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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks Before SEC Speaks


Commissioner Annette L. Nazareth

U.S. Securities and Exchange Commission

Washington, DC
February 9, 2007

I'd like to thank the co-chairs, John White and Linda Thomsen, as well as all of the SEC staff who work so hard to make this such a worthwhile conference. It is wonderful to see such a large crowd again this year. I applaud your interest in keeping abreast of the most recent developments in securities regulation.

There are certainly quite a few developments on the agenda to discuss. Over the past year, we have proposed or adopted a total of about 40 rule amendments. In December alone, we adopted rules relating to executive compensation and voluntary e-proxy, and we proposed management guidance for the implementation of Section 404, as well as new parameters to allow for foreign issuer deregistration, just to list a few. But with John and Linda, as well as Erik Sirri, Buddy Donohue, and Conrad Hewitt here today, you don't need me to delve into the details of those new rules. Rather, I'd like to turn to the topic that is on the minds of many, from Mayor Bloomberg and Senator Schumer to Treasury Secretary Paulson and the business community at large. That topic is, of course, the competitiveness of the U.S. financial markets.

Some have expressed concern that the U.S. markets are in danger of losing their competitive edge. They are focused on external forces that might be inhibiting our ability to maintain our competitiveness and what steps we might take to address them.

As the public dialogue has progressed, statistics have been referenced to support various positions. For example, the interim report from the Committee on Capital Markets Regulation raised the specter of falling IPO market-share in the U.S. as evidence of diminished competitiveness and then cited specific regulatory actions that may have contributed to that result. Other commentators have stated that although foreign listings are down, total listing numbers are up. They note that foreign issuers' choice of Hong Kong or London over New York may merely be a reflection of both the increased depth of those markets and the fact that foreign issuers may prefer to list in their own region for cultural and political reasons. The latest report, authored by McKinsey & Company, surveyed financial services leaders in the U.S. and abroad and raised a number of interesting recommendations for addressing competitiveness concerns, including clearer SOX Section 404 guidance, a move toward recognition of IFRS without reconciliation to GAAP, and the promotion of convergence of accounting and auditing standards.

Certainly it is unpleasant to hear so many predictions of market decline, but I believe the questions and criticisms being raised reflect the truly American phenomenon of constant reassessment and innovation. Self-criticism and a strong competitive spirit are central to the American psyche and that is especially true in the financial services industry. And for that reason, I am optimistic both about this debate and its potential outcomes.

Already, the questions and reports are spurring a productive dialogue, with a real potential for proactive, creative solutions. Our focus, broadly, should be on how to ensure that our markets are an attractive, cost-effective venue for raising capital, while at the same time maintaining a high level of market integrity and investor protection.

In discussions with both industry leaders and government officials over the past month, I sense that a roadmap for our response to the debate is beginning to emerge. First, the debate is causing us to reflect on our principles and goals. What kind of a marketplace do we want to have? What standards do we believe are appropriate in a highly developed market economy? What are the most cost-effective means of achieving those goals and how can we continually reassess whether the goals are being achieved? The debate will surely cause us to redouble our focus on the costs versus benefits of our regulatory efforts, as well as to focus on regulatory duplication and inconsistency.

Second, I expect that there will be a greater recognition that with some targeted, thoughtful modifications we can improve the effectiveness of our rules and thus the efficiency of our regulatory system. Although calling for a whole-scale dismantling of regulation is a predictable and all-too convenient knee-jerk reaction, we must bear in mind that even small, targeted modifications can have large, positive effects in terms of implementation. Costs and benefits can be better rebalanced without sacrificing fundamental principles and protections.

The Section 404 management guidance that we proposed this past December is an example of how the Commission has begun to address unexpected and unintended costs of regulation. Although we all realized that the implementation of Section 404 would entail costs, I do not believe that anyone anticipated that the costs would be so high, or that management's assessment would become driven almost exclusively by the PCAOB's Auditing Standard Number 2. Upon realizing the full costs of implementation, the Commission sought comments, hosted two roundtables, and received reports from both the GAO and SEC Advisory Committee on Smaller Public Companies. The Commission then issued a concept release in July 2006 to raise specific questions about 404 implementation and solicit feedback. The resulting proposed management guidance I believe maintains the benefits of 404 while emphasizing efficiency and innovation instead of a one-size-fits-all approach. The guidance is intended to liberate management by encouraging them to apply the guidance to their own situations instead of following a prescribed mold. Adjustments to 404 implementation, along with the PCAOB's proposed AS 5 and COSO's guidance to smaller issuers, should serve to strengthen the benefits of 404 while reducing the costs of compliance.

Other reforms that will bring costs and benefits into better balance have been market-driven, such as the proposed merger of the regulatory arm of the New York Stock Exchange and the NASD. In addition to the cost-savings that should result from streamlining duplicative regulation, the merger will potentially reduce conflicts of interest by allowing NYSE to continue oversight of its market while allowing the new combined regulatory entity to focus on firm compliance.

The need for proactive reflection on the benefits of regulatory reforms is not limited to the Commission. There are issues outside the immediate purview of the Commission which may have a profound effect on U.S. financial markets now or in the future. I agree with the McKinsey report's analysis that restrictive immigration and visa laws may be hampering the ability of our financial markets to attract and retain the most talented professionals. In addition, some have expressed interest in the issue of the costs of private litigation and the consequences of overlapping jurisdiction among state and federal regulators, which will undoubtedly be the subject of further debate.

Finally, any roadmap for greater competitiveness should focus on the goal of achieving more consistent global regulatory solutions, where possible. In a world in which market participants operate in multiple jurisdictions, significant efficiencies could be achieved through the implementation of consistent, high quality international standards. We have often taken the lead in setting these standards. Indeed, for all of our domestic criticism of the Sarbanes-Oxley Act, it is interesting that several jurisdictions are adopting regulations similar to SOX in an effort to improve investor protections, encourage private investment, and, as a result, increase the depth of their markets. And when those standards are implemented by other jurisdictions, making them viable competitors to the U.S. markets, we should embrace that progress as a sign of our success and as a challenge to spur us on to even greater innovation and efficiency.

We can continue to set an example by maintaining our status as the greatest capital market in the world, with unrivaled depth, liquidity, innovations, and investor participation. By continuing to assess and analyze our regulations, innovate change, and maintain a broad perspective, our rules will not stagnate or become impediments to investment in America's capital markets. Our eagerness to rise to the challenge is indicative of our commitment to respond to any questions about the future competitiveness of our markets.


Modified: 02/12/2007