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Speech by SEC Staff:
A Regulator's Perspective on the Needs of the Capital Markets

Remarks by

Mary B. Tokar

Senior Associate Chief Accountant – International
Office of the Chief Accountant
U.S. Securities and Exchange Commission

at the International Federation of Accountants, IFAC 2000

May 22, 2000

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of Ms. Tokar and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the Commission's staff.

First, let me thank you for inviting IOSCO to join in your discussions at this meeting. It’s a pleasure to be back in Scotland, and brave the threat of haggis once more. And it’s a particular pleasure to have a chance to thank Frank Harding for all his hard work and accomplishments as the Chairman of IFAC over the last two and a half years. Similar thanks and congratulations are due to Stig Enevoldsen for his leadership of the IASC during this same time period.

I’ve been asked to address the needs of capital markets from a regulator’s perspective, and I will try to do so, while also giving you an update on recent events from the annual conference of the International Organization of Securities Commissions (IOSCO). But first, even though I am here on behalf of IOSCO, I must offer the standard SEC disclaimer – that the views I express today are my own, and do not necessarily represent the views of the Commission or other members of the SEC staff.

The next disclaimer I’ll offer is on behalf of IOSCO – not a requirement, but a wise move, as I’m going to lay out my own views on the role, and needs, of securities regulators. IOSCO hasn’t "consulted" about this speech, and despite the substantial accomplishments of IOSCO at last week’s conference, there was no resolution, report or press release to authorize this address. Therefore, please take these as my own views and not an official IOSCO pronouncement.

Capital markets need effective financial reporting. Two key elements of effective financial reporting are effective accounting standards and effective audits. These two items are at the heart of this conference and the meetings of IFAC and IASC yesterday. Let me start my remarks with a brief look at the issue of the structure of the IASC and offer congratulations from the regulators’ community on yesterday’s unanimous approval of a revised structure for the IASC.

The IASC, as constituted today, has realized substantial achievements, particularly in the last five years. This is a tribute to the professionalism and public interest commitment of many in the accounting profession, which helped establish and support the IASC. Many people, including the 60 or so individuals who gather for each Board meeting, have spent considerable amounts of time as volunteer members of the IASC Board. And many more have spent time – time away from families, golf courses, or other more fun pursuits – to read exposure drafts, debate issues and write comment letters and participate in the IASC’s debate. Maintaining – and even increasing – this level of participation will be critical to the ongoing success of the IASC. Congratulations and thanks to all who have had the vision to examine the structure of standard setting and all those – the IASC Board, IFAC and IASC’s membership – who gave their unanimous support to a new structure.

Let me try to address the topic of "the needs of capital markets – a measured response" by talking first about what markets need from regulators. First, they need regulators to keep a level playing field, with all participants held to the same standards, and with the regulator ready to seek out and prosecute those who fail to play by the rules. Second, they need regulators to facilitate innovation. Markets shouldn’t look to regulators to be the innovators – competitive markets are much better resourced, much more inventive, and much better positioned to lead the way. Regulators shouldn’t be the drag on innovation, either – but this doesn’t mean stepping back to permit a "no holds barred" free for all on the playing field. Instead, regulators should be, and are, challenged to keep pace with changing conditions, seeking ways to deliver on core principles while allowing room for markets to evolve within a basic framework.

So, how have regulators done this?

At a high level, by articulating "core principles" of securities regulation. In September 1998, IOSCO issued its Objectives and Principles of Securities Regulations. These principles are focused on three objectives:

  • protection of investors;
  • ensuring that markets are fair, efficient and transparent; and
  • reduction of systemic risk.

In effect, these are the three objectives that regulators believe they should – and that capital markets want them to -- pursue.

So how do regulators do this?

One way is by trying to determine the degree to which these principles have been implemented. Therefore IOSCO is in the midst of a self-assessment by its members regarding their implementation of the IOSCO core principles.

Another way is by seeking to identify emerging issues and comparing experiences about those issues in the hopes of developing consistent, high quality (rather than lowest common denominator), responses to implement at a national level.

For example, at last week’s conference, IOSCO members discussed topics including:

  • regulatory concerns arising from the "New Economy";
  • demutualization of exchanges, including the implications for self-regulatory functions, such as listing requirements, that often are performed today by exchanges; and
  • securities activity on the Internet.

Will any of these discussions, some of which resulted in published reports, lead to new or modified regulation? Perhaps not directly – but the discussions help develop appropriate awareness and common approaches to problems we’re each trying to address at a national level. These types of discussions help us avoid gaps between different countries’ regulatory systems.

Another example of how regulators seek to address the needs of capital markets is exemplified by IOSCO’s work with the IASC on the core standards project. Back in 1995, IOSCO and the IASC agreed on a work program that the IASC undertook to complete in order to develop a body of standards for assessment by IOSCO. IOSCO committed to follow the IASC’s work, contribute its views as the standards were developed, and then consider the suitability of the completed standards for use in cross-border offerings and listings as an alternative to domestic requirements. In 1998, the IASC agreed on the last major component of the core standards work program, and last week IOSCO completed its assessment of the IASC standards.

And the outcome? IOSCO approved a resolution recommending that, for cross-border offerings and listings, its members permit the use of 30 IASC standards as supplemented by reconciliation, disclosure and interpretation, as necessary to address outstanding substantive issues at a national or regional level.

So, what does this resolution mean?

First, that IOSCO, not surprisingly, moved with appropriate caution.

But more importantly, that IOSCO acted thoughtfully, reflecting the mandates of its objectives: investor protection, fair and efficient markets, and reduction of systemic risk. IOSCO’s resolution recognizes the substantial achievements that have been realized by the IASC in improving its standards and therefore the quality of financial reporting worldwide. Equally important, however, the resolution also recognizes that there are remaining outstanding substantive issues to be addressed. And therefore IOSCO eschewed the more speculative route of giving an unqualified endorsement, seeking instead to make progress rather than bold leaps forward.

Is IOSCO’s caution appropriate? Absolutely. The capital markets of the world – even the 16 most developed markets in the countries on IOSCO’s Technical Committee – are in different stages of development in many areas, including financial reporting. The formulation of the resolution recognizes this important fact, and it also reflects IOSCO’s desire to find ways to address remaining concerns within, rather than outside, the IASC standards.

Let me explain this last point a little further. As part of its assessment of the IASC standards, IOSCO’s Working Party No. 1, a sub-group of the Technical Committee, reviewed the issues that had been raised by IOSCO, its members, and others during the core standards work program. The Working Party determined which issues had been addressed, and then evaluated the significance of those that remained outstanding. And there were items that remained outstanding.

So, what to do about the outstanding substantive issues? We all learned that a good accountant identifies not just problems but also solutions. Therefore, we sought to identify how regulators might deal with the issues that were identified.

These approaches include the three "supplemental treatments" (reconciliation, disclosure and interpretation) identified in the resolution.

So, what IOSCO has published is not just a resolution, but also a report of outstanding substantive issues. These issues are grouped first by the standard to which they relate, and then by the supplemental treatment that is expected to be applied.

Does this represent progress? Absolutely. Accountants love numbers, so let me give you a few.

  • We started with over 700 pages of comment letters that identified over 850 issues.
  • The final report identifies about 120 issues that are expected to require "supplemental treatments," with reconciliation being the least frequent resort (about 20 of the 120).
  • There are six standards for which no outstanding issues are identified, and another six with only one.

But now let me inject a few cautionary notes. First, IOSCO resolutions are not binding – many members, including the US SEC, have rulemaking processes that require public consultation, and IOSCO resolutions don’t require members to engage in rulemaking, and certainly don’t overrule national law. And this report, like others from IOSCO, is the work product of the staff of member commissions, rather than a final statement of position by the commissions.

But don’t despair -- IOSCO has a good track record for implementing its resolutions. Look, for example, at the International Disclosure Standards (IDS) approved by IOSCO in September 1998. These standards address the non-financial statement disclosure requirements for cross-border offerings and initial listings. One of the documents published last week by IOSCO is a brief report summarizing a survey on implementation of these standards by the Technical Committee members. This survey showed that, almost without exception, members currently accept documents prepared in accordance with the IDS from foreign companies, or have taken steps to be in a position to do so at some point in 2000.

A second note of caution: the resolution does not introduce "mutual recognition."

The resolution won’t preclude mutual recognition where agreements exist – for example, between EU member countries. However, it doesn‘t require it either. Therefore, when a single set of financial statements is filed first in one jurisdiction, and then another, the second jurisdiction may choose to review and comment on the filing, and request that changes be made.

And a final note of caution: the core standards project was never intended, or designed, to answer all financial reporting issues. Therefore, some of the outstanding substantive issues are ones contemplated in the original 1995 agreement regarding the IASC core standards work program. Let me give you two examples.

1. Scope

Recognizing that Rome wasn’t built in a day, the original work plan suggested, but did not require, that certain items be addressed, such as:

  • specialized industry reporting practices
  • equity compensation accounting, for example, stock options;
  • new basis reporting
  • and other, not inconsequential, areas.

For items such as these, regulators will have to decide whether to specify the accounting that should be applied in the primary financial statements and/or what supplemental disclosures are necessary.

2. Transition Provisions and Effective Dates

The IOSCO resolution is based on assessment of the revised IASC standards.

Of the 30 standards addressed by IOSCO, 14 are new or substantially revised as a result of the core standards work program. These new standards have effective dates ranging from 1998 to 2001. The IOSCO resolution addresses only financial statements prepared using the revised IASC standards, and not historical financial statements that do not reflect the improvements realized by the IASC in its recent efforts.

Before I close, let me throw out a challenge – and it’s a big one – to the members of this audience. The challenge is to make this work. Why is this your responsibility and not ours? Because IOSCO’s work to date is based largely on a theoretical study of the standards as words on a piece of paper. And, no matter how good the words – and the resulting nominal requirements – regulators ultimately will look to actual practice to determine the way forward.

For us to build on the framework established by the IASC standards, these standards must be applied faithfully; interpretive issues must be identified and raised for discussion before the excuse of "divergence in practice" is invoked to forgive past sins. And we all have an immense learning and training challenge ahead: few, if any, of those here, including me, were trained on IASC standards.

We’re largely self-taught, and in the United States (and I suspect elsewhere), few and far between.

So where does this leave us?

  • First, with a clear signal that regulators want to keep pace with innovation in capital markets – and a critical factor is the growing integration of discrete national capital markets.
  • Second, with convergence on high quality responses as the path to improving efficiency while continuing to protect investors.
  • Third, with the recognition that IASC standards still need improvement before they are accepted without supplemental treatments.
  • Finally, with a shared responsibilitiy for making change work – and that relies, on great measure, on how the IASC standards are implemented.

Thank you for your time and attention. I look forward to a lively Q&A session.