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 Financial Markets: Which Balance Between Market Discipline, Supervision and Regulation? How to Make Compatible Regulatory Initiatives on the Two Sides of the Atlantic?
Thank you very much, Hubert.
I'm very happy to be here to participate on this panel here with Hubert and Carlo, two of my most esteemed colleagues. Indeed, I am very grateful for their presence, since the topic of our panel is quite complicated. Without Hubert's Cartesian logic and Carlo's Croce-like eloquence, you would have no one but me and the logic and eloquence for which we Americans are so famous.
This topic touches on two quite distinct issues: what constitutes a proper balance between regulation and market forces, and how local regulation in a global market can be made to work such that both capital formation and investor protection are maximized. Much greater minds than mine - including Hubert's and Carlo's - continue to tackle with these issues and I'm not sure we will resolve the intricacies today.
But, who knows?
Before I proceed further with my remarks, let me start with the SEC's standard disclaimer: The 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.
As we all know, modern capital markets are characterized by nothing if not their global reach. Communication and computer technology has made this physically possible, but legal and regulatory changes over the past few decades have accelerated this trend - or, I would argue, the standards have bowed to reality and are being reformed to keep up with changes in the global market.
No one looking at our capital markets in 1990 could have predicted the effects that globalization and technology would have on today's market structure. No one looking at today's markets is likely to do any better attempting to predict what our markets will look like fifteen years from now. As one of the most logical and eloquent Americans, Yogi Berra, once said, "It's tough to make predictions, especially about the future."
Fortunately, when the United States Congress adopted the federal securities laws, it did not require the SEC to have a crystal ball. Instead, it gave the SEC broad regulatory powers - and the power to provide exemptions and other relief from statutory requirements - to ensure that our regulatory infrastructure was flexible, responsive and effective for all market participants. These participants' needs are not always the same. Preferences for reliable financial and other information about companies traded are generally the same, but institutional and individual investors often have different trading preferences and different views regarding what constitutes best execution and price reporting transparency. When the interests of market operators and market makers are introduced, there is even greater potential for conflict among market participants.
Congress recognized the need for a referee when it created the SEC. It directed the SEC to fulfill the objective of investor protection by assuring that markets were fair and orderly. Over the years, the SEC's mandate has been expanded to extend regulation to over-the-counter markets, to eliminate fixed commissions, to require efficiency in the clearing and settlement of transactions, and to take into consideration the effects of regulation on market competitiveness. More recently, we have been required to address the technological and other consequences of Internet trading, the proliferation of automated trading systems, and the potential regulatory consequences of market demutualization.
To be sure, regulators in foreign countries face similar regulatory issues, but with the exception of demutualization, many of these issues have crystallized first in the United States because of the sheer size, depth and liquidity of US markets. Not all countries have chosen to follow the US model regarding market structure or market regulation -- though -- many countries do look to the US regulatory model and to the SEC for leadership, both informally and through our participation in bodies such as the International Organization of Securities Commissions (IOSCO).
Financial regulation is often a reaction to catastrophic events - whether the South Sea Bubble in the 1600s, the 1929 Stock Market Crash, or the more recent financial scandals that led to the Sarbanes-Oxley Act. If we are to avoid over-reaction, we must first ask what are the objectives of our regulation?
The fundamental goals of securities regulation, according to the "Principles and Objectives of Securities Regulation" of IOSCO are "investor protection, fair, efficient and transparent markets, and the reduction of systemic risk." These fundamental goals mirror the legislative mandate of the SEC, to promote investor protection, "the maintenance of fair and honest markets," and "efficiency, competition and capital formation" or, in other words promote, market discipline.
Some see contradiction in these goals. I, however, would posit that these goals are not at all in conflict - indeed, one might even say they are redundant. To describe investor protection and market discipline as being in opposition to each other is, to put it frankly, to propose a false dichotomy. Indeed, the best way to promote market discipline is through market transparency.
Yet, the Devil, as they say, is in the details, and much of the current debate about regulation versus market mechanisms really boils down to a question of how to best assure market transparency in the most cost-effective manner.
In the United States, our focus has been on ensuring the integrity and efficacy of the guardians and gatekeepers of transparency. The SEC promulgated new regulations on securities analysts to make sure that these important information sources for investors maintained the highest standards of integrity. The SEC oversees, and SEC staff works closely with, the Public Company Accounting Oversight Board to help ensure that audit firms - a key check on the accuracy of issuer financial statements - are not compromised by conflicts of interest. Even the controversial SEC regulations enacting Section 404 of the Sarbanes-Oxley Act are designed to do nothing more than ensure that an issuer's internal controls are sufficiently robust to provide the issuer's board with the information needed so that the board members, as the shareholders' representatives, can be sure the issuer's financial statements accurately reflect the firm's financial condition.
Other jurisdictions are tackling precisely these same concerns. For example, right now the European Commission is considering how to best address bond market transparency in the European Union - an issue that the SEC itself has grappled with in recent years. The discussion, if I understand the matter correctly, revolves around what degree of transparency is necessary and at what cost. Our own economists at the SEC studied the phased-in introduction of transaction price transparency in the US OTC secondary corporate bond market and found that transparency lowered transaction costs.2 They estimate that if the prices for all bonds were made immediately transparent, then investors would save, at a minimum, an additional one billion dollars per year- a figure far in excess of the likely regulatory costs. This is a billion dollars that would not just be pocketed by investors, but probably would also result in a reduction in the cost of capital paid by issuers.
Others, of course, disagree.
And such disagreements lie at the difficulty of making the regulatory initiatives on both sides of the Atlantic "compatible" with each other. The SEC has no interest in imposing different regulations from those found in other jurisdictions just for the sake of being different. And, where ways are found to harmonize, converge, mutually recognize or even eliminate duplicative regulation, with no loss to our collective regulatory goals, the SEC and our overseas counterparts attempt to do precisely this.
Nonetheless, one point we all should keep in mind in this brave new world of convergence and regulatory dialogue is that different regulations and decisions made by the SEC, by CESR, and by securities regulators around the world, often reflect not just different approaches to similar problems, but also deliberate policy choices -- reflecting the choice of a different balance between rules and market discipline.