[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]



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

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




                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION
                               __________

                           DECEMBER 12, 2023
                               __________


       Printed for the use of the Committee on Financial Services

                           Serial No. 118-64 
                           





                           
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                                 ______

                   U.S. GOVERNMENT PUBLISHING OFFICE            

55-208 PDF                 WASHINGTON : 2024            
            
            
            
            


















                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                   Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas, Vice          EMANUEL CLEAVER, Missouri
  Chairman                           JIM A. HIMES, Connecticut
TOM EMMER, Minnesota                 BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia            JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
WARREN DAVIDSON, Ohio                JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee                 VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin               SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina      AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina         STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania             RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York
ANDREW GARBARINO, New York           SYLVIA GARCIA, Texas
YOUNG KIM, California                NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida               WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska                 BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director 
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                    Subcommittee on Capital Markets

                    ANN WAGNER, Missouri, Chairwoman

FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California, Ranking 
PETE SESSIONS, Texas                   Member
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas                DAVID SCOTT, Georgia
TOM EMMER, Minnesota                 JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
DAN MEUSER, Pennsylvania             SEAN CASTEN, Illinois
ANDREW GARBARINO, New York, Vice     WILEY NICKEL, North Carolina
  Chairman                           STEPHEN F. LYNCH, Massachusetts
MIKE LAWLER, New York                EMANUEL CLEAVER, Missouri
ZACH NUNN, Iowa
ERIN HOUCHIN, Indiana 




















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    December 12, 2023............................................     1
Appendix:
    December 12, 2023............................................    31

                               WITNESSES 
                               
                       Tuesday, December 12, 2023

Cook, Robert W., President and CEO, Financial Industry Regulatory 
  Authority (FINRA)..............................................     6
Jones, Richard R., Chair, Financial Accounting Standards Board 
  (FASB).........................................................     7
Williams, Erica Y., Chair, Public Company Accounting Oversight 
  Board (PCAOB)..................................................     4

                                APPENDIX

Prepared statements:
    Cook, Robert W...............................................    32
    Jones, Richard R.............................................    50
    Williams, Erica Y............................................    56

              Additional Material Submitted for the Record

Cook, Robert W.:
    Written responses to questions for the record from 
      Representative Garbarino...................................    67
    Written responses to questions for the record from 
      Representative Meuser......................................    70
    Written responses to questions for the record from 
      Representative Waters......................................    64
Jones, Richard R.:
    Written responses to questions for the record from 
      Representative Waters......................................    78
Williams, Erica Y.:
    Written responses to questions for the record from 
      Representative Waters......................................    79

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

                              ----------                              

                       Tuesday, December 12, 2023

                            U.S. House of Representatives,
                            Subcommittee on Capital Markets,
                                Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2128, Rayburn House Office Building, Hon. Ann Wagner 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Wagner, Lucas, Sessions, 
Huizenga, Hill, Steil, Meuser, Garbarino, Lawler, Nunn; 
Sherman, Scott, Gottheimer, Casten, and Lynch.
    Ex officio present: Representative Waters.
    Chairwoman Wagner. Good afternoon. The Subcommittee on 
Capital Markets 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.''
    I now recognize myself for 5 minutes to give an opening 
statement.
    I want to thank you all for joining us today to discuss our 
financial regulatory landscape. It is incumbent upon this 
committee to highlight the indispensable roles of the Public 
Company Accounting Oversight Board (PCAOB), the Financial 
Industry Regulatory Authority (FINRA), and the Financial 
Accounting Standards Board (FASB), in upholding transparency, 
accountability, and stability within our markets. However, 
recent developments have raised significant concerns, 
necessitating a thorough review of their approaches and 
impacts.
    Let's begin with the PCAOB. Recently-proposed amendments, 
notably the Noncompliance with Laws and Regulations (NOCLAR) 
proposal, raise red flags regarding the potential overextension 
of auditors' responsibilities. As Full Committee Chairman 
McHenry and I noted in an August letter to the PCAOB, these 
amendments not only divert crucial resources from the primary 
focus on auditing financial statements but may also compromise 
audit quality. And the anticipated costs associated with these 
changes are staggering, potentially comparable to the Sarbanes-
Oxley Act (SOX). This could lead to an alarming $18.2-billion 
fee increase, a burden that would ultimately fall on everyday 
investors. Moreover, the PCAOB's new approach upends U.S. 
auditor independence and forces them to function as law 
enforcement agents.
    Now, turning to FINRA, I, and many of my colleagues are 
concerned that FINRA has strayed too far from its original 
purpose. It has developed into an overzealous and 
unaccountable, I am going to say quasi-governmental entity, 
that looks and acts a lot more like the SEC than the member-
driven SRO that Congress originally established. The 
composition of its board, primarily consisting of individuals 
not directly involved in the industry, raises particular 
concerns around accountability. Moreover, we have questions 
about FINRA leadership's supervision of its operations and 
activities, including its enforcement function, which market 
participants tell me is inflicting unnecessary and excessive 
costs and uncertainty on the industry.
    As a self-regulatory organization (SRO), we would also 
expect to see increased formal engagement from FINRA on issues 
critical to the brokerage industry. These include, but are not 
limited to, the SEC's proposed Regulation Best Interest (Reg 
BI), a rule which FINRA has had on its books and effectively 
enforced for decades; the so-called predictive data analytics 
rule, which would strike at the heart of the brokerage 
industry's ability to serve its customers with basic 
technology; and the substantial costs and privacy concerns 
associated with the Consolidated Audit Trail (CAT).
    And yet, FINRA has declined to provide formal comments to 
the SEC on many of these key issues, showing too much deference 
to SEC Chair Gensler and his progressive agenda. For far too 
long, FINRA has escaped serious oversight from this committee, 
and now, under Republican leadership, those days are over.
    Finally, FASB's recent initiatives warrant attention, 
particularly its approach to income tax disclosures and the 
inclusion of sustainability reporting in its 2023 Strategic 
Plan. While supporting FASB's goal of offering valuable 
information to investors, we must ensure that these new 
projects are not influenced by activists and don't serve as a 
conduit for pushing social and political agendas into Generally 
Accepted Accounting Principles (GAAP). In light of these 
pressing issues, it is imperative for Congress to closely 
scrutinize proposed changes, regulatory expansions, and their 
comprehensive effects on market efficiency, investor trust, and 
the robustness of our financial systems.
    I want to urge all panelists today to engage in thoughtful 
and collaborative discussions addressing these concerns. 
Congress keeps a vigilant eye on these developments, and it is 
imperative that our regulatory frameworks align with market 
needs, bolster accountability, and stimulate growth, while 
upholding the highest standards of integrity and transparency. 
And I thank you all for being here today.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentleman from California, Mr. Sherman, for 4 
minutes for an opening statement.
    Mr. Sherman. Thank you for holding this hearing. Nothing 
could bring more joy to a Certified Public Accountant (CPA) who 
serves on this committee than bringing these witnesses before 
us.
    A lot of us in Congress make sacrifices because we want to 
play an important role in making national policy, so we are a 
little jealous of the people in front of us since they also 
make very important national policy, but they get to do so at 
private-sector salaries and with a level of anonymity of which 
many of my friends and colleagues who have had demonstrations 
in front of their homes could only dream.
    We have a democracy in which we elect the people who have 
governmental power. With the Executive Branch, you elect a 
President, who then appoints the people with governmental 
power. With the PCAOB, you get third degree: you elect a 
President, who appoints an SEC, who then appoints the PCAOB. 
But with the other two entities in front of us, there is no 
connection between the voters, on the one hand, and the 
exercise of governmental power on the other.
    It is said that elections have consequences, but not when 
it comes to the FASB or FINRA. And I am not surprised at all 
that the crypto world and the crypto billionaire bros want 
their own SRO so that they can have a patina of regulation, be 
in control themselves, and not have that regulation answerable 
in any way to the American people. We hold the President 
responsible for the Federal Aviation Administration (FAA), we 
hold the President responsible, in large part, for the economy, 
and yet the folks in front of us here have very substantial 
economic impact over which no elected official has much 
influence, although we do get to invite them here and talk to 
them.
    Speaking of listening to anybody, I have been working on 
FASB, to repeat FASB No. 2, which requires the immediate write-
off of research expenses. If you build a laboratory, you 
capitalize the cost of building the laboratory. If you do 
research in a laboratory, you have to immediately expense and 
hurt your earnings per share for the work done in that 
laboratory.
    It is true that the financial world has adjusted to this 
pernicious, unjustified, and theoretically bankrupt 
pronouncement, so they think they are already dealing with it. 
But I suggest that if we made people write off the cost of 
building laboratories, fewer laboratories would be built.
    FASB now has a rule for putting crypto on the balance 
sheet. I think crypto is a collection of pet rocks and it does 
not belong on the balance sheet. But what FASB has not done is 
give us accounting standards for environmental, social, and 
governance (ESG) factors, for human resources, or for just 
basic things like same-store sales. I am glad that they are 
working on a definition of EBITDA (earnings before interest, 
taxes, depreciation, and amortization), but there are so many 
measures, and in 100 years, very little has been done in the 
accounting world beyond the income statement, balance sheet, 
and funds statement.
    I would say that the pressure on FASB is that the only 
people they listen to are the stock analysts, and the analysts 
do not have the national economy in mind. They do not have in 
mind the interests of those people who do not use stock 
analysts but make their own decisions. But what the stock 
analysts want is for you to predict the future, which you 
cannot do verifiably, and which you cannot do accurately. But 
what a stock analysts wants to know is not what happened in the 
past, but what is a stock going to be worth in the future.
    With PCAOB, I'm glad we have pretty much dealt with the 
China issue. I led the effort here in the House on the Holding 
Foreign Companies Accountable Act, and the Accelerating Holding 
Foreign Companies Accountable Act, with strong support from 
this committee, and I want to thank everyone involved. And now, 
Mr. Luetkemeyer and I have the Holding Chinese Listed Companies 
Accountable Act, to call for the PCAOB to look at these 
statements annually. Of course, we have seen the recent $8-
million fine of one Hong Kong-based accounting firm.
    So, I look forward to hearing from our witnesses here. And 
I thank you for having this hearing.
    Chairwoman Wagner. Thank you, Ranking Member Sherman. The 
Chair now recognizes the ranking member of the full Financial 
Services Committee, the gentlelady from California, Ms. Waters, 
for 1 minute.
    Ms. Waters. Thank you very much, Madam Chairwoman.
    Today, we will hear what happens when Wall Street and other 
parts of the industry police themselves. So-called self-
regulatory organizations, like FINRA, are tasked with 
government functions that most Americans would assume are done 
by government officials, like writing rules, examining records, 
and levying fines.
    FINRA, whose leadership is appointed by Wall Street, 
imposes weaker penalties compared to government regulators. It 
lets brokers' misconduct go unchecked, permits board member 
conflicts-of-interest, and lacks any cap on executive 
compensation. In fact, FINRA's CEO, Mr. Cook, made $3.6 million 
last year, which is roughly 15 times the salary of SEC Chair 
Gary Gensler. Moreover, the Municipal Securities Rulemaking 
Board (MSRB) has broad-sector, wide regulatory authority 
similar to FINRA, and it was not even invited to testify here 
today.
    Reforms are long overdue. I have already started planning, 
and I hope Members will join me in writing legislation to 
finally rein them in.
    Madam Chairwoman, I yield back the balance of my time.
    Chairwoman Wagner. The gentlelady yields back.
    Today, we welcome the testimony of Ms. Erica Williams, the 
Chair of the Public Company Accounting Oversight Board; Mr. 
Robert Cook, the President and CEO of the Financial Industry 
Regulatory Authority; and Mr. Richard Jones, the Chair of the 
Financial Accounting Standards Board.
    I want to thank each of you for taking the time to be here. 
Each of you will be recognized for 5 minutes to give an oral 
presentation of your testimony, and without objection, each of 
your written statements will be made a part of the record.
    Ms. Williams, you are now recognized for 5 minutes to give 
your oral remarks.

     STATEMENT OF ERICA Y. WILLIAMS, CHAIR, PUBLIC COMPANY 
               ACCOUNTING OVERSIGHT BOARD (PCAOB)

    Ms. Williams. Thank you, Chairwoman Wagner, Ranking Member 
Sherman, Chairman McHenry, Ranking Member Waters, and members 
of the subcommittee. I am grateful for the opportunity to 
appear before you today to discuss our shared commitment to 
protecting investors in the U.S. markets.
    I am obligated to note that I am testifying on behalf of 
myself, as Chair of the Public Company Accounting Oversight 
Board, and my comments do not necessarily reflect the views of 
other board members or PCAOB staff.
    I want to start by thanking you for your commitment to 
holding China accountable. Because of the leadership of the 
U.S. Congress in passing the Holding Foreign Companies 
Accountable Act, the PCAOB secured complete access to inspect 
and investigate registered public accounting firms in China for 
the first time in history. As a direct result of that access, 
the PCAOB recently announced historic enforcement actions 
against China-based audit firms and individuals.
    The days of China-based firms evading accountability are 
over. Our work holding firms in China accountable is just 
beginning. Investors in U.S. markets are more protected today 
because of Congress' leadership, so thank you for your ongoing 
efforts.
    My path to the PCAOB starts with my grandmother. She and my 
grandfather were farmers in Alabama, and she quite literally 
kept what little money she had under her mattress. She did not 
trust it to a bank, let alone the stock market. The problem 
with money under the mattress is that it does not grow. 
Building wealth requires investing, and investing requires 
trust. So when I became the first person in my family to go to 
law school, I chose to go into securities enforcement in order 
to hold wrongdoers accountable and help bolster the integrity 
of, and breed confidence in, our capital markets.
    I am proud to continue serving investors at the PCAOB. As 
with our work in China, protecting investors drives everything 
we do, from workers saving for retirement in Missouri, to 
families investing in California, to businesses creating jobs 
in North Carolina because they can raise money through sound, 
liquid markets, and to anyone across this country who depends 
on the integrity of the U.S. capital markets to realize their 
version of the American Dream. Quality audits protect people, 
and protecting people is what the PCAOB's mission is all about.
    We have three key goals to accomplish that mission: 
standards, inspections, and enforcement. When the PCAOB was 
first getting off the ground in 2003, it adopted existing 
standards that had been set by the auditing profession on what 
was intended to be an interim basis. Unfortunately, far too 
many have not been significantly updated in at least 20 years. 
Our capital markets do not stand still. They evolve constantly. 
Practices change, technology advances relentlessly, and new 
risks emerge.
    To keep investors protected, our standards must keep up, 
which is why we are working to advance an ambitious agenda to 
modernize PCAOB standards and rules. The public comment period 
is an absolutely essential part of that process, and we 
carefully weigh each and every comment we receive.
    At the same time, our Inspections Division is also hard at 
work. Our teams inspect roughly 800 audits in more than 30 
jurisdictions around the world each year. This year, we 
enhanced our transparency by including a new section on auditor 
independence, and a range of other improvements in our 
inspection reports, and we rolled out new features on our 
website to help users access and compare inspection report 
data.
    Finally, we are strengthening our enforcement program to 
ensure accountability, promote deterrence, and protect 
investors. Last year, we imposed the highest penalties in PCAOB 
history. And this year, we have nearly doubled that record.
    Our capital markets are the envy of the world, and they are 
fueled by investor confidence. The role of auditors is to 
bolster that confidence by providing investors with assurance 
that the financial reporting they rely on to make decisions is 
accurate. The role of the PCAOB is to hold auditors accountable 
for living up to that responsibility.
    I am proud of the work we are doing every day on behalf of 
investors, and I look forward to answering your questions.
    [The prepared statement of Ms. Williams can be found on 
page 56 of the appendix.]
    Chairwoman Wagner. Thank you, Ms. Williams.
    Mr. Cook, you are now recognized for 5 minutes to give your 
oral remarks.

       STATEMENT OF ROBERT W. COOK, PRESIDENT AND CEO, 
       FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA)

    Mr. Cook. Chairwoman Wagner, Ranking Member Sherman, and 
Ranking Member Waters, thank you so much for the opportunity to 
discuss the important work that FINRA is doing to fulfill our 
mission under the Federal securities laws to protect investors 
and safeguard market integrity, while facilitating vibrant 
capital markets--I inadvertently left out members of the 
subcommittee, so thank you all as well.
    The last several years have witnessed a period of 
continuing evolution for the securities markets. Throughout 
this time, FINRA has continued to adapt and innovate under the 
close supervision of the SEC, and drawing on our status as a 
private, not-for-profit self-regulatory organization, to 
leverage the expertise of those we regulate, which helps us 
understand and react quickly to market events, enhance our 
regulatory programs, promote compliance, and tailor our 
rulemaking and other initiatives to meet regulatory objectives.
    This afternoon, I would like to focus on three main areas: 
protecting investors; maintaining confidence in the markets; 
and supporting capital formation.
    FINRA's regulatory programs work every day to protect 
investors, particularly retail investors and those most-
vulnerable to potential abuse. We regularly monitor and examine 
close to 3,400 member firms for compliance. When firms fall 
short of their regulatory obligations, we investigate and 
respond appropriately, including through disciplinary actions 
that address wrongdoing, deter misconduct, obtain restitution 
for investors, and remove bad actors from the broker-dealer 
industry.
    The U.S. capital markets are the best in the world, and 
while the vast majority of firms and individuals that FINRA 
oversees are dedicated to serving their clients with integrity 
and professionalism, outliers can pose significant harm to 
investors.
    We recently implemented innovative rules to identify and 
address risks posed by firms and brokers with a significant 
history of misconduct before they can do more harm to 
investors. And we continue to prioritize protecting senior 
investors and vulnerable adults. For example, we adopted a rule 
permitting a member firm to contact a customer's designated 
trusted contact person if they suspect financial exploitation, 
and place a temporary hold on questionable transactions or 
disbursements, as well as a rule that limits brokers from being 
named a beneficiary or holding similar positions of trust on 
behalf of a customer.
    And we are not just focused on senior investors. Research 
by the FINRA Foundation has shown that many new retail 
investors have joined the markets in recent years. These 
investors tend to be younger and more racially and ethnically 
diverse, with lower household incomes and much smaller account 
balances. They also report using complex products and relying 
on social media for investment information. FINRA is seeking to 
adapt and expand our educational content and other tools to 
better support informed decision-making by these investors, 
including delivering content where newer investors seek 
information.
    In addition to protecting retail and institutional 
investors, FINRA, in recent years, has invested heavily in 
technology so that we can better protect market integrity by 
conducting ongoing surveillance of billions of market events 
each day for potential misconduct. FINRA deploys a range of 
sophisticated algorithms to analyze market data and detect 
potential rule violations across markets. We also promote 
transparency by making information on market transactions 
available to the public, which helps inform investors and 
reduce transaction costs.
    Finally, FINRA continually looks for opportunities to 
support capital formation where consistent with investor 
protection, both by addressing unnecessary barriers and by 
stopping activities that could undermine confidence in the 
capital formation process. In recent years, FINRA launched two 
initiatives to identify how FINRA can support capital 
formation. These initiatives have produced results, from 
modernizing our corporate financing rule and public offering 
system, to removing impediments to smaller firms participating 
in the capital formation process.
    In conclusion, as the markets continue to change, and 
retail investors are presented with both new opportunities and 
risks, FINRA remains firmly focused on its statutory mission. 
We look forward to maintaining our ongoing engagement with 
Congress, other regulators, market participants, and the 
investing public.
    Thank you again for the opportunity to be here today, and I 
look forward to answering your questions.
    [The prepared statement of Mr. Cook can be found on page 32 
of the appendix.]
    Chairwoman Wagner. Thank you, Mr. Cook.
    Mr. Jones, you are now recognized for 5 minutes for your 
oral remarks.

        STATEMENT OF RICHARD R. JONES, CHAIR, FINANCIAL 
              ACCOUNTING STANDARDS BOARD (FASB)

    Mr. Jones. Thank you, Chairwoman Wagner, Ranking Member 
Sherman, Ranking Member Waters, and members of the 
subcommittee. My name is Richard Jones, and I serve as the 
Chair of the Financial Accounting Standards Board, also known 
as the FASB.
    Before joining the Board in 2020, I spent over 30 years in 
public accounting, where I was responsible for interpreting and 
applying FASB standards across a wide range of industries. That 
role gave me a deep appreciation for the importance of 
accounting standards in accurately depicting and transparently 
communicating a company's financial condition to its investors 
and other capital allocators.
    Today, I am honored to be a member of an organization that 
plays such a key role in our capital markets. I am also honored 
to appear before you today and answer your questions.
    Founded in 1973, the FASB's mission is to establish and 
improve financial accounting and reporting standards to provide 
decision-useful information to investors and other allocators 
of capital. This includes all investors and allocators of 
capital that use financial statements to make capital 
allocation decisions, from the smallest pension plan seeking to 
maximize returns for its participants, to the largest actively-
traded mutual fund. We accomplish our mission through a 
comprehensive and independent process that encourages broad 
participation, objectively considers all stakeholder views, and 
is subject to oversight by the Financial Accounting 
Foundation's board of trustees.
    Independent standard-setting is both a great asset and a 
great privilege. It is a great asset because it allows the FASB 
to solicit and incorporate diverse views into our process, 
providing investors and other allocators of capital with 
relevant, unbiased information in the most cost-effective way 
possible.
    And it is a privilege because the FASB must continuously 
earn the right to set standards. Every day, we work to earn 
that right by engaging in a robust and inclusive and 
transparent process with the active participation of our 
stakeholders. We are judged by how well we execute that 
process.
    Members of the FASB come from diverse professional 
backgrounds. While each of us brings different experience to 
the table, we are equally committed to our mission to provide 
decision-useful information to investors and other allocators 
of capital, and the continuous improvement of standards that 
constitute U.S. Generally Accepted Accounting Principles 
(GAAP). Our standards are designed to provide investors and 
other allocators of capital with financial, accounting, and 
reporting information for investment decisions. Even so, we 
recognize that other parties may choose to use that information 
as a starting point for other purposes, including regulating 
certain industries, taxation, and other public policy matters. 
How and when GAAP information is used in the adjustments that 
are made is within the discretion of the bodies who choose to 
use GAAP as a starting point.
    We are always available to all parties to answer questions 
about how our standards operate, and we are always open to new 
ways of increasing participation in our process. History shows 
that we make the best decisions when we consider all views, 
which is why stakeholder outreach is at the heart of everything 
that we do. For our standards to be successful, they must be 
able to be applied by accountants, audited by auditors, and 
provide unbiased decision-useful information to investors and 
other allocators of capital.
    The participation of those parties, and other parties in 
our process, is essential. For example, during our most-recent 
agenda consultation process, we solicited a broad range of 
stakeholders' views to help us set the direction of our 
standards-setting efforts. We went out with an open mind, and a 
clean sheet of paper, and applied a rigorous process. And the 
feedback from all of our stakeholder groups was tremendous, 
including a 300-percent increase in investor participation 
since our last agenda consultation in 2016.
    The FASB has made significant progress in addressing that 
input by adding new projects to our agenda, setting direction 
for existing projects, and executing on that revised agenda. 
Our work does not end when a standard has been issued. Our 
ongoing post-implementation reviews of the revenue recognition, 
leases, and credit losses standards continue to help us fine-
tune these areas.
    We recognize that high-quality accounting standards that 
facilitate the effective operation of the capital markets are 
in the public interest. The FASB continues our 50-year journey 
to earn the privilege of setting standards by engaging in the 
robust, inclusive process that has built the comprehensive body 
of GAAP that we have today.
    My written testimony provides more detailed information 
about the FASB and our projects and activities. Thank you for 
the opportunity to appear here today, and I look forward to 
answering your questions.
    [The prepared statement of Mr. Jones can be found on page 
50 of the appendix.]
    Chairwoman Wagner. Thank you very much, Mr. Jones.
    We will now turn to Member questions, and I recognize 
myself for 5 minutes for questions.
    Mr. Cook, as a self-regulatory organization (SRO), there is 
an anticipation for heightened formal engagement from FINRA 
regarding critical issues within the brokerage industry. This 
includes: first, the SEC's proposed Regulation Best Execution 
(Best Ex), a rule that FINRA has effectively enforced for 
years; second, the Predictive Data Analytics (PDA) Proposal, 
which could significantly impact the industry's technological 
services to customers; and third, the substantial costs and 
privacy concerns linked to the Consolidated Audit Trail (CAT).
    Let me ask you first, Mr. Cook, has FINRA sent formal 
comment letters to the SEC on its Best Ex and PDA proposals?
    Mr. Cook. Thank you, Chairwoman Wagner. We have on the Best 
Execution proposal. I do not believe we have on the Predictive 
Data Analytics proposal.
    Chairwoman Wagner. Are you going to?
    Mr. Cook. We do not have a plan at the moment, but we are 
still reviewing the content of the proposal, and it is possible 
that we will.
    Chairwoman Wagner. FINRA has its own Best Execution Rule, 
correct?
    Mr. Cook. That is true, yes.
    Chairwoman Wagner. How long has it been in place, and how 
many times has it been updated over the years, based on 
industry feedback, sir?
    Mr. Cook. I could not answer that question for you today. I 
can say it has been a long time that we have had that rule in 
place, and it has been modified and interpreted with guidance 
multiple times.
    Chairwoman Wagner. Multiple times. Is FINRA's Best 
Execution Rule so deficient that the SEC needs to impose its 
own rule, sir?
    Mr. Cook. I do not believe FINRA's Best Execution Rule has 
been deficient. I do believe it is important to recognize that 
there has always been kind of two tiers of regulation here. The 
SEC has had an approach to Best Execution through the anti-
fraud rules for a long time, and it has had engagement with 
SROs on their Best Execution Rules for a long time.
    Chairwoman Wagner. I am just concerned about expensive and 
costly redundancy here.
    And let me move on. Chair Williams, I am deeply, deeply 
concerned with the PCAOB's NOCLAR proposal, which could compel 
auditors to extend their responsibilities far beyond financial 
statement audits and essentially force them to function as law 
enforcement agents. Over the last 2 years, more than 300,000 
auditors and accountants have left their positions, with many 
of them citing the regulatory environment as a main factor for 
leaving.
    Do you think that this proposal, which adds new liabilities 
and costs to auditing firms and their employees, will make it 
more attractive to join this profession?
    Ms. Williams. Thank you for the question. The NOCLAR 
proposal right now is just at the proposal stage, and it is 
critical for us to make sure that we are getting public comment 
on the proposal so that we can make sure that we get the final 
rule right.
    Chairwoman Wagner. Good. I hope that you are taking 
everything into account here, Chair Williams, from a lot of 
different stakeholders. The NOCLAR proposal is anticipated to 
have a significant financial impact, with estimates indicating 
a substantial increase in auditing fees by $18.2 billion, 
according to the U.S. Chamber of Commerce, and overall 
compliance costs possibly reaching upwards of $83 billion, 
according to the Audit Committee Council.
    Could you provide details on the expected surge in auditing 
firms hiring attorneys and specialized experts to adhere to 
NOCLAR, and what estimates has the PCAOB made regarding the 
associated costs?
    Ms. Williams. Thank you for that question. The PCAOB has 
included an economic analysis in our proposal, and we are very 
interested in making sure that we receive comments on that 
proposal. We thank you, Chairwoman Wagner, and Chairman 
McHenry, for the comment letter that you provided. We are 
reading and weighing every comment that we receive. Many 
commenters have asked us to hold a public roundtable so that we 
could receive even more feedback on that proposal.
    Chairwoman Wagner. I would encourage you to do that. These 
costs are just exorbitant. We have accountants and auditors 
leaving the field, and I do not want to make them police 
officers; they are auditors.
    In addition to auditor fees, I am very concerned that 
NOCLAR would result in an audited company needing to spend 
additional capital and use more company resources than they 
would have previously. Could you elaborate on the anticipated 
financial impact on public companies, specifically on their 
finance teams and other relevant departments, resulting from 
the implementation of NOCLAR?
    Ms. Williams. Yes. We are going to be holding the public 
roundtable in the new year in response to the comments that we 
received thus far. And our intent in the NOCLAR proposal is to 
make sure that hardworking Americans are not put at risk by 
companies who violate rules and standards. We believe that the 
auditors currently have a role to make sure that companies are 
not engaged in fraud, and we are weighing all of the comments 
to make sure that ultimately, we get that final----
    Chairwoman Wagner. My time has expired, Ms. Williams. I am 
so sorry. And if you have any more information regarding this 
question, please submit it for the record.
    And I now recognize the distinguished ranking member of the 
subcommittee, Mr. Sherman, for 5 minutes for questions.
    Mr. Sherman. Thank you. I think there is support for your 
work in NOCLAR, but a lot of investors are at risk when 
companies flagrantly violate the laws that govern them. Sam 
Bankman-Fried is just one example. And I know that you will 
consult with industry and others and try to fine-tune that 
proposal.
    With regard to FASB, I think you are making some real 
progress on software and allowing those costs to be capitalized 
or causing yet software development and other kinds of research 
are almost indistinguishable as to the accounting issues they 
raise, and I hope that you will look at not only doing what you 
are going to do on software, but applying those same standards 
to research.
    Congress spends many billions of dollars incentivizing 
research, and while you can say that your rule of requiring it 
to be immediately written off does not influence behavior, I 
have yet to meet an honest corporate executive who tells me 
that they do not care about earnings per share and bonuses 
which usually rely on that figure.
    But there are a number of other things on the FASB plate. 
Basically, we have dealt with three accounting statements for 
over a century. The third one is only about 50-years-old, and 
that one is just a rate compilation of what is in the income 
statement and the balance sheet. We need more information where 
you write the definitions and we can rely on the number.
    You are working on EBITDA (Earnings Before Interest, Taxes, 
Depreciation, and Amortization) but that is just a 
recompilation of numbers you already have on the income 
statement. Maybe a little fine-tuning.
    Can you give me yes-or-no answers? Do you currently have a 
project to define same-store sales?
    Mr. Cook. No, we do not.
    Mr. Sherman. How about human resource metrics, such as 
average tenure of each employee or turnover rate?
    Mr. Cook. No, we do not.
    Mr. Sherman. And anything on carbon or carbon footprint?
    Mr. Cook. No, we do not.
    Mr. Sherman. Then, you have a lot of work to do.
    Ms. Williams, I think we have already dealt with this, but 
can we count on you to have these roundtables and other 
discussions as you develop additional rules, particularly the 
ones that the chairwoman was talking about?
    Ms. Williams. Yes, we are going to be holding a public 
roundtable on the NOCLAR proposal in the new year.
    Mr. Sherman. Okay. Mr. Cook, you now have a system where I 
can pick the name of an individual broker or brokerage firm and 
use BrokerCheck to see whether it has been designated for 
malfeasance. But what you do not do is just publish the whole 
list, so I can just browse and see names that might be in my 
community. Is there some reason why you do not just publish the 
whole list so I can look at it?
    Mr. Cook. Do you mean the whole list of brokers or the 
whole list of----
    Mr. Sherman. Those that are listed in BrokerCheck as having 
had a history of malfeasance.
    Mr. Cook. You can search in BrokerCheck. Do you mean a 
special list just for those?
    Mr. Sherman. Yes. Just publish the whole list of everybody 
who comes up as malfeasance.
    Mr. Cook. I think the challenge there is we would have to 
define what we mean by malfeasance. BrokerCheck requires a wide 
range of disclosures in the interest of full transparency, but 
they are not all the same. Sometimes, if you just have a 
customer complaint that is unverified, you have something in 
BrokerCheck.
    Mr. Sherman. And can you just browse the whole list and 
look at every name and see what complaints or whatever they 
have?
    Mr. Cook. There is not one specific list for a particular 
type of malfeasance, but we certainly could----
    Mr. Sherman. Or just a list including those who have no 
accusations of malfeasance.
    Mr. Cook. I am happy to take back whether there are ways we 
can change the presentation of the database to address that.
    Mr. Sherman. The SEC is currently working on a Best 
Execution standard as part of its market equity structure. You 
have a Best Execution standard. Have you been talking to the 
SEC about what kind of standard they might have, and is there a 
need for us to have a different standard than the Best 
Execution standard that FINRA has?
    Mr. Cook. We have had conversations with the SEC about the 
design of their proposal. Of course, it is important for us 
that they understand what our rule has covered and our 
experience with the rule.
    They have laid out their own reasons why they may want to 
have their own rule, to be able to enforce it, to be able to 
define policy. I think the question about duplication is an 
important one here, and we would need to address that. If the 
SEC adopts a rule, it does not make sense to have firms try to 
figure out if there is daylight between our two rules, and we 
will need to adjust that accordingly.
    Mr. Sherman. If their rule is tougher, you might not need 
yours.
    Mr. Cook. Right.
    Mr. Sherman. I yield back.
    Chairwoman Wagner. The gentleman yields back. The Chair now 
recognizes the gentleman from Oklahoma, Mr. Lucas, for 5 
minutes.
    Mr. Lucas. Thank you, Madam Chairwoman. I was a member of 
this committee during the oversight hearings held to examine 
the extraordinary market movement back in 2010 known as the, 
``flash crash,'' in which the Dow Jones lost nearly 600 points 
in just 5 minutes, before recovering. In response to the crash, 
the Consolidated Audit Trail (CAT) was established to monitor 
equities and options data across the U.S. markets. FINRA and 
the national exchanges have adopted rules for the CAT with 
which members must comply.
    Mr. Cook, I would like to discuss the operational cost of 
CAT. It is fair to say that CAT has been much more expensive 
than originally anticipated. Does the cost of operating the CAT 
have an impact on the SEC or FINRA's budget, or are all of 
those costs passed on to the members?
    Mr. Cook. Thank you, sir. To be clear, the CAT is operated 
by the consortium of SROs, and I cannot speak for them, but I 
will try to answer your question as best I can.
    Mr. Lucas. Please.
    Mr. Cook. That consortium filed a rule proposal with the 
SEC for how the cost would be allocated amongst the SROs and 
the members of the industry. It does not come out of the SEC's 
budget. It comes out of a fee allocation that has been approved 
by the SEC. We commented negatively on that proposal, I think 
twice, but it has been approved. And it is now being challenged 
in court.
    Mr. Lucas. What steps have been taken to reduce operations 
costs?
    Mr. Cook. Managing the cost is a critical element here. I 
want to point out that the initial estimates for CAT were based 
on an assumption about how much volume there would be, 
essentially, and those estimates turned out to be way off. We 
are now seeing volumes that are 10 times what they were 
estimated to be. And of course, volumes translate to processing 
costs, and storage costs for data, so naturally, the costs are 
higher.
    But it is very important to continue to work to reduce the 
costs. I think there are opportunities to do that going 
forward.
    Mr. Lucas. Continuing down that line, do you have an 
estimate for how much of the costs of CAT are driven by usage 
from regulators and SROs versus simply the processing of the 
incoming data?
    Mr. Cook. I cannot speak for CAT LLC on this, but to try to 
answer your question, I think most of the costs, maybe 75 
percent, have to do with processing the data. I do not know how 
much of the costs are associated with extracting the data.
    Mr. Lucas. Last question on this topic. Is there a 
mechanism in place for market participants to examine the CAT's 
funding and decision-making?
    Mr. Cook. The funding went through notice and comment, sort 
of an SEC approval process, so there were opportunities for the 
industry to weigh in at that point. Some people objected to it, 
as we did. Also, within the CAT structure, I think concerns 
have been raised about the lack of industry participation in 
it. I recognize those. Again, I cannot speak for the CAT LLC, 
but there is a formal advisory committee that helps provide 
advice to CAT LLC, but they do not have voting power.
    Mr. Lucas. Chair Jones, you discussed in your testimony how 
FASB is proactive with stakeholder outreach to identify areas 
of improvement and to potentially develop new accounting 
standards. Are there any new accounting standards that FASB is 
proactively seeking feedback on right now?
    Mr. Jones. Yes, sir. In fact, it is our whole agenda. We 
are benefitting right now from extensive outreach that we did 2 
years ago. As I mentioned in my opening testimony, we do go out 
to our stakeholders with a blank sheet of paper, and ask them 
what should be our highest priorities. I would say we have an 
investor-driven agenda, and we focus on investors who actually 
use those financial segments to drive accounting decisions. And 
as you look through our agenda, those projects all align with 
that.
    Mr. Lucas. Do you believe there are reporting matters that 
Congress would need to first provide a clear directive on 
before FASB introduces a change, or in other words, what topics 
must Congress address before FASB can act?
    Mr. Jones. Sir, I cannot think of any that we need Congress 
to address. I think that we are taking our charge of setting 
accounting standards very seriously, very appropriately, and we 
are focused on that and solely on that, the accounting 
standards for investment purposes.
    Mr. Lucas. On that thought, I yield back, Madam Chairwoman.
    Chairwoman Wagner. The gentleman yields back. The Chair now 
recognizes the ranking member of the Full Committee, the 
gentlewoman from California, Ms. Waters, for 5 minutes.
    Ms. Waters. Thank you very much, Madam Chairwoman.
    Chair Williams, did I understand from your testimony that 
you are an attorney?
    Ms. Williams. Yes.
    Ms. Waters. And you worked at the SEC?
    Ms. Williams. Yes.
    Ms. Waters. And you were in the Enforcement Division?
    Ms. Williams. That is correct.
    Ms. Waters. So, you came to this job with a great 
background and experience.
    Ms. Williams. Yes.
    Ms. Waters. Thank you. I understand that there have been 
Republicans who have criticized you and questioned your ability 
to lead the Public Company Accounting Oversight Board (PCAOB) 
because they say, ``Oh, she is not a certified public 
accountant.'' I want you to know, Chair Williams, that I find 
these criticisms to be entirely without merit and quite 
unacceptable.
    Did you know that all four previously appointed Chairs of 
the PCAOB were all White men, and were also not CPAs?
    Ms. Williams. That is correct.
    Ms. Waters. It is interesting that this criticism is coming 
from Republicans now that we have the first Black woman serving 
as the Chair of the PCAOB. Further, current law limits the 
number of CPAs that can serve on PCAOB's board to a maximum of 
two. This was because Congress designed the PCAOB to have a 
variety of expertise on its board. And today's PCAOB board 
already has two CPAs.
    Chair Williams, I know better than most that when women of 
color rise to positions of power, we are often subjected to 
unwarranted criticisms like this, so I wanted to set the record 
straight. And I also want to applaud you for your leadership. 
For example, the agreement that you reached with China's 
securities regulator better protects U.S. investors. This is an 
agreement that none of the previous Board Chairs were able to 
do.
    With that, I want to pivot to ask you, Chair Williams, 
about the independence of auditors in the aftermath of the 
recent bank failures. KPMG served as the auditor for all three 
of the banks that failed recently, causing many to wonder if 
KPMG was operating on a sufficiently-independent basis.
    What steps has the PCAOB taken to ensure that auditors of 
banks maintain sufficient independence? What other lessons are 
to be learned here, and do you have any recommendations for 
Congress as we continue to look for ways to prevent future bank 
failures?
    Ms. Williams. Thank you for that question. Auditor 
independence is absolutely critical. We have taken several 
steps. First, we have added independence and ethics to our 
standards-setting agenda to make sure that the interim rule and 
those interim standards are up to today's challenges.
    Second, we have expanded the independence information that 
we are providing in our inspection reports. And third, when we 
find independence violations, we do not hesitate to hold those 
who violate our independence and ethics rules accountable, and 
that is an example of one of the recent actions we brought in 
China.
    With respect to the bank failures from earlier this year, 
last year, in June of 2022, the PCAOB put out an alert 
notifying auditors that fluctuations in interest rates could 
pose financial reporting and auditing risks. And then, we 
followed up by adding financial institutions that could be 
subject to those risks to our inspections as a priority area. 
So, that is an area on which we are very focused.
    I cannot talk about enforcement matters, but know that 
anyone who is violating our rules will be held accountable to 
make sure that investors are protected.
    Ms. Waters. Thank you very much. To clarify something that 
I have been thinking about, when you talked about the 
fluctuation in interest rates, was that caused because of 
inflation and the securities that they were holding the 
interest rates at changed, had gone down quite substantially?
    Ms. Williams. In our alert, we notified auditors that 
interest rate fluctuations could definitely pose risks to 
financial reporting and audits.
    Ms. Waters. Thank you very much.
    Let me go back to Mr. Cook. Mr. Cook, FINRA was designed by 
Congress to serve the public interest. Unfortunately, Wall 
Street has gamed the system to stack the boards they would be 
regulating with industry representatives, damaging the 
confidence of investors and policymakers. To understand how 
this infiltration of Wall Street interests has compromised the 
public interest missions of SROs, look no further than FINRA's 
refusal to rid its membership of high-risk broker firms that 
prey on investors, targeting communities of color, immigrants, 
and senior citizens.
    Chairwoman Wagner. The gentlelady's time has expired. The 
gentleman can respond in writing for the record. Thank you.
    Ms. Waters. Thank you, Madam Chairwoman.
    Chairwoman Wagner. The Chair now recognizes the gentleman 
from Texas, Mr. Sessions, for 5 minutes.
    Mr. Sessions. Madam Chairwoman, thank you very much for 
calling this hearing today. I think it is important for each of 
you to be here in front of this subcommittee, and we appreciate 
you.
    Mr. Cook, thank you very much, in particular. I have been 
spending a good bit of time with your organization, and I want 
you to know that I believe that they are doing their very best 
to keep us updated on matters that we have before us.
    I am going to make just a general statement here, but I 
believe it is for Chair Williams. According to the Bureau of 
Labor Statistics, over 300,000 accountants and auditors have 
left their practice in the last 2 years, a 17-percent decline 
in the number of people who are in the industry. A recent 
survey revealed that the regulatory environment makes the 
profession unappealing to many aspiring accountants, with 64 
percent saying it is the deterrent to them pursuing their CPA 
license.
    I think that our chairwoman spoke about not workload, but 
perhaps an overabundance of workload, perhaps maybe an activist 
perspective, as she used that word. And while I do want you to 
have and the industry to have professionals who are up to not 
only change, but an opportunity to see what professional 
training they need and to stay after that, I just wondered what 
is your perspective about hearing this feedback from people 
probably who left or observations they had?
    Ms. Williams. Thank you for that question. We absolutely 
want to make sure that more accounting students are thinking of 
accounting as a profession for them, and also that those who 
are in the accounting profession stay. That is how we can 
continue to protect investors and drive audit quality forward.
    At the PCAOB, we are doing our part, and Congress, in your 
wisdom when you established us, determined that every dollar we 
collect from our enforcement matters should go to accounting 
scholarships. Last, year we provided more scholarships to 
accounting students than any other year in PCAOB history.
    I also am familiar with the survey that you referenced. The 
large majority of the respondents in that survey found that 
people are not staying in accounting, or are not going into 
accounting because of the lower salaries that the accounting 
firms are paying. And that is something that the firms need to 
address. But we at the PCAOB are working to try to alleviate 
the economic impact on accounting students by providing 
scholarships.
    Mr. Sessions. So, you believe you are listening, you have 
read the report, you have discussed it, and you believe it is 
because accounting majors are not being paid perhaps as much as 
they could be in a competitive marketplace. Is that correct?
    Ms. Williams. That was what the survey said.
    Mr. Sessions. That is what the survey said. I have no 
reason really to argue with that. I will tell you that I am 
pretty much in touch with people who are accountants, who feel 
like they believe in their work, and the money coexists with 
each other, and I did not know that, so that is news to me.
    Mr. Cook, FINRA's operating expenses were $1.094 billion--
that is a pretty big operation--and you expect expenses to 
increase by 6 percent. Can you please talk to me about the 
money and the agency and your work?
    Mr. Cook. Thank you for that question, sir. FINRA's mission 
is important and it is important that we fully fund that 
mission. Our revenues come primarily from fees on the industry.
    Mr. Sessions. That is correct.
    Mr. Cook. Our workload has grown over the years, and so, 
too, have our expenses. And we have also made significant 
capital investments in technology to be able to do our work 
more efficiently. I think if you look over the past 10 years at 
the overall growth rate in our expenses and our size, it has 
been well-constrained. Certainly, our expenses have grown less 
than the industry, and less than other regulators, but it is an 
important mission. We have very complex markets with lots of 
investors participating in them, and it is important that we 
make sure we fully resource our mission.
    Mr. Sessions. One last point, Madam Chairwoman, and that is 
in working with Mr. Cook's organization, I am trying to move my 
work as well as their work more to find answers and away from 
less investigation and more directly to the problems that 
people may bring to us. I just want you to know that we are 
involved in that. And thank you very much. Thank you, Madam 
Chairwoman.
    Chairwoman Wagner. Thank you. The gentleman yields back. 
The Chair now recognizes the gentleman from Georgia, Mr. Scott, 
for 5 minutes.
    Mr. Scott. Thank you, Chairwoman Wagner, and first let me 
compliment you on this hearing. This is a most important issue. 
It is one that, as you recall, we have been involved in 
together before, the last time dealing with the horizon of the 
Labor Department.
    But Mr. Cook, let me go to you. In your testimony, you 
outlined how FINRA has been carefully examining member firms 
for compliance with the Regulation Best Interest requirement, 
and you discussed your work in holding firms accountable--very 
important--when they put their own interests ahead of the 
investors' interests. Can you provide for us and give us just a 
brief assessment of the practices that FINRA has observed 
during their review process and through your ongoing talks with 
firms about their preparedness initiatives?
    Mr. Cook. Thank you very much, sir, for that question. 
Oversight of Regulation Best Interest is critical. It is 
something we have been involved with closely since the 
regulation was adopted. We work closely with the SEC because it 
is their rule and they interpret it. They also inspect and 
examine for it, so we want to make sure we are closely 
coordinated.
    In the early days of the rule's adoption, we were looking 
at firms' efforts to come into compliance. There are a lot of 
policies, procedures, et cetera, that they need to adopt, and 
we saw them do so. More recently, we have been focusing on the 
substantive obligations, and we do have findings that we share 
with the public.
    Mr. Scott. And do you believe there is any evidence to 
suggest that since June of 2019, implementation of the 
Regulation Best Interest comprehensive framework has failed to 
work effectively to protect investors and retirement savers or 
has demonstrated a need to make far more aggressive changes to 
the existing rules?
    Mr. Cook. I do not believe so, sir. The rule is still new. 
It is still evolving. The SEC continues to provide more 
guidance about the requirements. But it has done some things 
that were not there before. We have a national standard, a 
general principle that you cannot put your interest ahead of 
your investors. We have specific compliance obligations--
disclosure, conflict review, a care obligation. These all can 
be examined against.
    And most importantly, I think the SEC has created a uniform 
framework across broker-dealers and investment advisors, where 
substantially similar obligations are owed to both. And from an 
investor perspective, that is important. It should not matter 
where you go for your advice; you should get the same 
protections.
    Mr. Scott. And I will note that in 2022, customers filed 
216 arbitration actions alleging a violation of Regulation Best 
Interest through the FINRA arbitration process. That is more 
than five times as many claims as the year before, far and away 
the steepest increase of any type of claim. FINRA has taken 
serious disciplinary actions, imposing a 6-month suspension, 
and significant fines on brokers who recommended transactions 
that were not made in the customer's best interest.
    Madam Chairwoman, I believe that FINRA is doing a 
magnificent job, and I believe they are doing it in a 
remarkable way. And thank you. I yield back the balance of my 
time.
    Chairwoman Wagner. My good friend, Mr. Scott, yields back. 
And the Chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, who is also the Chair of our Oversight and 
Investigations Subcommittee, for 5 minutes.
    Mr. Huizenga. Thank you, Chairwoman Wagner, and to our 
witnesses, it's always good to see you all at various times and 
at various functions over the years. Let me just jump right in.
    Chair Williams, let me start with you. When Congress 
created the PCAOB in 2002, the word, ``independent,'' appeared 
in statute 10 different times. Twenty-plus years later, do you 
believe the PCAOB is living up to the spirit of the law that 
Congress had created, in that it is actually independent?
    Ms. Williams. Yes.
    Mr. Huizenga. Okay. Do you believe that your predecessors 
were able to be independent and free from politicization?
    Ms. Williams. Yes.
    Mr. Huizenga. Now that we have established that, are you 
required, as Chair, to run things through and receive the 
approval of the Securities and Exchange Commission? I am 
referring to new standards, rules, and enforcement actions. 
What level of coordination exists with the SEC?
    Ms. Williams. Thank you for that question. Our enforcement 
activity is independent and we do not run that through the SEC. 
If, however, a respondent wants to appeal a finding of a 
hearing officer at the PCAOB, they can go through the board and 
then to the SEC and then to the Federal court.
    And you asked about standard-setting and rulemakings. Once 
the Board has approved their standard or rule, it does go to 
the SEC for a subsequent approval by the SEC.
    Mr. Huizenga. They have to approve whatever you are working 
on, correct?
    Ms. Williams. In the standards-setting and rulemaking 
areas, yes.
    Mr. Huizenga. Yes, okay. Can Chair Gensler remove you?
    Ms. Williams. Yes. The full Commission actually can remove 
me, not the Chair alone.
    Mr. Huizenga. Okay. Just help me out with this, and I am 
going to go back to my original question. And I am not saying 
you, as a person, because I have gotten to know you over the 
years and I know you are a very independent-minded person, but 
sometimes maybe the structure is not allowing you to do that. 
Are you truly able to be independent, or is this another avenue 
for Chair Gensler to impose an agenda?
    Ms. Williams. The PCAOB does act independently.
    Mr. Huizenga. My colleagues might remember that last 
Congress, I introduced a bill that would essentially fold the 
PCAOB into the SEC. You would still exist. But in testimony 
before this committee, Chair Gensler admitted that the PCAOB 
was, in fact, not independent. That is problematic in my mind, 
and I believe that, frankly, politicization has crept in, and I 
think Congress should really take a serious look at my 
legislation.
    Mr. Cook, yesterday, Chairwoman Wagner and I sent a letter 
to the SEC's Inspector General asking them to conduct an audit 
of the Consolidated Audit Trail (CAT), which you received a 
copy of, and among other things, we asked the Inspector General 
to examine the SEC's jurisdiction as it pertains to the 
collection of personally identifiable information (PII) of 
American investors. Are you concerned that FINRA has the 
authority to access sensitive financial data from everyday 
American investors in the CAT database without evidence or 
suspicion of a crime or violation?
    Mr. Cook. Thank you for that, sir, and I think the 
protection of the data that is in the database is critical. 
There are safeguards around access. Each SRO that could have 
access to it, is to be doing so on a need-to-know basis. I do 
not know whether that applies to the SEC, but I know it applies 
to the SROs.
    So, we have policies and procedures in place to limit who 
can access it and to make sure there are controls around it. 
But I have said before----
    Mr. Huizenga. Let me interrupt you there. In the past, you 
have talked about, ``other approaches,'' when it comes to 
satisfying regulatory needs versus concerns over privacy and 
data security. Can you elaborate on what those approaches might 
entail? We are having a little bit of this conversation, 
frankly, about the Foreign Intelligence Surveillance Act (FISA 
) right now. Who can access very sensitive information, under 
what circumstances, and do they do they not need a warrant to 
do so?
    Please explain a little bit of what you think some other 
approaches might entail?
    Mr. Cook. It is a critical question of whether we got the 
balance right, because on the one hand, the data in that 
database--there are two databases, a transaction database and a 
customer database. The data in the customer database is there 
to help investigations. But if you ask, as a regulator, ``Do 
you want more data?'', they are going to say, ``Yes, I want 
more data,'' but that cannot be the only consideration. We also 
need to think about other considerations, including risk and 
privacy.
    Some of the other ideas that have been considered along the 
way, sir, include limiting who is in that database, large 
traders, which would be a small subset of the people who are 
trading in the markets, having a request response system. So, 
there are some other alternatives that have been considered.
    Mr. Huizenga. My time has expired. I look forward to 
pursuing this in some written questions, as well, so thank you. 
I yield back.
    Chairwoman Wagner. The gentleman yields back. The Chair now 
recognizes the gentleman from Illinois, Mr. Casten, for 5 
minutes.
    Mr. Casten. Thank you, Madam Chairwoman, and I thank you 
all for coming. I am sitting here thinking that with all the 
hearings we do, if you all could show up at every hearing and 
just provide accounting expertise to help inform what is going 
on, it would be helpful.
    I was sitting here reflecting on this hearing. We are 
almost exactly a year to the day after John Ray testified 
here--it was December 13, 2022--on the FTX bankruptcy. I 
remember him describing it as a paperless bankruptcy, and all 
of our chins hit the floor when he said the whole thing was run 
on QuickBooks. Accountant nerds are smiling. We get the joke. I 
say that with love.
    I would like to just dig in a little bit on how accounting 
standards in the crypto industry have evolved since then. Ms. 
Williams, I would like to start with you, because the PCAOB 
recently issued an advisory warning investors to, ``exercise 
extreme caution when relying on Proof of Reserves reports 
prepared by third parties,'' and said that, ``Proof of Reserves 
reports do not provide any meaningful assurance to investors or 
the public.''
    Could you just explain for us what Proof of Reserves 
reports are and why you are concerned, and I would just add, 
before you do that, that some of the public firms have also 
raised these concerns. I think Mazars stopped auditing Binance 
and crypto in 2022, because they said these were being 
essentially presented as audits, but they were not. Can you 
explain what Proof of Reserves reports are and why they are not 
audits?
    Ms. Williams. Thank you for that question. Proof of 
Reserves reports are reports that accounting firms may put out 
regarding the amount of reserves that a particular entity has 
at a particular point in time. They are in no way an audit, and 
they are definitely not a PCAOB audit, and we wanted to make 
sure that we put out a bulletin to investors because some firms 
that are issuing Proof of Reserves reports may be registered 
with the PCAOB, and we did not want investors misled into 
believing that those Proof of Reserves reports were PCAOB 
audits.
    Mr. Casten. Okay. And just so I understand, the Proof of 
Reserves does not say anything about liabilities. Correct?
    Ms. Williams. That is correct.
    Mr. Casten. And it does not say anything about the controls 
that are in place?
    Ms. Williams. That is correct.
    Mr. Casten. Do they use standard accounting practices or do 
they rely on whatever practices the audited firm says to use?
    Ms. Williams. They do not use standard accounting 
practices, and they are not in accordance with PCAOB standards 
or rules.
    Mr. Casten. Okay. I am glad I got that right. And I am glad 
you are calling it out. I think we are all watching what is 
going on with Tether and some of the reports from the Attorney 
General that they may have lied about their reserves and are 
still essentially having these self-attested reports.
    Mr. Jones, in all your time as a public accountant, would 
you ever sign off on a balance sheet that did not include 
liabilities, did not include reserves, and the auditing 
companies set the rules of engagement?
    Mr. Jones. Not as a GAAP-compliant financial statement, I 
did not.
    Mr. Casten. Me, neither.
    I want to shift to FASB. In September, you issued new 
standards that, if I understand it, require fair value 
reporting for any crypto that is held on a balance sheet. Do I 
understand right that exchanges are not covered by that rule?
    Mr. Jones. We issued, for a narrow subset of 
cryptocurrency, rules that would require certain cryptocurrency 
to be accounted for at fair value. That is because prior to 
that, we had two different standards, depending on what 
industry someone was in. For example, funds would have recorded 
crypto and any other investment at fair value, but for 
commercial-type companies, they would record it at lower 
historical cost or fair value, effectively a mark to lowest 
value.
    That is the standard-setting we did. It typically relates 
to commercial companies. As far as the exchanges, unless they 
qualified for some specialized accounting, it would have 
encompassed them.
    Mr. Casten. I guess I ask that because going back to that 
hearing we had a year ago, when FTX was issuing FTTs where they 
were both the issuer, and effectively, the valuer, could they 
still do that under these rules you have right now?
    Mr. Jones. I cannot speak on that fact pattern, because I 
do not know whether they applied GAAP, and if so, whether it 
was U.S. GAAP or international GAAP, or whether they applied it 
well.
    What I will tell you is that our standard excludes related 
party-issued tokens.
    Mr. Casten. Okay. I am about out of time, but I would hope 
that this committee can look into this more, because we talk a 
lot about how blockchain is trackable and auditable and, in 
theory, yes, but I think we have established that it is not a 
balance sheet. And particularly as we work on stablecoin 
legislation, given how big Tether is in this space, I am 
concerned that the accounting standards we have, through no 
fault of you all, but we need to develop rules to make sure 
that we do not have this huge, unaudited or under-audited 
behemoth that is causing collateral damage in the system.
    Thank you all. I look forward to continuing to work on 
this, and I yield back.
    Mr. Garbarino. [presiding]. The gentleman yields back. The 
gentleman from Arkansas, Mr. Hill, who is also the Chair of our 
Subcommittee on Digital Assets, is now recognized for 5 
minutes.
    Mr. Hill. Thanks, Mr. Chairman. I am glad to have the panel 
with us today. Thank you very much. And Mr. Cook, I'm glad to 
see you, from your leadership position at FINRA.
    When Chair Gensler was here a few weeks ago, I had an 
opportunity to talk to him about the Consolidated Audit Trail, 
so I thought I would turn to you and start there. I know you 
have had several questions on it.
    Is it true that it 3,000 individuals have access to 
querying that database?
    Mr. Cook. Thank you, sir. My recollection is that was what 
the plan required the capacity to be. I do not have a number 
for you of how many; that would be something we would have to 
get from CAT LLC.
    Mr. Hill. Would you submit that to me in writing?
    Mr. Cook. I will ask CAT LLC if we can get that, yes.
    Mr. Hill. That would be very helpful. Thank you.
    What is your understanding, regardless of whether it is 1 
person or 3,000 people, as to what the security clearance and 
background check information of the people available to do that 
query would be? Is it just something standard, or is there 
something special attached to that?
    Mr. Cook. I can only speak for FINRA, which is one of the 
agencies that can access the database, but we do have controls 
around who is authorized to do it, what the circumstances would 
be, the training they need to go through, and then, what the 
reasons would be for accessing it. There is a narrower set of 
access requirements around the customer database than there is 
around the transaction database, which has anonymized 
information. And I just want to distinguish that. I know that 
you know the difference, but the transaction database is 
essential for market oversight. I really think it is the 
customer account database where people are most concerned about 
the data privacy issue.
    Mr. Hill. You say it is essential for market oversight, but 
don't the markets, the SROs and FINRA, also basically have 
access to daily market data?
    Mr. Cook. Not on a consolidated basis. This was the problem 
after the flash crash. We have a market with----
    Mr. Hill. And how long ago was the flash crash?
    Mr. Cook. Thirteen years ago.
    Mr. Hill. Okay. And we are still talking about it. But you 
could do a sweep exam if you were concerned about GameStop or 
Apple on any given day, in any given year, and get all the 
transaction data pretty much that same day, if not overnight. 
Right?
    Mr. Cook. If we went back to pre-CAT days on the 
transaction, before we had a transaction database, it would 
take a lot longer than that to pull together. We do not even 
have the old Order Audit Trail System (OATS). I know you are 
familiar with that. That has been decommissioned because of 
CAT. So, the audit trail that used to exist before CAT does not 
exist anymore, at least parts of it.
    Mr. Hill. During a conference in October, you mentioned 
that even your 80-year-old mom's information would be stored on 
the Consolidated Audit Trail, despite the absence of any 
investors being interested in seeing her manipulation of the 
broad market. To me, that sounds like it has a lot of data that 
you do not really need.
    Mr. Cook. That is a concern, I think, that we strike the 
right balance. If we really wanted to go after, just sort of 
look for people who are able to move the market, large traders, 
that would be one way to scale back the scope of this database, 
just focus on----
    Mr. Hill. Would you support that, if that is how it were 
scaled back? Would that not be a fantastic way, just to even 
use it initially, instead of collecting all this data? The 
government does not have a great track record on maintaining 
privacy or stopping people from querying it or letting people 
string concepts together using big data analytics, and exposing 
something that even you say is anonymous.
    Mr. Cook. It is obvious that if you do not collect it, you 
cannot lose it. But whether it is the large trader approach, or 
I think there may be some other approaches, too, that are worth 
considering, we are getting smarter about this as we go 
forward.
    Mr. Hill. Do you have the authority to do that without 
Congress telling you what to do directly?
    Mr. Cook. The CAT LLC, run by the exchanges and FINRA, can 
engage with the SEC, but it would require SEC approval. It can 
be done without the authority of Congress but it would require 
SEC approval.
    Mr. Hill. But do you think, just personally, as the CEO of 
FINRA, that that would be a much more effective, narrowcasting 
way to----
    Mr. Cook. I would love to work with the industry, the 
exchanges, and the SEC to shrink that database down and still 
try to achieve the regulatory objectives.
    Mr. Hill. Quickly turning to Prometheum, which is the only 
Special Purpose Broker-Dealer licensed by FINRA, it is 
essentially a storefront with nothing on the shelves which has 
been approved but nothing is happening, did you work with the 
SEC to approve that application, or did you do that solely 
inside FINRA, in the normal process?
    Mr. Cook. It definitely followed the normal process. FINRA 
decides, ultimately, on the decision of whether to accept the 
new membership application. This particular application, 
because it was under the SEC's Special Purpose Broker-Dealer 
no-action letter, like other applications we have had for that 
type--there are interpretive questions. To get interpretive 
questions about the SEC's rules, we talked to them about 
exactly what is required here, but ultimately, the decision is 
FINRA's to make.
    Mr. Hill. I may follow up with additional questions. I 
thank the chairman for your discretion. I yield back.
    Mr. Garbarino. The gentleman yields back. The gentleman 
from Massachusetts, Mr. Lynch, is now recognized for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman. Mr. Cook, you have 
established, over at FINRA, a Crypto Hub, right?
    Mr. Cook. Yes, sir.
    Mr. Lynch. And you have what they call a Crypto Asset 
Investigation Team over there.
    Mr. Cook. Yes, sir.
    Mr. Lynch. Just recently, we had Mr. Changpeng Zhao over at 
Binance plead guilty, and I think he is a paying a $4.3-billion 
penalty for violating anti-money laundering rules. And then, we 
are waiting for the sentencing of Sam Bankman-Fried. He bilked 
at least a million different investors and stole $10 billion 
worth of customer funds, and he was just convicted of 7 
different counts of fraud. He is facing, I think, jail time of 
up to 110 years. These are the two largest crypto exchanges in 
the world.
    Are there any lessons learned from those two cases, setting 
aside the part that there are no use cases for crypto except 
for trading crypto. FINRA's core responsibility is to protect 
consumers and investors and the integrity of our markets, and I 
am just concerned with the flagrant noncompliance going on in 
this space.
    Mr. Cook. Thank you for that important question, and in 
part, the Crypto Hub and the Crypto Asset Investigation Team 
and other teams within FINRA--the Hub is to pull them together 
to make sure that we are doing that work effectively and that 
different parts of FINRA know what other parts of FINRA are 
doing.
    You asked about lessons learned. I think that there are 
probably many. But one of them is that the traditional rules 
around securities and other regulated products are there for a 
really good reason, to make sure that assets are safe, that 
customers know who is using them and why. As we go forward, I 
think those are important things to keep in mind.
    I want to point out that the SEC has provided some guidance 
that does allow a certain model of broker-dealer to engage in 
crypto asset securities activities. So, part of the Crypto Hub 
and the other efforts you mentioned are really to make sure 
that we are prepared, as people apply, as they are entitled to, 
to work under those no-action letters that were prepared to be 
able to properly supervise them and protect investors.
    Mr. Lynch. I appreciate that. There seems to be a gap, 
though. You have the ability to self-regulate members, but not 
affiliates, is that correct?
    Mr. Cook. That is correct.
    Mr. Lynch. Ms. Williams, I am just concerned. Let's say an 
affiliate of a regulated entity melts down. We have seen what 
happened with, I think it was Signature Bank, and Silicon 
Valley Bank, when there was a perception that the assets--and 
you talked about the Reserve reports--were not as valuable as 
had been posted or reported. When those assets dropped, there 
was a run on the bank. All the customers started to withdraw 
their money, and there was a run on that bank.
    I am just wondering, with crypto being so volatile, does 
that present a risk to our system internally, our banking 
system, and our economy, if outliers, people not being 
regulated, crash and burn, can that come back on our banking 
system if people perceive that there is no strength and not 
enough assets in that bank to answer all claims?
    Ms. Williams. Thank you for that question. In June of 2022, 
the PCAOB put out an alert to auditors warning them of the 
risks that fluctuation in interest rates and volatility in 
certain markets could have, and we also have prioritized the 
inspections of audit engagements involving digital assets and 
financial institutions that may be subject to interest rate 
fluctuations, increased inflation, and volatility in digital 
assets. Those are all areas of focus for the PCAOB.
    Mr. Lynch. Great. And I would just ask this, and I will 
take the answer offline, if you could recommend changes to 
address the special nature of the risks that are being 
presented by a widening use of crypto, that would be very 
helpful to the committee.
    Thank you, Mr. Chairman. I yield back.
    Mr. Garbarino. The gentleman yields back. I now recognize 
myself for 5 minutes of questions.
    Mr. Cook, we have talked about the CAT quite a bit already, 
and again, in the comments you made in October, you were highly 
critical of the CAT. And I understand you told my colleague, 
Mr. Lucas, that the consortium proposed a fee allocation to 
cover the cost of the CAT. However, given your recent comments, 
whom do you believe will ultimately pay for the cost of the 
CAT?
    Mr. Cook. Thank you for that question, sir. I would be 
speculating a little bit, but if this fee proposal goes forward 
the way it is designed, there is allocation to the SROs, and 
then there is allocation to the members. I think in many cases 
it is likely to be passed on if it can be. Ultimately, I think, 
directly or indirectly, it is very likely that this will be 
paid for by investors and by others down the chain.
    Mr. Garbarino. It will trickle down and be passed on to the 
investors. That is what is likely to happen.
    Mr. Cook. I would assume that is what is likely to happen.
    Mr. Garbarino. Thank you. In your view, does the CAT offer 
improved investor protection significant enough to warrant the 
ongoing expenses required to maintain this database?
    Mr. Cook. I think that is an excellent question, sir. I do 
not know how we do surveillance today in this market. We have 
24 different securities exchanges. You have lots of alternative 
trading system, et cetera, et cetera. How do we surveil for 
misconduct across those markets without some type of audit 
trail to be able to do that? That does not mean that we do not 
have to be laser-focused on costs, but I think that is a really 
good area for us to continue to be focused on.
    But the average daily trading volume in the U.S. is $600 
billion a day, so that is a lot of money that is at stake here. 
And I think investors probably expect that regulators are 
looking at what is happening across the markets, and that is 
really the tool that the CAT is intended to provide, the 
transaction database of the CAT.
    Mr. Garbarino. It was also reported that you said it is not 
too late to do the right thing regarding the CAT, to fix some 
of the underlying problems. Can you explain the right thing 
that Congress or the SEC should do to fix the CAT and to 
protect the investors?
    Mr. Cook. Yes, I think that is from the same speech where I 
was sharing a conversation I had with my mother, who shared 
motherly advice that it is never too late to do the right 
thing. And in that context, it was about if we are collecting 
more data than we need to about individuals in the marketplace, 
we can always change the rules and find a better balance. And I 
think the conversation can go in that direction, about, is 
there a better way to be able to make sure we are doing the 
regulatory work we need to do and investors expect us to do, 
but reduce our data footprint if we can?
    Mr. Garbarino. Any suggestions?
    Mr. Cook. I think there have been some ideas that have been 
worked on by the SROs over the years, including one that 
involved a request response system, so you only pull in the 
data when you need it. I think now that we have more experience 
with the database there are some other ideas about how you 
could only go out and get the information when you actually 
need it, so that you are not pulling it in up front. I think 
those are worth exploring because I think they could help 
bridge the difference between the data use cases and the data 
privacy issue.
    Mr. Garbarino. Thank you very much. Chairwoman Williams, 
your July opinion article in The Wall Street Journal stated 
that the audit quality is trending down for the second year in 
a row. How does the PCAOB define audit quality and where can we 
find it? And when you said that the audit quality is trending 
down, does that mean that there has been an increase in 
incorrect financial statements? Can you please help us 
understand the interplay between audit quality, as the Board 
defines it, and the accuracy of the issuer financial statement?
    Ms. Williams. That you for that question. We define audit 
quality by looking at the Part I.A deficiencies in our 
inspection reports, and those are deficiencies that are so 
significant that our staff does not believe that the auditor 
has sufficient appropriate audit evidence to sign their 
opinion. A deficiency does not necessarily mean that the 
financial statements are inaccurate, but it does mean that 
there is a risk that if those statements are inaccurate, the 
auditor would not find it.
    Mr. Garbarino. Is your definition of audit quality public? 
Is that written down, or is it just----
    Ms. Williams. Yes. We note that when we talk about audit 
quality, I always reference that that is, in my opinion, based 
on the Part I.A deficiencies. There are other measures that 
could be used, but we think deficiency rates are a good way to 
measure audit quality because our inspectors are in there 
actually looking at the work that was done by auditors.
    Mr. Garbarino. Thank you. I would like to take more time, 
but I think the Chair would be very mad at me, so I yield back.
    I now recognize the gentleman from Iowa, Mr. Nunn, for 5 
minutes.
    Mr. Nunn. I always appreciate a good Chair who is so fair. 
Thank you very much, Mr. Chairman.
    As I highlighted during the appropriations amendment 
process with Chairwoman Wagner, the Public Company Accounting 
Oversight Board (PCAOB) arguably has gone completely rogue 
under Chairman Gensler, by firing all of the previous Chairs 
and replacing them with a board, at the entire direction 
primarily of two Senators, Elizabeth Warren and Bernie Sanders.
    In a recent proposal from earlier this year, Chair 
Williams, you, as the the newly-replaced Board lead, imposed an 
obligation on auditors to detect and evaluate the company's 
noncompliance with any law or regulation that, ``could 
reasonably have a material effect on a financial statement.''
    Chair Williams, I would like to discuss with you today the 
PCAOB under your leadership, and specifically, Noncompliance 
with Laws and Regulations. I have heard from several of the 
small public firms in my district that this proposal could 
triple their annual costs, roughly $55 billion a year in total, 
with some even estimating over $80 billion--that's, 
``billion,'' with a, ``b.'' Given that these businesses are 
already subject to highly complex and technical laws and 
regulations, both at the Federal and the State level, the 
vagueness and the complex language in your proposals has 
clearly created ambiguity that will only lead to adverse 
outcomes for U.S. businesses and increase the legal compliance 
costs that they are incurring.
    I want to begin with this. Chair Williams, how does the 
Board intend to enhance audit quality, as you stated in The 
Wall Street Journal op-ed from this summer, while at the same 
time reshaping the role of auditors and extending their 
responsibility beyond financial statement audits?
    Ms. Williams. Thank you for that question. The 
Noncompliance with Laws and Regulations right now is just a 
proposal, and we are very much looking forward to public 
comments. We have received a number of comments, and we are 
going to be holding a public roundtable----
    Mr. Nunn. We have heard that, Chair Williams. I appreciate 
that. Let's go deeper then, because now you are asking for 
feedback. So, despite the complex and specialized nature of 
your agency's work, is it correct that the Board currently has 
only two CPAs?
    Ms. Williams. That is correct. Under Sarbanes-Oxley, 
Congress, in its wisdom, determined that----
    Mr. Nunn. And of those two CPAs, is it also correct that 
they voted against this?
    Ms. Williams. That is correct.
    Mr. Nunn. And roughly 80 percent of the firms who commented 
upon your rules are against this. Is that correct?
    Ms. Williams. We have received a number of comments, both 
in favor of the proposal and against it.
    Mr. Nunn. It was 20 percent in favor, and 80 percent 
opposed.
    Ms. Williams. I have not done that calculation.
    Mr. Nunn. I would hope that you would, because now you are 
asking people to come together for a roundtable. Why did you 
not do these roundtables prior to writing this rule?
    Ms. Williams. We did. For the past 19 years, we have 
received feedback from stakeholders on Noncompliance with Laws 
and Regulations (NOCLAR), and a majority of our staff are CPAs, 
and they provided the recommendation on NOCLAR on which the 
board voted.
    Mr. Nunn. I appreciate that. But at the end of the day, the 
only two CPAs on your Board are opposed to this. You are now 
doing roundtables because Chairwoman Wagner asked you about 
feedback, and so you have started this new process of sitting 
people around the table. Yes, we have always received feedback. 
This is not new. But having to do the roundtables is a direct 
reflection of the fact that you are having a full-scale 
rebellion on your rules coming forward.
    Wouldn't you press other members of the Board--let's have a 
conversation here on this--you and the other members of the 
Board decided to press forward when the real accountants in the 
room told you this was wrong. Why did you make that decision?
    Ms. Williams. We received a proposal from, and a 
recommendation from the CPAs on our staff, and the majority of 
our staff are CPAs. Many of them have been working with this 
standard for years, and have seen ways that it needs to be 
improved, in addition to the fact that our stakeholder groups, 
our advisory groups have, for the past 19 years, raised issues 
with regard to the current standard. So, we are just trying to 
be responsive to feedback, because our ultimate goal is to make 
sure that we get the standard right for the protection of 
investors.
    Mr. Nunn. Chair Williams, I think that you need to start 
listening to your auditors who are telling you that this needs 
reform. It is costing all of us more money at our local and 
small business level. And let's get one thing straight: 
Auditors are not attorneys, nor should they have to be. By no 
means, should they be expected to function as law enforcement 
agents in many of the ways that you are asking them to do. This 
proposal diverts auditors' attention and resources away from 
the rigorous evaluation of financial statements, which serve as 
the backbone for our capital markets across everyone's 
districts and their constituencies, and forces them to become 
more of a compliance attorney, and ultimately, an enforcer.
    Please listen to your auditors. Please listen to the more 
than 80 percent of businesses and community members who have 
come back and asked you to change these rules before you put 
them into effect.
    With that, Mr. Chairman, I yield back the remainder of my 
time.
    Mr. Garbarino. The gentleman yields back. The Chair now 
recognizes the gentleman from New York, Mr. Lawler, for 5 
minutes.
    Mr. Lawler. Thank you, Mr. Chairman. Mr. Cook, my 
colleagues and I have repeatedly asked you and the SEC Chairman 
what, if anything, the SEC and FINRA are doing to address the 
threats imposed by Chinese-owned broker-dealers to retail 
investors in the United States. These firms are regulated by 
the SEC and FINRA, and yet some of them reportedly have close 
ties to the Chinese Communist Party (CCP). The threats include 
the potential that millions of Americans' personal and 
financial information could be easily exfiltrated to entities 
or individuals connected to the CCP as they increasingly 
pressure companies to pursue the CCP's goals and to participate 
in China's espionage.
    Generally, Chinese companies are required by Chinese law to 
share data with the Chinese Government. These companies present 
substantial risks to U.S. individual privacy and national 
security.
    This threat needs to be examined, when you consider that at 
least one of these companies reported employees and operations 
in Hunan Province, China. On top of that, Massachusetts 
regulators recently settled a case with Webull, stating that up 
until February 2021, the firm did not have a formally-
designated compliance department.
    Do you recognize the potential threats to American 
investors posed by broker-dealers like Webull, Moomoo, and 
Prometheum, with reported ties to the CCP, and have you taken 
any action whatsoever to address these threats?
    Mr. Cook. Thank you, Congressman, for that important 
question. We recognize the concerns that have been raised. We 
appreciate the interest in the oversight, and we also 
appreciate the correspondence we have had with a number of 
Members of Congress on this front.
    FINRA's role is to make sure our member firms comply with 
U.S. securities laws and with FINRA's rules, under the 
supervision of the SEC. We don't actually regulate direct or 
indirect owners, but when people apply to be FINRA members, we 
certainly look at who are those direct and indirect owners, 
what kind of connections might they have to the broker-dealer, 
and what kind of risks, if any, might that present. But there 
is no flat-out prohibition on direct or indirect owners from 
any particular country or any particular party unless they are 
sanctioned. And we feel like that is a Federal regulatory 
decision, not something for a private SRO to make. But we are 
certainly sensitive to those concerns.
    Mr. Lawler. I will ask you a simple question: Can FINRA 
decide tomorrow to send its small army of examiners and 
enforcement lawyers into Mainland China and investigate 
Webull's registered representatives and brokerage operations 
located there, or use its enforcement authority to compel the 
production of documents maintained by Webull in China?
    Mr. Cook. FINRA's authority allows it to examine people and 
to collect data, and----
    Mr. Lawler. Would you be able to send them to Mainland 
China to do that?
    Mr. Cook. We have the authority to do that. It would 
require them to present where they are, and if they do not, if 
they do not comply with----
    Mr. Lawler. Have you done it?
    Mr. Cook. We have sought information.
    Mr. Lawler. Have you sent investigators to Mainland China?
    Mr. Cook. I am not aware of us actually sending anyone 
over.
    Mr. Lawler. This begs another simple question: If FINRA 
cannot go to China directly, or at least has not taken the 
opportunity to do so, even though you just seemed to indicate 
you have the authority to do so, to inspect and investigate the 
employees and operations of these brokers located there, or 
compel production of documents kept by these firms in China, 
how can FINRA assure American investors that these firms are 
actually complying with financial rules?
    Mr. Cook. The books and records of these broker-dealers--we 
understand that the SEC's rules are maintained in the U.S., the 
full scope. So, we do examine for compliance with the books and 
records that we have, and look at things like, how is 
information being shared, what kind of controls are there 
around that, and so forth.
    Mr. Lawler. Do you have a high level of confidence in the 
information that is kept here in the United States versus what 
Webull has in China?
    Mr. Cook. I cannot speak to any particular firm, but I know 
that this is something that our staff would be looking at. They 
would be looking for compliance with Reg S-P on that front, 
which is the Gramm--
    Mr. Lawler. But how can you look at it if you have not sent 
anybody to Mainland China to go look at it?
    Mr. Cook. We can look at what information is available 
where. These operations that you are referring to are very 
limited in scope, in terms of the number of our overall 
membership. And I am not trying to diminish the issue. I am 
just saying we take a risk----
    Mr. Lawler. They may be limited in scope of your overall 
membership, but I think we can all recognize that there is a 
greater threat to the general public in terms of their privacy 
and information from these companies that operate in Mainland 
China. Do you not agree with that?
    Mr. Cook. I think there are some jurisdictions that we are 
more concerned about, and we absolutely, if we find they are 
not complying with the U.S. rules, will initiate enforcement 
proceedings.
    Mr. Lawler. I yield back.
    Mr. Garbarino. The gentleman yields back.
    I would like to thank our witnesses for their testimony 
today.
    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. I ask our witnesses to please respond as promptly 
as you can.
    The hearing is now adjourned.
    [Whereupon, at 4:19 p.m., the hearing was adjourned.] 
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

                            A P P E N D I X






                           December 12, 2023 
                           
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