Speech by SEC Chairman:
Address to the Australian Securities and Investment Commission Summer School
Chairman Christopher Cox
U.S. Securities and Exchange Commission
Good morning, and welcome to the Tuesday session of the Australian Securities and Investment Commission Summer School. Thank you, Jeremy, for including me in this outstanding lineup of speakers. I have to say it's a pleasure to join you, even if it's only by video, in a city that's not only the largest corporate and financial center in Australia and one of the most important in the Asia Pacific region, but also hands down the most beautiful major business center on earth. From the Australian Stock Exchange to the Reserve Bank of Australia to the Sydney Futures Exchange, not to mention the hundreds of domestic and multinational public companies headquartered in this great city, you've got an absolutely splendid venue to discuss and debate the regulatory issues surrounding the ongoing integration of our planet's capital markets.
March 6, 2007
Doing business globally is no longer a choice for any company that has a website. From my office in Washington or my home in California, I'm just as likely to find an Australian merchant on the Internet as one across the street. And even though we're not quite there yet, the trends are unmistakable when it comes to my investment choices as well. The winds of change are blowing like Cyclone Vance across old ways of doing business, and that goes for the capital markets as well. So this summer school's focus on Australia's place in Asia's financial markets is highly timely - and we might just as well focus on Australia's place in the world's financial markets, while we are at it.
Every time I visit Australia I'm reminded how sports mad this country is. So if you'll indulge me, I'm going to use a football analogy to explain what I think should be the role of the regulator in all of this. And don't worry - I know that football means something a little different down under. Having attended the playoffs in both countries, I'm convinced of the benefits for spectators of a field that's twice as long as in U.S. football, and of having 18 players instead of just 11. And there's nothing quite like the bone crunching physical contact without pads that makes footy an always-on "ballet with blood."
But there are some things that are just the same in the Australian Football League and the National Football League, whether you cheer for Justin Longmuir or Peyton Manning. The most important thing, if you're a spectator, is that you don't come to watch the referees and the umpires. Of course they're absolutely essential in order to have a game at all, but it shouldn't be all about the officials. Rather, what we ask of the officials is that they keep the game moving. We expect them to be fair, impartial, and competent - but we'd also like them to stay in the background and not to call the plays.
The same is true for capital market regulators. If we're doing our jobs well, the markets should be moving more quickly and efficiently than they otherwise would. Like a good umpire, we should always strive to be impartial and fair. We need to enforce the rules and keep things moving. But the point of the exercise is not to aggrandize our role. Instead, it's to let the markets work so that the citizens of all of our countries can enjoy the benefits of economic growth, job creation, innovation, and prosperity.
The United States Securities and Exchange Commission - with some 70 years of experience under our belt - is one of the oldest securities regulators in the world. But despite its age, the SEC is two centuries younger than some of the markets that we regulate. The SEC and its regulations didn't create the market, and they aren't the force that drives them. Instead, we're the umpires and referees that make certain the game runs smoothly. When a football match is officiated well, no one ever gives the umpire or the ref a second thought. But when the officials fail to call a crucial penalty, the fans are quickly reminded that the contest can't be fairly decided without rules and without enforcement. I know that if most people don't always appreciate or even in many cases know about securities regulation when markets are working well, they're quick to notice good officiating when it's absent.
In the months and years ahead, in order for market participants to have good regulation in a global context, not just Chris Cox and the SEC, but Jeff Lucy and ASIC, as well as every other major regulator in the world, will have to be at the top of our games, working together to improve the flow of information and to collaborate on cross border enforcement. We're dependent on one another as never before.
And there's one more thing we'll have to work on together: maintaining investor confidence in markets that are bigger, broader, and more faceless than ever before. Since trust is the bedrock characteristic of any market, that's a vitally important job, and a daunting one in the international context.
While we take global markets and instant communications for granted, it's worth stepping back a moment to remember what trade was like before the information age. When most business was conducted on a personal level, reputation and trust were everything. In today's markets, what substitutes for personal reputation and bonds of family, friendship, or kin is a system of laws and trading rules that are enforced by respected institutions and by an impartial, professionalized government bureaucracy.
With anonymous trading comes the requirement that we rely on vigorous enforcement by securities regulators and law enforcement agencies with the powers and resources necessary to do the job. In a world in which your investment may be on the other side of the earth, with people you'll never meet, you've got to be confident that the markets themselves are fair. It's for this reason that the SEC and every other securities regulator in the world have the obligation to protect the investors and issuers within their borders from fraud. In the same way that a visiting football team has no choice but to rely on the local officials to enforce the rules when they travel to a rival's stadium, investors and issuers also look to the regulators in other jurisdictions to treat them fairly and honestly and to ensure that there is no "home-field" advantage that works against their interests.
For the SEC, every other regulator that shares this commitment to investor protection and capital formation is a natural ally. And with that in mind, I've embarked on a series of broad-ranging conversations with our counterpart regulators that is unprecedented in the history of the SEC, including with the ASIC here in Australia.
These conversations have led us to ask some fundamental questions about the way we've done things for so many decades. For example, while the reasons for requiring overseas issuers, broker-dealers, and exchanges to register with the SEC were plain enough when the requirements were put into effect, is that absolutely necessary now that international competition and choice that can benefit investors are so clearly possible? And we have discovered that by working together, the regulators of high standards countries such as Australia and the United States may be able to cut transaction costs and increase opportunities for investors while still maintaining every ounce of investor protection.
We've also been looking for ways to eliminate regulatory friction in the capital markets that results from national systems of rules that are different without any good reason for being different. The most obvious opportunity is in the area of accounting standards. We are hard at work at converging IFRS and GAAP. But even if we never fully achieve a global accounting Esparanto, the very technology that is integrating markets may also prove to be the solution to differences in our financial languages. In the same way a traveler can use a dictionary to navigate between, we can use interactive data - the computer labeling of the individual elements of financial information with smart tags - to translate between accounting languages. Interactive data using the XBRL computer language has already made financial reporting faster and less expensive for issuers. It may also make financial reporting easier to compare across global markets.
Our focus at this summer school is on the increasingly international character of business — on issues such as the way that technology is shrinking the world, and integrating markets as never before. But the truth is that our capital markets have always been global.
When the first company ever to go public issued its shares, in Holland, that small country's modest population required the promoters to sell stock to foreigners and immigrants as well. So shares in the Dutch East India Company were purchased by, among others, many Germans and residents of today's Belgium and Luxembourg. The world's first IPO was an international offering, and that DNA has been proliferating around the globe ever since. And of course it wasn't just the offering of securities that was international. The world's first public company was itself global in every sense. It traded silver from Spanish mines in Peru, copper from Japan, textiles from China and India, and spices from throughout Asia and the Pacific. It established offices all over the world, in what today would be such far flung places as Iran, Thailand, Malaysia, Taiwan, and South Africa.
So while it's true that today's technology has expanded our geographic horizons and is bringing the world closer together, it's also true that what we're seeing in the early 21st century is really just the continuation of a global imperative that has characterized the entire history of trade and markets. And it's in that context that we should view the merger of the New York Stock Exchange and Euronext, and Nasdaq's initial acquisition of 25% of the London Stock Exchange, and the alliances that are springing up daily among markets in North America, Asia, and Europe. The challenge for us as regulators is that our jobs are by nature national - we generally claim jurisdiction only over companies whose shares trade on our markets. So as companies, capital, and people live less and less within national limitations, regulators are going to have to work together more closely than ever before if we're to fulfill our missions of investor protection, market promotion, and capital formation.
One final point. It's easy to forget the individual, personal significance of what we're talking about when we're caught up in the heady world of global markets, and organizing markets for the entire planet. But the fact is, nothing that society does impacts more people, or offers a greater opportunity to serve our fellow citizens, than the improvement of our capital markets. That's because they're the wellspring of support for our entire free enterprise system. And they touch the lives of almost everyone.
Back when the SEC started in business, our first Chairman could marvel that "one person in every ten" owned equities. But today, our financial markets encompass the investments, the hopes, and the dreams of half of all households in the United States. Some 57 million Americans now own stocks -- and the median income for shareholders is a very middle-class $65,000.
Our market economies in the United States and Australia, better than any other system in the world, enable the poor to rise from poverty, and help protect the vulnerable and marginalized - because after all, before wealth can be shared, it must be produced.
Which brings me back to the beginnings of the world's stock markets in Amsterdam, when our civilization took the first deliberate step toward privately financed commerce on a global scale.
Then, as now, investors came from a broad cross-section of society - because the genius of the stock market was that anyone could participate. Among the investors in that first IPO were hundreds of ordinary people with occupations such as spoon maker, seamstress, and servant maid. From the get go, the very idea of a stock market combined the two basic elements that still characterize stock markets today: ordinary people of modest means, often unsophisticated, investing in ventures that will, if they succeed, grow into significant business enterprises unlimited by national boundaries.
Governments and their citizens have learned, the hard way, that markets work best when individual investors can have confidence their money is safe from manipulation. So we will do well to bear in mind that no matter how global and sophisticated our markets become, we must never take our focus off of the ordinary investor, the families, the retirees, the teachers, and every citizen of our nations whose savings and futures are at stake.
It's an interesting fact that since it became the first market to formally begin trading in securities over 400 years ago, the Amsterdam Stock Exchange and its successors have been in continuous operation - and six years ago, the exchange became part of Euronext. So it may be that the cross border market that will be the result of the NYSE-Euronext merger represents a dramatic new development in the history of free enterprise. Or it may simply be that, four centuries after the first florins changed hands on the banks of the Amstel River, we're just getting back to our roots.
Thank you for inviting me. As you continue your discussions in Sydney, keep in mind that what you do is of great importance here in America and around the world as well. And to all of you whose vocation it is to power our capital markets with your imaginations and your willingness to take risks, thank you for what you do. Thank you for what you give each day for your fellow men and women, and for our world. We're on the threshold of exciting changes. And the SEC is honored to be your partner.