[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]







                  EXAMINING THE AGENDA OF REGULATORS,
                    SROs, AND STANDARDS-SETTERS FOR
                       ACCOUNTING, AUDITING, AND
                          MUNICIPAL SECURITIES

=======================================================================

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 22, 2016

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-104







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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
PETER T. KING, New York              BRAD SHERMAN, California
EDWARD R. ROYCE, California          RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              STEPHEN F. LYNCH, Massachusetts
PATRICK T. McHENRY, North Carolina   ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan              DAVID SCOTT, Georgia
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
STEVE STIVERS, Ohio                  KEITH ELLISON, Minnesota
STEPHEN LEE FINCHER, Tennessee       BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             GREGORY W. MEEKS, New York
DENNIS A. ROSS, Florida              JOHN C. CARNEY, Jr., Delaware
ANN WAGNER, Missouri                 TERRI A. SEWELL, Alabama
LUKE MESSER, Indiana                 PATRICK MURPHY, Florida
DAVID SCHWEIKERT, Arizona
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas
























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 22, 2016...........................................     1
Appendix:
    September 22, 2016...........................................    31

                               WITNESSES
                      Thursday, September 22 2016

Bricker, Wesley R., Interim Chief Accountant, Office of the Chief 
  Accountant, U.S. Securities and Exchange Commission............     5
Colby, Robert L.D., Chief Legal Officer, Financial Industry 
  Regulatory Authority...........................................    13
Doty, James R., Chairman, Public Company Accounting Oversight 
  Board..........................................................     6
Golden, Russell G., Chairman, Financial Accounting Standards 
  Board..........................................................     8
Kane, Jessica, Director, Office of Municipal Securities, U.S. 
  Securities and Exchange Commission.............................    10
Kelly, Lynnette, Executive Director, Municipal Securities 
  Rulemaking Board...............................................    11

                                APPENDIX

Prepared statements:
    Foster, Hon. Bill............................................    32
    Bricker, Wesley R............................................    33
    Colby, Robert L.D............................................    42
    Doty, James R................................................    48
    Golden, Russell G............................................    62
    Kane, Jessica................................................   105
    Kelly, Lynnette..............................................   113

              Additional Material Submitted for the Record

Bricker, Wesley; and Kane, Jessica:
    Written responses to questions for the record submitted by 
      Representatives Royce and Hultgren.........................   131
Colby, Robert L.D.:
    Written responses to questions for the record submitted by 
      Representatives Royce, Perlmutter, and Hultgren............   140
Doty, James R.:
    Written responses to questions for the record submitted by 
      Representatives Royce, Perlmutter, Hultgren, and Ross......   149
Golden, Russell G.:
    Written responses to questions for the record submitted by 
      Representative Royce.......................................   157
Kelly, Lynnette:
    Written responses to questions for the record submitted by 
      Representatives Royce and Hultgren.........................   166

 
                  EXAMINING THE AGENDA OF REGULATORS,
                    SROs, AND STANDARDS-SETTERS FOR
                       ACCOUNTING, AUDITING, AND
                          MUNICIPAL SECURITIES

                              ----------                              


                      Thursday, September 22, 2016

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:01 p.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Neugebauer, 
Huizenga, Hultgren, Schweikert, Poliquin, Hill; Maloney, 
Sherman, Perlmutter, Scott, Himes, Ellison, and Murphy.
    Ex officio present: Representative Hensarling.
    Chairman Garrett. The Subcommittee on Capital Markets and 
Government Sponsored Enterprises will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``Examining the Agenda of 
Regulators, SROs, and Standards-Setters for Accounting, 
Auditing, and Municipal Securities.''
    Thanks, members of the panel, for being here. And I will 
begin by recognizing myself for 5 minutes for an opening 
statement.
    So since 2011, one of the primary objectives of this 
subcommittee and of the full Committee of Financial Services 
has been to hold regulators and other governmental bodies 
accountable to the American public who, lest we forget, 
ultimately, we are the ones that pay the cost and have to 
contend with rules and regulations that are issued out of here, 
out of Washington.
    In the last 3 years, our subcommittee has received 
testimony from the heads of a number of offices within the 
Securities and Exchange Commission, SEC, including our most 
recent hearing that was just back in April, when we heard from 
the chief economist, the Office of Compliance and Inspection, 
the Office of the Whistleblower, and the Office of Credit 
Ratings. These hearings that we have held have allowed our 
subcommittee to take a deeper dive, as we call it, into the 
regulatory apparatus of these various agencies so that we can 
better understand how they operate and what their agenda is so 
to ensure that they are actually carrying out their statutory 
missions.
    So if someone wants to step back, we may have a bit of a 
Noah's Ark here on the panel in terms of the breadth of the 
issues that we will be able to cover between the ones I listed, 
municipal security regulations as well as accounting and 
auditing. In all of that, I am particularly pleased that we are 
able to hear from the PCAOB and FASB today. It has been, as you 
know, a while since you have last testified, and there are a 
number of areas within your jurisdiction that I think members 
will be interested in.
    In the time that I have left, let me just highlight a few 
areas of particular interest I am looking forward to hearing 
from you today, although certainly this is not an exhaustive 
list.
    The first one is related to enforcement. As members are 
aware, the subcommittee has spent a great deal of time 
examining and also criticizing the lack of due process 
protections that exist for respondents who are the subject of 
an administrative proceeding at the SEC and other agencies. 
There are few issues that are more important to Congress than 
upholding the rights of Americans to defend themselves when the 
government brings a charge against them.
    But in today's enforcement world, there exists an anomaly 
in that proceedings initiated by the PCAOB are held in private 
and are only made public if they are then later on referred to 
the SEC. This obviously contrasts sharply with practices over 
at the SEC or FINRA, where charges against an individual or a 
firm are made public as soon as they are brought.
    Even as someone who has long been concerned about 
government overreach, I can't bring myself to find a good 
reason for why an enforcement proceeding against an auditor 
should be treated any differently. Well, then again, it is a 
proceeding against a broker-dealer or a proceeding against an 
investment advisor.
    Seems that investors have a right to a certain level of 
transparency. If an auditor of a company they have invested in 
has serious charges brought against them, that seems to be 
important information. Certainly, that auditor should be 
granted every single right possible to defend themselves. But 
keeping a proceeding quiet means and makes our market less 
transparent and is potentially harmful to the investor.
    Second issue I would like to discuss is what related to the 
hearings the subcommittee held just yesterday. There we 
discussed the topic of materiality, with regard to SEC filings, 
of course. Companies, of course, make decisions on what to 
disclose based off the questions whether they are material to 
the investors or not. And as we heard from our witnesses 
yesterday, the long-held definition in this country of 
materiality has worked well and therefore should not be 
changed. While it seems that the SEC and FASB are working 
towards a common definition that would provide certainty to 
preparers and to issuers and investors, what is less certain is 
the role that the PCAOB is playing and whether they are 
coordinating there properly with both the SEC and FASB.
    The third and final issue that--and I don't think this will 
come as a surprise to anyone in this room--is the issue of 
cost-benefit analysis. This committee has made cost-benefit 
analysis a top priority, not just for the regulators, but for 
the SROs and the standard-setters as well.
    I understand that some of the organizations represented on 
our panel this afternoon have made efforts to improve economic 
analysis. And this committee and myself appreciate that. But as 
in many things, the devil is always in the details. So I am 
looking forward to hearing how each one of your organizations 
or offices incorporate cost-benefit analysis into either your 
rulemaking or your standard setting.
    And with that, I yield back the remainder of my time, and I 
yield 3 minutes to the gentlelady from New York, the ranking 
member of the subcommittee, Mrs. Maloney.
    Mrs. Maloney. I am speaking for 1 minute and yielding 3 
minutes to Mr. Sherman and 1 minute to Mr. Perlmutter, who have 
a great deal of interest in this subject matter.
    This hearing will cover a range of topics from auditing and 
accounting standards to the municipal bond market, the 
oversight of broker-dealers. And as a former city council 
member, I know firsthand the importance of municipal bonds. 
They allow cities and States to finance infrastructure, build 
schools, pave roads. This is a huge market with more than $3.8 
trillion in bonds outstanding. And as we look forward to the 
next Congress, an infrastructure package is supported by both 
Presidential candidates. And municipal bonds are an important 
part of that.
    The other main topic of this hearing is accounting and 
auditing. Accurate and transparent financial statements are 
absolutely critical to maintaining investor confidence in our 
markets. And I have always said markets run much more on 
confidence than they do on capital. And I also want to make 
sure that we are not needlessly undermining confidence in our 
own financial system. I understand the concern that the PCAOB 
has about firms dragging out disciplinary proceedings. But I am 
also concerned that by making these proceedings public, we may 
be unnecessarily harming the reputation of a firm before any 
official action is taken.
    I look forward to the and listening to everyone's 
testimony. And I reserve my time for Mr. Sherman, 3 minutes, 
and Mr. Perlmutter for 1 minute.
    Chairman Garrett. Mr. Sherman, you are recognized now for 3 
minutes.
    Mr. Sherman. I thank the gentlelady for the generosity in 
granting the time.
    FASB exercises tremendous government power. It is funded by 
a tax. If you don't follow its rules, you go to jail. Yet it 
gets little attention and is not subject to the cost-benefit 
analysis requirements suggested by our chairman, nor to the 
FOIA requirements, Open Meetings Act, or Senate confirmation of 
its members. That would all be okay if they didn't make one 
really bad decision. And that was the requirement to write off 
research expenses.
    Research is critical to our Nation. Congress determined 
that when we passed a tax law last year providing $11 billion 
every year to incentivize research by private companies. How 
many refugees could you feed? How many veterans could we 
provide better care for? But we have decided it is that high a 
priority. But our $11 billion to incentivize research is 
virtually wiped out in its effect by an unheralded decision 
made I think 30 years ago by FASB to say that we are going to 
violate all accounting theory and instead require companies to 
write off research expenses. Now, if we had that rule for 
inventories, if you bought inventory for your store, you had to 
show that as an expense, retailers couldn't carry inventories. 
But we say that you match the expenditure with the revenue it 
generates. So you recognize the inventory as an expense when 
you sell it.
    With research, instead of writing off that cost as the 
research is used, as the patent expires, you write it off all 
the way. That is a system designed to discourage research. And 
as I say, wipes out $11 billion of Congressional effort. It is 
a clear violation of everything that you learn about accounting 
theory. It is done solely for convenience.
    And FASB has been resisting reviewing this for the 20 years 
I have been in Congress, saying: Oh, we will get to it. Oh, the 
Europeans are doing something. We will catch up to them maybe. 
Oh, we will deal with development expenditures. Development 
expenditures are not our focus here. It is research and 
experimentation, which is the focus of Congress' $11 billion of 
credit.
    So I look forward to FASB coming up with better decisions. 
And if they don't, then maybe they need a better process. 
Senate confirmation, FOIA, open meetings, cost-benefit 
analysis. Because the power that they have to control--to 
really to be the arbiter that determines what publicly traded 
corporations do. Because they will do what is necessary to show 
higher earnings per share. That amount of power shouldn't be 
hidden in Norwalk, Connecticut.
    I yield back.
    Chairman Garrett. The gentleman yields back.
    And for the final 1 minute, Mr. Perlmutter.
    Mr. Perlmutter. Thank you, Mr. Chairman. And thank you, 
Ranking Member Maloney.
    Today, it is my hope that our witnesses will focus some of 
their remarks on how the current regulatory regime impacts 
small broker-dealers. Since 2011, we have seen a 12.5 percent 
reduction in the number of registered broker-dealer firms from 
about 4,400 down to 3,900. Small firms are being forced to 
consolidate, merge, or sell in order to achieve economies of 
scale to compete in today's environment.
    This committee spends a lot of time discussing the 
important role independent community banks play in our towns 
and States. We have considered several regulatory relief 
proposals targeted at community banks, including tailoring for 
risk and size, yet we rarely focus on the role of small broker-
dealers. Small firm broker-dealers in my district tell me the 
regulatory pressures are squeezing them, especially the costs 
associated with a PCAOB audit and supervision requirements on 
activities happening away from their firms and not as part of 
their firms.
    So I would ask our panelists to please discuss those 
particular issues that seem to be troubling small broker-
dealers.
    Thanks, Mr. Chairman. I yield back.
    Chairman Garrett. The gentleman yields back.
    We now turn to the panel. And I appreciate all the members 
of the panel being with us today. Some of you have been here 
before, and some have not.
    We will now recognize each of you for 5 minutes for an oral 
presentation of your testimony. And without objection, your 
complete written statements will be made a part of the record.
    For those of you who have not been here before, I always 
begin by saying that in front of you should be a lighting 
system, a timing system. You will be recognized for 5 minutes. 
The green light goes on initially, and then yellow is a 1-
minute warning to you to begin to wrap up, if you would, 
please. And then the red is the conclusion of your time.
    So we will begin to my left, with the SEC interim Chief 
Accountant, from the Office of the Chief Accountant over at the 
SEC. Mr. Bricker, you are recognized for 5 minutes. Welcome.

   STATEMENT OF WESLEY R. BRICKER, INTERIM CHIEF ACCOUNTANT, 
 OFFICE OF THE CHIEF ACCOUNTANT, U.S. SECURITIES AND EXCHANGE 
                           COMMISSION

    Mr. Bricker. Thank you very much. And good afternoon, 
Chairman Garret, Ranking Member Maloney, and members of the 
subcommittee. It is a pleasure to be here. I appreciate the 
opportunity to appear before you today to testify on behalf of 
the Commission regarding current topics in accounting--in the 
accounting and auditing profession that impact the capital 
markets and the related activities of the Office of the Chief 
Accountant, or OCA.
    The reliability and the credibility of financial reporting 
is critical to the proper functioning of our capital markets. 
As the agency empowered by the Federal securities laws to be 
the investor's advocate to maintain fair, orderly, and 
efficient markets and facilitate capital formation, the 
Commission has the authority and the responsibility to specify 
the form and the content of financial statements filed with the 
Commission. Also, the Federal securities laws mandate that 
public company financial statements be audited by an 
independent public accounting firm that will provide a report 
as to the credibility and the reliability of the information 
presented.
    OCA furthers the Commission's mission by working to enhance 
the foundation of our disclosure framework, which is the 
disclosure of reliable and accurate financial information to 
investors and other market participants. OCA is responsible for 
establishing and interpreting accounting policy to enhance 
financial reporting. OCA also leads the Commission's efforts to 
oversee two entities with key roles in the financial reporting 
process, which are the Financial Accounting Standards Board, or 
FASB, whose accounting and financial reporting standards the 
Commission has recognized as ``generally accepted'' for 
purposes of the Federal securities laws, also the Public 
Company Accounting Oversight Board, or PCAOB, which is 
responsible for overseeing the audits and auditors of public 
companies and registered broker-dealers.
    Currently, OCA has been directing significant attention to 
monitoring implementation activities for recently issued 
accounting standards. First, the FASB and the International 
Accounting Standards Board, or IASB, issued largely converged 
standards for how a company should report information about 
revenue from customers, which is generally intended to improve 
existing requirements by eliminating inconsistencies, requiring 
additional disclosures, and simplifying the preparation of 
financial statements.
    Second, the FASB and the IASB's new standards on the 
measurement and reporting of leasing activities will increase 
the transparency and comparability among organizations, thereby 
enabling investors to more readily and accurately understand 
the rights and the obligations associated with lease 
transactions.
    Finally, the FASB and the IASB have issued new credit loss 
standards that will improve and simplify reporting for loans, 
investments, and other financial instruments. These new 
standards should improve financial reporting within the United 
States and reduce country-by-country disparity in financial 
reporting.
    OCA is also focused in the area of internal controls over 
financial reporting. Maintaining adequate internal accounting 
control promotes reliable financial reporting and encourages 
investment in our capital markets. Updating and maintaining 
internal controls will be particularly important as companies 
work through the implementation of significant new accounting 
standards that I discussed earlier.
    Now I would like to say a few words about the importance of 
auditors and our oversight of the PCAOB. Independent auditors 
have been long recognized as one of key gatekeepers in our 
investor protection system. And the integrity of this system is 
supported by the PCAOB's oversight of public company auditors. 
Recent PCAOB inspection results show promising signs of 
improvement in many audit firms' quality controls that are 
designed to ensure compliance with the professional auditing 
standards as determine by the PCAOB.
    However, inspections alone cannot fully achieve the 
objective without the complement of rigorous and high-quality 
auditing standards that keep pace with the evolution and 
financial reporting, the economic environment, and companies' 
business models. The PCAOB has continued to update and 
modernize its interim auditing standards that it adopted in 
2003. For example, the PCAOB has made significant progress on a 
major project of vital interest to investors, which is 
improving the informative value of the standard auditor's 
report upon which investors rely.
    I commend the PCAOB for its efforts and its commitment to 
high-quality auditing standards that have the potential to 
further enhance the credibility of financial reporting for the 
benefit of investors.
    Thank you again for the invitation today, and I am happy to 
respond to any questions.
    [The prepared statement of Mr. Bricker can be found on page 
33 of the appendix.]
    Chairman Garrett. Thank you.
    And speaking of the PCAOB, Mr. Doty, you are recognized, 
and welcome, for the next 5 minutes.

STATEMENT OF JAMES R. DOTY, CHAIRMAN, PUBLIC COMPANY ACCOUNTING 
                        OVERSIGHT BOARD

    Mr. Doty. Chairman Garrett, Ranking Member Maloney, and 
members of the subcommittee, it is a pleasure to be here today. 
Thank you for the opportunity to appear.
    As chairman, I want to highlight a few key themes and 
priorities of the PCAOB. First, I believe the PCAOB is a vital 
resource protecting investors and fostering economic resilience 
by advancing reliable, informative, and independent audits.
    Second, accurate and transparent financial audits are a key 
to promoting investor trust and investment that grows capital 
markets and drives a healthy economy.
    Third, experience tells us that the PCAOB's role is 
essential, and our standards and oversight programs are making 
a real difference on behalf of investors and companies.
    Fourth, it is critically important that PCAOB remain 
vigilant and independent because persistent economic pressures 
can threaten the integrity of audits.
    Finally, going forward, a rapidly changing landscape will 
require that the PCAOB sustain our investment in innovation to 
meet the needs of investors and enable public companies in our 
markets to benefit from a lower cost of capital.
    When investors lose confidence in financial reporting, it 
becomes more difficult and more expensive to finance the 
businesses on which our economy depends. Moreover, inaccurate 
financial reporting can mask poor business strategies or fraud 
that, if left uncorrected, may result in the misallocation of 
capital, business failures, and job losses.
    The PCAOB promotes audit quality through its inspection and 
enforcement programs, its standard setting, coordination with 
other regulators, domestic and foreign, and an important 
investment in economic analysis we have made in recent years.
    The PCAOB also benefits from extensive outreach to 
investors, preparers, and audit committees, academics, 
auditors, and others. As we speak, representatives of PCAOB are 
conducting a forum in Jersey City for auditors of small 
businesses and brokers and dealers.
    In the PCAOB's 14 years, our inspections have found many 
examples of high-quality auditing, including evidence of 
auditors requiring companies to change their accounting or 
improve their internal controls over production of financial 
reports. These auditors are the unsung heroes who avert the 
scandals that don't happen.
    But our inspectors have also found and reported instances 
in which firms' audit reports should not have been issued. 
These instances include audits of some of the largest companies 
in the world, as well as midsize and smaller companies. What 
this points to is smart regulation and accomplishments that are 
changing the landscape.
    Inspections have improved audits and changed firms' 
attitudes and execution. Emerging research on our inspections 
indicates that when we find audits that are deficient, the 
engagement teams raise their game without a commensurate 
increase in fees, but with a statistically significant 
reduction in restatements. Issuance of regular inspection 
reports provides meaningful information that didn't exist 
before. And that helps all parties, including investors, audit 
committees, and companies that make better decisions. 
Enforcement has helped root out bad apples and fosters trust in 
the system.
    We have issued clearer and better audit standards and have 
made progress in improving the relevance and transparency of 
audits. Markets will soon have useful information to 
differentiate auditors on the basis of track records for 
quality. Awareness of our role and mission is now firmly 
established, and emerging research suggests that this is 
helping build public confidence in investing.
    The PCAOB has helped foster global recognition of the 
importance of cooperation. Our joint inspection with 
counterparts around the world have proven to be both effective 
and efficient. The PCAOB has established a center for economic 
analysis headed by Luigi Zingales of the University of Chicago, 
to further incorporate meaningful economic analysis in all 
aspects of our work. I firmly believe that through these 
accomplishments, the PCAOB has played a part in helping our 
economy and capital markets be resilient and grow.
    As we go forward, we must continue to invest in staff skill 
sets, information technology, and analytics. The audit of the 
future will need to take advantage of big data. And we will 
need to stay ahead of that curve. Our 2017 budget is still 
under development in consultation with the Commission, which 
must ultimately approve it. I should point out that by law, our 
budget is funded primarily by public companies, brokers, and 
dealers.
    In order to adequately address priorities, the PCAOB needs 
to at least maintain the current budget level. I do anticipate 
the need for a small increase over our $257.7 million budget 
for 2016. This would be for the cost of living, annual merit 
increases, as well as expected expenses for travel, 
particularly for inspections, information technology, including 
cybersecurity, and facilities. But we do have a keen sense of 
stewardship. It is my goal to accomplish our objectives through 
careful and continuous assessment with the best use of our 
resources without a significant increase.
    In conclusion, I appreciate the subcommittee's continued 
interest in our work and I will be happy to answer questions. 
Thank you.
    [The prepared statement of Mr. Doty can be found on page 48 
of the appendix]
    Chairman Garrett. Thank you.
    From FASB, Mr. Golden, thank you for being with us. You are 
recognized for 5 minutes.

STATEMENT OF RUSSELL G. GOLDEN, CHAIRMAN, FINANCIAL ACCOUNTING 
                        STANDARDS BOARD

    Mr. Golden. Chairman Garrett, Ranking Member Maloney, and 
members of the subcommittee, good afternoon. My name is Russell 
Golden and I am the chairman of the Financial Accounting 
Standards Board.
    Established in 1973, the FASB operates under the oversight 
of the Financial Accounting Foundation, a private sector 
nonprofit organization. Through authority established by 
Congress, the SEC has recognized the FASB as the designated 
accounting standard-setter for public companies.
    The objective of financial reporting is to neutrally depict 
the economics of a transaction and thus provide financial 
information that is useful to existing and potential investors, 
lenders, and others. Accounting standards, however, are not 
intended to drive behavior in a particular way. Rather, they 
seek to present financial information so that users can make 
informed decisions about how to best deploy their capital. U.S. 
GAAP is essential to the efficient functioning of the U.S. 
economy because investors, creditors, donors, and other users 
of financial reports rely heavily on the information that they 
contain. The FASB's goal is to improve financial information 
that is useful to investors and other financial statement users 
in making capital allocation decisions.
    It is important to note that although the FASB has the 
responsibility to set accounting standards, it does not have 
the authority to enforce them. That falls to regulators like 
the SEC and the PCAOB. An independent standard-setting process 
is integral to producing high-quality accounting standards. The 
FASB sets accounting standards through processes that are open 
and that encourage input from all stakeholders. This involves, 
among other things, proactively requesting meetings with 
stakeholders, including a wide range of investors, auditors, 
and issuers. These meetings help us to assess whether the 
proposals or existing standards will lead to better information 
as well as to assess the related costs.
    Our comprehensive procedures permit timely, thorough, and 
open study of financial accounting and reporting issues. 
Because we understand that the FASB's actions affect so many 
stakeholders, the procedures also encourage broad public 
participation throughout the standard-setting process.
    The FASB supplements its direct outreach by meeting 
regularly with numerous advisory groups and with staff of the 
SEC, the PCAOB, and banking regulators. This broad consultation 
provides the opportunity for the FASB to hear and consider all 
stakeholder views and to identify unintended consequences. The 
FASB is keenly aware of the need to balance compliance costs 
with the benefits investors and other users of financial 
reports gain from the improved information. The FASB's broad 
and inclusive process helps us to assess these factors and 
strike appropriate balances. The FASB exercises its judgment 
after considering relevant research, analyzing stakeholder 
views, and carefully deliberating issues.
    The FASB's role does not stop when a standard is issued. An 
important part of the FASB's mission is to monitor 
implementation and assisting preparers and other practitioners 
in their understanding and ability to consistently apply a new 
standard. Further, we ensure that stakeholders have sufficient 
time to transition to a new standard, and our goal is to be in 
a position to help them facilitate a smooth transaction.
    The FASB recently completed a number of amendments to U.S. 
GAAP designed to improve transparency and overall usefulness of 
information provided in financial reports, as well as reduce 
complexity. The most significant amendments are related to the 
recognition of credit losses and lease accounting. The FASB has 
a number of ongoing projects, including a disclosure framework 
project in materiality continued to increase the utility of 
information disclosed in a financial statement. Stakeholders 
have also prompted us to look at four financial reporting areas 
of concern, namely, intangible assets, including research and 
development, pensions, and other postretirement benefit plans, 
distinguishing liabilities from equity, and reporting 
performance.
    In conclusion, I would like to emphasize that the objective 
of financial reporting is to neutrally depict the economics of 
a transaction, and it is important for Members of Congress and 
the American public to know that the FASB's accounting 
standard-setting process is robust, transparent, and 
accountable. Thank you for the opportunity to provide this 
brief overview of the FASB and its priorities for the year. I 
would be pleased to answer any questions.
    [The prepared statement of Mr. Golden can be found on page 
62 of the appendix]
    Chairman Garrett. Thank you.
    Moving next to the Director of the Office of Municipal 
Securities at the SEC, Ms. Kane, welcome. And you are 
recognized for 5 minutes.

   STATEMENT OF JESSICA KANE, DIRECTOR, OFFICE OF MUNICIPAL 
      SECURITIES, U.S. SECURITIES AND EXCHANGE COMMISSION

    Ms. Kane. Good afternoon, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee. Thank you for 
inviting me to testify on behalf of the U.S. Securities and 
Exchange Commission regarding the activities of the Office of 
Municipal Securities.
    The office supports the Commission's mission of protecting 
investors, maintaining fair, orderly, and efficient markets, 
and facilitating capital formation by overseeing the municipal 
securities market, administering the Commission's rules 
pertaining to municipal securities brokers and dealers, 
municipal advisors, investors in municipal securities, and 
municipal issuers, and coordinating with the MSRB on rulemaking 
and enforcement actions.
    The Commission created the office as an independent office 
that reports directly to the SEC Chair as required by the Dodd-
Frank Wall Street Reform and Consumer Protection Act. The 
office's current activities generally fall within the following 
three areas: First, municipal advisors. Second, market 
structure and disclosure initiatives. And third, regulatory 
coordination.
    The Dodd-Frank Act required municipal advisors to register 
with the SEC and to comply with MSRB rules. The Commission 
adopted final rules for municipal advisor registration in 
September 2013. The office has significant responsibilities 
relating to the implementation of the municipal advisor 
registration rules, including providing interpretative guidance 
to market participants, reviewing and processing MSRB rule 
filings related to municipal advisor regulation, and overseeing 
the registration of over 650 municipal advisory firms.
    The office also consults with the Commission's Office of 
Compliance, Inspections, and Examinations regarding municipal 
advisor examinations, and coordinates with the MSRB and FINRA 
to help promote fair and uniform application of new rules to 
municipal advisors.
    With respect to market structure and disclosure 
initiatives, the Commission issued a report on the municipal 
securities market in July 2012 that recommended a number of 
possible actions to improve the municipal securities market in 
these two areas. In a June 2014 speech, Chair White discussed 
three of the report's market structure recommendations with 
respect to the fixed income markets, and steady progress has 
been made on these initiatives.
    First, the Commission approved the MSRB's proposed rule 
change to require brokers, dealers, and municipal securities 
dealers to seek best execution of customer transactions in 
municipal securities. And the MSRB and FINRA issued guidance on 
their respective best execution rules. Second, the MSRB and 
FINRA have filed proposed rule changes with the Commission to 
require broker-dealers to disclose markups and markdowns to 
retail customers on certain principal transactions for 
municipal, corporate debt, and agency securities. And third, 
the office continues to work with the Division of Trading and 
Markets to consider ways to enhance the public availability of 
pretrade pricing information for municipal and corporate bonds.
    The Division of Enforcement's Municipalities Continuing 
Disclosure Cooperation Initiative, a program for municipal 
issuers and underwriters to self-report Federal securities law 
violations, has focused significant attention on compliance 
with the continuing disclosure requirements of rule 15c2-12 and 
disclosure practices more generally. The self-reported 
violations have provided the office with valuable information 
as to how rule 15c2-12 is working, and will help us determine 
where best to channel our efforts going forward.
    The office regularly coordinates with other regulators in 
the municipal securities market. The office is responsible for 
reviewing and processing all MSRB rule filings on behalf of the 
Commission. The office also regularly meets with the MSRB to 
discuss rulemaking, examination, and enforcement activities in 
the municipal securities market. And the office leads the 
semiannual meetings with the MSRB and FINRA as required by the 
Dodd-Frank Act.
    In addition, the office also works with the municipal 
securities industry to educate State and local governmental 
officials and conduit borrowers about the Commission's rules.
    Thank you again for having me here today. And I would be 
happy to answer any questions.
    [The prepared statement of Ms. Kane can be found on page 
105 of the appendix.]
    Chairman Garrett. Thank you, Ms. Kane.
    I now recognize Ms. Kelly, the executive director of the 
MSRB.
    Ms. Kelly. Thank you.
    Chairman Garrett. Welcome, and you are recognized for 5 
minutes.

  STATEMENT OF LYNNETTE KELLY, EXECUTIVE DIRECTOR, MUNICIPAL 
                  SECURITIES RULEMAKING BOARD

    Ms. Kelly. Thank you. My name is Lynnette Kelly, and I am 
the executive director of the Municipal Securities Rulemaking 
Board. On behalf of the MSRB, which regulates the $3.8 trillion 
municipal securities market, I appreciate the opportunity to 
testify today.
    Since the enactment of the Dodd-Frank Act in 2010, and the 
2012 release of an SEC report on the municipal securities 
market, the MSRB has made significant strides in fostering a 
municipal securities market that provides investors and State 
and local government issuers with an unprecedented level of 
transparency. In 1975, Congress created the MSRB under the 
Securities Exchange Act of 1934 as an SRO with the mandate to 
regulate the activities of broker-dealers and bank dealers that 
buy, sell, and underwrite municipal securities.
    We are a 501(c)(6) organization governed by a 21-member 
board of directors with a majority of public members. The MSRB 
is overseen by both Congress and the SEC, and our rules 
generally must be approved by the SEC before becoming 
effective. Our mission is to protect investors, State and local 
government issuers, other municipal entities and the public 
interest in promoting a fair and efficient municipal securities 
market. The MSRB is unique amongst SROs in that it does not 
examine for compliance with or enforce our rules. But we do 
play a supporting role for those organizations that do, 
including the SEC, FINRA, and the bank regulators.
    Congress expanded the MSRB's authority under Dodd-Frank to 
include the regulation of municipal advisors, those 
professionals who act as fiduciaries to State and local 
governments. Congress also expanded our original mandate to 
protect investors, to include the protection of State and local 
government entities. MSRB Chair Nat Singer wrote to this 
committee earlier this week detailing the MSRB's progress in 
advancing this expanded authority through its establishment of 
our core regulatory framework for municipal advisors.
    The MSRB is also working to enhance market transparency 
through three avenues: rules for financial professionals 
informed by economic analysis and regulatory efficiency 
measures; improved access to market information through 
enhancements to our EMMA website, which provides free public 
access to municipal disclosures and data; and education for 
issuers on their disclosure responsibilities.
    First, we are improving transparency with rules intended to 
ensure that retail investors in this market have a more 
detailed view of the market, including dealer compensation. A 
new MSRB rule proposal on that topic requires dealers to 
disclose markups and markdowns to retail customers on certain 
principal transactions. This and other MSRB rules benefit from 
a 2013 MSRB policy to formally integrate economic analysis into 
our rulemaking efforts. In addition, the MSRB has undertaken a 
multiyear initiative to review the totality of our rule book 
with the result of streamlining, clarifying, and modernizing a 
number of rules.
    Secondly, the MSRB has greatly enhanced municipal market 
transparency through new tools and resources on our EMMA 
website to improve retail investor access to important market 
information. EMMA also offers tools and features that support 
issuers in making full and timely disclosures to the market. 
This is a topic we underscore through our third avenue for 
enhancing transparency, education.
    When State and local governments issue most types of 
municipal securities, the issuer or obligated person generally 
must agree to provide ongoing or continuing disclosures. We 
have consistently called for better disclosure, better quality, 
and more timely disclosure through market education 
initiatives, including disclosure of bank loans and other 
direct purchase debt which is not currently subject to SEC 
disclosure requirements.
    More generally, the MSRB highlighted for the Congressional 
Task Force on Economic Growth in Puerto Rico principles and 
practices that any municipal issuer should consider to ensure 
timely and complete disclosures to the market. Attached to my 
written testimony is a comprehensive MSRB report card that 
shows the progress that we have made on numerous initiatives 
aligned with those recommendations contained in the 2012 SEC 
report.
    I would be pleased to provide this committee with further 
detail on these and other initiatives, and again very much 
appreciate the opportunity to testify today.
    [The prepared statement of Ms. Kelly can be found on page 
113 of the appendix.]
    Chairman Garrett. Thank you.
    And Mr. Colby, chief legal officer of the Financial 
Industry Regulatory Authority, you are recognized for 5 
minutes.

STATEMENT OF ROBERT L.D. COLBY, CHIEF LEGAL OFFICER, FINANCIAL 
                 INDUSTRY REGULATORY AUTHORITY

    Mr. Colby. Chairman Garrett, Ranking Member Maloney, and 
members of the subcommittee, I am Bob Colby, chief legal 
officer of the Financial Industry Regulatory Authority, or 
FINRA. Thank you for the opportunity to testify today.
    As you have now heard twice before, the municipal 
securities market is overseen via a well-developed 
collaborative relationship between the MSRB, FINRA, and the 
SEC. The MSRB has responsibility for adopting rules relating to 
the municipal securities market. FINRA serves as the 
examination, surveillance, and enforcement authority for its 
regulated firms. And the SEC oversees the activities and 
approves the rules of both FINRA and the MSRB.
    Effective coordination among these regulatory bodies is 
achieved through both leveraging of resources and collaborating 
on many financial, operational, and business conduct topics. 
FINRA examines for and enforces compliance with the Federal 
securities laws and rules by broker-dealers engaging in 
municipal securities transactions. In addition, since the 
passage of Dodd-Frank, FINRA has examined its broker-dealers' 
activities as registered municipal advisors. In doing so, we 
coordinate closely with the SEC and the MSRB, and we have a 
specialized team that acts as a central point of contact with 
the SEC and the MSRB.
    As part of this coordination, FINRA requests interpretative 
guidance from the MSRB regarding its rules and provides 
information to the MSRB about FINRA's municipal securities 
market examinations and enforcement actions. FINRA also 
participates in formal periodic meetings with the MSRB and the 
SEC to discuss timely issues arising from current examinations.
    Each year, FINRA and the MSRB collaborate on municipal 
securities regulatory priorities leveraging, among other 
things, regulatory intelligence gathered from current year 
examinations, new rules, rule interpretations and emerging 
issues. FINRA then performs a qualitative and quantitative risk 
assessment of each municipal broker-dealer and municipal 
advisor to determine its municipal dealer exam priorities. 
FINRA conducts on average about 500 municipal broker-dealer and 
60 municipal advisor examinations annually.
    In recognition of the unique characteristics of the 
municipal securities market, FINRA operates specialized exam 
teams for the largest most complex municipal broker-dealers and 
municipal advisors. We also conduct market surveillance of 
municipal securities transactions using a risk-based approach.
    FINRA worked closely with the SEC and the MSRB to develop 
regulation for the fixed income market that is consistent yet 
calibrated to reflect the unique regulatory needs of each 
market. In particular, FINRA works with the SEC and MSRB and 
focuses on initiatives designed to enhance transparency and 
promote better execution quality in the fixed income markets. 
One of these initiatives, which has been mentioned already, 
involves proposals that the FINRA and MSRB recently filed with 
the SEC that would require additional pricing information to 
customers on their trade confirmations. Putting additional 
pricing information in the hands of customers will better 
enable them to evaluate the cost and quality of the services 
that firms provide. FINRA and the MSRB also jointly conducted 
investor testing to evaluate the potential benefits of the 
proposed disclosures.
    We look forward to evaluating the comments that will no 
doubt be received on the proposal and coordinating with the 
MSRB on this and other issues. I appreciate the opportunity to 
testify today and would be happy to answer any questions you 
may have.
    [The prepared statement of Mr. Colby can be found on page 
42 of the appendix.]
    Chairman Garrett. Thank you. Thank you very much.
    So I said at the--I will recognize myself for 5 minutes.
    I said at the outset that our hearing today is examining 
the agenda of regulators, SROs, standard-setters for 
accounting, auditing, and municipal securities. We were saying 
that this--and being done through one panel, it really could 
have been two, but let's delve into it. And I guess I will 
start off with PCAOB.
    Mr. Doty, reading through your testimony and hearing you 
today, as you know, you mention in your testimony that--you 
know, and I mentioned in my comments, PSAOB enforcement 
proceedings are somewhat of an anomaly, right, in that they are 
held out of the public eye unless, what, both parties consent? 
Essentially, I guess you would say, grants a--what do you call 
it, veto power, if you will, before that gets out. And this 
contrasts with other folks here, with the SEC, FINRA, and other 
agencies.
    And as you are aware, the subcommittee has been as I--I 
have been one of the critics when it comes to the way in which 
the SEC and FINRA conduct their enforcement proceedings, and 
particular a lack of due process. And you have probably seen 
some of my comments on that. But no point of our examination of 
their practice they would say, you know what, let's just make 
all of them private and out of the public eye.
    So just from a practical sense, and I think you will 
probably agree, if you were an investor in a public company and 
that company's auditor had a charge brought against them, if 
you are that investor in that company, wouldn't you want to 
know whether that charge was brought against them?
    Mr. Doty. Absolutely, Chairman Garrett. If you are an audit 
committee making a selection of an audit firm--
    Chairman Garrett. Right.
    Mr. Doty. --you might want to know. And our strong hope for 
this--the change that you are describing is that the present 
situation as an anomaly creates harm. It harms--when we go 
after the bad apples, they continue to practice, they continue 
to issue bad audit opinions. They compete with the vast 
majority of good auditors who are doing conscientious work. And 
we think that is unfair.
    Chairman Garrett. That is true. And I wasn't even thinking 
about it from the audit committee perspective, but just the 
investor. But that is true.
    And I have said it, but does this type of enforcement 
secrecy exist anywhere else, that you are aware of, within the 
whole regulatory framework, certainly not right here, but 
elsewhere, particularly within the banking securities area? The 
secrecy aspect.
    Mr. Doty. We see no reason why auditors--
    Chairman Garrett. Yes, but you don't see it anyplace else.
    Mr. Doty. No. No, we don't. It is a general practice in 
Federal agencies and administrative law and other areas that 
the public knows when we have made a determination that auditor 
conduct is sufficiently egregious, and an extreme departure 
from professional standards, that we have brought charges.
    Chairman Garrett. Okay. And that is interesting. And so 
under the Grassley-Reed Senate bill, you mention that in your 
testimony, I will be introducing a version of that over here, 
the investigation portion of it, however, would still remain 
private. Correct?
    Mr. Doty. It would. Absolutely.
    Chairman Garrett. And this was an argument made up years 
ago, but--a while back, but I assume you will agree here: Do 
broker-dealers and investment advisors operate in an 
environment where reputation and trust matters? And the answer, 
of course, is yes. And is there anything inherently different 
between those folks and auditors?
    Mr. Doty. Other professionals who rely on the trust of the 
public are subjected to public proceedings where they are 
derelict.
    Chairman Garrett. Right. Thanks.
    Moving next to Mr. Golden. My time is going by quick. I 
understand that FASB has been working on the disclosure 
framework, you mentioned it in your testimony, to improve the 
effectiveness of disclosures. We had a discussion on that about 
disclosure. Were you watching our hearing yesterday by any 
chance? Did you tune in?
    Mr. Golden. No, I did not.
    Chairman Garrett. You missed it. It was exciting. It was 
the whole issue of materiality. One of the most fascinating 
hearings we have held to date and--no. And I want to follow up 
in my last minute on, last fall, FASB issued guidance that 
would revise the definition of materiality for financial 
statements, though it is based on a legal concept that the 
Supreme Court has articulated. Can you explain briefly FASB's 
logic behind that updated guidance and the importance of 
following the materiality standard articulated by the Supreme 
Court?
    Mr. Golden. Sure. And thank you for that question. Our 
intention in the project was to align the existing definition 
with that of the PCAOB and the SEC, and remove a change that 
the board made in 2010 to have the same words as that of the 
IASB. We thought it was important that the conceptual 
definition of the FASB align with the SEC, the PCAOB, and the 
laws of this country.
    Chairman Garrett. And let me just jump back to Mr. Doty. So 
there is some degree I hear as far as confusion as far as where 
you guys are and where they are. Are you consulting as you are 
coming up with your--with definitions of materiality?
    Mr. Doty. We do consult. And Chairman Golden is correct 
that we have continued to observe the law, as we understand it, 
on materiality under the Exchange Act.
    Chairman Garrett. And be willing to make--
    Mr. Doty. Supreme Court decisions.
    Chairman Garrett. Yes, but my understanding is there some 
discord or confusion at this--
    Mr. Doty. Our--we do consult, and we will be looking to be 
sure that auditors are auditing in accordance with the legal 
standard for disclosure policy that the SEC and the FASB 
established.
    Chairman Garrett. And since--this is off page, but Ms. 
Kelly, you raised one issue. I know my time is over. But you 
brought up the aspect of some degree of materiality. Is your 
standards--this is just for my information. I just don't 
understand this. The materiality issue that you were raising 
near the end of your testimony. Right? Are you with me? Ms. 
Kelly?
    Ms. Kelly. I am sorry, sir.
    Chairman Garrett. At the end of yours talking about 
disclosure regimes and materiality issues. Is there--no?
    Ms. Kelly. Well, the disclosure regime in the municipal 
market does--is based on a materiality standard.
    Chairman Garrett. And is that all--this is my learning 
education period--different definition here? Because you were 
saying--you were going into some of the other areas that needed 
to be disclosed and some of issues that are being brought out 
there. Right? By your testimony. So is that something that I 
need to understand better, I guess I do, as far as the 
materiality definition over here versus where in your market? 
Either one? Are you with me?
    Ms. Kelly. Well, I can say during the MCDC initiative, 
there were certainly market participants that did ask for 
further clarity on the definition of materiality.
    Chairman Garrett. Okay.
    Ms. Kelly. And that wouldn't be something that is within 
the MSRB's--
    Chairman Garrett. Per your authority, but--okay. With that 
uncertainty that I still have in my head on that point--I will 
circle back with you--I now yield 5 minutes to the gentlelady 
from New York.
    Mrs. Maloney. I thank the gentleman for yielding, for 
calling this important meeting, and for all of your testimony. 
I have been called to a confidential briefing on the bombings 
that--the terrorist attacks in our country, one of which took 
place in my district.
    But before I leave, I wanted to ask Mr. Colby about the 
proposed rule to require the reporting of--FINRA's reporting of 
Treasury trades. Certainly, our Treasury market is the deepest 
and most liquid in the world, and tremendously important to the 
financial markets, and very, very important to the financing of 
government. So I wanted to ask you, where does this rule stand? 
When will it be completed? What is the status of it? What can 
you tell us about this important rule?
    Mr. Colby. Thank you, Congresswoman. We have filed a 
proposal to require our members to give us information for 
purposes of an audit trail of Treasury securities. It is with 
the Commission. There have been a round of comments. We are 
about to respond to those comments, and we are hopeful the 
Commission will approve it shortly.
    Mrs. Maloney. And so you think it will be shortly. Okay. 
What do you think of the argument that some people have put 
forward that the Treasury trades should be reported publicly 
rather than just to regulators? And do you think there is a 
risk that public reporting could potentially in some way hurt 
or disrupt the market?
    Mr. Colby. Well, we believe that the question about 
dissemination of the Treasury data is primarily a question for 
the Treasury Department and the SEC. We responded to their 
requests for us to develop an audit trail. We have made public 
data with respect to corporate and agency securities, and we 
heard these same arguments in that context. And so we went 
through a very methodical process where we put out in the 
public sphere the most liquid of the security transactions and 
assessed the impact of those before moving on to other 
transactions.
    Mrs. Maloney. Well, I would like to address this question 
also to Jessica Kane and to you. And would each of you describe 
the types of enforcement actions you have brought in the 
municipal market, both with the SEC and with FINRA, and any 
emerging threats that you see either to municipalities or 
investors, and how are you addressing them? First, Ms. Kane and 
then Mr. Colby, if I could.
    Ms. Kane. At the Commission we have a specialized unit 
within the Division of Enforcement. It is the Public Finance 
Abuse Unit, the PFAU, and their current efforts focus on 
investigating and pursuing enforcement actions in four primary 
categories: Offering and disclosure fraud, broker-dealer 
abuses, public corruption, and municipal advisors.
    Earlier, Ms. Kelly referenced the MCDC initiative. I would 
say the lack of compliance with continuing disclosure 
obligations was one area that we saw a potential for abuse and 
the Enforcement Division, noting this area, brought the MCDC 
initiative.
    Mrs. Maloney. Mr. Colby?
    Mr. Colby. Our efforts are focused on broker-dealers and 
municipal advisors that are members. We have brought a range of 
cases covering both market transactions and customer 
transactions. In the customer area, we focused on suitability 
issues, the sort of recommendations that are made to customers 
and whether they are appropriate for that sort of customer. In 
the transactions area, we have brought cases on markups where 
excessive undisclosed markups were charged to customers; also 
for failure to report transactions that should have been 
reported under the municipal reporting system.
    Mrs. Maloney. Thank you.
    And my time is almost up, but I would like to ask James 
Doty. It is my understanding that the PCAOB does not currently 
have a budget request for 2017 because of a unique timeline. 
Could you explain what the timeline is and discuss, in general 
terms, what your views are on your expected budget request?
    Mr. Doty. Yes. Ranking Member Maloney, we are in the 
process of formulating our budget. That happens as a bottom-up 
assessment of each program's needs. It occurs with extensive 
discussions that begin in the spring. We receive some--a lot of 
feedback and discussion from SEC staff here, which acting--
which Acting Director Bricker has referred to. We normally--we 
will submit a preliminary budget for examination and review at 
the end of July, which we have done, and that will receive a 
lot of work, both with the SEC and ourselves pitching in and 
meeting frequently. It will culminate with a final budget 
request on November 30. That will then be the subject of a 
hearing by the Commission.
    Mrs. Maloney. Thank you. My time has expired. Thank you.
    Chairman Garrett. Thank you. The gentlelady yields back.
    The gentleman from Arizona is recognized for 5 minutes.
    Mr. Schweikert. Thank you, Mr. Chairman. And this is one of 
those hearings where you sort of get to ask those sort of 
questions that have bounced around in the back of your head.
    A decade ago, I was the treasurer of a very large county. 
And so this is going to be to Ms. Kelly. I signed a lot of 
bonds in that time. I mean, lots. I mean, the type where you 
have the hand cramp. But I remember a number of occasions where 
we were doing a defeasance, a refinance. And typically, my job 
was just, you know, the official of the county putting our name 
on it, saying, you know, the school district or whatever the 
taxing district was, and I got loose with some of the fees and 
costs. And in digging into them, I realized that the legal 
fees, the rating fees, everything else that goes into that cost 
stack of this refinance was actually almost as much as the 
savings on the instrument was going to have to the taxing 
district.
    Is there a standard that is articulated that you don't walk 
in and convince, say, a school district, someone else saying we 
want you to refinance your bonds because we are going to make a 
bunch of legal fees on it, but over the next decade, we are 
going to save you five grand? I mean, what is the proper 
etiquette or rules, and has that changed in the decade since I 
was doing that?
    Ms. Kelly. Thank you. The MSRB rules apply to broker-
dealers and municipal advisors, and we have rules for each, 
fair dealing and fiduciary duty rules, for both of those types 
of professionals that prohibit the charging--
    Mr. Schweikert. Yes, but you already--because it was not--
there was no municipal advisors involved in this.
    Ms. Kelly. Right.
    Mr. Schweikert. And someone handed you a note; you might 
want doublecheck that. Look, we all rely on our experts. 
Because in this particular case, there seem to be some 
extraordinary legal fees rolled into this defeasance.
    Ms. Kelly. Right.
    Mr. Schweikert. And, you know, I know that is sometimes 
uncomfortable, but when we looked at the entire stack of costs, 
from the rating to, you know, the analysis, this, that, there 
was really very little savings happening here. Does the entire 
cost stack get looked at?
    Ms. Kelly. Not by the MSRB. We have no direct authority 
over bond attorneys at all, but there are certain activities at 
the State level that seek to really make cost of issuance on a 
bond issue more transparent. So for example, the State of 
California just adopted a bond disclosure law that would 
require very detailed information about all of the 
professionals and the costs that they were--or the fees that 
they were paid per bond transaction.
    Mr. Schweikert. Okay. And this is for anyone on the panel. 
Has anyone ever seen a State municipal government or even a 
national organization that says, hey, we have a very simple 
online disclosure when someone walks in and wants your road 
district, your sewer district, your school district, whatever, 
you know. In Maricopa County we have, what, 3,300 taxing 
districts, and I think 25 percent of those have the right to do 
some type of bonding. Here is our cost. And any taxpayer can 
log in, see it, and it is a nice, simple, looks like the back 
side of a yogurt carton, of here is our legal costs, here is 
our rating costs, here is our research costs, here is our 
certification, here is our--and to see that, and particularly 
in the occasion of a defeasance where, you know, you are moving 
from one to the other and assuming that you are saving the 
taxpayers money.
    Does anyone know of something like that? Because I am 
thinking of the elected officials who may not be from our world 
of doing finances. How do they get a quick understanding of the 
cost?
    Ms. Kelly. What is fair, what is not. I am not aware--
    Mr. Schweikert. No. What is rational.
    Ms. Kelly. I am not aware of--well, there certainly is no 
national database that requires municipal bonds.
    Mr. Schweikert. Wouldn't that be a lot easier than a fairly 
large regulatory statement?
    Ms. Kelly. Sure.
    Mr. Schweikert. Like as you were mentioning California, 
which I am a little familiar with, which has, you know, what, a 
couple dozen line items--
    Ms. Kelly. Right.
    Mr. Schweikert. --and categories in it, and just make it, 
hey, this is it.
    Ms. Kelly. Again, there are certain States that do require 
disclosure at the State level. I am not aware of whether or not 
that information is publicly available, but I take your point.
    Mr. Schweikert. Okay. If anyone ever comes across something 
like that, I would love to read more about that.
    And with this I yield back, Mr. Chairman.
    Chairman Garrett. The gentleman yields back.
    Mr. Scott is recognized now for 5 minutes.
    Mr. Scott. Thank you, Mr. Chairman.
    As a co-lead sponsor on Dodd-Frank a few years back, I was 
happy that the law elevated the attention needed to the 
municipal securities market by creating the Office of Municipal 
Securities at the SEC. It has been a long time, indeed, since 
this committee itself has even had a hearing on municipal 
securities. So I wanted to ask the panel, especially you 
Director Kane, if you could provide us with an update of any 
emerging threats, any emerging threats that you see today, 
either to the municipalities themselves or to the investors? 
And I am particularly interested in this because municipal 
bonds have been getting a lot of attention in my own district 
in Georgia, in Cobb County, lately because of our brand-new 
spanking Atlanta Braves stadium. So it is of particular 
interest to me to make sure things are going to be going 
smoothly, and so I would like to know, do you see any threats 
on the horizon to either municipalities themselves or to 
investors, or do we see smooth sailing along the way?
    Ms. Kane. I am happy to start that off.
    Mr. Scott. Yes, if anybody else would like to comment, I 
certainly would like to cover the waterfront so all of us will 
know. And we are on C-SPAN, so people across the country will 
know if everything is fine.
    Ms. Kane. Well, I think I would like to talk about two 
issues in particular. The Dodd-Frank Act required municipal 
advisors to register with the Commission and to comply with 
MSRB rules. These are important rules that the Commission 
promulgated in September 2013. The MSRB has rolled out a suite 
of conduct rules applicable to municipal advisors, and these 
rules were really designed with the idea of protecting 
municipalities--
    Mr. Scott. Let me ask you one thing. I think I just missed 
you. Who would register with the Commission again?
    Ms. Kane. Municipal advisors.
    Mr. Scott. Okay.
    Ms. Kane. These are persons who would provide advice on the 
issuance of a bond or municipal financial products or would 
solicit a municipal entity or obligated person. So the SEC does 
have authority over municipal advisors with respect to 
registration, examination, and enforcement. As Ms. Kelly 
mentioned, the MSRB has recently completed a suite of conduct 
rules applicable to municipal advisors, including a fiduciary 
duty rule. So advisors to municipalities are now subject to SEC 
registration, examination, and oversight, as well as to MSRB 
conduct rules. These are important rules designed to protect 
municipalities from conflicted advice and from unregistered 
financial advisors advising them on transactions without the 
municipalities' best interests at heart.
    Another area that we have been focusing on at the SEC is 
compliance with continuing disclosure obligations. The 2012 
report that the SEC Commission put out noted that there were 
widespread failures to comply with continuing disclosure 
obligations on the part of municipal issuers. To correct that 
widespread activity, the PFAU, the Public Finance Abuse Unit, 
in the Commission's Enforcement Division launched the MCDC 
program. This is a voluntary self-reporting program whereby 
issuers and underwriters could self-report violations of the 
Federal securities laws. It has been an incredibly successful 
program from the perspective of my office in terms of focusing 
compliance by municipal issuers and underwriters on continuing 
disclosure obligations and ensuring that investors get the 
information that they need.
    Mr. Scott. So let me ask you this too. Also in my State, at 
the same time we are building the new Atlanta Braves stadium on 
municipal bonds in the area, downtown in Atlanta we are 
building the new Falcons stadium in municipal bonds. And there 
was some concern about is this too much in one area, and 
particularly because municipal bonds now are becoming the 
favorite way of building these huge mega stadiums now.
    Do you all see any threat in that? I mean, we are doing 
well given we are doing them all at the same time. We got both 
stadiums supposed to come on in 2017, so that will be 
interesting. But is that a threat? Is that something 
communities need to be aware of, not to overload?
    Ms. Kane. The decision to incur debt is a decision that is 
made at the State and local government levels. The SEC has 
authority over municipal advisors, municipal securities brokers 
and dealers. The SEC also enforces the antifraud provisions of 
the Federal securities laws with respect to disclosures made by 
issuers to investors.
    Mr. Scott. Right. So we are safe.
    Chairman Garrett. The gentleman's time has expired.
    Mr. Scott. Thank you.
    Chairman Garrett. Thank you.
    The gentleman from Texas is recognized for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. Thanks for holding 
this hearing.
    One of the things I wanted to talk about a little bit is 
the municipal bond market and the transparency in that market. 
And, Ms. Kelly, I think I will start with you. You recently put 
out a new proposal that would require the dealer to disclose 
the markup. Kind of walk me through kind of where you are with 
that process and what are some of the plusses and the minuses 
of that proposal.
    Ms. Kelly. Certainly. The MSRB worked, actually, very 
closely with FINRA so that there could be a uniform standard 
for disclosure across the fixed income markets. There were over 
2 years of notice and comment on various kinds of disclosure 
proposals, including price reference, you know, a reference 
price on a confirm, which eventually evolved into a markup 
disclosure requirement. This is a great example of where a 
really thorough independent economic analysis worked, and it 
was pretty clear that the price reference standard didn't make 
sense from an economic analysis perspective.
    So fast forward, in the last 2 months, both FINRA and the 
MSRB filed rule proposals with the SEC. They are in public 
comment right now, public comment directly to the SEC, which 
MSRB and FINRA will respond to. And it is expected that there 
will be an effective date possibly as long as 12 months. The 
effective date, if approved, has not been set yet. This kind of 
disclosure requires some very significant technological changes 
and confirmation disclosure changes, so we want to make sure 
that the industry has enough time to implement those 
requirements.
    Mr. Neugebauer. The interesting thing to me is the 
technology in the securities area has, you know, been 4X, but 
it seems like the municipal bond market has trailed that. And I 
think one of the things that concerns me about the municipal 
bond market is that--kind of the lack of information from an 
investor's standpoint. I think most sophisticated investors 
understand that municipal bonds can be less liquid than other 
types of securities. But if we had more information, then as 
investors we would actually know how illiquid that is, and for 
example, the last time that bond traded, for example.
    Ms. Kelly. Certainly.
    Mr. Neugebauer. And what you can find out on the Web right 
now, you can find the ask, but you can't find really 
information on what maybe the current bids for those securities 
are or what was the last trade in--the last trade date. So are 
those some of the things that are being considered or what--
kind of give me some insight into that.
    Ms. Kelly. Certainly. An equally important activity at the 
MSRB, equal to rulemaking, is transparency in the market. And 
in 2009, the MSRB launched the EMMA website, which is the 
central location available for free and really geared to the 
retail investor that has information on over 1.3 million 
individual municipal securities. That includes offering 
documents, ongoing disclosures, trade data, short-term interest 
rate resets, market information, as well as other tools and 
information useful to better understand the market.
    You are right that municipal bonds generally don't trade 
very frequently. We have a price discovery tool which allows a 
retail investor to ascertain similar securities and look at 
their trading patterns to get a better sense of the value of 
their security. Perhaps we need a little bit more of a 
marketing budget, but it is really a game changer for the 
market. And what we have found out with the age of the 
traditional municipal retail investor happens to be, you know, 
in the 60 to 80 range, they are not as likely necessarily to 
embrace technology and to do research on their own. The market 
generally still is a buy-and-hold market, but we are very 
confident that, you know, as the new investors come into the 
market, that they will be much more self-directed.
    Mr. Neugebauer. And one last question. In your cost benefit 
analysis that you have done on this particular rule--
    Ms. Kelly. On the what rule?
    Mr. Neugebauer. The liquidity issues, did that come up? In 
other words, if I have to start disclosing, you know, what my 
markup is, I may not want to inventory certain bonds, and so 
that might create some liquidity issues. Was that something 
that was discussed?
    Ms. Kelly. Yes, sir. We certainly invite a dialogue with 
the industry about the costs and the benefits of each 
regulatory proposal that we issue. Many times we have 
quantitative information, and sometimes we don't, in which case 
we would have to rely on a more qualitative assessment. So that 
question absolutely is part of the analysis.
    Mr. Neugebauer. Thank you.
    Chairman Garrett. The gentleman from California, Mr. 
Sherman, is recognized for 5 minutes.
    Mr. Sherman. Let me first focus on the PCAOB. It has been 
thought that we should publicize every time they do an 
investigation. I would point out that nobody in the room is an 
accounting firm, but we are all citizens, and as far as I know, 
none of us have been indicted, but none of us know whether we 
have ever been, you know, talked about in a grand jury. I don't 
think it would make sense to publish everyone whose name is 
mentioned in a grand jury. That is why we keep them private.
    I will ask our witness from the PCAOB, if it was announced 
that you were investigating a firm, that would punish the firm. 
That would hurt the firm's position in the community. It would 
cost them clients. Would you be reluctant to investigate a firm 
if you didn't know that they had done any wrongdoing and you 
knew that by merely announcing the investigation, you were 
punishing folks that may be blameless?
    Mr. Doty. Mr. Sherman, we would not identify witnesses or 
even announce the fact of an investigation.
    Mr. Sherman. Oh, I know that is your current policy. What 
if Congress said that you couldn't investigate anybody until 
you published the fact that you were investigating them? Would 
that interfere with your work?
    Mr. Doty. Our investigations should be confidential. And as 
with other law enforcement agencies, including the SEC, we 
would not seek the authority to announce and do not seek the 
authority to announce the commencement of investigations or the 
participants, no more than we would identify the identity of 
companies that we audit or we have findings in an audit report 
or where we have an investigation. That should be confidential. 
We are seeking only the ability to publicize the facts when we 
get to the point of filing charges.
    Mr. Sherman. And then if you file charges, that is public, 
and there could be, in effect, a public trial or hearing before 
the SEC?
    Mr. Doty. Well, there would be a hearing at the PCAOB in 
which those persons charged would be entitled to all of the 
protections of due process that government agencies, including 
the right to counsel
    Mr. Sherman. So a secret grand jury and a public trial. 
Sounds familiar. That sounds like how we do business in this 
country. We don't punish somebody because we want to 
investigate them.
    I want to go on to Mr. Golden. Well, the chairman believes 
in cost-benefit analysis with regulations. You say that 
accounting standards are not intended to drive behavior, and 
they are not, but when you violate every accounting principle 
for the convenience of accountants and provide tens of billions 
of dollars of punishment to those companies that choose to do 
research, can you ignore that you are driving behavior?
    Mr. Golden. I have enjoyed the conversations we have had 
over the number of years regarding the accounting for research 
and development. As we have completed a number of standards 
this year, we began to plan our future agenda, and a few months 
ago we issued for--
    Mr. Sherman. If I can interrupt. I talked to your 
predecessor. I talked to your predecessor's predecessor. I 
talked to your predecessor's predecessor's predecessor. I 
talked to your predecessor's predecessor's predecessor's 
predecessor. And they have all promised to look at this and 
they have all done absolutely nothing, and you sound just like 
them. So telling me that you are going to finally go back to 
good, solid accounting of matching--of expensing and 
expenditure when it generates revenue, you know you are not 
going to do that. I know you are not going to do that. It is 
pretty clear that your decisionmaking process is broken. Please 
proceed.
    Mr. Golden. A few months ago we issued for public comment 
four very important issues that have been raised by a number of 
stakeholders. One of those was the accounting for intangible 
assets, including research and development. We plan to seek 
feedback throughout the fourth quarter and have a public 
discussion with our stakeholders as to whether or not we should 
change the accounting for intangible assets, including research 
and development, and I look forward to talking to your office 
as that process continues.
    Mr. Sherman. I look forward to a situation in which--you 
can't build a two-story apartment building in my community 
without a public hearing, Freedom of Information Act request, 
and people paying attention. But you can do damage to the 
entire state of science and research for decades, and as long 
as your ruling comes out of Norwalk, Connecticut, nobody pays 
any attention. There is no Senate confirmation. There is no 
freedom of information. There is no cost-benefit analysis, and 
there is no open meetings act. Just because accounting is 
boring doesn't mean it is not important.
    I yield back.
    Mr. Poliquin [presiding]. Thank you, Mr. Sherman.
    Mr. Hultgren from Illinois.
    Mr. Hultgren. Well, I do want to express my appreciation to 
Chairman Garrett for holding this series of oversight hearings 
on our capital market. I especially want to thank Chairman 
Bruce Poliquin for doing such a great job chairing this 
committee. And I hear Maine is beautiful this time of year. All 
of you, grateful that you are here. This is important.
    Mr. Colby, if I can address my first question to you. As 
you might be aware, Chair White stated last week that the 
Commission is close to finalizing amendments on rule 15b9-1 
that would require more firms to register with FINRA. I am 
hearing concerns about the impact on the options markets if the 
rule is finalized without changes. Can you tell me why 
expanding FINRA supervision over these new registrants would 
improve option markets?
    Mr. Colby. The purpose of this rule is to extend FINRA 
oversight to entities that are trading outside of specific 
markets and to make sure that they are included in the broader 
audit trail that FINRA currently operates. And so we have been 
in discussions with a number of the participants for the 
options markets trying to identify their concerns. We have a 
filing that is going to go in that is going to have specific 
changes to our fees that apply to trading, which we know that 
they support, and we hope to respond to their concerns in other 
ways through these discussions.
    Mr. Hultgren. I would share their concerns. I mean, I do 
think from at least an initial look, the proposal scope is 
maybe broader than intended and really could do, as oftentimes 
happens up here, harm when we want to do good. Mr. Colby, if I 
can follow up. I am also co-chairman--not follow up but change 
a little bit here.
    I am co-chairman of the Municipal Finance Caucus. I am 
especially interested in assuring that we have a highly 
competitive municipal securities market. I have heard of some 
unscrupulous marketing practices that would suggest States and 
local governments are required to retain the services of 
municipal advisors despite the statute and rule being quite 
clear that this is not necessary. I recently introduced the 
Municipal Advisor Choice Act to address this issue.
    Is this an issue you have encountered in your surveillance 
of the municipal securities market, and would you agree that 
Congress should take all steps necessary to clarify its intent?
    Mr. Colby. I certainly support Congress clarifying its 
intent. We have seen situations where--and brought cases where 
a firm has acted both as advisor and as underwriter in a 
situation, contrary to the law.
    Mr. Hultgren. Okay. Well, I hope we will be able to clarify 
it and make our intent crystal clear.
    Let me switch over to Ms. Kane real quick, if I could. As 
you are aware, Dodd-Frank requires the SEC to promulgate rules 
to make reforms to money market funds, which will go into 
effect next month. A significant portion of the $3.7 trillion 
in outstanding muni debt is held by money market funds. 
According to a September 16 story in the Financial Times, 
assets in tax-exempt funds have dropped by nearly 50 percent 
since standing at $266 billion at the beginning of this year, 
and the cost of borrowing for issuers to States and local 
governments is already beginning to increase significantly. 
What cost-benefit analysis did your office conduct on this rule 
and how did you contemplate the increased cost in borrowing for 
issuers and how did you weigh this with investor protection?
    Ms. Kane. So I am aware of the issue that you referenced. 
The Office of Municipal Securities monitors the municipal 
securities market and current developments in that market. The 
Commission's Division of Investment Management is responsible 
for administering the Commission's rules on money market funds. 
I am generally familiar with their 2014 amendments, which I 
think is what you are referencing, and would note that these 
amendments are not yet effective. They are scheduled to become 
effective in October of this year. There are many factors 
investors may be considering in their determinations in how to 
allocate capital. The current low interest rate environment may 
be one of those factors that investors are considering 
currently.
    Mr. Hultgren. We may follow up, if that is okay, and find 
out who we should direct a question to directly of just, again, 
looking at cost-benefit analysis, certainly seeing higher costs 
and concern in the significant decrease this year.
    I just have a few seconds left. Let me address my last 
question to Ms. Kelly, if I may. You note in your written 
testimony that the MSRB advances transparency of the municipal 
securities markets in three ways. One, through rulemaking; two, 
through your website, the Electronic Municipal Market Access; 
and, three, by encouraging timely disclosures. I wonder if you 
could please discuss briefly some of your initiatives in this 
space. I am sure we can all agree that market transparency is a 
crucial thing.
    Ms. Kelly. Thank you. Yes, on transparency, again, it is 
really a fundamental activity that we find to be certainly as 
important as rulemaking. This year, the board of directors has 
approved making third-party yield curves available on EMMA, 
adding a new issue calendar, enhancing the EMMA user experience 
for various types of users for the EMMA system, and we are also 
exploring whether or not there are certain kinds of pretrade 
information that might be helpful, especially for retail 
investors. We want to study the impact of our regulatory 
framework continuing our retrospective rule review. And 
finally, on the education front, we have recently launched our 
Muni Ed Pro system, which is a learning management system that 
we are making available to all market participants and 
including investors and issuers with courses over this year. We 
really want to empower market participants to really understand 
the market to make the decisions and to know what kinds of 
questions to ask their market professionals.
    Mr. Hultgren. Okay. Thank you.
    Chairman Poliquin, you have been very generous, and I 
appreciate that so much. I yield back to you.
    Mr. Poliquin. Well, it is the fall in Maine. You are very 
welcome, Mr. Hultgren.
    Mr. Ellison from Minnesota is recognized for 5 minutes.
    Mr. Ellison. Thank you, Mr. Chairman.
    My first question is directed to Mr. Doty, chairman of the 
Public Company Accounting Oversight Board. Section 404 of 
Sarbanes-Oxley Act is a cornerstone in providing public 
confidence in financial statements. Section 404 requires firms 
to include information concerning the scope and adequacy of the 
internal control structure and procedure for financial 
reporting in their annual report.
    What are the benefits of section 404(b) to investors?
    Mr. Doty. I am sorry, sir?
    Mr. Ellison. What are the benefits of section 404(b) to 
investors?
    Mr. Doty. Well, it is a fundament of good accounting, we 
believe, that there be good internal controls. Good internal 
controls have proven over time, Congressman, to be the best 
tool we have for early detection of problems and the prevention 
of fraud.
    Mr. Ellison. Thank you. And since Sarbanes-Oxley was passed 
in 2002, have costs for the implementation gone down? And if we 
roll this back to cover fewer and fewer companies, what would 
be the impact?
    Mr. Doty. The cost has gone down, as you rightly point out, 
because companies, I think, have gotten better and auditors 
have gotten better at working with companies to spot earlier 
the improvements in internal controls that are needed. We would 
like to think that as the process continues to evolve, that 
without regard to the very largest companies or the midsize or 
even smaller companies, there is an advantage to adopting and 
implementing the best internal control system that you can 
find.
    I am quite aware of the fact that there is a statutory 
issue here, and I don't want to suggest that we have 
disregarded the JOBS Act and the position of emerging growth 
companies, which have a different and competing statutory 
purpose.
    Mr. Ellison. Are you concerned at all that if section 
404(b) covered fewer and fewer companies, that some of the 
internal controls that are so important--as you correctly point 
out, in my opinion--are you concerned that some of those 
controls will be relaxed and we could introduce more risk into 
the system?
    Mr. Doty. Congressman, we do see a change in the view of 
audit committees and boards, and there is a perception 
spreading in corporate America, which I think is very healthy, 
that if you are on a board of directors, you want to know they 
have good corporate--good internal controls. One of the 
achievements of Sarbanes-Oxley, I think, might be that over the 
time that we have had it, and over the 14 years of the PCAOB's 
existence, the advantages of internal controls for the board of 
directors as well as the stakeholders is becoming apparent. And 
so many of the people on audit committees to whom we speak--and 
we meet with businessmen and audit committee people all the 
time--we continually hear this said, that most responsible 
directors would not consider going on a board of directors now 
that did not have an integrated audit of internal controls.
    Mr. Ellison. Well, I just want to say that there is a lot 
of criticism in this institution of Congress about regulation, 
but Sarbanes-Oxley didn't come about because everything was 
going great. And if we relax those requirements, I am concerned 
that, you know, some of the trouble that we saw back then could 
return. That is just my own view.
    Let me ask you this also, Mr. Doty, regarding the issue of 
technology. I think technology has always had and will continue 
to have a transformative impact on the financial statement 
audit. And I am eager to see the SEC implement Inline XBRL, 
eXtensible Business Reporting Language, and I have opposed 
efforts from certains of my colleagues to reduce XBRL coverage.
    When it comes to audits, we know that the ability to 
analyze vast amounts of data, access it remotely, and create 
digital audit trail will change the audit forever. How will 
technology impact the accounting profession and the PCAOB?
    Mr. Doty. We are keenly aware, Congressman, of the need to 
maintain our cutting edge and our investment in innovation. It 
will be incumbent on us to understand the tools of technology 
that are being used by audit firms to appreciate the extent to 
which they can meaningfully contribute to a better audit. That 
is a project the firms have now that will go on for a long 
time, and it will be important for us to recognize that, to 
adjust to it, to be able to evaluate how good their tools are 
and how competent they are at using their tools. That will be a 
technical challenge for us. We will have to maintain investment 
in technical skills and the data ourselves to do that.
    Mr. Ellison. Well, I have run out of time, so allow me to 
thank the panel.
    And I yield back.
    Mr. Poliquin. Thank you, Mr. Ellison.
    I recognize myself for 5 minutes.
    Ms. Kane, you run the Municipal Securities area at the SEC?
    Ms. Kane. That is correct. I am the director of the Office 
of Municipal Securities.
    Mr. Poliquin. Yes, ma'am. When I was the State treasurer up 
in Maine, I came from the private sector and we were trying to 
do things quite differently to save as much money as we could 
for our taxpayers. And one of the things that was a big 
surprise to me when I arrived, Ms. Kane, was the history in our 
State of using negotiated bond sales instead of competitive 
bond sales. And I always found this quite unusual, especially 
when we were dealing with a plain vanilla offering, a general 
obligation offering from State treasury, in that when the 
legislature would come to us and say, you know, we need to 
build a new road or we need to build a new bridge, or what have 
you, or when some of our smaller rural communities needed to 
pool their offerings and raise money that way.
    And I know if the credit is a little bit unusual and 
negotiated sale makes a lot of sense, but what we used to do, 
Ms. Kane, for the first time, is introduce a competitive 
process and such that we would get all the information to all 
of the investment houses out and say, we are going to market on 
Tuesday at 10:30. We would push the button. We would sit behind 
the computer and we would watch the bids come in. And I 
remember when we would get a dozen or so many or so bids, we 
would drive down the interest rates in a very transparent way, 
no hidden cost. And we saved the taxpayers a boatload of money.
    Now, my question to you is, in the work that you do over at 
the SEC, are States required--or municipalities required to 
employ the services of independent advisors with respect to 
this function? Because we did. We had a very small staff at 
State treasury and we didn't have the depth of personnel that 
we needed to to get this done. But what I found, it was very 
refreshing when you had an independent set of eyes and set of 
experience that could advise the folks that were borrowing the 
money for the taxpayers of Maine to build the roads and 
bridges. It was helpful to say, you know, Mr. Treasurer, I 
think we can do very well with a competitive bond sale here 
instead of a negotiated one here and not succumb to the 
pressures of Wall Street.
    What are your thoughts about that?
    Ms. Kane. Well, the decision to incur debt at the State and 
local level is a State and local government decision. The 
decision to hire market professionals is a State and local 
government decision. The SEC does have authority over municipal 
securities brokers and dealers and municipal advisors. 
Certainly, the municipal advisor registration rules bring a new 
class of SEC registrant into SEC registration exams and 
enforcement.
    One of the benefits, as you pointed out, of hiring a 
municipal advisor by a municipal entity is that that municipal 
advisor owes a fiduciary duty to the municipal entity client 
and can help the municipal entity client evaluate the advice 
coming in from other transaction participants, can help 
evaluate conflicts of interest. It is someone standing next to 
the municipal entity advising them, acting in their best 
interests.
    Mr. Poliquin. I always found in our work at Maine State 
Treasury, Ms. Kane, that in a negotiated sale, there tended to 
be a lot of hidden fees, you know, the cost of issuance, where 
a lot of things could be in there that wouldn't be clear to the 
taxpayers who are eventually paying for all this. And have you 
found in your work at the SEC that there have been surprises or 
abuses in that regard with respect to that type of sale?
    Ms. Kane. With respect to negotiated versus competitive?
    Mr. Poliquin. Yes, in the cost of issuance.
    Ms. Kane. I would have to take that back to our Office of 
Compliance Inspections and Examinations, but I am happy to get 
back to you on that.
    Mr. Poliquin. Would you mind? And we look forward to that, 
and I thank you very much.
    Mr. Golden, I know that in the work that you folks do you 
try to always assess the cost and the benefit with respect to 
dealing with the space that you are in. Do you folks have a 
very rigorous process, not only to look at specific companies, 
but also in aggregate, look at whole different sectors of the 
economy when it comes to assessing the cost and the benefit of 
your regulations?
    Mr. Golden. We do have a very robust and transparent due 
process. All of our board meetings are in public and all of our 
discussions are communicated in a basis for conclusion. We do 
meet with a number of companies. For example, in our recently 
completed project on expected credit losses, we met with over 
200 users and over 100 different companies and received over 
3,000 comment letters. What we were trying to do is to 
understand what is the cost that the company will incur upon 
transition and what is the cost it will incur over time. We 
then compared that to the benefit that the investor will 
receive with respect to more information.
    Mr. Poliquin. Great. Thank you very much. My time has 
expired.
    I don't believe there are any more individuals here looking 
to ask questions of our witnesses today.
    I would like to thank all the witnesses today for your 
testimony.
    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.
    And without objection, this hearing is adjourned.
    [Whereupon, at 3:36 p.m., the hearing was adjourned.]







                            A P P E N D I X



                           September 22, 2016
                           
                           
                           
                           
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