU share the same fundamental goals: Protecting investors, maintaining the stability of our markets and allowing free and unfettered competition among all market participants.
    The Dialogue is also proving useful in resolving potential problems by providing an opportunity for both sides to air concerns about the possible impact of upcoming regulations and to explore adjustments.
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    Finally, the Dialogue has afforded an opportunity to learn from each other's experiences. The learning process allows us to consider possible new avenues of regulation for our own markets which ultimately enriches the regulatory rulemaking process and helps us each to better carry out our regulatory mandates.
    We have made a connection with the Dialogue on a number of occasions and on these occasions we have discussed a number of key issues, including the implementation of the Sarbanes-Oxley Act, EU Financial Conglomerates Directive and international financial reporting standards. Although the US-EU Dialogue began before the Sarbanes-Oxley Act was signed into law, implementation of the act added new significance to the Dialogue.
    As the SEC began to implement the Sarbanes-Oxley Act, it quickly became clear in some cases implementing the provisions in certain ways could conflict directly with laws and regulations in other jurisdictions. The SEC worked very hard to resolve these conflicts in a manner consistent with the spirit and intent of the act.
    The Dialogue played a key role. Through our interactions with representatives of the European Commission, the SEC learned where potential conflicts lay, while the European Commission came to understand the objectives of our proposed rules. These discussions, in turn, led us to consider modifications to our proposed rules and avoided putting foreign market participants in the unenviable position of being asked to comply with conflicting laws while still ensuring that the objectives of the Sarbanes-Oxley Act were met.
    The cross-border impact of securities regulation travels both ways, as the SEC also had to respond to legislative initiatives in the European Union. And one example we had to respond to was the EU legislation called the Financial Conglomerates Directive. This directive had cross-border implications given that it requires non-EU holding companies or financial firms operating in the EU to be subject to consolidated supervision.
    Again, the Dialogue played a key role. As the EU went through the process of proposing, amending and finalizing the directive, we discussed as part of the Dialogue the implications of the directive for U.S. broker dealers with operations in Europe. Indeed, the SEC provided detailed explanations of the SEC's form of oversight to EU regulators and policymakers and at this juncture expects that the European Commission and EU member states will find our system of consolidated supervision to be equivalent to the Financial Conglomerates Directive.
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    Going forward, the SEC and the European Commission will be examining many of the same regulatory issues partly in response to very similar financial scandals in both our markets. The Dialogue is proving to be fertile ground for exploring new ideas and approaches, as both sides consider whether to introduce new regulation or to strengthen existing regulation to address regulatory concerns.
    To complement our discussions with the European Commission, I expect that we will in the near future also develop a framework for cooperation between the SEC and the Committee of European Securities Regulators, or CESR. The committee comprises securities regulators from all EU member states and is responsible for implementation of EU laws and day-to-day oversight.
    In conclusion, I would note that the US-EU Dialogue is a key element in a web of connections between the U.S. and EU policymaking community. It serves the important function of providing a forum for developing greater understanding of each other's approaches, for airing concerns about actions that either the U.S. or EU has taken with respect to financial services and ultimately will help us achieve more converged regulations relating to financial services while ensuring the highest level of investor protection.
    I believe the Dialogue will lead to better securities regulation in the U.S. and the European Union and in the long run better protection and choices for investors. Thank you.
    [The prepared statement of Ethiopis Tafara can be found on page 82 in the appendix.]
    The CHAIRMAN. Thank you, Mr. Tafara, and we now turn to our panel, and I will begin with a series of questions.
    I would first like to ask Mr. Quarles, since the Treasury coordinates the views of the U.S. Federal regulators regarding the issues before the Dialogue, one of the most striking differences that I have noticed between the Federal regulators until recently has been that the SEC did not regulate holding companies and supervise holding companies. That appears to be changing. It would seem to the outside observer that the SEC is finally using the Gramm-Leach-Bliley authority in order to converge with the EUs legal standard.
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    I understand the equivalence determination in Europe regarding our state-based insurance regulators could be at least as thorny as the determinations in the securities industry. Having said that, what is the Treasury doing to help facilitate the equivalency determinations for all sectors of the U.S. financial services industry, and where do we go from here?
    Mr. QUARLES. The question of equivalency has been one of the central ones that we have been discussing in the Dialogue, and we have—what the Treasury has been doing is attempting to deal with all of the aspects of that as it arises in the discussion. What the SEC is proposing has been helpful. We have been encouraging direct conversations between the commission and the regulators on the topic of equivalency and some of the technical issues that arise.
    And on the insurance side, there is a direct Dialogue as well between the commission and the insurance regulators. It is an insurance regulatory Dialogue that is led by the NAIC, the National Association of Insurance Commissioners, which we are monitoring, and occasionally representatives of the NAIC will participate in our Dialogue on issues related to the Financial Conglomerates Directive and equivalency determination. So we have attempted to strengthen their separate Dialogue by including them in ours.
    The CHAIRMAN. Does our system of insurance regulation at the State level complicate your efforts?
    Mr. QUARLES. I don't know that I would use the word, ''complicate.'' Obviously, because there isn't a Federal system of regulation for insurance, we have to approach that in a different way than we approach the regulation of other financial institutions. But that said, I think that the Dialogue that there has been between the State insurance commissioners and the European Commission, which we have been monitoring, has been helpful in addressing some of the concerns about varying State regulations that the European institutions face when they come into the United States.
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    The CHAIRMAN. When you get into Dialogue sessions, do you have a coordinated approach going into those, and that is directed by the Treasury, you are kind of the quarterback? Is that how it works?
    Mr. QUARLES. Yes.
    The CHAIRMAN. In areas of competency and regulatory structure?
    Mr. QUARLES. Yes. Generally, the technical group when they meet, for example, usually will meet in advance, not always, but usually will meet in advance to go over the issues that will be presented in the discussion, so that there is a unified view.
    The CHAIRMAN. Thank you. Let me ask all of our witnesses, and I am kind of running short of time, so we will try to do our best to get some answers. The exercise of consolidated home country supervision in the world of modern finance is going to involve a lot of sharing of information across borders—sharing data, verifying models implemented properly, even on occasion sharing enforcement and investigative authority.
    Let me start with Mr. Tafara and we will work that way. Do you believe that all of these things can be accomplished through the informal networks that exist, such as the Dialogue, or are we going to need at some point some more formal arrangements to accomplish our goal?
    Mr. TAFARA. I am not sure that we need something more formal. Indeed, today, I mean as we have put into practice our risk assessment program, which involves gathering certain information from broker dealers and assessing their exposure and the capital that should be charged as a consequence of that exposure, we do meet regularly with our counterparts in Europe at the national level, particularly with respect to broker dealer groups that have a presence in the major countries, in Europe, Germany and the UK and indeed a country outside of the EU, the Swiss.
    We meet with them one to two times a year to share information about what we see, concerns that we have identified and to hear from them about the same thing. And that process has worked extremely well over the course of the past several years that we have been meeting with them. And I expect that will continue going forward, that we would continue to meet on a rather informal basis but yet share information relevant to the risks and the risk exposure of these firms that we should be taking into account.
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    The CHAIRMAN. Thank you.
    Ms. Ross? Don't forget that mike.
    Ms. ROSS. Yes. We do plan on establishing working protocols and procedures with the various auditor oversight bodies that we hope to be able to gain assistance from and rely on in our inspection work and our other oversight programs. That is one of the things that we are beginning now to get working on. The European Commission has been very helpful in establishing a framework for that kind of work through the ACE Directive.
    In addition, the European Commission is now helping us establish relationships with the various member states which will be forming these new auditor oversight bodies as we are forming now so that we can work together.
    The CHAIRMAN. Thank you.
    Ms. Bies?
    Ms. BIES. Mr. Chairman, the Federal Reserve already has legal agreements that allow us to share information with all the major banking regulators across the world, and where we have specific cases of investigations, our experience has shown we work very well together under the period where you are sort of under stress and have a real problem situation.
    So we are very comfortable we have the authorities that we need day-to-day coordinate the activity between the home and host regulators.
    The CHAIRMAN. Mr. Quarles, specifically to you in terms of terrorist financing and anti-money laundering, do we need to go beyond the informal arrangements and look towards MOUs and other forms of agreements? I know that based on the PATRIOT Act that the Treasury has been quite busy and successful in many cases in implementing that law. Could you give us some details?
    Mr. QUARLES. Sure. There obviously are a number of ways in which we would want Europe to, again, refine and improve the procedures it has in place for addressing anti-money laundering and counterterrorist financing. I don't know—at this point, I don't know that we would say that it requires something more formal than what we have been doing.
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    We have a regular interaction with the Europeans on these issues, and, for the most part, it is fruitful, and we have had some significant successes, for example, in September of 2003 when Europe moved to designate the entire Hamas organization rather than attempting to split it up from its charitable arm and its political military arm.
    But, for example, in that same vein, they still don't designate all of Hezbollah, and that is something that we are working with them to improve. We think they need to streamline the clearinghouse process that they have for handling information related to preparing designations and for moving quickly to disseminate information about designations to banks in their jurisdiction. We think they need to develop a more flexible standard for designation. It is really more of an actual criminal standard as opposed to an administrative standard, and that isn't flexible enough to be able to act quickly enough, and speed is of the essence in this effort.
    So there are clearly issues like that—I think those are the principal ones—there are issues like that we want them to move on and are continuing to work with them to move on. But the progress that we have had so far, while it is not complete, I think would not say that we need a thorough overhaul of the way that we are engaging with them.
    The CHAIRMAN. My time has expired.
    The gentleman from Washington?
    Mr. INSLEE. I was so enthralled with your questioning that I was just momentarily rendered speechless, which doesn't happen very often.
    The CHAIRMAN. That is true. I won't start your time running until you tell me when you want.
    Mr. INSLEE. Okay. Maybe it goes without saying that U.S. businesses have a huge interest in having consistency between American and EU regulatory structures. And where we have consistency, we frequently have global kind of concurrence, other nations follow. And where we don't, it can give inconsistent results, not only in the EU but folks who feel free to start new regulatory schemes around the world.
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    This was brought home to me. Obviously, frankly, with the Microsoft case, it has two different at least potential, and there are some good signs, actually, that we may find more coordination in those policies, so that is—we have optimism about that.
    But I just wondered what you could tell us, particularly, Mr. Quarles, about efforts at upcoming summits, EU-American summit, G7 and the effort to really emphasize our need and explore ways to improve our consistency across the pond knowing how important it is to U.S. business.
    Mr. QUARLES. This Dialogue, for example, is something that forms an important part of the discussion at the summit, at the US-EU summit. And in the context of the G8 summit that will be coming up, a central theme is the agenda for growth, which is to say measures that all of the G8 economies need to take in order to—we call them supply side measures that improve the environment for economic growth in each of those economies. And an important part of that is the regulatory environment and ensuring that business climate is conducive to economic growth.
    We have made that a constant and central theme of our engagement with the developed countries at the summit level, at the ministerial level and in various international forums, and I think you can see that it is beginning to bear some fruit, both from the support that the Dialogue has at the heads level because it is always, as I say, a central topic of the US-EU summit but also in some of the structural changes that European countries are making in their economies that are pro-business and pro-economic growth.
    Mr. INSLEE. Well, we encourage those efforts, we hope you are successful, because this has enormous ramifications for companies that need predictability, need consistency, need to trust one judicial system instead of having to go through 100, and we hope you will be successful. Thank you.
    The CHAIRMAN. I thank the gentleman.
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    Let me ask Ms. Bies and Mr. Tafara, and I am going to be asking a similar question to Dr. Schaub when he testifies. It is a complicated issue and it is one that really has enormous consequences going forward. Many U.S. institutions have been listing in the Euro markets on the basis of US GAAP standards.
    The euro markets are obviously huge. I understand that the new EU directives imply that unless US GAAP is soon found equivalent for the purposes of listing in Europe, these firms may not be able to continue using the Euro markets. It would seem to me that such a development would mean lower liquidity and volume in the European capital markets, which would be contrary to the basic purpose of the FSAP.
    In the meantime, uncertainty in the markets could inhibit issuances. Governor Bies and Mr. Tafara, there has been much debate and concern in Europe regarding the IASB's proposed fair value standard for derivatives. What is your impression of how that debate is likely to turn out? Do you agree that it could be a problem for the balance sheets in Europe and the United States to have different standards for evaluating and valuing derivatives?
    Ms. Bies?
    Ms. BIES. Mr. Chairman, the proposal that Europe is debating at the moment would bring the international standard closer to the U.S. Today, we have a very wide difference between the two accountings. In the United States, several years ago, the Financial Accounting Standards Board required all corporations, not just financial institutions, to recognize on their balance sheet financial derivatives of all types. Europeans still don't do that.
    So one of the things in terms of a level playing field and transparency of these complex organizations, we think it is important that they do move forward and provide that transparency.
    Now, the U.S. companies, to their advantage, had to adopt all these changes one by one because these are in different standards in the U.S. and so had more time to implement, and that is one of the issues I think the Europeans are struggling with to adopt all this at once. But the European firms who are already preparing under US GAAP will find that much of the work they are already doing will help them.
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    And, furthermore, some of the approaches that are in IASB proposals 39 and 32 actually provide some interesting alternatives to some of the areas in the US GAAP that we have found problematic and might provide an alternative. So I am hoping that we get to a closer consistency across the two standards, and I think the Dialogue that is going on now between the FASB and the IASB and our work with the other banking regulators in Europe to talk about how to look at financial standards in the two countries is very productive.
    I would also add that even if we get comparable standards, the issue is going to be whether they are implemented and interpreted the same way, and that is going to require some work. We think some of the new standards, for example, on loan loss reserve accounting should move us closer than what we have in practice today. And, obviously, the work of the PCAOB is important because a lot of the issues that we struggle with that we call accounting issues, even in this country, are not accounting, they are audit failures.
    The CHAIRMAN. Well, maybe we should ask Ms. Ross then to comment on that since you brought her into the equation here.
    Ms. ROSS. Thank you, Chairman. Our board has not taken a position on accounting standards, and I don't really expect it to, because we really are in the audit area. But, of course, once the accounting standards are established, we do play a very big role in helping to ensure that these accounting standards are applied in a consistent manner, just as Governor Bies is saying.
    So that will be critically important to us as we move forward in our inspections of accounting firms work on public companies, both those public companies that are the sort of bread and butter companies we have here in the U.S. and then also the foreign private issuers that are listed and registered with the Securities and Exchange Commission. So this is something we are very mindful of.
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    The CHAIRMAN. Thank you.
    Mr. Tafara?
    Mr. TAFARA. Don't know that I have much to add to what Governor Bies had to say about IS 32 and 39. We have tried to stay outside of the debate that is raging in Europe with respect to whether or not they should use IS 32 and 39, as they have been currently proposed, other than to note that a financial instrument standard is pretty important to add and to note that the conceptual underpinnings to 32 and 39 are the ones that are in FASB 133 and our institutions have been able to adapt to use the standard.
    With respect to convergence, I want to add on to what Governor Bies had to say and say that we have been strong supporters at the SEC, at least at the staff level, of the convergence project that is taking place between the IASB and the FASB, the exercise of identifying the principal differences and trying to eliminate them over a period of time, and we think that actually will increase the transparency and the comparability of financial statements as investors look to the choices they have for their capital.
    But as Governor Bies pointed out, critical to the acceptance of IAS on a cross-border basis will be a robust infrastructure for consistent interpretation, application and enforcement of the standards. Without that, what is supposed to be one standard can quickly devolve into 15, 25, 30 different standards, and that is something we are working with our counterparts across the Atlantic on establishing.
    The CHAIRMAN. I would assume that all of the witnesses would share the same concerns expressed by Mr. Tafara in terms of having numerous standards and trying to deal with all of those. I see everybody shaking their heads. And, of course, one of the purposes of the hearing was to get some of those issues out there, and that is been enormously helpful, and your testimony has been enormously helpful to the committee in making a record as we move forward.
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    I think the encouraging thing is that we have made significant progress already, and in many ways we are just probably in the first inning of this process, but it is quite encouraging, and for that we thank all of you and we are now—you can go back to work, and thank you for your testimony.
    The committee is now pleased to welcome Mr. Alexander Schaub, Directorate General for the Internal Market of the European Commission.
    Mr. Schaub, it is great to have you here to share your expertise. The committee is very familiar with your background and your reputation in the European Union, and we most appreciate your coming across the Atlantic to be with us this morning and testify, and you may begin whenever you feel comfortable.
    Mr. SCHAUB. Good morning, Chairman Oxley and members of the committee. Thank you very much for inviting me to testify on behalf of the European Commission and in addition for the first time on the informal EU-US Financial Markets Regulatory Dialogue.
    Cooperation in this area is not an option, an extra. It is an economic, political and regulatory necessity. We are economically interdependent. In the global markets, our regulations inevitably spill over on each other, not only in this area, it was already talked about, competition policy where you have exactly the same phenomenon.
    The financial integration that we are undertaking in Europe offers huge opportunities for the U.S.. And we can cooperate. Within the EU, we have had to ensure that also in an enlarged union investors in one country can feel secure about the offer of service from intermediate in another. We have taken, and we continue to take, stringent steps to ensure that high regulatory standards prevail. Such cooperation, which we have been training and practicing over 4 decades now within the European Union, must also be possible with our friends in the U.S.
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    We have taken a fresh start in our cooperation. That has involved recognizing the need, not necessarily to take identical approaches, but to agree on equivalent approaches. That is, in our view, the only viable way forward, and it is based on our practical experience over the last 40 years. We have taken a fresh—excuse me.
    The Financial Markets Regulatory Dialogue is key to this exercise. There is no magic to the term, it just refers to the fact that we are talking to each other frequently. It does not matter whether that takes place face to face or by telephone. What matters is that it does happen and in a constructive and effective way which removes hurdles and prevents the creation of new ones.
    What makes it tick is its informality, meeting only as on as an as and when basis and concentrating on solutions. We are constantly looking at improvements by organizing our discussions better, delegating work to experts, encouraging parallel Dialogues, including that, by the way, between yourselves and the European parliament, and we were always pleased to see you in Brussels, and between industry, while keeping all stakeholders informed of progress achieved.
    One of the key issues will be, as already mentioned, auditing. We welcome the excellent and extremely pleasant cooperation with the PCAOB, and we hope this will continue.
    On conglomerates, we recognize the need for certainty, and we hope to be able to announce guidance shortly, European guidance to be applied by the national supervisors. It is vital that we work together on the reconciliation of international accounting standards with US GAAP, and there are indeed practical questions which have to be further clarified.
    It is crucial that supervisors continue to work closely on the implementation of a new capital accord, and I think we can congratulate our negotiators from both sides of the Atlantic on the outcome of the latest meeting in Basel. Banks must not find the benefits of the new framework undermined by conflicting approaches to implementation and interpretation.
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    There are benefits to cooperating on the regulation of securities and exchanges and the possibilities of remote excess to trading screens of exchanges based in the jurisdictions of the other side. We also see benefits in the increased cooperation on the collateralization of reinsurance, allowing insurers on both sides to diversify risk.
    Finally, there are issues such as credit rating agencies, financial analysts, mutual funds and hedge funds which offer real opportunities for more upstream convergence and practical cooperation.
    Mr. Chairman, I welcome the support that you have brought to this process, and I ask this committee to support us as we proceed. Our citizens, intermediaries and companies all stand to benefit from it. Thank you for your attention.
    [The prepared statement of Alexander Schaub can be found on page 68 in the appendix.]
    The CHAIRMAN. Thank you, Mr. Schaub, again for—Dr. Schaub for appearing before us today and your very positive comments. And, indeed, what you say is correct, that our constituents on both sides of the Atlantic are depending on policymakers to work together to make certain that the free flow of services and their financial future is well in hand and that we do have the benefits of regulation that provide the kind of safety and protection for investors and for savers at the same time.
    Let me begin. The EU's Financial Conglomerates Directive states that the U.S. securities firms operating in Europe must be subject to an equivalent consolidated global supervision system which would be determined by the relevant Member State regulator beginning in 2005, next year. As you know, the SEC and others have been working closely with the European Commission for over 2 years in order to ensure that the SEC's regime is determined to be equivalent. As a matter of fact, we had some discussions in Brussels about that, I guess, almost 2 years ago.
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    And I understand that the Commission will not issue its guidance to start the equivalency determination process until at least June of this year. This delay is causing some concern, as you might guess, within the U.S. financial services industry. Is there any reason for us to be concerned that the SEC's new regime will not be found equivalent in time for compliance?
    Mr. SCHAUB. First of all, I should underline that this equivalence requirement is not a way of torturing unnecessary our friends and partners. It is a natural prerequisite before you enter into cooperation in such sensitive, important matters with important partners, and we find it perfectly natural that in cases where the U.S. is supposed to cooperate—U.S. supervisory structures are supposed to cooperate with us, that they would naturally first have a look whether the partner, their cooperation partner is at the equivalent quality level.
    Now, on the concrete case, you will understand that I cannot prejudge the outcome of this process, but personally I am very much convinced that this exercise, which is a new experience, which has taken more time also because American companies needed more time to present the practical details, I believe that at the end we will clearly come to a positive outcome.
    That is my firm, personal expectation, and I can tell you that we in the commission, Mr. Bolkestein, in the first place, are following closely this process. And if there should be any problem in the further development, because, as it was said, the final decision on equivalence is taken by the national supervisors on the bias basis of community-wide guidance, on the application of uniform rules at community level. But the last word is delegated to the national supervisors, and we will be in very close contact to make sure that unnecessary accidents can be avoided.
    The CHAIRMAN. Thank you. Do you think that the insurance issues will perhaps create the thorniest problem? What is your view just on the overall insurance issues within the scope of your jurisdiction?
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    Mr. SCHAUB. Well, I think it is not a secret that the insurance industry on both sides of the Atlantic is not in the most brilliant state of its history and that market participants rightly expect that this industry gets its act together. That is what is happening on the European side, what is happening certainly on the American side, and I believe that we have an interest on both sides to make sure that this process is closely followed and that it is pursued over time, because the scandals have already created enough doubt and hesitations in the marketplace, and it is vital for both sides that confidence comes back, and confidence is created in the first place by market players who visibly get their act together.
    The CHAIRMAN. And you heard the testimony from our panel. Was there anything that the previous panel discussed that you would like to comment on? Are there any glaring omissions or differences that you may have noted during that testimony?
    Mr. SCHAUB. I would say on the contrary, what is striking for me and what is at the same time very encouraging is that we are speaking more and more the same language and that your concerns on the U.S. side are our concerns in Europe.
    Let me just take one particularly crucial example, that is the introduction of international accounting standards. We both agree that this would be a major step forward, because what is happening at present that big internationally active companies have to present their annual results in four, five and sometimes even more different techniques with the amazing result that exactly the same company in some countries presents losses of $2 billion and in other countries comes out with a positive result of a billion. That is very amazing and puzzling for the market participants, and it undermines, obviously, the credibility of the whole system.
    Therefore, there is deep conviction on both sides of the Atlantic that this is certainly one point where we need to come to single rules. We don't need single rules for everybody and for everything, but this is a key element where do need, like on capital requirements for companies, we need common single rules. And I share the expectation and the strong wish of the U.S. authorities and of Congress that this crucial step is done soon.
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    As you know, these activities of the International Accounting Standards Board is entering now in a dramatic final phase. It seems to us clear if there is no agreement by mid-June, it will practically be impossible to create the conditions for companies to apply the new international accounting standards as of January next year, which was foreseen, which was the target date for a long time.
    So we are working very intensely with Mr. Bolkestein, personally involved with very intensive contacts with Paul Volcker and with David Tweedie, the chair of the IS Board, on how to solve the very few still open questions. And my conviction is, and I was very pleased to see that this is also Paul Volcker's conviction, that we can solve these one or two open points until mid-June in a pragmatic way, which means that we need not on every last detail come to solutions which would be considered as solutions for the next decade.
    If we come to solutions which are as a provisional solution, acceptable on the condition that a credible process is immediately now launched with a target date to further improve the provisional results, which, as I see today, will, in any case, imply very significant improvement if such a pragmatic way could be followed, it should be possible to terminate mid-June and to assure that as of January next year companies will apply these new standards.
    It would be an enormous breakthrough. It would give the signal to the world that this target of credibility and of reinsurance for the marketplace will be pursued and therefore it is worthwhile that all forces are concentrated on this final breakthrough.
    If we would fail, we should have no illusions that this would be a major shock for the marketplace, because it would not just mean probably that the efforts to go forward are not concluded, it would open a major risk that the process could be brought backwards, because there are people in the marketplace who would not be unhappy to work on more regional standards, and the whole dynamic towards convergence risks to be undermined and destabilized, and we could lose a decade if we can't bring this now to a positive end. We really hope that it will be possible, and I am personally confident that it will be done.
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    The CHAIRMAN. And so we are really talking about a month. We are already in the middle of May, so we are talking a matter of 4 or 5 weeks; is that correct?
    Mr. SCHAUB. That is exactly the case.
    The CHAIRMAN. So as we would say over here, it is crunch time.
    Mr. SCHAUB. Yes.
    The CHAIRMAN. Is the likelihood of fair valuation for derivatives the key issue to be decided?
    Mr. SCHAUB. This is certainly the most difficult remaining issue, and I believe it is crucial that on this point real significant progress is achieved, because I would understand that it is not acceptable that on such a key point simply nothing happens that would undermine the credibility.
    From my point of view, what is absolutely essential is that at least clear transparency is created, that investors in the marketplace have a possibility to get an idea what this hedging exercise, which is so complicated that only very few people understand it and I don't belong to these people.
    The CHAIRMAN. Nor do I.
    Mr. SCHAUB. But I can understand that the simple human being participating in the marketplace wants to know what does this hedging exercise mean for my company in January, in June, in December, and the minimum is that such transparency is introduced as a compelling element of the future rules.
    The CHAIRMAN. We have had some discussions with private sector folks on this side of the Atlantic that they are concerned about what appears to them to be lack of transparency in the EU process. To what extent do you take into account those views from private sector people that will be affected, obviously, by the rulings?
    Mr. SCHAUB. We are deeply convinced that high quality rules cannot be produced without systematic implication of the private sector on both sides of the Atlantic, because we are talking about rules which should be applicable worldwide.
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    Now, it is not a surprise, certainly not for you, that private does not appear spontaneously with a common view. So we are systematically exposed to quite diverging views which are reflecting often the diverging position of the companies or the association of companies which appear. It is simply a fact that there are—some of them are much more affected, and others are much less or not at all affected. So they will not sing the same song when they come, but our task is to make a sound judgment what should be taken into account of their wishes and what cannot be taken into account without endangering the credibility of the new future rules.
    The CHAIRMAN. Thank you. I think we have pretty well covered the IASB issues, and, by the way, we have had testimony from Mr. Volcker on a couple of occasions, and we could not be better represented than someone with his stature and ability, and we have certainly relied on him and leaned on him in many cases to help the committee better understand this transformation that is taking place across the Atlantic.
    The home country supervision issue, the term, ''home country,'' I just need to get this in my mind, home country supervision, from our perspective, means, of course, U.S. supervision. With the EU now, we are really talking about an expanded breadth of home country supervision, correct? In other words, the European Commission and European Union represent that home country supervision. I am correct, right? In other words, we are not talking about individual states here now, we are talking about the entire European Union when we define home country supervision.
    Mr. SCHAUB. Well, in Europe, we do not have the same structure than the one you have since very recently. We don't have one single European supervisor. There is a lot of debate about this. We have at present a decentralized European supervisory system, and that means that there are common European rules, there is a European body for security, CESR, and corresponding bodies for banks and for insurances, which are closely following the application—together with the commission the application, the enforcement of the common European rules by the national supervisors.
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    So it is a bit more complicated than your system today, but the purpose is to assure, like on the U.S. side, convincing, efficient, credible results. And we agree with the Bill McDonough and your PCAOB that an intelligent work sharing between the two sides is only possible if each side has convinced itself that the system on the other side offers comparable, equivalent guarantees.
    Now, this is not done just because we like the Americans so much or because you like the Europeans so much, it is largely a question of efficiency, how are we from London or from Frankfurt able to assure the supervision of a Japanese company located in Kobi and having a Japanese auditor? That is very difficult. So the same is true if you want to supervise an Italian company located in Milan and Bill McDonough has certainly highly qualified staff, but it is not sure that he has enough Italian-speaking people who could really do the job on the spot.
    So the idea is that there is work sharing to the point that it remains credible, that the guarantees of reliability of this joint effort is the same. And we believe that this work sharing is probably the only way to get out of the problem in an increasingly global system.
    The CHAIRMAN. Dr. Schaub, what is the—just having gone through an enlargement now, what commitments do the new countries that have joined the EU, what kind of commitments do they make in terms of their regulatory structure and all of the negotiations that are going on currently?
    Mr. SCHAUB. Well, you know, the fundamental requirements, preconditions for accession are for each of these 10 new members that they introduce as of the 1st of May fully—they introduce fully because there are no derogations accepted—the implementation of the so-called community acquis that is the totality of European Union rules on financial services. And it is the task of the European Commission to make sure that the community rules are effectively respected.
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    Now, it is not a secret that we have been working frantically until the end of April with some of these countries to make sure that they do the very few remaining elements of homework which had not been delivered yet.
    So we are now in a situation where they have introduced the rules where they do have supervisory structures, and we will now be in a much better position than in the past via the multiple committees where the representatives of these supervisory authorities from all 25 member states are regularly meeting. It will be much easier to assure that all these 25 supervisors are effectively applying the same rules, that they are making the same interpretation of these rules, and that they deliver convincing results. That will be, of course, an important responsibility for the commission and for these Europe-wide committees, but it is an exercise which has been applied in many other areas before.
    So it is not something totally new, and it is something which has successfully worked in other cases. Personally, I remember particularly the positive experience after the last accession exercise in the new member states at the time, and I remember very well in the competition area the remarkable efforts the 10 new member states have undertaken over the last years to get their own competition authorities now, their own financial supervisory authorities into the shape required to be part of a convincing European system.
    The CHAIRMAN. Very good. Again, we thank you profusely for coming over and testifying before the committee. We know that your trip was a brief one here, and for that we are most appreciative that you did take the time to come over and visit with us and impart some knowledge for the committee and make an excellent record.
    So, again, Dr. Schaub, thank you, and the committee stands adjourned.
    [Whereupon, at 11:40 a.m., the committee was adjourned.]