Speech by SEC Staff:
Remarks for Promethee: Transatlantic Dialogue and Regulatory Convergence
Director, Office of International Affairs
U.S. Securities and Exchange Commission
September 13, 2005
Panel on the Transatlantic Economic Relationship: What Comes Next and How the Debate Evolves?
Thank you for inviting me to this meeting; it is an honor and a pleasure to be here. Before I begin, I must give the standard disclaimer that the US Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. These remarks express my views and do not necessarily reflect those of the Commission, the Commissioners, or other members of the SEC staff.
I would like to start out with a positive and definitive statement: The US-EU Financial Markets Dialogue has been an unmitigated success. This is particularly true with respect to addressing the spillover of regulatory initiatives after the fact. The best examples of the dialogues effectiveness are the handling of the transatlantic implications of the EU's Financial Conglomerates Directive and the Sarbanes-Oxley Act. As regards to the Sarbanes-Oxley Act, the Dialogue proved to be an effective forum for discussing and addressing European concerns. What began more or less as a confrontation, rather than a dialogue - fueled by a perception that the EU was questioning the quality of supervision in the United States and that the Sarbanes-Oxley Act was unfairly imposing onerous regulatory burdens on non-US participants in US markets - has developed into a positive, constructive, and forward-looking relationship.
I can tell you that regulators and policy makers on both sides of the Atlantic largely agree on what the central issues are, as well as on their importance. We know that investors today can invest abroad with relative ease, and issuers are not limited to their own countries when seeking capital. We also recognize that there are additional transaction costs to doing so on a cross border basis. In addition, regulators in the United States and Europe all agree that, everything being equal, both issuers and investors will benefit if these transaction costs can be reduced or eliminated. This is good news for US and EU markets.
The Dialogue is successful because of its informality. It has taken shape out of the spotlight, giving the participants time to quietly evaluate the issues before them, develop mutual trust, and not feel pressured to come up with "deliverables" for every meeting.
This informality does not mean that the Dialogue has operated, or should operate, without input from others. Indeed, the topics discussed are informed by our respective stakeholders, from market participants to political leaders. Rather, the Dialogue's informal nature lends itself to achieving results, instead of scoring political points. The discussions are technical and practical, and Dialogue participants have flexibility to address what has been discussed in the Dialogue in the manner most appropriate to their particular circumstances.
With that said, what are the next steps for the Dialogue? We currently are moving beyond the period of putting out fires and developing mutual trust into a more mature phase of the Dialogue. To a certain extent, even though the US-EU relationship with respect to financial regulation is stronger now than it was four years ago, the contentious Sarbanes-Oxley Act issues may have been easier to resolve than some of the issues with which we will soon have to grapple.
Whether the Dialogue will continue to be a success will depend largely upon the results that we expect it to produce. I realize there are very different views on this issue: for example, politicians might disagree with issuers or other market participants about appropriate next steps. Financial regulators usually find themselves in between those relative extremes. Obviously, there are expectations for the Dialogue that will be easier to satisfy and those that may be difficult to accomplish.
Let's start with the expectations that are easier to satisfy. What the dialogue has done to date, and will continue to do well, is provide a forum through which we can discuss the issues that are of greatest concern to governments, regulators, and market participants. So, one expectation of the Dialogue is that it continue on the current path: discussing in advance and limiting potential spillover effects of regulation before they occur, and facilitating the ability of US and EU financial regulators to take into account the global nature of the capital markets as we consider domestic rulemakings. This is a valuable goal, and we are well on the way to accomplishing this goal.
The expectation that is more difficult to address is with respect to regulatory convergence. To highlight some of the issues associated with convergence and how these may impact the future perception of the success or failure of the Dialogue, I would like to discuss the convergence of US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). As you probably know, the SEC staff has stated that, among other things, if progress on convergence of US GAAP and IFRS continues, it will be willing to consider recommending the elimination of the requirement that non-US issuers reconcile their financial statements to US GAAP.2 The European Commission has sought the elimination of the reconciliation requirement since the start of the Dialogue, and can rightly take credit for helping to create the circumstances making the SEC staff statement possible.
The SEC staff described the milestones precedent to the elimination of the reconciliation requirement in its "roadmap" article, published this past spring.3 One of the milestones in the roadmap is greater "convergence" of standards and the other is a detailed analysis of the faithfulness and consistency of the application and interpretation of IFRS in financial statements across companies and jurisdictions. In other words, convergence on paper will not be enough - the staff will be looking for convergence on the ground.
The roadmap was a huge step forward on this issue. However, there are hard questions underlying the milestones in the roadmap that remain to be addressed. Some of these are the following:
- How much convergence between IFRS and US GAAP is enough? Do IFRS and US GAAP have to essentially merge into one set of standards, or can differences remain?
- Do sufficiently strong international institutions exist that will ensure that IFRS are faithfully and consistently applied across all jurisdictions that use IFRS? In other words, is there a shared mechanism that will ensure that IFRS are universal in practice as well as on paper?
- And, finally, once convergence has been achieved, what if the US Financial Accounting Standards Board and the International Accounting Standards Board reach principled but significantly different conclusions about how to account for certain transactions? How do we ensure ongoing convergence?
These questions have not been answered yet. We will have to find answers, and we will do so through engagement with our counterparts around the world that require their public companies to use IFRS. Personally, I believe that complete convergence of the standards should not be the objective. Rather, regulators and standard-setters should strive for a robust forward-looking convergence process and the appropriate degree of convergence that demonstrates the robustness and consistency of the process. In my mind, these elements are fundamental to the elimination of the reconciliation requirement.
Regulators on both sides of the Atlantic will have to answer similarly difficult questions with respect to any transatlantic convergence project that we might seek to undertake. Therefore, if regulatory convergence is to become one of the expected outputs of the Dialogue, the characteristics of the Dialogue that have contributed to its success up to now - informality, flexibility, and an emphasis on practical solutions - will become all the more important. Additionally, as we look forward to the future of the Dialogue, we must bear in mind that many questions related to convergence remain unanswered, so our expectations of what the Dialogue can achieve must be adjusted accordingly.
In conclusion, let me leave you with one important question, which we have already touched on here today. That is, what level or degree of convergence is enough? In other words, because of differences in our legal and regulatory structures, 100% convergence may be a practical impossibility. So, regulators and lawmakers must determine what level is sufficient as a precondition to affording foreign market participants greater cross-border market access. In the context of the Dialogue, I am hopeful that you will help us think through this and other questions as we pave the way forward.