and treat themselves as caterpillar employees. senator mccain. >> thank you, mr. chairman. the united states corporate tax rate is 35%. but i understand that the effective tax rate at caterpillar was 29% which is 3 percent higher than the average effective tax rate for u.s. corporations. how does that happen? does that include the overseas subsidiary and come? >> yes. senator mccain, that does include. it is a rate that is an average rate on our global business. and so our overall average effective tax rate is 29%. that does include our global business. ..

all business outside the united states. there are some provisions like the r & d credit and the production deduction that are part of u.s. tax law. you would then add some back in for state and local taxes. at the end you come up to 29%. >> i just am curious why it is that you would pay even with the overseas profits, you would still pay a higher effective tax

rate than motion other corporations. >> we do think that is significant, especially considering 65% of our business is -- or more than 65% is outside of the united states. >> when and how often since 1999 has the internal revenue service cadetted caterpillar. >> we are under continual examination, the irs literally sits outside my office in that time frame we have closed '99, two 2001, 2002, 2003, 2004, five -- >> what haven't you closed, what year? >> the 2007 and later years are still under exam. >> they're still under examination. >> uh-huh. >> you are under constant

auditing from the irs. >> yes, we are. >> and they have not claimed you were in violation of irs regulations? >> each year's return provides substantial information, including transfer pricing information, related to international businesses. they propose node adjustments. >> you heard that the phipps panel of -- first panel of witnesses said the irs wasn't doing their job. would you agree with that? >> well, they asked extensive questions about our business. we provided a lot of information to them. answered a lot of questions, reviewed our transfer pricing processes with them. i think they've been pretty diligent. >> maybe you could submit for the record the number of audits and the specific reasons for investigations by the irs that

they gave when they i'd audited you. can you do that? >> certainly, senator. >> the caterpillar obviously can deliver replacement parts anywhere in the world in 24 hours or less. what role does the swiss subsidiary and its dealer network play in making the 24-hour replacement parts delivery possible? >> csarl plays a significant role in that. so csarl is administering dealer out that's you'd. they developed the dealer network, now administer the dealers. they're working regularly with dealers on how best to serve our customers around the world, which includes forecasting the needs of the customers, developing merchandizing, marketing programs, et cetera. >> the parts come from the united states or where? >> parts come from all over the world, specifically csarl does

purchase 70% of their purchase finished parts from ute. they do get parts from other parts of the world also. >> i thank you. i thank the witnesses. thank you, mr. chairman. >> thank you very much, senator mccain. senator johnson. >> thank you, mr. chairman. just getting back to your relationship with the irs. mr. beran you said they're sitting outside your office. how many? on average? >> on average it's a half a dozen or so. they have a number of members assigned but they're in and out. >> so you closed out through 2006 and 2007. >> 2006. >> i they all just looking at 2007 now or looking at all the years in kind of compilation? >> they typically do two or three-year audit cycles. if they get behind they extend. >> in the closed out audits you said they looked at transfer

pricing. that encompasses this entire relationship with csarl and -- because they proposed no adjustments, they've basically given their blessing to what you have done here from the statement of compliance with tax law. -- standpoint of compliance with tax law. >> that's the way i've taken it. there's extensive documents provided each year and they ask questions about it. >> miss legacy, in the scheme of things in terms of the expenses of caterpillar, what is your largest expense? labor? material? >> yeah. it would be the cost to build and make our products, yes. >> okay. and in that hierarchy of costs, where does the tax expense fall? >> it is not the primary driver of our costs. >> but it's a large cost center.

correct? >> yes. >> certainly something that any response management team would take a look at managing just like you manage labor and material purchases. >> correct. >> there's nothing nefarious in trying to minimize the tax burden. >> no. absolutely not. >> you had a whistleblower say you didn't report 2 bridge of -- $2 billion of income tax to the united states. let's say legally or properly or improper, let's just stipulate you saved ourself $2 billion in tax expense by complying with the u.s. tax code. what did caterpillar do with that $2 million or any tax saving you enjoyed because of your compliance with the tax code? >> i'd like to say we did have a foamer employee, he did file an employment lawsuit. that was resolved, and all of his concerns were taken

seriously, and all of the expert, both internally and externally, price waterhouse coopers found there to be no apart -- no merit in his concerns. regarding what we do with that, we continue to invest that in our business and that's why we've seen the growth we have in 1999 we were $20 billion. last year the sales were $56 billion. our exports and our u.s. business grew over that time period. >> you didn't stuff any kind of tax savings in a mattress or pillow case. you put that to use, growing your business. >> correct. >> creating jobs. >> correct. >> both domestically and overseas. >> exactly. >> so, do those tax savings -- we can quibble over who should have claimed those dollars. certainly had we taken them here in the federal government we would have spent it somewhere, but you actually spent it putting people to work. >> we put into it our business

to grow our business, yes. >> what options -- let's say we were able to pass a law here and capture bigger share of caterpillar's income. what options would caterpillar have under that scenario if they texas burden just became too competitive and you constant compete with your global come pit temperatures. >> that's the key. it's really important we have a tax code that allows us to compete fairly in the global marketplace. we're not looking for a free lunch, but we are looking for the ability to compete fairly with companies inside and outside of the united states. >> can you just speak to the relative competitiveness of what you're paying tax-wise to your competitors, the ones mentioned earlier? name the -- >> again, we talked about volvo earlier in the hearing had a much lower effective tax rate. kimatsu -- >> can you give us the relative difference in tax rates?

>> i don't have the exact tax rates. >> mr. beraan? >> it varies year by year depending on their mix of income just like us, but they now have a lower japanese statutory rate. but on top of that they now have a territorial system that allows them to earn money in lower tax environments and can move it wherever they can best employ it in theirs business. >> do you feel that caterpillar is at a competitive disadvantage because of the u.s. tax system, and can you be specific in terms of exactly what is the worst part of it? >> one of the worst parts is the international regime, which taxes much more foreign activity income than any of our competitor nations. so a business like csarl wouldn't -- virtually all of the competitor nations would not tax that business at all.

back in their home country. you just pay the swiss tax. and then the complexity of the u.s. rules that cause us to have to do much greater effort to be able to move money across our foreign subsidiary, particularly back to the u.s. >> do you believe are are you specifically aware of any maybe large contracts you have lost and potentially believe it was because of our uncompetitive tax system? >> i couldn't say that we have lost contracts that way. it would probably come up more if we were looking to buy a company in a foreign competitor could bid more for the company. >> okay. so, puts you at a disadvantage in terms of activity. what total percentage of your sales is parts? >> i don't know. >> anybody on the panel know. >> we actually, senator, don't separate our parts business so we don't have a separate parts

business. it's very integral to our products and our machine products. so it's our business model. >> i was just trying to get a little better feel for the howard-count issue that senator levin was talking about. i view -- this is just my assumption -- that csarl in geneva is kind of a headquarters with limited head count but you have people with other divisions, internationally, with direct reporting responsibility, they may not be called csarl but they are ethe directly reporting to csarl or there's a dotted line. >> that's a very correct assumption. we have a lot of key decisionmakers and a number of employees outside of the united states who do, as you just suggested. they understand our customers and understand the needs of our customers. work with our dealers on everything from financing to inventory management, to understand what the needs are to best serve the customers in that

territory. >> i was trying to interpret the schedule that senator levin was talking not terms of head count. i guess my assumption is -- maybe it's not direct. maybe it wasn't answered because you were being very specific in terms of csarl, but there are thousands of employees that in some way, shape or form are reporting or certainly contributing to -- >> yes -- >> the activities of csarl. is that accurate? >> that's true. >> thank you for your testimony. thank you, mr. chairman. >> saying csarl has thousands of employees? >> again, there-- -- >> animal are you saying they have thousands of employees? >> again, if you're asking very specifically on the legal entity structure of csarl and has a number of subsid areas i know there -- subsidiaries i know there are thousands of employees doing the work of administering

the dealers, manufacturing, filling machines, et cetera, that are part of csarl. >> i don't know -- part of? you say a lot of people communicate with csarl. are you actually saying -- we know how many employees caterpillar has. >> yes. >> how many employees does c done sarl? >> i don't have -- >> approximation number. do you've have an proximate number? >> no. let's look at exhibit 52. the agreement between cat pill larry and c cc csarl. very few employees reallottively and here's what -- >> mr. chairman, can we get the

exhibit number? >> sure. okay. >> who is it that just spoke? >> steven ryan, counsel for the company. the witnesses -- >> i was just wondering since you spoke, for our reporter to know who it was. so at the back of this exhibit 52 is schedule 1. got a number 661 on it. schedule of services to be provided by caterpillar. this is a list of what they do. we got it? >> i have it clerics jew chez following, creating and translating service manuals. provides inventory ability management. provides parts customers services to dealers. processes dealer parts returns.

maintains information systems. provides marketing consulting services to dealers. provides strategic planning and accounting services. now, for the u.s. warehouses, caterpillar -- again, csarl has no warehouses -- caterpillar agrees to manage and monitor inventory levels worldwide and perform expediting services, arrange for transportation of csarl parts, perform general warehousing services and provide warehousing facilities. perform inventory management services, and for all those services on the last page, caterpillar gets reimbursed its costs, plus 5% of those costs. so, basically, caterpillar agreed to keep running the program for csarl. csarl has 65 employees handling parts, could going to your charts no warehouses, no parts inventories, no forecasting or

other software being administered from csarl. my question is would caterpillar perform all of these same services for a third party at cost plus a small service fee while giving up 85% of its profits? miss legacy, would you do that? >> yes. >> you would. >> your question -- >> you're offering to a third party -- >> i thought you asked me if i would -- >> i thought you were making an offer to a third party to buy all that. >> no. i was attempting to answer your question. so, first, you said csarl kept doing it was doing, and csarl and its predecessor company were in business since 1960, doing the work of supporting dealers and selling parts, marketing parts -- >> you are going into what csarl and i'm now telling you what your documents say caterpillar is doing. that's all. and i've read -- did i read it correctly? >> yes, you read the document

correctly. >> okay. >> now, take a look at exhibit 18. 2012, caterpillar board of directors, minutes. look at the first line of the second paragraph. do you have it? exhibit 18. did you get it? >> i'm on exhibit 18. >> second paragraph, says, mr. larson, who is -- >> i don't see that in the document. >> okay. >> is this a board of directors meeting you have, the minutes? >> caterpillar board of directors minutes experts, starts with page 5?

>> look at 1857 at the bottom. page eight. >> okay. >> larson -- you see that there? >> yes. >> next described the efforts to transform the part distribution business from a u.s. -- united states centric model -- 2012 -- efforts underway to transform the parts distribution business from a united states send trachemodle. so, -- centric model. so, february, 2012, a year ago, your parts distribution business is called united states centric. that's what was told to the board of directors. are you aware of that? >> no. i am reading those words on this page. i wasn't involved in this meeting so i don't know the context under which this discussion occurred. but i can tell you that our -- we have employees and parts

being handled all around the world by a number of people, today and have for maybe years. >> i'm -- have for many years. >> i'm sure of that. that's not the question. the question is whether 8515 -- 85-15 is an appropriate split on the parts business. >> i'd like to respond -- >> well, let me keep asking the questions. mr. larson next described the efforts underway to transform the parts distribution machines from a united states centric model -- a year ago -- you're not aware of that discrimination the board of directors. is that correct? you're not aware of that by mr. larson. >> no. i was not a -- >> the this is the first you have seen that? >> if i've seen it, it's been simply for preparation for this hearing. >> now, -- there was a

discussion here at the board meeting, according to the title, on parts growth and distribution facility footprint expansion. that was at the board meeting. did you to the that the board was going to be discussing that in february of 2012? >> i did not. >> now, let me ask you, mr. beran, information which has been provided to the subcommitee by caterpillar shows that 70% of all purchase finished replacement parts sold offshore were manufactured in the united states. that is a chart we're going to put up. that's exhibit 1-f, the same thing as the chart. i think miss legacy you used the same figure a moment ago. is that correct? >> yes. approximately 70% of --

>> purchased replace. parts sold offshore, manufactured in the united states. correct? >> yes. >> okay. which mr. beran -- >> by purchased, by suppliers. >> you agree with that, mr. beran? >> yes. >> how many purchased finished replacement parts are manufactured in switzerland? >> anyway rowing things down to switzerland does not describe -- >> i'm just asking you a question. you would ask yourself a different question. i'm asking you a question. how many parts are manufactured in switzerland. >> csarl manages to. >> cow answer my question, please? i'm not asking you what you think they've managed. i'm asking you a simple, direct question. >> they don't have any manufacturing -- >> thank you. >> in switzerland. >> what percentage of the -- how many warehouses does -- are there in switzerland? caterpillar warehouses, or csarl

warehouses? do you know? >> number to my knowledge. >> do you know how many warehouses there are in the united states? cat pill already warehouse. >> i think we discussioned earlier, around 10. don't knoll the exact number. >> is it true, mr. beran, that caterpillar has its largest parts house and manages the global part inventory in morton, illinois? the largest parts warehouse of caterpillar in morton, illinois. that's my question. >> morton as a very sizable facility. i think it's the largest -- >> thank you. >> but we have large ones in belgium, singapore -- >> not in switzerland. >> not in switzerland. all of them are owned by csarl of one of its subsidiaries.

>> i understand. you say owns. csarl owns that? who owns csarl? >> csarl owns all -- excuse me? >> who owns csarl. >> ultimately owned by caterpillar inc. but every government in the world expects us to report by legal intent. >> so csarl is owned by caterpillar. >> that's correct. >> you say csarl owns the warehouses? >> csarl either owns the warehouses or owns the entity that owns them. >> who owns the entity that owns csarl? >> again, ultimately, caterpillar inc. >> are the names stewart -- and steven larson and barbara hodo -- are those names familiar you?

>> i recognize those names. >> you know those names? >> die. >> do they work in the united states? do you know? >> cue read the his again. >> stewart levny ik, steve ven gosselin, steven larson, barbara hodel. >> yes, all of them work in the united states. >> are they key leaders caterpillar's parts business? >> they are key leaders but, again, keep in mind, we do not have a parts business. >> i'm sure. are they key leaders in the parts part of your business? >> they are key leaders of caterpillar. >> do they work heavily in the parts part of caterpillar, even though it's not signified at parts separately? >> they have, again, especially stu, would have multiple responsibilities that go well beyond parts but tom does have

some responsibilities there also. >> how about steven gosselin? does he have significant -- >> he has significant overall product support responsibilities but, again -- >> does that include parts? >> yes. >> steven larson? >> steven larson has retired. >> barbara hodel? >> barb hodel works in our parts distribution area. >> does she work the the united states? >> yes, she does. >> okay. do you know how many parts, approximately, are warehoused in the united states? >> i do not. >> do you know, mr. beran? >> the number of parts -- >> approximately. within 100 million or so. warehoused in the united states.

would you know, mr. perkins? >> no, i do not. >> how about within half a billion. >> i would say in total, i believe we have just under a million serviceable replacement parts. i do not know how many of those are stocked in the united states. >> would it surprise you to know that there's about a billion and a half parts no -- not types of parts but parts warehoused in the united states? >> i don't know that number. >> okay. it wasn't -- wouldn't surprise you or would surprise you. >> individual, so not part numbers but just individual numbers of parts? i frankly have no idea how many there might be housed in the you'd. >> okay.

>> would you take a look, please, at exhibit 53. >> i don't have an exhibit 53 in my book. thank you. >> do you have it now? >> yes. >> okay. this is the value of -- i want to talk to you about the value of what was transferred to csarl as part of the license. and this is a pwc document that addresses that question.

what intangible property will be transferred from cat inc. to csarl under the replacement parts license? under the replacement parts license. that's what we're talking about. replacement parts. not machines. replacement parts license. into, first, please note that the document talks about parts, not machines. and cosarl refers to what we have been calling csarl. here's here it what was transfer ted patents and designs, parts including patent elements, trademarks, parts sold under cat trademark, contracts, buying from suppliers. caterpillar already has screened. qualified. negotiated prices with. systems and procedures, cat proprietary log information. no how, methods, forecast, estimates. now, if you take a look at

exhibit 51, if you would, page 2, under intellectual property. this was transferred. bill ledge property throughs but notice immigrant led to know how, processes, designs, specifications, engineering standards, trade secrets, inventions, pant tent applications, caterpillar production, customer lists, supplier lists, systems and more. so that -- the neck right -- economic rights to use that were transferred to your subsidiary in a tax haven. would you have transferred all of that anyone but a related party? now you have a chance to answer that question. miss legacy. >> keep in mind that, again,

don't agree with your characterization of a tax haven -- >> you don't think switzerland is a tax haven? >> i don't know the definition of a tax haven. >> oh, okay. you said you disagreed with my definition. >> right. so i -- >> now you say you don't know what the defense mission. >> it's where we have done business and had a headquarters since 1960. >> it's a low-tax jurisdiction under your own documents and that was one of the purposes of the transfers, under your own documents to a low-tax jurisdiction. what's that it says. migrate profits to a low-tax jurisdiction. >> we have had headquarters in geneva since 1960 and found it to be a good base from which to grow our business outside of the united states. >> i'm sure -- >> which has been fairly effective. >> i'm sure you said that take a look again at exhibit 7. benefits. migrates profits from cat inc. to low tax marketing company. that's not irrelevant that it was a low tax marketing company,

or is it irrelevant? that's your own document. read it to you three times. exhibit 7, pain three at the end, benefit: migrate profits from cat inc. to low tax marketing companies. >> this is a pwc document, i believe. i certainly would agree that the tax rate in switzerland is much lower than the tax rate in the united states. >> okay. take -- so, you use words, too, don't you, low-tax countries? don't you ever use those words? doesn't caterpillar use those same words? yes or no? >> we don't use the word "tax haven pay pay. >> how about low tax and high tax? >> countries that are lower tax and others. >> how about low tax. look at exhibit 17.

at the bottom, 5979. this is a -- got cat number at the bottom? you see it? page -- i think it may be page 6. you see that? >> starting at -- >> tax drivers. >> right. >> see that in that oval at the right, losses in high-tax rate countries, profits in low? do you see that? >> i do see that. >> okay. my question is, would you have transferred all that, all of that was in the licensing agreement to anybody but a related party? >> again, to answer that

question, keep in mind that everything that we have done has been at an arm's length standard. so -- >> well, that's my question. will you sell that to an unrelated party? give a license to unrelated party? that's my question. >> that would require a business decision based on the economics of the situation. i can't simply answer that. >> you can't answer that, no? >> no, i cannot. >> okay. i think you wouldn't answer that no. but you can't answer it no because nobody in their right mind would sell to an unrelated party what caterpillar transferred in that license agreement for nothing. >> i think -- >> no company will do that. >> again, it wasn't for nothing, of course -- >> well, nothing -- they kept 15% of the profits and transferred 85% of the profits in the future but no consideration for the transfer. >> again, if you look at the 15% number, if you consider csarl -- i don't think it gives a total pick pure. if of if your sailor's total

lines business about is 30 and then you add on the service fees and subpart f insuring it's actually more than half of the income from csarl that incurs u.s. tax rates. >> misquestion -- my question to you is do you think any company, any company, would transfer with no conversation what was in that license? would you -- are you not able to answer that? i think every corporate executive in the world would answer that but you in front of this subcommittee. there's no way you would transfer that to an unrelated company. is that not true. >> keep in mind -- >> okay. you can't answer that. you can't give a yes or no answer to that. >> i'm trying to answer your question. >> are you able to give a yes or no answer to that question? >> i cannot give a yes or no answer to that question without understanding the full situation and the economics of what you're talking about. >> i'm talking about the license that was given to csarl. >> right.

a license given too csarl and csarl is the organization that developed the dealer network and continued to work with the -- >> had development the dieter network? caterpillar never developed -- >> c charl's red sedes are so company was in business -- >> of course, i'm not saying they didn't help develop a dealer networks but according to your transfer documents the major developer was caterpillar. i'm not saying csarl didn't help develop a network. of course they do. >> the predecessor company to csarl developed deal ever network off another the united states -- >> they helped to develop but caterpillar was the major development of markets everywhere. according to your transfer documents which i've read before. >> again, i don't agree with the statement. >> all right. are patents, trademarks, know

how, crown jewels of the company? >> those are very important, yes. >> they were transferred to csarl, the economic rights to those? is that not true? >> again, there is a -- there was a license agreement -- >> i'm just asking you if it's true. >> my colleague, mr. beran, may be able to talk more precisely about what specifically was -- >> i read it to him before. i read the patentses, trademarks, okay? i read that all to you. >> what was transfer walled the right to use them? >> of course. >> caterpillar did not give them up. they continued to receive compensation for the utilizeddation of those. >> you're just talking about the parts profits they retained. >> the patents wore relate- -- were related not just to the parts -- >> automatic talking about

patents relating to parts. come on. >> the patents were related to design and parts. >> that's what we're talking about. that's what the strategy related to was parts. >> it's an overall license nor entirety over the business. >> including the parts. >> parts are an integral element of our -- >> that's why i say including the parts. >> -- product strategy. >> that's why i say including the parts. >> yes. >> and the parts strategy, the tax distract related to parts. >> it related to the overall business. we were align hogue the product managers and other managers of the company ran the business. >> i understand what you're repeating but aim reading document after document after document relates parts, parts, parts. that tax strategy reef lated -- related to parts, digs not? that's my question. >> the -- >> did the parts strategy relate

to parts? >> it related to parts. >> didn't reef late -- related to parts. did you ever see any parts related in the documents i've read? >> well, senator, if you select documents prepared by people from our logistics business, they will prim marrily talk about parts. >> and you have documents with you've that say what was transferred was something other than parts? >> again, csarl is an integrated entrepreneur -- >> i know. you're talk being threat documents we got. i'm just asking you do you have any other documents? >> i didn't brake any documents. frsh. >> take a look at exhibit 7. >> i'm just going back to this one more time.

this was the proposal that you accepted and implemented for this tax strapping in switzerland. recharacterize marketing company income. recharacterize, mind you -- to achieve tax deferral. look what it said down here? what is left out? out of the chain? >> i'm still -- >> you're having trouble finding -- >> i'm on -- at the bottom. 4619. >> no. 4618. >> okay. >> see where it says, remove caterpillar inc. from the chain of title passage for purchased finished parties. >> yes. >> that's the strategy.

i'm going to read it to you because this is the strategy. to remove caterpillar, itching, from the claim of title passage for purchased finished parts. okay? i don't know -- >> but i believe -- >> i understand there was more than that. i'm just talking being the tax strategy. >> again, the tax strategy was established to follow the business strategy. csarl was set up an an integrity it entrepreneur and included manufacturing facilities and other things. >> let's -- mr. perkins, if you

take a look at exhibit 34, this is a depression that you provided under oath in 2002 about the tax strategy developed by pricewaterhouse for caterpillar involving csarl and the nonu.s. -- when you were asked the in the deposition was there business advantage for caterpillar inc. to have this arrangement -- meaning csarl -- put in place other than the avoidance or deferral of income taxation at higher rates, close quote?

you responded under oath: no, there was not. was that truthful? >> mr. chairman, at the time that i gave that deposition in the employment lawsuit is a couple years after retired in terms of the response to that specific question, that is a true statement, but i would like to have the opportunity to clarify what -- i did not say at that time the activities that associated with the removal of cat inc. from the supply chain did in fact have significant business activities accompanying it. when i responded to this question, i responded negatively, but the point is,

i -- >> i know what the point is now. i'm asking, was it true when you said -- was it true that when you said to the question, was there any business advantage to caterpillar to have this arrangement put in place other than the avoidance -- avoidance -- or deferral of income taxation at higher rates? your answer, no, there was. no my simple question to you -- and i know what you'd like to say now but my simple question to you is: was that true when you said it? >> when i responded, i'm responding from a tax viewpoint, and i look at things from financial impact, certainly from a legal intent standpoint there was a financial advantage, but legal entity changes are transparent to our business units. and so any after-tax benefit

generated creating a financial advantage to the enterprise, that was not reflected on the business unit's performance. >> question: what was the benefit to caterpillar, inc. to have csarl purchase finished replacement parts instead of having cat pill already inc. buy them and sell them to csarl? your answer: it would alter the character of the income from csarl from includable deemed distribution income to the united states. was that true? >> again, from -- >> i'm just asking you, was your answer true? just, yes, it was. >> question. -- same depression -- the advantage to caterpillar inc. would be that it would pay less federal income tax. answer: yes. was that true when you said it? >> yes.

>> mr. beran, are csarl's financial results included within caterpillar's u.s. consolidated financial statement? >> yes, they are. >> are any csarl losses that might come to pass ultimately then be reflected in that financial statement? >> they would in the financial statements. not necessarily reflected in the u.s. tax returns. >> of course. but in that financial statement they would be included. >> in the -- in our con ol' -- afternoon kole dated -- >> consolidated financial statements, yes. >> and csarl's losses are in the

consolidated caterpillar as the parent financial statement. please take a look, if you would, to -- exhibit 17. [inaudible conversations]

[inaudible conversations] >> on page 5984, under -- says cash management crossover cash buildup in geneva.

there's a cash buildup in geneva? you see that page? >> yes. >> okay. caterpillar definition crossover occurs when offshore cash no longer can be accessed in the u.s. without increptal -- incremental u.s. tax costs. fliers you bring that cash to the united states you have to pay tacks on it and even for credit for tacks paid in geneva it indicates you would have to pay 25% on the cash temp bottom it says you are working to, quote, develop tax efficient repatriation strategies, and then on page 12, it lists some of those strategies, with a goal of repatriating $3 billion. talks about loans, tax efficient dividends, prepaying royalties and goods prepayment. did you work on those strategies, do you know, miss

legacy? >> i was not there at that time. i think i can shed some light on this general topic. we are, again, about a 56 -- >> i'm not talking about at that time. have you continued to work -- put it in the present -- on the tax strategies. >> we have approximately $3.5 billion offshore at this point, outside of the united states. and that is available for general corporate use, and can be repatriated without significant additional u.s. tax. most of that money is outside of the united states because it is needed to run our businesses outside the united states. again, 65% of our $56 billion in sales and revenues comes from outside of the united states. >> and how much, if repatriated, would be subject to tax here? >> because of previously taxed information, transactions already taxed the u.s. rate, the

substantially -- a substantial sum can be returned significant amounts can be returned, nearly all of that without any substantial income tax. >> is there any part of that which you'd have to pay a tax on? u.s. tax? >> there might be some very minor but very insignificant. it's available for general corporate use and could be brought back to the united states without any additional significant tax burden in the united states. >> what does this mean tax efficient we patriation strategies. i would can't you just bring it back to the united states? >> i believe this is a 2010 document, and i am not exactly sure of the situation back in 2010 with cash, but again, i'm telling you that today -- i know you have situations of companies that you have talked to that have significant amounts of cash outside the united states that can't be repate treated but

we're not d -- repatriated so but we're not one of those companies. >> how much did you have in cash. >> we have 3.5 billion in cash. >> you could repatriate all of that without u.s. tax -- >> it is available for general corporate use and that cash could come back without significant additional u.s. tax there may be some small amounts there. >> that's what i -- you answered the question. [inaudible conversations]

>> i made reference before to documents written in the 1970s which said that cat inc. had the largest role with regard to market and dealer development. do you agree with that? these were caterpillar documents. i've read them before today and you were here, i believe. exhibit 4-a if you want to look at it again.

>> exhibit 4-a? this is a pricewaterhouse document. >> yes. the same thing was said in 1996, '95, '94, '97. >> right. that was stated by pricewaterhouse, again -- >> correct. i'm just asking you, said cat inc. has the largest role with extraordinary market and dealer develops, gives the reasons, acknowledge or says the marketing companies also have major responsibility for market development. in fact this is their primary responsibility. that's what they do. but it says that the largest role with regard to market and dealer development is cat inc. do you agree with that statement? that's what i'm asking. >> senator, at that time the u.s. market was over half the world. so by definition it would have the largest responsibility

related to that. >> again, as we have said, cosa had the -- the predecessor company to csarl to develop that network outside of the united states. >> by the way, this says, it has the largest role with regard to that for three reasons. the third is, continues to be involved in the development and oversight of worldwide marketing programs and approaches. did you agree with that statement? >> could you point me to they page you're on? >> the same page. >> okay. thank you. >> number three, continues to be involved in the development -- of worldwide marketing programs and approaches. >> i would say most of the specific marketing programs and discounting and merchandizing programs that happened outside of the united states are driven by csarl today. >> okay.

[inaudible question] conversation [inaudible conversations] [inaudible conversations] >> i understand, miss legacy, a dealer cannot be add or dropped from the caterpillar network or significantly change its territory without permission from caterpillar executives in the united states. is that correct? >> we have 178 deleads around the world and i do not know that for a fact. that seems reasonable to me but i do not know that for a fact. we have very -- >> the other two witnesses know if that's true?

>> i do not. >> okay. >> neither do i. >> okay. >> we have very little attrition in our dealer network around the world so that would not happen frequently. >> that i know. i'm just saying it's my understand that a dealer can't beakedded or dropped from the caterpillar network or significantly change it's territory without permission from caterpillar executives in the u.s. and you have no rope not to believe that. >> no reason not to believe that. i don't-door. >> that's what was told to us by caterpillar. >> okay. >> in february, caterpillar launched a major effort to toughen oversight of dealers around the world. are you familiar with that, miss legacy? >> yes blame you're referring to our across the table initiative. -- i believe you're referring to the across the table initiative. >> it's not sure of the name but let's keep going. it required, quote, underperforming dealers, end quote to submit by the end of

2014 a plan for improving their sales. is that the same -- >> you said it was launched in february of this year? >> yes. >> the plan has to be submitted to and approved by caterpillar in the united states. is that correct? >> i don't know that. i actually don't know that. >> let me tell you that it does. and if it's not true, you can correct for the record what i'm saying. okay? >> okay. >> it has to be approved by stewart levnik. who is he? >> one of our group president. >> is he the group president of cat pill already customer and dealer support? >> yes. >> okay. he works out of illinois? >> he does. >> so dealers whose plans are approved and have three years to meet their job -- their sales targets or may be drop from the network. is that correct? >> i don't know all the specifics of the program. the intention of the program is

benchmarking amongst our dealers, and looking at the dealers that are the highest performing around the world in a number of different elements, and helping to improve the performance of all of our developers around the network. >> right. those dealers then have get to their plan approved or they're going to be -- they have to meet the sales targets or day may be trop. it that true or not? >> i don't know. stu's organization does include the distribution groups that are headquartered in -- one in his -- he has one vice president in geneva, one in singapore, and one vice president in the ute and they have a distribution self-s responsibility which will be coordinating the work with each of the dealers itch don't have all the details on the program. >> he is head of the whole thing. right? >> they report to stu. those three -- >> he is in illinois. >> yes. >> okay. so, it's been run out of the united states. that's the top of it, the responsibility for it. it's not run by csarl, is it?

>> well, but keep -- >> i know csarl is part of it -- gees -- >> so are the other traction distributions, i'm just asking you, the head of this effort, the driver of this effort, the one who is going to decide whether or not a dealer stays in or isn't going to be allowed to stay in, is mr. levnik in illinois. >> he will hold his vice presidents accountable to work with the dealers in their region. so these dealers have -- those vice presidents have that accountability and responsibility and, yes, they do work for stu. ...

>> [inaudible conversations]

prior to the 1989 transaction caterpillar u.s. was buying purchased finished replacement parts and mostly for manufacturers here in united states transferring them to this was affiliate's which then transferred them primarily to caterpillar non u.s. dealers. prior to 1999. >> correct. >> caterpillar reported most of the sales didn't come on the u.s. tax return with the

international part sales is that correct? >> caterpillar would have reported a significant portion although it was paid out to the commercial entities responsible for manufacturing. >> but most of that income was shown on u.s. tax return ? >> i believe most of it was. yes. >> until 9985% or more of the international replacement parts, sales income was included on caterpillar u.s. tax richard tranfifteen was reported as swiss income? correct?

and then the united states. is that correct? >> i don't remember their ratio. >> let's assume it is that. is that fair enough? >> having a method to keep track of profits for business purposes. is that correct? to make the accountable profits from the internal management system allocated income to all business groups and that accountable profit results. so far argue with me? >> prior to the 1999 transaction that matched the results for tax purposes about 85 percent of the accountable profits in the united states which was designed in building and

track and ship the parts while 15 percent approximately we're allocated to switzerland in exchange for their marketing efforts. is that correct mr. beran? >> roughly seven mec get matched the tax report? >> i am not familiar with those numbers. >> anybody here? >> that system is not intended to be the same as what we report legal entity it is a way to drive behavior but i don't believe we understand the relationship you are making. >> is not true 85% of the accountable profits status business groups in the united states before 1999? >> is that true? >> i don't know that. >> it changed how profits

were allocated for tax purposes. would you agree? tim mckyer would not change how they were allocated but correctly identified in 1999 where the profits were earned. >> was that a major change from the way it was previously identified? >> the change was to remove the unnecessary middleman. >> via understand the theory and the unnecessary middleman it is absurd to call it the unnecessary middleman but i have heard your explanation. but was there a major change after 1999? from what you just described a major change? >> if i could be clear clear, though work done prior to 1999 and after was not a major change.

>> listen to my question. i am not saying the work was changed obviously it was not. when i unmasking is did that have an impact on the allocation on the tax return >> yes. 1989 with the royalty and service fees with the change there was an impact on taxes. guess yes. >> okay. was it understood that the time that that transaction was not going to have a negative impact on the west division accountable

profits? was that understood mr. perkins? >> mr. chairman, there are significant differences between legal and business and accountable profits i cannot answer that question still make you say you don't know whether or not at that time there was an understanding that transaction would not have a negative impact on the u.s. division accountable profits you don't know? >> i don't know. i of attacks person. >> you don't know if there was an understanding? >> i do not know. >> do you know, mr. beran? >> i don't recall. >> let me tell you. do you know, ms. legacy? was there an understanding? to make generally what i can tell you is the accountable profits that we use

internally to drive behavior is above for tax system so that does not include after-tax measurements. >> the is it a way to reward its divisions for their work ? it affects people's bonuses? >> it is a way to establish goals to drive business behavior that ultimately can impact incentive pay. >> a and rewards. >> it is an accountable system to drive the organization. >> is it not true u.s. business division capt. and about the same proportion of that accountable profit after the cesaro transaction >> i do not know.

>> no. be accountable system was independent of the reporting >> i am just asking a question in-house if you were aware of the fact u.s. business divisions kept the same percentage of accountable parts profits after the transaction as they had before the transaction? >> are you not aware of that? did you not tell our staff that? >> no, no, no. mr. beran did you not tell our staff that? >> we were not directly impacting the accountable system. >> that is a pretty good dancer. >> would ever you call it but that transaction, the cesaro transaction does not affect the accountable profits issue strictly

accountable system was not aligned with the international tax law but was to derive david behavior. >> of course. it was not impacted by the major change of how taxes would be paid. >> not to my knowledge. >> mr. perkins, while you were working on the cesaro structure 1999 was a you're interested in seeing that it was not supposed to change the operational functioning of the parts of business in any significant way just the invoicing system? was that your understanding? remic the invoicing system with respect to the and related suppliers to cesaro.

>> except for the invoicing system like question is what you were working on the cesaro structure was the your new standing it was not supposed to change the operational pushing of the parts business in any way with the exception of invoicing? was that your understanding? >> there were significant changes legal, accounting and tax. legal externally in terms of the the contractual relationship. >> i talk about operational function was your understanding that there was not going to be any significant change in the operational functioning of the parts business? >> physical goods move the same way after the restructuring as it did prior.

>> thank you. [inaudible conversations] and there has ben plenty of talk here today suggested by enforcing the current tax laws somehow we will endanger american

manufacturing. of men as enthusiastic supporter of american manufacturing has business families space who was more enthusiastic. caterpillar has ideas, the tass quoted can better support manufacturers i am all ears. so as everybody else is obvious if everyone on this subcommittee would be welcoming of such suggestions. i of a strong supporter of r&d tax credits and advanced manufacturing tax credits and a strong supporter of energy efficiency tax credits and policies to help american manufacturing. i support tax policies that helped caterpillar and other manufacturers compete around the of world. what i do not support is making this a competition to see who has the most creative tax lawyers. i do not support tax

loopholes or other manufacturers to exploit or refuse to exploit. we need more policies to support manufacturing but that is not what we have here with this investigation. the caterpillars with strategy is not the result of conscious policy making to support american manufacturing. it is simply a tax loophole. actual or perceived it is not fair to other companies to american families we don't have accountants at their disposal. so i cannot support what is going on here. i know caterpillar is an american success story in they have every right to. headquarters are here most executives are here most of the parts are made here, a

ship from here, a story from here forecasting inventory management and logistics' are handled year. but since 1999 most of the international parts profits go to switzerland. the contrast between caterpillar u.s. and the swiss operations is dramatic. switzerland does not manufacture any parts united states manufactures 70% of the parts sold abroad. switzerland does not have a single parts warehouse by yet u.s. supports excuse me its doors 1.5 billion parts. only 65 swiss employees handle parts versus 5,000 in the united states. caterpillar swiss operation doesn't have the personal or infrastructure or expertise to have a global parts business. they have a role obviously to promote cards to work

with dealers but they don't have the personnel or the infrastructure or the expertise to run a global parts business. everyone knows what happened and the documents could not be more clear. it is a tax deal. caterpillar used to pay taxes on all parts profits before 1999. then a transfer to license to go wholly-owned subsidiary cesaro that allowed it to sell caterpillar parts overseas to more places. it got back a royalty equal 15% of the parts profits that means the other 85 percent stayed in switzerland where caterpillar by the way had negotiated a special low tax rate between four and 6% the

usual swiss tax rate is eight-point 5% for caterpillar use the licensing agreement to shift profits of $8 billion to switzerland while avoiding u.s. taxes of 2.$4 billion and counting whereas an ongoing number. $300 million per year in tax avoidance. it is going to switzerland instead of here. caterpillar was not compensated turning of the parts business over to cesaro. no compensation even though it was 75 years developing the business and allowing cesaro to use the state of the art forecasting and order and management system but was paid less by the way. since it traded $1 of profits to cesaro with $0.15

in return. at the same time caterpillar kept doing all of the work. that was the deal and it continued to bear economic risk. all of the economic risk. it is the consolidated returned. no reasonable business could have a chance for the crown jewels to see a related party for less than nothing. keep doing all the work can continuing to bear the economic risk. it is clear that caterpillar licensing transaction fails the arm's-length standard and the substance test because it had no business purpose other than tax avoidance is started as a tax strategy and caterpillar paid 55 million to price waterhouse to implement

paillette in compliance with u.s. tax laws that is for someone else to decide. but if caterpillar is right our laws need even more strength. the irs has to step up enforcement to stop the multinational offshore profit shifting to start requiring transfer pricing agreements to justify the profits let between u.s. parents and the tax haven subsidiary. it needs to clarify that economic substance law goes to pricing agreements and congress needs to pass the stop tax haven abuse act to shut down the existing offshore tax loopholes. thanks to our panelists and again to caterpillar and

price waterhouse with their cooperation. we stand adjourned. [inaudible conversations] [inaudible conversations]

>> please poll your microphone close. think you mr. chairman and committee and members. i am ms. barra the chief executive officer of general motors for i appreciate the opportunity to be here today. more than one decade ago gm embarked on a small car program. sitting here today i cannot tell you why it took so long for a safety defect to be announced for this program but we will find out. kisses an extraordinary situation involving vehicles with no longer make but it came to light on my watch so i am responsible for resolving its. when we have answers we will be fully transparent with you, regulators and customers. while i cannot turn back the

clock as soon as i learned about the problem we acted without hesitation. we told the world had a problem that needed to be fixed. whatever mistakes were made in the past we will let shirk from our responsibility now or in the future. today's gm will do the right thing. that begins with my sincere apologies to everyone who has been affected by the recall. especially the families and friends who lost their lives or were injured. i am deeply sorry. the vast former u.s. attorney to conduct a thorough and unimpeded investigation of the action of general motors. i have received updates from him and he tells me he is well along with the work. he has free rein to go with the facts take care regardless of outcome. the facts are the facts. once they're in my leadership team and i will

do what is needed to help assure this does not happen again. we will hold ourselves fully accountable. however i want to stress a and not waiting for his results to make changes. i made the new vice president of global safety of first for general motors. his top party is to quickly identify and resolve any and all product safety issues. he is not taking on this task alone for by stand with him and my senior leadership team stands with him as well and we will welcome input from you, our customers, our dealers and current and former employees the latest round of recalls shows how serious we are about the way we want to do things with today's gm. identify issues and we are fixing them. i have passed 13 to stress

the system would -- work with one thing in mind the the customer and their safety. customers that have been affected are getting our full and undivided attention. we are talking directly to them with a dedicated but site with updated information and through social media platforms. we have trained and assigned more people to the customer call center and wait times are down two seconds. we're sending customer's written information through the male part we have the power to dealers if they do not want to driver recalls vehicle dealers can provide with the loaner or rental car free of charge today we provided nearly 13,000 loaner vehicles if a customer over the looks for another car dealers can give

additional cash allowance for a lease or a new vehicle. our supplier is manufacturing replacement parts that are no longer in production we have commissioned to lines and have lost four 1/3 those parts will start being delivered next week. these are only the first to make things right to rebuild trust with our customers. as i have reminded our employees it is only the first step. giving customers the best support possible throughout this with is how we will be judged i would like this committee to know all gm employees and i are determined to set a new standard. everyone at gm up to and including the board of directors supports this. ims second generation gm employee and i am here as the ceo but also

representing the many women who are a part of today's gm dedicated to the safest vehicles on the road. reason the held a town hall meeting to introduce the vice president of safety we met at the technical center in michigan this is where the men and women work the brains behind the cars but also the heart of general motors. it was a tough meeting. they're disappointed and upset. i could hear in their voices. they have many of the same questions that they've want to make things better for their customers to make gm better. they want to know what we plan to do for those who have suffered the most from this tragedy. i am pleased to announce we have retained kenneth feinberg as a consultant to evaluate the situation to

look at the best pass for word the committee knows he is highly qualified and experienced to handle matters such as this leading the efforts with 9/11, the bp oil spill and the boston marathon bombing. he brings expertise and objectivity to this effort. i consider this to be an extraordinary event and we are responding to it in an extraordinary way. gm has settled and legal responsibilities. we are thinking through exactly what those are and how to balance them in the appropriate manner. bringing on mr. feinberg is the first that. i would now be happy to answer your questions. thank you.

[inaudible conversations]

the hearing will come to order. we want to will, our witness sec chairman ms. white thank you to testify before the subcommittee. the sec has a uniquely important job to maintain fair and efficient security markets to encourage capital formation and protect the investment. it is not an easy task but incredible part to keep our economy thriving. fiscal year 2015 the sec is asking 350 million or 26 percent increase over last year funding level. this is an especially large increase for any agency while the sec is funded by fees, i believe congressional oversight over your budget is important task on the commission's activities checklist. what we went from the sec is

a securities regulator that is both capable and economical. the sec to argue money will solve all problems of the world but we expect to see results before appropriating additional dollars. the house included bill language fully funding the risk analysis i am anxious to hear how you're using that funding to hire more economist to increase the cost benefit analysis performed during their rule making. in addition i'm interested to hear your thoughts that the sec released earlier this year and i am concerned and might be regulatory overreach in the area that can benefit from more competition, not less. american investors use the markets deserve to know there is a couple of the beat who is protecting our markets.

with those damaging inspections and enforcement of the past like the ponzi scheme as a lapse of management and due diligence such as the constitution debacle and with documents and weaknesses of the financial statements. with the increases that congress has given over the past decade there can be no more excuses. york 15 long dash 2015 budget request as for increase of almost all division including overall request of 467. we heard the claim that you need increased staffing to get through dodd/frank however the standing in the -- staffing and funding levels cannot exponentially increase forever. this is not efficient use of your funds and will not protect american investments

for toy maker to hear how the plan -- the sec will use key funding to leverage the expertise and capability to protect our capital markets and investors to facilitate the overall group of capital. fake you for being here today and look for it your testimony now of a like to recognize the ranking member. >> thank you. i join you also to welcome chair white back to the subcommittee on the 2015 budget request for the sec. last year you were just into your new position now with almost one year of service with the new position i have been heartened by what i have seen in many areas. as a former prosecutor you have taken a tough line to require more admission of guilt and settlements and made dodd/frank the ongoing priority and have moved the

ball for word on the most important and complicated positions for all that said you cannot continue to protect investors to make sure the system is secure without sufficient resources. for all the compromises reached in the appropriations bill i think we did fall short of the mark to provide the necessary funding for the sec for a while concerned about the impact the funding level as of the commission caribbean by belief more needs to be done in the fiscal year 2015 that brings us to the request today of $1.7 billion allows the sec to keep pace with the growing markets. these transactions that take place to expand their role in the wake of the financial crisis without a significant increase we send the signal

that market actors should not expect consequences for illegal behavior and that should be extremely troubling for all of us for but this point we know the consequences of the sec underfunded or unwilling with the federal security laws and the market suffering and investors suffer in taxpayers suffered we need the strongest cops on the beach that real strong protections in place to determine future misconduct they take your request seriously i hope my colleagues will as well. i look forward to your testimony. >> no i would recognize the ranking member of the full committee. >> thank you. i certainly would like to

think you for holding this hearing. chair white for testifying today and they can you for agreeing to serve this great country of ours. great nova miss possibility that you have. madam chair coming you come before us with the budget request of $1.7 billion which would support the responsibilities as well as the hiring of the additional 639 employees. these additional positions to help the sec to examine investment advisers and enhance its functions with continued improvements of technology to keep up with changing markets, year after

year the sec budget authority has been kept below what is needed in the needs of the increasing global economy. the republican majority kept the budget at more than $300 million below the president's request for 2014. this approach is nonsense. the sec is entirely defunded and as such providing adequate funding will not take a dime of taxpayer dollars nor have any impact. i worry their republican majority by jurisdictions from the sec are purposely intended to make it more difficult for the sec to do its job. by bobbing the sec if needed funding to maturity is making it more likely that it will go undetected and

investors will be less at risk. when this occurs they'll use that opportunity as the play for future funding it is a cynical and unnecessary cycle. for our economy to succeed to its job these misguided budget restrictions only harm the ability to succeed prefer the 42 discussing the importance of the sec budget request and faq icahn for appearing before us. >> if you keep your remarks to five minutes that gives us more for questions. >> members of the subcommittee thank you for inviting me to testify of

the 2015 budget request. now more than ever our markets need adequately resources to sec. fiscal 2001 through 2014 trading volume more than doubled to a projected $71 trillion the complexity of financial products than the speed with which they are traded increased exponentially assets grew by 131% of 14.$8 trillion in assets under management with $55 trillion today there are over broker-dealers with the changes with gm president said change with new and

significant responsibilities for derivatives private fund advisers and a crowd funding portals and more. the 1.7 billion dollar budget request enables with critical core priorities including examination and coverage for investment advisers in the other key entities dealing with retail and institutional investors by expanding its enforcement program and capabilities to strengthen the ability to litigate. leveraging technology to make operations more efficient and improve the ability to identify a variety of market risk including emerging fraud. has you know, the funding is deficit neutral that means the amount does not impact the deficit the funding available for other agencies or against the

framework but i fully recognize my responsibility to be effective and prudent stuart of funds them pursue only those we need to a advance our mission for our belief our accomplishments should give congress confidence we shall do so. war remains to be done since my arrival of the commission has adopted or proposed 20 significant rule making including mandated across the regulatory spectrum of our jurisdiction. we are now more aggressively enforcing securities laws to will publicly accountable to obtain orders from penalties looking at fiscal 2013 the highest in the history we have taken in said dated driven approach with a

complex market structure issues implementing an analytical tool that would permit the sec to increase the examination coverage that every day investors are increasingly turning to for investment assistance of the sec has made the most of the limited resources nevertheless are able to examine only 9 percent of advisers fiscal 2013 as a point of reference in 2001 the sec had 19 examiners per $1 trillion in assets under management today we have zero main page. more coverage is needed as the industry itself has acknowledged it would also allow us to better leverage technology to support a number of key initiatives and including modernization is a multi-year effort to simplify the reporting

process and completion of the data warehouse and the analytical tools to allow us to organize and integrate and analyze large amounts of data for fraud detection and enhancement to the referral system to maximize our ability to move quickly to act on the high volume of tips received, information security and responding to the ever increasing security threats and modernization one of the most widely used websites more informative for investors this budget request also allows us to augment our division of risk analysis to bad financial economist and other experts to assist with rulemaking and risk-based selection and structured data initiative. i firmly believe by the

important in growing responsibility to investors and companies and the markets this support will allow us to better fulfill the mission to build on this significant progress the agency has achieved and i am committed to achieving in enhancing name happy to answer your questions. thank you. >> let me start by asking a couple of questions about efficiency. one of the things that most of us are aware it has increased 66% going back to 2001 the funding has increased so over the years there has been a lot of money spent and as has been pointed out it is sid defunded agency but we

takeover site responsibility to make sure whether taxpayer dollar or feed driven money is spent effectively and efficiently and last year when the sec asked for the 26% increase you were there one month now it is one year in your view is you need another 27% increase. when you talk about technology, but me ask you can you point to the savings you have been able to leverage with this capability? could you tell us how you work on that equation? >> yes. i specifically work with our chief operating officer on savings weather driven by an investment of technology

that was in the agency that the cost savings that are measured under different metrics we saved $6 million per year from consolidating operations to save $6 million fiscal 2015 and going forward for a number of years also to achieve the $80 million of cost avoidance by our investment to improve data infrastructure to make maintenance less required. those are two examples but i think seriously with that funding that we do get we do need that the part of that

is cost savings ian three defect -- and we do that. >> will i have noticed you have a pretty large amount of carry over funding from previous years for the quarter the report says the balance was 112 million. that was last year when you were subject to the sequester that took about five minute long dash 5 million now is still 8% of your level. you take that with access to the $100 million mandatory reaser find you could spend 100 million on that. i know you talk about additional resources and constraints but could you tell us why you have such a high carryover balance?

gimmickry you're able to carry over a balance if we don't spend it that year. it is a product of responsible financial planning because of the continuing resolution spent conservatively early 2013 we also tried very hard very wisely to hire the right people to do the job most effectively. and about 30 million is from financial good one dash manager it to deal obligate moneys on closeout contracts. i spent a lot of time on this, it's taken into consideration.

>> at the end of 2014 do you expect to have a carryover balance? >> i cannot answer that certainly we have enhanced the h.r. function to hire more a efficiently as well as prudently that is where that expense comes from but we do think with that request is granted those funds to higher in those physicians that we do think we can do that. yes, sir. >> we will go to questions with the committee members of the people being recognized by seniority where the meeting started the latecomers are recognized in the order they arrived and he will make a special concession to the ranking member for the next round. >> you are very kind because

there are several hearings going on at the same time. thank you. madam chair fiscal year due to budget constraints the sec sam and only 9% registered investment advisers over the past decade that number has increased by 40 percent. the assets under management has more than doubled to more than $55 trillion get funding has not kept up with the need the overwhelming majority of investment advisers who work with their clients best interest and mine but there are always bad apples. we can agree with those of pfizer's how does the sec

prioritize examination why are these important to mom and pop investors -- investors how could they have been in the market to of the investment divisors never examined? >> no question this is a historic example of the stream challenge by the current level of funding but with his advisers space what we do with our resources is to apply them as wisely as we can with risk-based assessment of where we should go with the rates of return and recidivism. also instructed our

examiners i don't want to be absent from the smaller space is either because that is where more and more retail investors are relying on investment to geysers to tell them what to do with their retirement money that they cannot afford to lose the money. there helped by every sam that we do like the larger investment advisers as well because they tend to be managed by the larger advisers this is another data point of concern. we do find issues with these examinations. between 75 and 80% received a deficiency letter of some kind. 42 percent of those are significant deficiency finding the there is harm to

a customer or client or a significant risk or some kind of recidivism. in terms of the value returned 86 through 93% of who we do examine will tell us they reid mediated the problems about 15% of the findings were referred to enforcement also to find the problem with the misallocated will return them to investors so it is a critical function we must find a way. i believe using resources to get greater coverage. >> following up on that it carries stories justifiably so but with the stories of

working-class families to be taken advantage of by fraud how would the budget request help the enforcement need to combat this fraud? binnacle large part of the budget request is directly to meet the examination and enforcement so we can better protect investors. what we see we still have cases against prominent wall street firm says the rise of the of micro cap fraud that would impact quite significantly we see a rise of securities violations said you could come across directed that victim investment race, religion,

age something we have been very aggressive about to meet these crimes that are occurring against retail investors. across the range of enforcement priorities and various kinds of market abuses market integrity issues with the exchange's. is across the board retry to use the resources in the way we can four priority areas. >> i just want to mention what has concerned me greatly i have had a lot of briefings that companies have a responsibility to their shareholders i know in the past when they should have made security breaches public to help prevent

future breaches that rather than sharing disinformation companies have kept it private leaving more times. investors to have the right to know companies have been a victim of cyberattacks to ensure the steps to help mitigate criminal action. could you comment briefly shed their reports with the sec and me required to disclose cyberattacks? what resources do they need from the government to effectively manage a cyber threat and how can they encourage information sharing? this has been a major issue and i don't know if we're making much of a breakthrough. >> i share your concerns across the issue of the

impact of investors. no question about that. we held a round table last week on cybersecurity to emphasize that with respect to the public companies to bring together the government agencies to are charged with dealing with this cyberthreat in the coordination of the government agencies the department of homeland security with the national security issue is the coordinating agency among the federal agencies and the emphasis there that is so critical to have a public-private partnership the government needs to be better to share information or get security clearance but with disclosure to commend the staff of the sec

they put up guidance to public companies to disclose cyberrest if they were material it was regarded as helpful guidance the staff has followed up with think they have improved would it is a continuing process and priority. >> chairwoman plight i along with my colleagues many of whom are here sent you a letter asking for an update on actions after the round table back in december. us you no to such firms one of which is in the process of being sold 97% of the market has actually become

defacto bears in the united states come with these firms have obvious conflicts of interest and sometimes don't necessarily reflect the fiduciary responsibility to their clients. is it safe to assume there sec host to the roundtable because it recognizes we have problems there? >> by the way i thought that was quite constructive and there is more areas of agreement and i make to up front calls that they are quite important of the cage with the shareholders but also no question a number of concerns have been raised including whether the disclosures are required to make have been adequate with conflicts of interest there

is a lot of dialogue about that with the fiduciary duty to retain that it has a fiduciary duty in their retain that that offerings with it certain duties that the firm is discharging the service. where i think that we are on that, we have received quite recently recommendations from our staff as to what steps if any the sec should take following the round table on these issues i expected fully short order to expect -- discuss that with my commissioners. . .