Speech by SEC Commissioner:
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Good afternoon. It is a very great pleasure for me to appear here before you in Brussels. I'd like to thank the Centre for European Policy Studies very much for their kind invitation.
I also want to thank my erudite and accomplished host, U.S. Ambassador to the E.U., Rock Schnabel for that kind introduction and, especially for his hospitality and that of his wonderful spouse, Marna. The staff at U.S. Mission has also been extremely helpful during my visit.
I also bring very warm greetings from our SEC Chairman Bill Donaldson and greetings from my fellow SEC Commissioners.
I am in this magnificent city of Brussels, among many things - the capital of the European Union, essentially for two reasons:
First, I wish to reaffirm a simple message: European and other non-U.S. market players are welcome and encouraged to participate in the U.S markets. The SEC has facilitated foreign participation in the past and will continue to do so, all within the framework of protecting investors through our existing securities regulation.
Secondly, I am here to listen and to fact-find. I wish to do more listening than talking. Many in the European community seem to believe that the SEC should do more to ease access to U.S. investors by European issuers and markets. By listening, I hope to learn and understand how we can better achieve this goal, of course in ways that will not compromise the safety of investors. I will report my findings to my fellow Commissioners.
In my remarks today I also thought it would be useful to review briefly recent history regarding U.S. securities regulation and to discuss our regulatory principles.
As you are aware, the past couple of years have been ones of upheaval in the US financial markets. Indeed, the reasons for the current troubles are several. The tremendous market rise in the late 1990s was followed by an equally stunning market drop - and the bad news didn't stop there. The depressed markets uncovered the fact that a number of public companies were not being honest with the public. Plain old greed was coupled with business cultures emphasizing meeting earnings projections at any cost. What's more, many of the gatekeepers in whom the public placed its trust, including financial analysts and accountants, betrayed that trust.
Congress responded with the Sarbanes-Oxley Act. The Commission has worked hard to implement this Congressional mandate. We have developed new regulations concerning audit committees, internal controls and enhanced reporting. And, we also are reviewing various aspects of our markets, such as the role of credit rating agencies and principles-based accounting standards. These studies will assist us in making well-reasoned assessments of whether these topics merit further Commission action. Yet, we do not want to regulate indiscriminately. There may be effective market-based solutions to any given issue. This latter consideration I take very seriously. As a former federal prosecutor, transactional lawyer, and most recently, a businessman in a highly regulated industry, I am keenly aware that, while regulation is certainly necessary, excessive, unduly burdensome regulation benefits no one. I am personally committed to finding the right balance.
Indeed, investors benefit from our taking care not to regulate business out of existence. After all, fully half of all American households invest in the securities markets. Even if they do not directly invest in individual stocks, their pensions or retirement savings plans likely contain stocks. While fulfilling our duty to protect investors, we must also work towards ensuring that a positive investment environment flourishes. In short, we want US investors to have options when allocating their capital. Foreign participants in the US capital market are among those that provide such investment options. Diversified financial products, accompanied by accurate and timely disclosure, contribute to fair, honest, efficient and vibrant markets.
Today, I would like to speak with you about the SEC's regulatory philosophy as applied in a global environment generally, and how it has shaped our rulemaking under the Sarbanes-Oxley Act in particular. The title of my speech, "Embracing International Business in the Post-Enron World," was chosen deliberately. Indeed, I believe that the Commission's history has been, and continues to be, one of welcoming a diversity of participants to the US markets. We maintain a level playing field for all, and we believe our markets are better for it.
To begin, let there be no confusion about the SEC's mandate. As Supreme Court Justice and former SEC chairman William O. Douglas said, "we are the investor's advocate." In our view, US investors are best served when they have access to a wide range of financial services and products, about which they are fully informed of the potential risks and rewards. With this philosophy in mind, over the past 70 years of the SEC's existence, we have afforded equal treatment to all market participants. Few distinctions have been made based on the domicile of the issuer or service provider. After all, US investors are entitled to the same protections regardless of whether an issuer is foreign or domestic. In addition, placing US market participants at a competitive disadvantage negatively affects the vibrancy of US markets and, ultimately, would hurt US investors. Shielding US firms from foreign competition, however, would deprive US investors of the benefits derived from the services and products offered by non-US competitors. We also would do our economy a great disservice if we were to shelter our issuers, markets and intermediaries from competition. We are striving for a balance that will result in fair, reasonable, and efficient markets.
We realize that some in the EU think that the SEC hasn't gone far enough in welcoming non-US firms and issuers to US markets. They have called for full exemptions for non-US entities based on the principle of mutual recognition in a variety of contexts. While we respect those views, the SEC, as well as any national regulator, has the right to determine the terms and conditions under which financial service providers access investors in its jurisdiction. The challenge for all of us is to do so in a reasonable and equitable manner, and to find accommodations where possible.
I note that the European Commission is undertaking to develop common rules for the EU financial services market. I assume that this is in recognition of the fact that an integrated market needs a single set of rules. Having rules that differ depending on the origin of the market participant lead to an incoherent, fragmented market. Such an approach is not in the best interest of investors or the market. On this, we agree. That is why, we at the SEC strive to maintain a level playing field. We are more inclined to a single set of rules for all participants in the US market, rather than mutual recognition.
While the SEC does not practice mutual recognition, it does make extra efforts to provide accommodations for foreign market participants where possible without sacrificing investor protections. The SEC has continually addressed issues resulting from the differences between our customs and regulatory systems and those of other countries. We have recognized that, in some cases, accommodations for foreign participants must be made where it is possible to make them without sacrificing investor protection. Thus, in a number of contexts, we have made adjustments to our rules resulting in more favorable treatment to foreign market participants. For example:
Through these and other adjustments, the Commission has facilitated foreign market participants' access to US investors, while being vigilant to maintain a level playing field and strong investor protection. I believe that we have been able to make certain accommodations for foreign market participants without unfairly disadvantaging US market participants and without sacrificing investor protection. At no point have we seen fit to hold foreign participants in the US market to a higher level of regulation or review than the level to which we hold US-based participants.
Implementation of the Sarbanes-Oxley Act is a case in point. The Act is a sweeping piece of legislation that required significant action by the Commission within a short period of time. As with existing securities laws, and in line with our commitment to a level playing field, Congress predominantly avoided distinguishing between market participants. Yet, we understood that the broad scope of the Act naturally raised concerns for our foreign market participants. In this connection, we asked for input and received hundreds of comment letters. We met with market participants and regulators to discuss the consequences of the Act on cross-border actors. We also held hours of public roundtables focused exclusively on the international implications of the Act.
This was not a hollow exercise. We learned a great deal about potential conflicts between US and foreign laws and requirements. The challenge was to marry the knowledge gained with our Congressional mandate - implementing the Sarbanes-Oxley Act and giving effect to its provisions in a non-discriminatory fashion to all who seek to raise capital in US markets.
The Commission recognized that, when our rules conflict with home country legal requirements, foreign market participants are placed in an impossible position - violate home country law in order to comply with SEC rules. Accordingly, we made accommodations where conflicts of law exist, and where foreign laws and requirements address in alternative fashion the underlying issues in the Act.
Ultimately, in implementing the Sarbanes-Oxley Act, the Commission made a number of accommodations for foreign market participants, including:
The Public Company Accounting Oversight Board, created under the Sarbanes-Oxley Act, appears to have taken a similar approach with its auditor registration rules. The Board recently adopted rules requiring the registration of all public accounting firms, domestic and foreign, that issue or prepare audit reports on the financial statements of US public companies. The rules reflect careful consideration of comment letters from foreign authorities and firms, as well as views obtained at an international roundtable held on March 31. Although the Board determined not to exempt foreign accounting firms from registration, it recognized the need to avoid unnecessary burdens or legal conflicts. To this end, the Board has made certain preliminary accommodations for foreign firms consistent with the spirit and intent of the Sarbanes-Oxley Act and the Board's mandate. These include:
Going forward, the PCAOB has also indicated a desire to work with non-US accounting regulatory bodies to develop cooperative reporting, inspection, and disciplinary programs. Although the PCAOB's final rules call for registration of non-US firms by April 2004, the PCAOB hopes, before that time, to be able to make substantial progress with its foreign colleagues in developing harmonized registration and oversight models.
As required under the Act, the SEC recently published the PCAOB's proposed registration rule for notice and comment. I encourage everyone with an interest to provide us with your input on this matter.
I believe that the recent regulatory changes called for by the Sarbanes-Oxley Act are not overly burdensome. They treat foreign and domestic participants fairly and equally. They will strengthen investor confidence in US markets. Indeed, precisely because of these new regulations, I am confident that foreign participation in US markets will only increase with time.
As we look to the future, I think it is safe to say that a major overhaul of securities regulation does not occur every day. While a revision on the order of the Sarbanes-Oxley Act is unlikely to be repeated anytime soon, there will be continual refinement and improvement of regulation in the United States. Regulation in other countries will also change. The EU Financial Services Action Plan is a prime example. In a world where markets are interconnected and cross-border business is a fact of life, we need to collaborate to ensure our regulations don't lead to conflicts of law that hinder business.
We can't accomplish this in a vacuum. Indeed, conflicts can best be avoided through constructive dialogue. Dialogue allows us to understand our respective regulatory objectives. It also assists in identifying possible adjustments that eliminate conflict. US policy makers and regulators, including SEC staff, are engaged in an ongoing dialogue with European Commission staff regarding financial services regulation. This process was very important to the implementation of the Sarbanes-Oxley Act. Through it, we have avoided misunderstandings and given voice to our respective regulatory philosophies. But let there be no ambiguity. The dialogue is not a negotiation. I believe it is axiomatic that each regulator determines the terms and conditions under which financial services providers access investors in its jurisdiction. The objective is to make sure that the terms and conditions reflect thought, are reasonable, and are applied equally to all.
That said, I fully support the EU-US informal financial markets regulatory dialogue and believe that it was extremely helpful to our implementation of the Sarbanes-Oxley Act. I am also convinced that it will contribute positively to our consideration of future US and EU initiatives with international implications.
Dialogue also has the potential of achieving a degree of regulatory convergence. We face similar regulatory issues in the US and EU. We can each benefit from an exchange of views on the approaches available for addressing these issues. We may even adopt common approaches. Such regulatory convergence can raise standards and facilitate cross-border business, provided the convergence is a race to the top, and not to the lowest common denominator. An example of this concept in operation is the convergence project of the International Accounting Standards Board and the US Financial Accounting Standards Board. Last fall, these two organizations agreed on a project to work towards the improvement and convergence of International Accounting Standards and US Generally Accepted Accounting Principles. The task before them is challenging, but I believe that they have a good chance of succeeding.
The implementation of the Sarbanes-Oxley Act has been of considerable interest to the international community during the course of the past year. I know, however, that there is a fair amount of interest in a couple of other international issues facing the SEC. Accordingly, I will take a few moments to discuss acceptance of International Accounting Standards in the United States. In addition, I'll make some observations about the placement of screens in the United States by foreign exchanges.
European officials and issuers for years have urged the SEC to accept financial statements prepared under IAS without requiring reconciliation to US GAAP, as required at present. SEC staff has noted two important considerations in assessing this requirement: progress in converging IAS and US GAAP, and the development of an effective global financial reporting infrastructure for the consistent application, auditing and enforcement of IAS. Because investor protection is the fundamental mission of the SEC, we will look at the quality of the information received by US investors. The standards themselves are very important. No less critical is how standards are interpreted and applied in practice.
With respect to convergence of IAS and US GAAP, it is widely agreed that similar, high-quality answers to important accounting issues will benefit cross-border investors. Convergence of accounting standards should translate into greater transparency. This ultimately will increase the comparability of financial statements for investors and lower costs for cross-border issuers. As I mentioned earlier, the FASB and IASB entered into a memorandum of understanding to work together toward the important goal of convergence between US GAAP and IAS. The SEC has fully supported this project.
While the FASB and IASB convergence project is still in its early stages, and involves many complicated issues, I continue to be encouraged by the progress being made. SEC staff is working closely with these organizations to support an agenda that prioritizes consistency among critical accounting standards.
In addition to our work with the IASB and the FASB to encourage short-term convergence, we are working with regulators in other countries - and with the accounting and auditing profession - on ways to encourage the development of an effective global infrastructure for interpretation, auditing and enforcement of IAS. Such an infrastructure is as important as the accounting standards themselves. It is meant to ensure consistency and accountability. Without such a mechanism, a "single" set of standards quickly could devolve, for practical purposes, into multiple standards. In this context, we are encouraged by the EU's work through CESR to develop a supporting infrastructure for IAS within the EU. We continue to see 2005 as an interesting possible target date for evaluating IAS.
Foreign market access is another long-standing issue of concern in the EU. Several EU exchanges are seeking to have access to US investors through trading screens, absent registration with the SEC. Normally, under the US system, in order to offer and sell securities to the public, an exchange must register with the SEC. In addition, all securities listed on that exchange have to be registered with the SEC. The non-US exchanges have argued that, because they are regulated in their home countries, registration is unnecessary.
Exemption from the registration requirements goes to the heart of the SEC's mandate to protect investors. The Commission imposes significant regulatory requirements on exchanges, as well as on issuers who list on those exchanges, whether foreign or domestic. The exemptions being requested by some foreign exchanges would create access to US investors on different terms than those available to US exchanges. This, in turn, puts considerable stress on our system of regulation, disrupting the level playing field we have created for all market participants. The SEC is faced with a complicated task. It must establish a regulatory regime that responds to the request for exemptive relief, but that maintains a level playing field. Foreign exchanges face an equally challenging task. They must make a compelling case for being treated unlike all others who also seek to tap the disposable capital of US investors.
In closing, the Commission has always welcomed foreign participation in US capital markets, and US investors will continue to demand no less. The SEC remains committed to a philosophy of providing all participants with a level playing field, discriminating against no issuer, intermediary, exchange or other participant on the basis of their country of origin. Most importantly, the SEC remains devoted to the highest standards of protection for all investors in US markets. These two principles are not mutually exclusive: investors in US markets are better off with the wealth of investment options - and, frankly, the competition - non-US participants provide.
On the road to promoting investor protection and stable markets, we recognize, of course that there is not just one right path. Countries have different regulatory approaches and different legal, political and economic systems that must be respected and taken into account. Accordingly, the SEC historically, and in regards to Sarbanes-Oxley in particular, has made accommodations for foreign market participants where such accommodations are necessary to avoid undue burdens or conflicts of laws, while still fulfilling the letter and spirit of our legal mandates.
Although our approaches may vary, I believe that regulators on both sides of the Atlantic and around the world are united by common principles and a desire to restore investor confidence globally. To this end, partnerships with our foreign counterparts are increasingly important. As we converge upwards our regulatory standards, coupled with robust enforcement, we have the potential for a brave new world for global capital. I look forward to working with you to make it a reality.
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