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Mr. McCool. We have not taken a position on that, Senator.

Senator SARBANES. Some have argued and actually, it has come up here today—that you cannot put the Federal Home Loan Banks into the same regulatory structure as Freddie and Fannie because there are important differences. I take it your position is that the similarities more than outweigh the differences, and therefore it is sensible to put them all under the same regulatory structure. Is that correct?

Mr. WALKER. That is correct, Senator. There would be some differences, but there are more commonalities than differences, and with regard to mission, safety, security, soundness, there are more similarities than differences.

Senator SARBANES. Thank you.
Thank you, Mr. Chairman.
Chairman SHELBY. Senator Sununu, anymore questions?
Senator SUNUNU. No, Mr. Chairman.
Chairman SHELBY. Senator Hagel.
Senator HAGEL. No questions.
Chairman SHELBY. Senator Chafee.
Senator CHAFEE. No questions.

Chairman SHELBY. Mr. Walker, we thank you, and we look forward to your answers to those last questions and any others for the record. We appreciate your appearance before the Committee and your insights into what we are trying to do.

Mr. WALKER. Thank you, Mr. Chairman.

Senator SARBANES. Mr. Chairman, could I note that the GAO has built up quite a body of expertise on this issue, and I would hope we could be able to draw on the Comptroller General for his counsel and advice as we move forward.

Mr. WALKER. We have great staff, and we are happy to help.
Thank you.
Senator SARBANES. You have a good head of a great staff, too.
Mr. WALKER. Thank you.

Chairman SHELBY. Our next panel will be Mr. Alan Beller, Director, Division of Corporate Finance and Senior Counselor to the Commission on Securities and Exchange; Mr. Richard Carnell, Professor of Law, Fordham University Law School; and Mr. James R. Rayburn, President, National Association of Home Builders.

Gentlemen, we appreciate your patience dealing with the first panel. Your written statements, we have for the record, and we have reviewed them. We would appreciate it if you would sum up as soon as your can your top points here today. We will start with Mr. Beller.


Mr. BELLER. Thank you, Chairman Shelby, Ranking Member
Sarbanes, and Members of the Committee.

I am pleased to have this opportunity to testify before you on behalf of the Securities and Exchange Commission regarding the application of disclosure and reporting requirements of the Federal securities laws to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. These Government Sponsored Enterprises, or GSE's, issue marketable debt to the public. In addition, Fannie Mae and Freddie Mac have publicly held common stock and also issue guaranteed mortgage-backed securities. All of these entities and their securities are exempt from the registration and disclosure provisions of the Federal securities laws. None of the debt securities issued by any of these GSE's is backed by the full faith and credit of the United States.

As to the Commission's historical views on GSE disclosure, since at least 1992, the Commission has expressed the view that because the GSE's sell securities to the public, including debt securities, and have public investors and do not have the full faith and credit backing of Government securities, their disclosure should comply with the disclosure requirements of the Federal securities laws. Mandatory compliance by the GSE's is the objective. Further, the disclosure quality that we seek for the GSE's can only result from becoming subject to the SEC's reporting system. The disclosure quality results not only from the Commission's rules, but also the Commission's and the staff's administration of these rules, including our review and comment processes and our enforcement program.

A 1992 joint report of the Department of the Treasury, the Board of Governors of the Federal Reserve System, and the Commission on the Government securities market addressed attaining that objective through registration. However the means, mandatory registration or voluntary registration, for example, would appear to be less significant than the objective-mandatory compliance with SEC disclosure and other requirements.

I would like to turn to a preliminary discussion of our registration requirements. For purposes of today's subject, two of the Federal securities laws are relevant—the Securities Act of 1933 and the Securities Exchange Act of 1934. Registration under the Exchange Act results in reporting companies providing for disclosure of detailed information relating principally to the company itself. Registration under the Exchange Act also subjects companies to the provisions of the Sarbanes-Oxley Act applicable to issuers.

The Securities Act, by contrast, requires registration by issuers of transactions, namely public offerings of their securities. One result of registration under the Securities Act is required disclosure of essentially the same information regarding corporations as is required for reporting companies under the Exchange Act. Another result of registration under the Securities Act is disclosure regarding the securities being offered. Finally, because Securities Act reg. istration statements are subject to review by the Commission staff, registration can affect the timing of offering transactions.

With that summary, let me turn to Fannie Mae and Freddie Mac. On July 12, 2002, Fannie Mae and Freddie Mac announced that each would voluntarily register its common stock under the Exchange Act and thus become mandatorily subject to Commission reporting requirements. Fannie Mae's registration statement under the Exchange Act was declared effective on March 31, 2003. Freddie Mac has stated that it intends to conclude the Exchange Act registration process after it completes its restatement and audit of the financial statements. I think Freddie Mac's latest information is that they intend to become subject to registration in 2005.

The Office of Federal Housing Enterprise Oversight has also adopted rules requiring the officers and directors of Fannie Mae and Freddie Mac to file with the Commission the insider transaction reports required by the Exchange Act and requires the companies to file with the Commission all proxy documents that are also required pursuant to the Exchange Act.

It has been our focus to date that investors who purchase and sell stock or debt of the GSE's are entitled to the corporate information required under the Exchange Act. Registration under the Securities Act would not result in disclosure of additional corporate information.

Registration of securities transactions by Fannie Mae and Freddie Mac under the Securities Act, especially offerings of their mortgage-backed and other mortgage-related securities, does require consideration of factors not implicated by registration under the Exchange Act. The Commission did not recommend in 1992 removing the exemption from the Federal securities laws for the offer and sale of mortgage-backed and mortgage-related securities of Fannie Mae and Freddie Mac. We seek the achievement of the benefits for investors of registration under the securities laws, but we also recognize that these other factors need to be examined in connection with considering registration.

First, as noted earlier, the review process of the Division of Corporation Finance of registration statements under the Securities Act means that the timing of offerings can be affected.

Second, Fannie Mae's and Freddie Mac's mortgage-backed and other mortgage-related securities are backed by their respective guarantees. Exchange Act filings already would contain important corporate information necessary to analyze those securities as a credit matter.

And finally, registration of offerings of the GSEs’ mortgagebacked and related securities under the Securities Act may raise another significant and complex factor—the impact on the U.S. mortgage market—that we believe should be considered. In particular, a substantial portion, and recently a majority of the GŠEs' mortgage-backed securities have been sold into the so-called “To Be Announced” or TBA, market. These transactions involve forward sales of mortgage-backed securities made up of pools of mortgages not yet identified and in many cases not yet even in existence. Therefore, in a TBA transaction, actual mortgage pool characteristics cannot be disclosed at the time of registration or offering. The TBA standards that those mortgage pools must meet, which have been established by market participants, are already available to the market independent of registration.

In addition, we understand that the TBA market is used to set or "lock in" mortgage rates in the U.S. housing market. A decision to require registration under the Securities Act of offers and sales of mortgage-backed securities should therefore take into account whether and if so, how such registration might impact the mortgage market and especially the operation of the TBA market.

Ì would now like to turn to the Federal Home Loan Banks. The Federal Home Loan Bank System was created in 1932 and is comprised of the 12 banks. The Federal Home Loan Bank System through the Office of Finance is one of the largest issuers of debt securities in the world into the public markets. Approximately $716.9 billion was outstanding as of September 30, 2003.

The Federal Home Loan Banks are exempt from the Federal securities laws because they are GSE's. In the absence of their GSE status, they would be required to register, and the fact that they issue only public debt and do not have public equity would not change their status as required to register as issues of public debt securities. The Banks, because they are exempt, are also not subject currently to the provisions of the Sarbanes-Oxley Act. In September 2003, the Federal Housing Finance Board proposed for comment a rule to require registration with the Commission by the Banks under the Exchange Act. The comment period for that rule ended on January 15, 2004.

The Federal Home Loan Banks have many of the same disclosure issues as any financial institution whose debt securities are issued to, and held by, the public. As discussed earlier, we believe investors in the Banks' debt securities are entitled to the same type of information as that provided by other issuers of public debt. As also discussed earlier, we further believe that the Commission's detailed disclosure rules and filing requirements, review and comment process, and enforcement mechanisms provide the best framework for disclosing information to which investors are entitled.

As is the case with Fannie Mae and Freddie Mac, the focus to date for mandatory disclosure has been the corporate disclosure required under the Exchange Act. Registration of offers and sales of securities by the Federal Home Loan Banks under the Securities Act has not been the focus to date and is not the subject of the proposed Finance Board rule. In particular, as with Fannie Mae and Freddie Mac, disclosure of corporate information following Exchange Act registration is the same as would be required under the Securities Act.

Because of the structure of the Federal Home Loan Bank System, including the Office of Finance, however, there are some issues that may be unique to the Banks that should be taken into account in considering registration. The staff of the Commission has met with members and staff of the Finance Board, representatives of the Banks, and a group of directors of certain Banks, in each case at their request, to discuss the issues that registration under the Exchange Act may raise.

In addition, insofar as registration under the Exchange Act is being considered, we believe there would be no impact on the timing or other aspects of offering transactions as a result of registration.

We have also indicated to the Banks that we would work with them to determine if there were certain requirements, such as the proxy rules, from which it should be clear the Banks are exempted because the publicly held securities that implicate registration and disclosure issues are their debt securities. This would produce the same results as would be the case for corporate issuers whose only public securities are debt securities. And there is a very significant number of very large corporate issuers who fall into that category. In addition to these items, there have been certain accountingrelated issues that have been identified as significant for the Banks in terms of ascertaining our staff's view prior to any registration process. We have met with representatives and advisers of the Banks to resolve those issues, and the resolution is discussed in detail in the written testimony that I have submitted; I do not intend to go into those right now.

In conclusion, the individual and institutional investors who hold debt securities of the banks depend for repayment on the Banks under their joint and several liability, and not a Government guarantee. We therefore believe that applying the Commission's disclosure requirements and processes is the preferred method of helping to ensure that these investors receive the materially accurate and complete disclosures they deserve. If registration by the Banks is pursued, we are committed to achieving that result with maximum protection for investors and maximum efficiency for registrants, consistent with our mission to protect investors.

Thank you again for inviting me to speak here today on behalf of the Commission. I would be pleased to answer any questions that you may have.

Chairman SHELBY. Thank you, Mr. Beller.
Mr. Carnell, welcome back to the Committee.



Mr. Chairman, Senator Sarbanes, Members of the Committee, I am pleased to have this opportunity to discuss how to improve the regulation of the housing GSE's and particularly how to structure a new GSE regulator.

I commend you, Mr. Chairman, for your leadership in focusing attention on these issues, on the weaknesses of current law and the weaknesses of the current structure of OFHEO, and for your resolve to move legislation to correct these problems.

A new GSE regulatory agency should regulate all three housing GSE's. It should be responsible for keeping GSE's safe and sound and for making sure that GSE's carry out their housing mission. It should have permanent funding. It should have the same safety and soundness authority as the Federal bank regulators, including authority to raise capital standards and take enforcement action. It should also be able to appoint a receiver for an insolvent GSE.

I want to focus now on three specific issues—first, the governance of the new agency; second, the need to have an adequate mechanism for handling an insolvent GSE; and third, the double game that GSE's play in talking about their relationship to the Federal Government.

First, governance of a new agency. In structuring the agency, the paramount goal should be to assure the agency's independence from the GSE's and thus to maintain the new agency's integrity, objectivity, and effectiveness. One approach would be to make the agency an autonomous bureau of the Treasury Department, like the OCC and OTS. The Treasury has an institutional commitment to safety and soundness and has the will and institutional credi

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